Morgan Stanley, Citigroup settle brokerage dispute

Tue Sep 11, 2012 10:29pm EDT
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By Lauren Tara LaCapra and David Henry

(Reuters) - Morgan Stanley MS.N agreed to buy the rest of a brokerage joint venture from Citigroup Inc C.N at a lower-than-expected price valuing the business at $13.5 billion, a win for Morgan Stanley although it faces challenges to boost the operation's profits.

The brokerage business was meant to stabilize Morgan Stanley's revenue during economic cycles but has not been nearly as profitable as the investment bank had hoped. Costs have run over and technology problems have dogged the joint venture since its inception.

"Morgan Stanley has fabulously disappointed investors with the execution of its integration plans," said Brad Hintz, a former Morgan Stanley treasurer who is now a bank analyst at Bernstein Research.

The banks restructured the deal so Morgan Stanley can buy Citigroup's 49 percent stake faster than previously planned. The price they agreed to will trigger a $2.9 billion after-tax charge for Citigroup, which was holding the business on its books at a much higher value. That charge would wipe out analysts' third-quarter profit forecast for the bank.

But it will also allow the banks to move past the negotiating table and focus on plans to fix their businesses.

Morgan Stanley's wealth management business is a key component of its strategy to smooth out earnings, which have been highly volatile over the past several years, and to delve deeper into more reliable revenue streams.

Its wealth and asset management revenue now represents half of net revenue, up from 31 percent in 2007, and its wealth management division has been delivering quarterly revenue in a range of $3 billion to $3.4 billion, even in a flat interest rate environment.

But to achieve its goal of boosting wealth management pretax profit margins to a "midteens" range by June from the current 12 percent, Morgan Stanley will have to deliver on aggressive cost-cutting targets.   Continued...

The Morgan Stanley worldwide headquarters building is pictured in New York June 22, 2012. REUTERS/Brendan McDermid