SWOT Analysis Report on Morgan Stanley
Morgan Stanley
(or ‘the company’) is a global financial services firm. The company provides
investment banking, financial advisory services, wealth management, asset
management, credit cards and other related consumer products and services.
Morgan Stanley operates in the Americas, Europe, Asia Pacific, the Middle East
and Africa. It is headquartered in New York City, New York, and employed 57,061
people as on December 31, 2012. The company recorded revenues of $26,112
million during the financial year ended December 2012 (FY2012), a decrease of
19% over FY2011. The operating profit of the company was $515 million in
FY2012, a decrease of 91.6% over FY2011. The net loss was $30 million in
FY2012, compared to a net profit of $2,067 million in FY2011.
SWOT ANALYSIS of Morgan Stanley
Morgan Stanley
is a leading underwriter of equity-related securities, convertible securities
and American Depositary Receipts (ADRs). It also commands a strong market
position in underwriting fixed income securities including investment grade
debt, non-investment grade instruments, mortgage-related, and other
asset-backed securities. Morgan Stanley is a key player in the financial
services industry and leverages its reach, brand name and market position to
increase association with top clients. However, increasing competition could
impact the company’s profitability.
Strengths
Leading positions in the securities market sustains
revenue visibility
Morgan Stanley
is a leading underwriter of equity-related securities, convertible securities
and
American
Depositary Receipts (ADRs). It also commands a strong market position in
underwriting fixed income securities, including investment grade debt,
non-investment grade instruments, mortgage-related and other asset- backed
securities, tax-exempt securities and commercial paper and other short-term
securities. In FY2011, Morgan Stanley’s institutional securities segment was ranked
the first leading player in global mergers & acquisitions (M&A), and
the leading player in global IPO and global equity. Morgan Stanley's subsidiary
‘Morgan Stanley Investment Management’ is one of the largest global asset
management organizations. Leading position in the securities market sustains
the company’s revenue visibility.
Well diversified business mix sustaining revenue
visibility
Morgan Stanley’s
business mix is well diversified. For instance, in FY2012, global wealth
management segment accounted for 51.4% of revenues with the rest from
institutional securities segment (40.1%), and asset management segment (8.4%).
Global wealth management segment’s revenues in turn were from a variety of
sources including brokerage of securities and trading, asset allocation,
annuity products, and cash management services. Institutional securities
division’s revenues were also diversified with a well balanced mix consisting
of equity, fixed income, and investment banking. Well diversified business mix is sustaining the
company’s revenue visibility.
Increasing equity contributing to strong capital
position
Morgan Stanley’s
equity capital has been increasing in the recent years. For instance, the
company’s equity capital increased from $57,211 million in FY2010 to $62,109
million in FY2012. As a result of which, the company’s tier 1 capital ratio
increased from 15.5% at the end of FY2010 to 17.7% at the end of FY2012.
Likewise tier 1 common ratio increased from 10,2% at the end of FY2010 to 14.6%
at the end of FY2012. Moreover, Morgan Stanley increased its global liquidity
reserve to $182 billion at the end of FY2012 from $171 billion in FY2010. In
FY2011, the company negotiated two significant transactions to further
strengthen its balance sheet (1) conversion of the company’s stock owned by
Mitsubishi UFJ Financial Group, Inc. (MUFG), which increased the company’s
common equity capital by $8 billion and it also eliminated legacy exposure
through a settlement with MBIA. This settlement significantly reduced
risk-weighted assets and increased the pro forma tier 1 common ratio by
approximately 75 basis points by the end of 2012 under the proposed Basel III
framework. Therefore, increasing equity
capital is contributing to strong capital position.
Weaknesses
Exposure to distressed institutions leading to loss
booking
Morgan Stanley
has substantial exposure to distressed institutions such as monoline insurers.
Due to the exposure to distressed monoline insurers, the company suffered
losses of $1,838 million in FY2011, compared with losses of $865 million, and
$232 million in FY2010, and FY2009 respectively. As the company’s exposure to
monolines is still significant, it could continue to book losses until either
the exposure is reduced significantly or the monoline industry’s prospects
improve dramatically.
Exposure to Japan through joint venture with MUFG
Morgan Stanley
has substantial exposure to Japan through its joint venture (JV) with MUFG. In
that partnership, Morgan Stanley had set up two businesses in Japan that
operate on a joint venture basis. One business is operated and risk managed by
Morgan Stanley. The other is operated and risk managed by MUFG. MUFG has a 60% economic interest in each
joint venture while Morgan Stanley’s is 40%. Morgan Stanley recorded a loss of
$783 million and $62 million in FY2011 and FY2010 respectively, due to its 40%
stake in the JV. The loss was associated with trading results and write-downs
in its fixed income business, operating expenses, and other costs. This loss is
reflected within institutional securities in the other revenue line item.
Though the company recorded income of $152 million through this JV in FY2012,
there is no assurance that these integrations will yield all of the positive benefits
anticipated. Morgan Stanley could continue to book losses from its JV with MUFG
as the operating environment in Japan has been tough post the recent tsunami.
Over dependence on the US market increasing the
business risk
Morgan Stanley
is more dependent on the US market in comparison to other geographies. For
instance, in
FY2012, the company derived 77.4% of its revenues from the US market, where as
it
derived 11.8% of
its revenues from Europe, the Middle East and Africa and 10.9% of its revenues from
Asia. Morgan Stanley’s increasing concentration in the US increases the risk of
negative financial impact owing to events that affect the US economy.
Concentration of operations in the US not only increases its exposure to local
factors, but also deprives the company of more revenues from high growth
markets in Asia and other Latin American countries.
Opportunities
Favorable outlook for global mergers and
acquisitions
Global mergers
and acquisitions (M&A) is likely to be favorable in 2012. According to industry
sources, in FY2012, global M&A value touched $2.7 trillion, down 2% from
FY2011. Despite the overall decrease in M&A, the last quarter of 2012 saw a
volume of $908.6 billion, the highest quarterly total since the last quarter of
2007 ($1 trillion). In spite of many uncertainties, the trend of increased transaction
value in the fourth quarter of 2012 is expected to continue in FY2013, as
indicated by increased consumer confidence according to industry sources.
Favorable trends could help Morgan Stanley to be the leading players in global
M&A league tables helping it expand fee and related income from those
deals.
Asia-Pacific wealth market likely to offer growth
opportunities
The population
and wealth of Asia-Pacific's high net worth individuals (HNWI) increased
significantly over the last five years (2007-12), according to industry
sources. Compared to the rest of the world, population and wealth of
Asia-Pacific’s HNWIs grew at double and triple rates. In particular, Hong Kong
and India experienced the most significant gains in HNWI population and wealth
in 2012, following steep declines in 2011. Hong Kong’s HNWI population grew by
35.7% and their wealth by 37.2%, while India’s population grew by 22.2% and
their wealth by 23.4%. Japan and Taiwan experienced steady growth at 4.4% and
7% respectively. Asia-Pacific’s Ultra HNWI population and wealth grew 15.4% and
17.8% respectively, while that of the rest of the world expanded by 9.7% and
9.4% respectively. Building on this trend of strong performance in 2012,
Asia-Pacific region is positioned to become the largest wealth market by
population by 2014.With Morgan Stanley launching its wealth management
operations and strengthening its presence in Asian countries, the company is
set to benefit from the growth in the Asia-Pacific wealth management market.
Positive outlook for asset management industry and
custody bank sector
The global asset
management and custody banks sector is forecasted to grow at a compounded
annual growth
rate (CAGR) of 4.1% during 2011-16. As per MarketLine, the global asset
management and custody banks sector grew by 2.7% in 2011 to reach a value of
$82,599.1 billion. In 2016, the global asset management and custody banks
sector is forecast to have a value of $100,984 billion, an increase of 22.3%
since 2011.The Americas accounts for 63.4% of the global asset management and
custody banks sector value. The main factors driving this growth would include
the need for private individuals to make provision for their pension
requirements. Positive outlook for asset management industry and custody bank
sector could provide revenue and profit expansion opportunities for Morgan
Stanley.
Threats
Regulatory and legislative changes in the US
Legislation proposing
significant structural reforms to the financial services industry is being
considered in the US Congress, including, among other things, the creation of a
Consumer Financial Protection Agency, which would have broad authority to
regulate financial service providers and financial products. In addition, the
Federal Reserve Bank has proposed guidance on incentive compensation at the
banking organizations it regulates and the US Department of the Treasury and
the federal banking regulators have issued statements calling for higher
capital and liquidity requirements for banking organizations. Complying with
any new legislative or regulatory requirements and any programs established
there under by federal and state governments to address the current economic crisis
could have an adverse impact on Morgan Stanley’ results of operations.
Intense competition likely to keep margins under
pressure
There are nearly
700 financial firms from around the world that compete in the US market to
provide investment management services to fund investors. Nearly 60% of the US
fund and trust sponsors are independent fund advisers, and these sponsors
manage more than half of investment company assets. Banks, insurance companies,
securities broker-dealers, and non-US fund advisers are other types of sponsors
in the US marketplace. Historically, low barriers to entry have attracted a
large number of investment company sponsors to the fund marketplace in the US,
and active competition among these sponsors has led to squeeze on margins
(front-end and back end loads charged by mutual fund companies). These low
barriers to entry led to a rapid increase in the number of fund sponsors in the
1980s and 1990s. However, this trend has reversed itself since 2000. About 387 fund
advisers left the fund business from 2000 through 2009; at the same time, about
265 new firms entered. So, the competition in the industry continues to be
intense and dynamic. As a result, margins are expected to be under pressure for
companies that operate investment funds.
Consolidation in fund management industry
The fund management
industry has undergone major consolidation in the recent years. For instance, in
January 2011, Institutional Financial Markets, Inc. (formerly Cohen and Co
Inc.) acquired JVB Financial Holdings, LLC (JVB), an investment firm
specializing in the wholesale distribution of fixed income securities, by the
company’s subsidiary Cohen Brothers, LLC. Also in February 2011, Sprott Inc.
acquired Global Resource Investments, Ltd., Terra Resource Investment
Management, Inc. and Resource Capital Investment Corporation (collectively, the
Global Companies). Further in April 2012, Apollo Global Management LLC acquired
Stone Tower Capital LLC, an alternative credit manager with approximately $18
billion of assets under management (AUM) across a variety of alternative credit
funds. It is now clear that players in the industry are looking to up their
scale through consolidation. Ongoing consolidation is creating larger rivals
with diversified businesses who could take away market share from the company
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