Wednesday, June 8, 2011

At Morgan Stanley, Focus Put on Costs

As I have discussed many times before in this BLOG that growth is over as it was in Aussie in the 90's and the focus will go to driving out costs and a consistent dividend that will provide stability of earnings.

Aivars Lode

At Morgan Stanley, Focus Put on Costs

Morgan Stanley offered a glimpse into Wall Street's future, and the outlook has changed so much from the heady days of the past that the firm is planning to keep a close watch on BlackBerry usage.

New cost-cutting moves were the focus of a 45-minute discussion at a Deutsche Bank conference by Morgan Stanley Chief Financial Officer Ruth Porat aimed at showing how the securities firm is trying to boost profits in the next few years. Barely mentioned were revenue opportunities that dominated other recent Morgan Stanley presentations.

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.Morgan Stanley's penny-pinching obsession is a sign of the struggle inside many banks and securities firms to overcome sluggish revenue growth and the looming costs of new regulatory and capital requirements. Banks including Wells Fargo & Co. and Bank of America Corp. have launched cost-cutting efforts, with BofA looking to reduce its branch count by 10%.

For Morgan Stanley, that means monitoring even routine expenses much more closely, ranging from travel to mobile devices. Brokerage clients will be prodded to give up paper account statements for cheaper electronic documents.

"We periodically ask employees to self-certify their usage of such services, which leads to constant monitoring and reduction of nonessential, redundant services," Ms. Porat said on Tuesday.

The overall expense-savings target: about $500 million in 2012, revving up to $1 billion in the next three years.

Some job cuts are likely over time in the company's 62,000-person work force, though Morgan Stanley's investment-banking and trading division won't be touched for now, according to a person familiar with the situation. Ms. Porat also said the number of financial advisers in the firm's majority-owned Morgan Stanley Smith Barney joint venture with Citigroup Inc. might shrink below the previous target of 17,500 to 18,500.

In March, Morgan Stanley dumped about 300 trainees and lower-producing brokers. The joint venture has 17,800 financial advisers, down 2% from a year ago. While the tech-investing frenzy is a pleasant distraction from those deeper troubles, investment banking is at a cyclical low until the economy improves, Ms. Porat said. She said she remains confident that the company is well-positioned.

Morgan Stanley's challenges are even bigger because the Wall Street company came so close to death in 2008. Then, the firm pared back substantially in early 2009, just as bond trading enjoyed a heyday that fattened profits at Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. Last year, Morgan Stanley's net income of $4.7 billion was slightly more than half of Goldman's.

In 2009, Morgan Stanley doubled down on the retail brokerage business by forming the joint venture, which is more stable than many of the firm's trading businesses but still dependent on a rising stock market.

Recent signs that cost-cutting was rising in the pecking order of strategic moves at the top of Morgan Stanley include the February announcement of a new office in charge of re-engineering and expense management. The office is led by Jim Rosenthal, the company's chief operating officer. Through a company spokesman, Mr. Rosenthal declined to comment.

This year, Morgan Stanley's shares have sunk more steeply than financial stocks overall as investors fret about how fast Chief Executive James Gorman, who took over at the start of 2010, can improve the bottom line as regulators rein in trading and other businesses.

Morgan Stanley's shares fell 26 cents, or 1.2%, to $22.26, in 4 p.m. New York Stock Exchange composite trading Tuesday, leaving them near a two-year low and down 18% for the year. By comparison, an exchange-traded fund following a Standard & Poor's financial-services index has fallen about 7%, though Goldman has fallen more—21%.

Mr. Gorman sarcastically joked at the company's annual shareholder meeting in April that the languishing stock price filled him with joy. He added that he was focused on things Morgan Stanley can control over the medium and long term.

Longer-range cost-cutting moves include outsourcing certain tasks, reducing the number of legal entities that Morgan Stanley is affiliated with and expanding operations in locations outside metropolitan areas, Ms. Porat said. Belt-tightening on BlackBerrys and travel likely will target relationships with vendors and perhaps employee usage, according to a person familiar with the matter.

David Trone, an analyst at JMP Securities, compared those moves to using a fine-toothed comb. "When you are trying to save peanut shells, you are really putting the effort in," he said.

One Morgan Stanley employee joked Tuesday that he planned to return a phone call from a land line because he didn't want to use a BlackBerry.

Like Goldman, Morgan Stanley will keep spending big money on technology, Ms. Porat said. Technology investments in institutional securities, global wealth management and asset management will "help us to execute better for clients but lead to better cost savings over time," she said.

About one-third of the firm's 14,000 technology-related employees and consultants are working on the integration of Morgan Stanley Smith Barney. Morgan Stanley plans to buy Citi's 49% stake in the next several years.

Ms. Porat said Morgan Stanley is plowing ahead with revenue-boosting plans in emerging markets in Asia and Latin America, as well as an effort to increase the firm's market share in fixed-income trading.

One of the biggest cost-savings opportunities at any investment bank didn't come up Tuesday. Ms. Porat said not a word about cutting salaries or bonuses.

—Dan Fitzpatrick contributed to this article.
Write to Aaron Lucchetti at

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