Morgan Stanley investors await Fed's buyback blessing

Tue Mar 25, 2014 1:25am EDT
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By Lauren Tara LaCapra

NEW YORK (Reuters) - Morgan Stanley shareholders will find out this week whether the U.S. Federal Reserve will allow the bank to start returning capital to shareholders in a meaningful way for the first time since the financial crisis.

But even if the Wall Street bank gets the Fed's blessing to buy back more shares and potentially raise its dividend, it is unlikely to hit a shareholder return target Chief Executive James Gorman set out for this year, analysts and investors said.

The target, called return on equity (ROE), measures how much profit a bank makes using shareholder funds. An ROE of at least 10 percent would show that Morgan Stanley can earn enough to pay for new capital and signal that the bank is past the restructuring it needed to make after the financial crisis. Morgan Stanley's annual return on equity has languished below 10 percent since 2006.

If the bank cannot jump that hurdle in the near term, which could be done by boosting profits, buying back shares, or both, shareholders may get impatient and demand that management outline a bolder strategy to boost profits.

"They should be generating double-digit ROEs, and if they aren't, what are they going to do about it?" said Mike Mayo, a longtime bank analyst at CLSA. He raised a similar question at Morgan Stanley's annual meeting last year, prompting Gorman to say the bank would meet the 10 percent target some time in 2014.


Last week, the Fed said Morgan Stanley passed its annual stress test, a requirement of the Dodd-Frank financial reform legislation that examines how well big banks' balance sheets would hold up in hypothetical crises.

As part of the test, banks submitted capital plans, including how much they would like to spend buying back stock and paying out dividends. On Wednesday, the Fed will say whether those plans have been approved, and how much each bank can spend.   Continued...

The corporate logo of financial firm Morgan Stanley is pictured on a building in San Diego, California September 24, 2013. REUTERS/Mike Blake