Morgan Stanley: What A Decade Plus Two (NYSE:MS)

Accolades for James P. Gorman, Chairman and Chief Executive Officer of Morgan Stanley (NYSE:MS).

I feel that I must deviate a little from the usual format of these articles to applaud what Mr. Gorman has accomplished during his time as the Chairman and Chief Executive Officer of this bank.

Morgan Stanley is one of the major banks in the United States banking system. It is right up there in size with JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), Citigroup (NYSE:C), and Goldman Sachs (NYSE:GS).

Mr. Gorman became the Chief Executive Officer of Morgan Stanley in January 2010, 12 years ago this month.

Morgan Stanley, although one of the larger banks in the country, was the one that was the laggard. It concentrated on investment banking, and did not control its expenses very well and, as a consequence, was not very profitable, and its profits were extremely volatile due to the nature of investment banking.

In 2009, Morgan Stanley earned a return on tangible common equity (ROTCE) of less than 3 percent. its performance swung by at least 4 percentage points almost every year. Thus, one could expect its better results might put it up around a 7 percent ROTCE.

Mr. Gorman took over in 2010, promising to change things. And, change things he did.

His main focus was on two areas. First, Mr. Gorman wanted to cut expenses and get them under control.

Second, Mr. Gorman wanted to achieve much steadier results. He wanted major volatility to go away.

In achieving steadier results, committed Morgan Stanley to grow its wealth management business.

Mr. Gorman set very aggressive goals, wanting the bank, after years of shortfalls, to get its ROTCE up to 10 percent, then 12 percent, then to 15 percent.

This past Wednesday, Morgan Stanley told shareholders that in 2021 it had earned an ROTCE of 20 percent. in what Mr. Gorman called “an unbelievably good year.”

Wow! What a performance!

Yes, it was helped by record deal-making on Wall Street and by elevated trading activity.

But, its total revenues came in at $14.5 billion in 2021 with wealth management revenues contributing $6.5 billion to the total. investment banking revenues rose by 2.6 billion.

Mr. Gorman, however, still has set another ambitious goal in the wealth and investment management area.

He wants Morgan Stanley to lift the current total of client assets from $6.5 trillion to $10.0 trillion.

However, I want to drop back to the return on tangible common equity.

For most of my career, it really seemed to push the limits for a bank to shoot for a 15 percent return. That was the gold award for performance.

The banks that I turned around and made profitable never got much above 10 percent at the best although all the turnarounds were successful and resulted in favorable acquisition prices.

To earn a return of 15 percent was really a push.

Oh, sure, Jamie Dimon at JPMorgan Chase earned some 15 percent ROTCE’s, but that was the exception.

And then, James Gorman and Morgan Stanley made a 15 percent ROTCE.

But he then upped the target. The goal became a 17 percent ROTCE.

Look what happened! In 2021, Morgan Stanley earned a 20 percent ROTCE.

Now the bank’s goal is to earn 20 percent ROTCE, up from the previous goal of 17 percent.

Mr. Gorman blurted out in a call with analysts, “I don’t think you’re gonna find another bank in the world that’s putting out a 20 percent plus ROTCE goal.”

KUDOS

I believe that Mr. Gorman deserves lots of praise for what his bank has accomplished.

To take an organization earning around 3 percent return on tangible common equity and then push it through one aggressive goal after another to earn more than 20 percent on tangible common equity is a major feat.

Very few people, if any, would have believed this story if they had been told it in 2010…or, in 2012…or, 2015…or, further.

This is a real victory for him, and he deserves the credit.

Mr. Gorman seems to be a real winner.

For investors, a standard for investing I used to pay attention to was this: A company can be seen as having a competitive advantage in its industry if it earns more than 15 percent on equity. A company can be said to have a sustainable competitive advantage if it earns at least a 15 percent return on equity for five years or more.

I think Mr. Gorman and Morgan Stanley have earned our respect.

Side Light

Oh, by the way, JPMorgan Chase reported a 23 percent return on tangible common equity in 2021. Its “medium-term” target is a 17 percent return or more.

The thing is Jamie Dimon and JPMorgan Chase are not really expecting returns like this in the near future. Just last week, Mr. Dimon announced that the bank was making major allocations of funds to support its effort to build up its digital banking efforts.

Mr. Dimon, it appears, is now focused on how technology is taking over the financial world and wants JPMorgan Chase to be a major player in this digital world. Thus, he is committing a massive amount of resources to be a leader in this area. Hence, earnings will not be anywhere near where they recently have been.