Morgan Stanley (NYSE:MS) is really working hard to shed its image of being a pure investment bank. While there can be no denying the effort it has put in over the recent years to rely less on volatile trading revenues by focusing on wealth management, the banking giant is also keen on ramping up the lending business over coming years – something that will provide it with a rather well-diversified business model. 
Incidentally, the opportunity to increase business lending is an indirect result of Morgan Stanley’s acquisition of Citigroup’s (NYSE:C) remaining stake in the erstwhile Smith Barney wealth management unit. The deal will boost the bank’s deposit base from around $82 billion currently to almost $140 billion by mid-2015, allowing it to lend out more cash in the future. This coupled with Morgan Stanley’s strategy of lending more to clients could see its loan-to-deposit ratio swell to 90% over the long term – a figure at par with those maintained by the country’s biggest retail banks (see The Traditional Banking Model Is Losing Steam In This Economy).
We are in the process of updating our $28 price estimate for Morgan Stanley in view of the upside presented by the increased focus on lending activities.
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The chart above shows the contribution of Morgan Stanley’s various operating segments on its total share value. As of now, business lending forms such a small part of the bank’s total business model that we do not consider it as a separate segment for our analysis. But this is likely to change over coming years, going by what Morgan Stanley’s CFO Ruth Porat revealed at a recent investor event. The bank which was once almost entirely focused on trading, advisory and underwriting services alone is now looking to make it big in the business lending arena.
The move isn’t really a big surprise though, as Morgan Stanley’s efforts to diversify its business model and grow in areas which offer a more stable revenue stream have been quite evident since the economic downturn of 2008. To put things in perspective, the chart above would have been very different pre-2008, with wealth management figuring towards the bottom along with asset management. It is only because of the bank’s diligent efforts to focus on this business that it is the second most valuable segment in our analysis for Morgan Stanley.
At the end of Q2 2013, Morgan Stanley had roughly $82 billion in deposits but a loan-to-deposit ratio of just 55%, which indicates that the bank had given out loans worth about $45 billion in total. Porat expects the loan-to-deposit ratio to increase to 70% by mid-2015 when the deposit base will be $138 billion – indicating almost $100 billion in outstanding business loans then. This represents a more-than-doubling of the outstanding loans portfolio within two years. In fact, the size of its expected deposits and lending business by then would be bigger than that of BB&T (NYSE:BBT) as well as SunTrust (NYSE:STI) banks. 
What remains to be seen is how profitably Morgan Stanley is able to achieve this latest strategic addition to its business model.Notes:
- Morgan Stanley Makes Plans for Forthcoming Deposits, The Wall Street Journal, Sept 10 2013 [↩] [↩]