Incoming Morgan Stanley chief executive Ted Pick is set to inherit a bank that is in far better shape than when his predecessor James Gorman took it on 14 years earlier. Unfortunately for Pick, the lender also faces far greater challenges than it did a year ago.
“You could argue James has top-ticked this thing,” said one former Morgan Stanley banker who has worked with both men, using the Wall Street jargon for when an asset is traded at its peak price.
Pick, 55, will officially become chief executive on January 1 at a time when US interest rates are at their highest in more than two decades, its wealth management business is under regulatory scrutiny and its investment bank still lags behind its rivals.
Morgan Stanley declined to comment.
When Gorman took the top job from John Mack in 2010, the group’s future was still uncertain following the 2008 financial crisis. Gorman then transformed Morgan Stanley from an investment bank and trading firm into a money management juggernaut with a string of well-timed acquisitions, and it now earns more than half of its revenues from wealth and asset management.
That move into more stable businesses has helped Morgan Stanley’s market capitalisation leapfrog that of longtime rival Goldman Sachs, even as Goldman continues to out earn Morgan Stanley in investment banking and trading.
“In the wealth management market, they have assembled just an incredible scale platform,” said Devin Ryan, director of financial technology research at Citizens JMP Securities.
Higher rates
But Pick will be without the rock bottom interest rates that helped Gorman in his efforts to vacuum up money inflows eager to earn some sort of return on their assets, with wealthy clients now getting attractive rates by keeping their money in cash.
“That is probably the biggest opportunity as well as challenge [for Pick],” said Gerard Cassidy, a banks analyst at RBC Capital Markets. “More people can now dial back the ‘risk-on’ strategy and sit in cash, which Morgan Stanley and others just don’t earn the fees on.”
At third-quarter earnings in October, Morgan Stanley shares suffered their worst day in more than three years as investors took fright at the stuttering growth in wealth management.
Since the Fed started raising interest rates in March 2022, Morgan Stanley’s stock, which a month earlier had hit a record high, was up 2 per cent as of Wednesday, lagging well behind Goldman Sachs and JPMorgan Chase as well as the benchmark S&P 500 index.
Regulatory issues
The wealth management business is also in the sights of the Federal Reserve over money laundering controls in its international business, according to people familiar with the matter. The scrutiny from the Fed was reported previously by the Wall Street Journal.
The Fed declined to comment.
Morgan Stanley’s wealth management business is mainly made up of US customers but its international business has been an area of growth, hiring money managers from the likes of Credit Suisse and Wells Fargo. Internally, Morgan Stanley concluded that its international processes did not keep up with the pace of expansion, an issue it is now working to resolve.
Pick will also have to grapple with the final implementation of international banking rules, which are set to increase capital requirements for big banks such as Morgan Stanley.
The proposal from US regulators has become a flash point between banks and lawmakers, with JPMorgan chief executive Jamie Dimon warning this year that they could make bank stocks uninvestable.
Gorman has stressed to investors that the proposals are still up for debate, but with comments on the draft regulations due to close in mid-January, it is Pick who will have to deal with the fallout when the rules are finalised.
Morgan Stanley has also yet to resolve a high-profile US investigation over its handling of bulk sales of stock.
In May, the bank disclosed it was in talks with US authorities to settle federal investigations into its block trading business, which are among the most significant legal probes the bank has faced in recent years. But more than seven months later it has yet to reach a deal.
Restoring the investment bank
Restoring Morgan Stanley’s investment bank to its former glory, something Pick struggled to achieve during five years in charge of the division, is another difficult task.
The business has lagged behind JPMorgan and Goldman Sachs in industry league tables for more than a decade, a gap that has been a source of frustration inside Morgan Stanley.
The disjunct has been particularly pronounced during the past two years because of Morgan Stanley’s strength in technology equity capital markets banking, where activity slowed sharply as the Fed raised interest rates.
Despite its share price coming off its record high, investors are still cheering the group’s push into asset and wealth management. Pick has talked about his appointment as being a continuation of Gorman’s strategy, and Gorman is sticking around as executive chair of Morgan Stanley’s board of directors for Pick’s first year in the job.
Ryan at Citizens JMP said: “The initial thought is investors want to see the firm stick to its knitting, but also look at ancillary opportunities to grow that are consistent with the strategy the firm already has under way.”
Gorman has suggested Morgan Stanley could find more opportunities outside the US, potentially by making further acquisitions following on from its deals for ETrade and Eaton Vance. But as of next month, it will be Pick’s job to make that call.
“The thing that Gorman’s said multiple times when he took over from Mack, he was very deliberate he was not going to be John Mack,” said one longtime Morgan Stanley banker. “Ted is going to have to be Ted.”
Additional reporting by Arash Massoudi in London
Read the full article here
