Morgan Stanley, armed with cash from fixed income dump, goes shopping

Fri Oct 17, 2014 3:38pm EDT
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By Lauren Tara LaCapra

NEW YORK (Reuters) - Morgan Stanley (MS.N: Quote), which has spent three years throwing out bad apples from its fixed income trading portfolio, now wants to put the freed up money into businesses that bear healthier fruit.

It is reinvesting capital previously held against unprofitable trades into areas like municipal bonds, credit and securitization, where it sees opportunities for boosting profit, senior executives at the bank said on Friday.

This step represents a turning point in the bank's efforts to shrink to the point where it can make money again in bond trading. New regulations put in place after the financial crisis have made the business more expensive for big banks, forcing them, for example, to use shareholder money to finance their trades instead of cheaper debt. As trading becomes more expensive, many banks have to be choosier about which trades to do.

"We've been very focused on 'what is the return on equity in the business?'" Chief Financial Officer Ruth Porat said in an interview on Friday, referring to a measure of profitability.

The bank's risk-weighted fixed-income trading assets have shrunk to $190 billion, close to its target of $180 billion by the end of next year, giving Morgan Stanley more room to reinvest in the business again, the executives said.

At this stage, Morgan Stanley's bond trading business sits in a gray zone - not as big as JPMorgan Chase & Co's (JPM.N: Quote), nor as profitable as Goldman Sachs Group Inc's (GS.N: Quote).

The bank's executives have sometimes been inconsistent in their statements about where the business is headed.

In 2010 and 2011, management said the bank was committed to growing revenue in a range of fixed-income trading businesses, and pledged to increase market share by 2 percentage points. One focus was growing trading in interest-rate driven products like Treasuries, a business that generally requires a big balance sheet to be successful.   Continued...

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