When Morgan Stanley (NYSE:MS) came out with its performance figures for the first quarter of the year in mid-April, we detailed how its results show a fundamental shift in its business model – from one relying almost completely on sales & trading to the balanced one it is now, thanks to its emphasis on generating steady revenues by focusing on its wealth management business. Our conclusion is only strengthened by the fact that the global investment bank has significantly scaled down revenue targets (and ambitions) for its debt trading business. 
At a recent event, the president of the bank’s institutional securities business detailed the importance of maintaining a considerably smaller fixed-income unit compared to competitors like JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS), in order to generate decent profits. He quoted quarterly revenue targets in the range of $1.5-$2.5 billion from what was once Morgan Stanley’s primary money-minting unit – well below that of its peers.
Morgan Stanley’s stand is similar to the one announced by the largest Swiss bank UBS (NYSE:UBS) last year – of shrinking its fixed-income business to the bare minimum and focusing instead on its other business units. The decision also lends support to Deutsche Bank’s (NYSE:DB) hypothesis that the fixed-income industry will see quite some consolidation over the coming quarters (see Deutsche Bank: The Bond Industry’s Reform Will Lead To Further Consolidation).
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We have a $24 price estimate for Morgan Stanley’s stock, which is about 5% below its current market prices.
Morgan Stanley reported the lowest revenue figures from its fixed-income, currencies & commodities (FICC) trading unit among the country’s five largest investment banks for each of the last six quarters – something clearly seen from the table below which shows the quarterly FICC trading revenues for the banks since Q1 2011. The figures have been taken from the respective quarterly filings, and has been adjusted for any accounting gain/charge stemming from a revaluation of the bank’s own debt.
|(in $ mil)||Q1 2011||Q2 2011||Q3 2011||Q4 2011||Q1 2012||Q2 2012||Q3 2012||Q4 2012||Q1 2013|
|Bank of America||3,997||2,250||553||1,303||4,130||2,555||2,534||1,788||3,301|
The declining focus on debt trading for Morgan Stanley is evident from the fact that for quite some quarters now, the revenues from this business have been less than half that of the nearest U.S. competitor. And with tighter regulation for the industry on the cards, the importance of the unit is only expected to dwindle further over coming periods. The $1.5-$2.5 billion revenue estimates provided by Colm Kelleher, president of the bank’s institutional securities, clearly highlight this fact as they are a far cry from the $3.4 billion in quarterly revenues the unit churned out at its peak in Q1 2007. 
We factor in the income from Morgan Stanley’s FICC trading business in our analysis of our bank by breaking the revenues down into the size of the bank’s FICC trading assets and the yield on them. We believe that as the economic environment improves, the bank will be able to generate more trading yield on its assets (as shown in the chart below). However, the reduced emphasis on the business would mean that the trading asset base itself will only grow slowly, if at all, over the years to come.Notes: