Why Morgan Stanley Is A Worthy Competitor To Bank of America In The Wealth Management Space

Morgan Stanley (NYSE: MS) and Bank of America (NYSE: BAC) are two of the largest investment banks in the U.S. Since the recession, their business model has evolved from being focused primarily on one or two revenue streams to significantly diversified ones. Morgan Stanley has reduced its dependence on investment banking and sales & trading business, while wealth management business has gained revenue share –  from 24% of total revenues in 2007 to 43% in 2018. On the other hand, Bank of America has transformed itself from a traditional loans-and-deposits bank mainly relying on consumer banking to a balanced bank with a sizable wealth management business – the segment revenues increased 2.5x from $7.6 billion in 2007 (11% of total revenues) to $19.3 billion in 2018 (20% of total revenues).

Trefis captures recent trends in the wealth management business for Morgan Stanley vs. Bank of America in an interactive dashboard and concludes that although Morgan Stanley’s wealth management business is growing at a faster pace than Bank of America, the latter has a larger business both in terms of client assets and wealth management loans, and is also more profitable than its peer.

Bank of America has higher revenues and has reported higher growth over the last 2 years, as compared to Morgan Stanley

• Although Morgan Stanley has reported lower wealth management revenues than Bank of America over the last 4 years, its revenues have grown 14% as compared to the 7% increase in Bank of America’s figure.
• Bank of America’s wealth management business is bigger than its peer, in terms of total client assets and average wealth management loans. Its segment revenues increased from $18 billion in 2015 to $19.3 billion in 2018 (which was 13% more than Morgan Stanley’s figure in 2018)
• Morgan Stanley’s wealth management revenues increased 10% y-o-y in 2017, mainly due to a 10% growth in wealth management loans and a 13% jump in total client assets. However, the growth rate dropped in 2018 due to a 3% decrease in total client assets.
• Similarly, Bank of America’s wealth management revenues grew 5% in 2017, due to a 7% increase in wealth management loans followed by a 10% jump in total client assets. Thereafter, the growth rate decreased in 2018, due to lower net interest yield on wealth management loans coupled with a 6% drop in total client assets.
• Moving forward, we expect Morgan Stanley’s wealth management revenues to improve 0.6% and cross $17.3 billion in 2019, whereas Bank of America is expected to report $19.7 billion in the segment revenues – up 1.6%.

Our interactive dashboard for Morgan Stanley details the factors that have driven changes in revenues of Morgan Stanley’s individual revenue streams over recent years along with our forecast for 2019-2020.

Wealth management contributes more than 43% to Morgan Stanley’s Revenues, which is twice of Bank of America’s figure

• Morgan Stanley’s wealth management revenues have averaged around 43.7% of total revenues, while Bank of America’s figure was less than half of its peer – around 21.3% of total revenues.
• This implies that Morgan Stanley is heavily dependent on the wealth management business, as compared to its peer.

Bank of America’s outstanding wealth management loans in 2018 was almost 2x Morgan Stanley’s figure.

• Bank of America’s outstanding wealth management loans were almost twice the Morgan Stanley’s figure over each of the last 4 years, something we attribute to the former’s ability to cross-sell its wealth management services to consumer and commercial banking clients.
• Additional details regarding how the outstanding wealth management loans for Morgan Stanley and Bank of America has grown over the years are available in our interactive dashboard

Bank of America manages slightly more client assets than Morgan Stanley

• As of 2018, Morgan Stanley managed client assets stood at $2.3 trillion nearly 6% less than Bank of America’s $2.5 trillion.
• Additional details regarding how client assets for Morgan Stanley and Bank of America has grown over the years are available in our interactive dashboard.

Although Morgan Stanley has slightly higher fees, Bank of America’s Wealth Management Business Is still More Profitable than its peer.

• Although the increase in asset base has helped Morgan Stanley’s Wealth Management division report an average pre-tax margin figure around 24% over the last four years, it was lower than the 26% average pre-tax margin for Bank of America.
• Bank of America’s wealth management business is much more profitable, it reported a pre-tax margin of 28.3% in 2018 – almost 200 basis points higher than Morgan Stanley’s figure of 26.2%.
• Despite slightly higher average fees, Morgan Stanley’s wealth management business is less profitable than its peer. The primary reason for this is a notable difference in average wealth management loans.

Conclusion

• Bank of America has a larger wealth management business both in terms of client assets and wealth management loans, which is also more profitable than its peer.
• However, Morgan Stanley is growing at a faster pace than Bank of America.
• Further, Morgan Stanley’s business model has evolved over the years with a shift in focus from investment banking and sales & trading business to wealth management, which has helped it in becoming the highest contributing segment in 2018.
• Moreover, the difference in wealth management revenues of both the banks is not huge, and given the higher growth rate of Morgan Stanley, it is possible that Morgan Stanley would be able to cross Bank of America’s scale over the foreseeable future.

Trefis estimates Morgan Stanley’s stock (shows cash and valuation analysis) to have a fair value of $55, which is roughly 5% higher than the current market price (Our price estimate takes into account Morgan Stanley’s earnings release for the third quarter).

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