Key Points
- In 2021, Morgan Stanley had a big year and achieved a 20% return on tangible common equity.
- After the strong year in investment banking, management believes it can do this on a more long-term basis.
- The bank also aims to significantly increase client assets.
But even after such a strong year, I still see Morgan Stanley as a compelling investment right now because it’s guiding for some of the best — if not the best — returns among its peers on a more long-term, sustainable basis. Let’s take a look.
It’s firing on all cylinders
Investors tend to judge a bank’s performance based on the earnings it can generate on the capital it raises from shareholders. For banks, investors also tend to strip out intangible assets, goodwill, and preferred stock in order to get a better idea of the returns. All this is expressed in a metric known as return on tangible common equity (ROTCE). In 2021, Morgan Stanley achieved a 20% ROTCE after setting a target range between 14% and 16%.
Most investment banks have been extraordinarily profitable since the pandemic started, as those businesses tend to do better with volatility. Morgan Stanley’s institutional securities division, which houses investment banking and its equities and fixed-income sales and trading desks, generated record revenue of nearly $30 billion in 2021.
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Investment banking, which includes equity and debt underwriting services, saw the biggest year-over-year increase and generated $10.3 billion of revenue in 2021. But equity sales and trading contributed the most revenue to the division, with roughly $11.4 billion, up nicely from 2020. Over the years, Morgan Stanley has done a nice job increasing its market share in each of its institutional businesses.
The wealth management business continues to perform extremely well and shows even more potential. Client assets rose to $4.9 trillion at the end of 2021, and net new asset growth had its best year ever, with growth of 11%. Management said the integration of E*Trade continues to go well, and the bank saw good asset growth from existing and new clients.
Wealth and investment management made up more than 50% of revenue in 2021, and that’s on top of a record year of revenue in institutional securities, which shows how the bank has succeeded in creating the more sustainable earnings that it often speaks about. Additionally, Morgan Stanley is well positioned to benefit from a rising-rate environment, and it doubled its dividend in 2021, giving it a very respectable 2.8% yield at Thursday’s closing price.
There’s a lot more to come
With such a successful year in the books and strong momentum heading into 2022, management at Morgan Stanley is targeting a ROTCE of 20% or better on a long-term sustainable basis. CEO James Gorman said on the fourth-quarter earnings call, “I don’t think you’re going to find another bank in the world that’s putting out a 20%-plus ROTCE goal.”
Among Morgan Stanley’s peers, it would appear that Gorman is right. The largest bank by assets in the U.S., JPMorgan Chase, has been targeting a 17% ROTCE but acknowledged that it might struggle to achieve this in 2022 and maybe 2023 as well. One of Morgan Stanley’s main rivals, Goldman Sachs, generated a 24.3% ROTCE in 2021, but that’s way above medium-term targets the firm has provided in recent years, which are around 15%.
Baked into its ROTCE target, Morgan Stanley expects to achieve pre-tax wealth management margins above 30% and has a longer-term goal of doubling client assets in wealth management to $10 trillion.
Obviously, investors will want to see proof that Morgan Stanley is hitting these goals. But the bank has dramatically transformed itself and improved its earnings power in recent years, and everything seems to be working right now. I think there is good reason to believe the firm can achieve these goals.
