Morgan Stanley New CEO Inherits Rich Pickings: What’s Next for the Investment Bank?

Morgan Stanley New CEO Inherits Rich Pickings: What’s Next for the Investment Bank?

Ted Pick’s elevation to the position of chief executive at Morgan Stanley (MS.N) mirrors a chart-topping band gearing up for their challenging second album. He steps into a company that’s highly esteemed by investors, significantly profitable, and has recently completed the assimilation of two substantial acquisitions. Ted Pick has big shoes to fill when it comes to future deals, but he also has the luxury of time.

The outgoing chief, James Gorman, has given clear indications that Morgan Stanley’s future endeavors will revolve around the wealth and asset management sector, which he dedicated the past decade to building. Despite Ted Pick’s background in the firm’s dealmaking and trading division, his predecessor mentored and helped select him. Gorman is remaining as chairman for the time being, so there’s no reason to anticipate a shift in direction. Gorman holds a preference for private banking, scalable enterprises, and what’s known as alternative investments. Conversely, he’s not a fan of bank branches, payments, credit cards, or fringe markets.

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Expanding Morgan Stanley’s operations beyond its home market presents a promising starting point. The business of advising clients on wealth management is substantial but predominantly U.S.-centric. Gorman, in fact, sold the firm’s European wealth business to Credit Suisse in 2013. However, the case for serving non-American affluent clients remains robust. Western European millionaires are projected to accumulate $1.8 trillion in personal financial wealth from 2022 to 2025, as per McKinsey. In the Asia-Pacific region, excluding Japan, this figure climbs to over $4 trillion.

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Should Ted Pick opt to explore new opportunities, he would discover assets that are attractively priced. Valuations of fund managers such as Germany’s DWS (DWSG.DE), Britain’s Schroders (SDR.L), and hedge fund Man Group (EMG.L) have experienced declines in recent years. According to LSEG data, Morgan Stanley’s shares are trading at 11 times forecasted earnings for the upcoming year, a substantial premium compared to numerous European asset and wealth managers.

Nevertheless, there are a couple of obstacles. European wealth management is primarily localized, and cross-border deals are a rarity due to local regulations. Regulations can also prove unfavorable, as evidenced by the UK wealth manager St James’s Place (SJP.L), which was compelled to reduce fees by the regulator. Political factors could create hurdles as well. Amundi (AMUN.PA), Europe’s closest counterpart to the U.S. fund giant BlackRock (BLK.N), holds prominence in environmental, social, and governance-focused investments and has established ventures in emerging wealth hubs like India and China. However, Amundi is essentially a French national champion.

Another challenge is the high benchmark set by Gorman. Morgan Stanley’s two most recent substantial acquisitions were sizable, totaling $20 billion, and fulfilled specific niches. E*Trade, an online brokerage, brought in millions of households and company employees that Morgan Stanley had not previously served. Eaton Vance, a U.S. asset manager, offers investment products that Morgan Stanley now distributes through sales teams in distant markets. Acquiring a traditional asset manager in the slow-growing European market might seem like a less than ideal follow-up.

Opportunities for smaller deals may emerge. Although Morgan Stanley has identified alternative assets as a high-growth market, they currently represent around $230 billion of the total $1.4 trillion investment management portfolio. Infrastructure, real estate, and private credit are all logical additions, but these rapidly growing asset classes typically lack large takeover targets.

Ted Pick has the potential to create value without rushing into a deal, provided he can achieve the ambitious targets outlined by Gorman. If Morgan Stanley’s assets under management reach the touted $10 trillion, as projected by the outgoing chief in the next five years, the wealth division could potentially double its revenue to $50 billion, assuming fees remain stable. This would result in a roughly 50% increase in the firm’s overall revenue, even if the institutional securities business that Ted Pick previously oversaw doesn’t experience growth. Gorman has even hinted at the possibility of doubling assets once more.

Not all banks have the luxury of operating with such substantial figures, which could be where Ted Pick’s greatest opportunities lie. Gorman’s notable deal was the acquisition of Smith Barney from Citi (C.N), a move that helped Morgan Stanley establish a stronghold in the wealth management sector. By purchasing a portion of a bank that has already undergone rigorous vetting by U.S. regulators, the risk of discovering unwelcome surprises under the hood is minimized. This eliminates many smaller targets in Asia or Switzerland.

For instance, Citi’s private bank has been expanding rapidly and provides access to affluent clients across the globe. Approximately a quarter of the world’s billionaires already bank with the U.S. lender, which maintains a presence in 20 countries. However, Citi’s CEO Jane Fraser has displayed no intention of divesting private banking, which currently falls under the group’s $756 billion global wealth management division. Nevertheless, the company’s shares have declined by 40% since Fraser took the helm in March 2021, making it uncertain what Citi’s strategy may be in two years.

It’s not implausible that other previously off-limits targets may gradually enter the discussion. HSBC (HSBA.L) and (0005.HK) is undergoing a transformation and has positioned wealth management at the core of CEO Noel Quinn’s strategy. Not long ago, Europe’s largest bank faced calls from investor Ping An (601318.SS), (2318.HK) to restructure itself. Even UBS (UBSG.S), the Swiss behemoth now chaired by former Morgan Stanley executive Colm Kelleher, could align with Ted Pick’s aspirations should it decide to separate its substantial wealth business from the core Swiss bank.

While these prospects may be speculative, Ted Pick has time on his side. Furthermore, the rush into wealth management by global banks may have reached its zenith. Being one of the few mega-sized firms that isn’t grappling with a turnaround, facing probation from regulators, or already too substantial to consider transformative acquisitions, Morgan Stanley provides Ted Pick with the luxury of exploring his options over an extended period.

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John Smith

John Smith is a distinguished journalist, holding a Master's in Journalism from the renowned Columbia University. With a knack for uncovering the most captivating stories, John is the go-to expert for all things related to politics and current affairs. His insightful analysis and commitment to unbiased reporting set him apart in the world of journalism. John's writing ensures you're always in the know about the latest happenings in the USA.

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