Morgan Stanley margin inches toward 20%

Morgan Stanley is showing further improvement in the profitability of its brokerage business, but still fell short of its long-stated goal of a 20% pretax profit margin, according to second-quarter results released today.
“The quarter wasn’t quite as good as I expected,” said Alois Pirker, research director for consultant Aite Group LLC. “The profit margin improved a little but it stayed under 20%. They’re still experiencing some integration costs from the Smith Barney acquisition.”
Still, chief executive James Gorman did not back down from his June comment setting a margin goal of 20% to 22% by the end of 2015.
“We increased our margin goals for the wealth management business [in June] to 20% to 22% by the end of 2015, without the benefit of higher interest rates or markets, and more than 23% if markets or rates increase,” he said in an investor conference call this morning.
The 18.5% pretax profit margin for the second quarter is up from 17% in the first quarter but still significantly lower than the 26.3% margin Bank of America reported for its Merrill Lynch brokerage yesterday. Still, the margin increase marks the fifth consecutive quarter that the company has improved its profitability and puts it within spitting distance of the 20% target that Mr. Gorman set for the wealth management business after he engineered the merger of Morgan Stanley’s brokerage with that of Smith Barney in 2009.
With the full effect of 100% ownership of the brokerage joint venture, Morgan Stanley might surpass the 20% margin this quarter if the markets cooperate. It took a $152 million charge in the second quarter to complete the $4.7 billion purchase of Citigroup’s remaining 35% stake in the business at the end of last month.
Revenue in the wealth management business ($3.53 billion) was up 2% from the first quarter and 10% year-over-year. Mr. Gorman’s focus on controlling costs appears to be paying off as non-interest expenses were flat with the first quarter and up only 3% from the second quarter of last year. Net income of $326 million was up 41% from the same quarter in 2012.
The stabilization of adviser head count is also an encouraging sign, said Mr. Pirker. After losing thousands of advisers since the merger with Smith Barney, Morgan Stanley finished the quarter with 37 more advisers than it started with. Annualized revenue per rep was up 12% from the second quarter last year to $866,000. That compares to the more than $1 million per rep that Merrill reported yesterday, although the firms may calculate their numbers differently.
“The adviser headcount number is going to bounce around from quarter to quarter,” Mr. Gorman said on the conference call. “The productivity of advisers is the more important issue.”

“There’s still a gap between Morgan Stanley and Merrill but this is certainly a solid quarter for them,” Mr. Pirker said.