A few years ago, the large Wall Street bank Morgan Stanley (MS -0.99%) traded in the middle of its peer group when it came to valuation. Now, Morgan Stanley trades at the largest premium to its tangible book value, or net worth.
Morgan Stanley achieved this by building out a growing stream of wealth and investment management revenue that has been more consistent and durable than its large investment banking and trading businesses. Wealth and investment management has also allowed Morgan Stanley to generate high returns and has also been more capital efficient, which is a big plus as banks continue to need to hold more regulatory capital.
With so much success with its wealth and investment management business, Morgan Stanley is now planning to double down. Here's the bank's plan.
Growing wealth earnings
In 2010, Morgan Stanley only had about a quarter of its total revenue from wealth and investment management. In 2022, that number was 52%. Now, Morgan Stanley CEO James Gorman wants to keep going and derive an even higher percentage of revenue from wealth and investment management.
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The bank has new scale from its recent acquisitions of Eaton Vance and E*Trade and believes it can continue to grow client relationships and client assets, which stood at $5.5 trillion at the end of 2022.
This will not only increase management fees; it will also likely lead to more deposit and loan growth in Morgan Stanley's wealth management departments, whether it's through margin lending, mortgages, or commercial real estate. This can be a good driver of profits, especially in a rising interest rate environment.
After adding about $980 billion of net new assets between 2020 and 2022, Gorman said he expects the bank to be able to add $1 trillion of net new assets every three years. When you add investment management flows and assume the market grows and compounds the value of these assets, Morgan Stanley's longer-term goal is to get to $10 trillion of client assets.
Then, according to Gorman, assuming a 30% pre-tax margin, which is what Morgan Stanley just had in 2022, the bank would generate $14 billion of pre-tax profit from the wealth and investment management business alone. That's equivalent to the total pre-tax profit Morgan Stanley generated in the full year 2022, including its investment banking and trading revenue.
Morgan Stanley's long-term goal is to consistently generate a 20%-plus return on tangible common equity (ROTCE), which is currently the highest ROTCE goal of any Wall Street bank.
Can Morgan Stanley pull this off?
The wealth and investment management space has intensified as banks have realized that it's a capital-light revenue source that can generate attractive margins and returns.
But Morgan Stanley has had a lot of success and built out a diversified stream of sources to drive net new asset growth, including through its retail brokerage, institutional clients, family offices, self-directed assets, and stock plan vested assets. The company has also been seeing success in increasing its workplace relationships, another promising area of net new assets.
While Gorman believes the long-term goal of $10 trillion in client assets is achievable, I'm guessing that if the company gets anywhere close to that mark, the market will be pretty happy. And the bank's current valuation shows that the market has plenty of confidence.
