Morgan Stanley has been able to leverage its wealth management client base and produce loan growth at a rate that is more than 4x faster than the banking industry as a whole.
Morgan Stanley has grown total loans and leases by 153% to $132.49 billion through the end of the second quarter from the second quarter of 2012. During the same period, the entire bank and thrift industry saw loan growth of 37% to $9.909 trillion, according to SNL Financial data. About five years ago, Morgan Stanley announced its intentions to increase lending to wealth management clients, and that business has grown loans by 272% to $65.1 billion as of June 30 from $17.3 billion at year-end 2012.
The lending has helped boost wealth management returns for Morgan Stanley, which is set to report third-quarter earnings Oct. 17. During the first half of the year, Morgan Stanley reported that wealth management interest income reached $2.19 billion. That is some 15% higher than the $1.89 billion total the investment bank produced in all of 2012. Morgan Stanley also reported a wealth management pretax margin of 25% for first half of 2017, up from 12% at year-end 2012.
Autonomous Research US LP analyst Guy Moszkowski said it was a transformational decision for Morgan Stanley to pursue growing loans. "It's been very effective," Moszkowski said in an interview. "They basically had underpenetrated that opportunity with their customers for a very long time."
Moszkowski noted that Merrill Lynch & Co. Inc. emphasized lending growth for years before Morgan Stanley made the practice a priority. Morgan Stanley is currently led by Chairman and CEO James Gorman, who joined the company in 2005 as president and COO after working as an executive with Merrill Lynch earlier in his career.
After taking the helm at Morgan Stanley, Gorman said in 2012 that the company lagged peers in banking revenue. At the time, he saw "enormous upside" by increasing lending, Gorman said.
Loan growth remains a focus for Morgan Stanley, said JMP Securities analyst Devin Ryan, who recently met with leaders of the company's wealth management team.
"Management reiterated that Morgan Stanley is still well under-represented in lending to wealth management clients relative to some of its other large peers, purely a function of a late start in the bank," Ryan said in a Sept. 26 note to clients.
Ryan added that Morgan Stanley is moving toward its goal of $70 billion in wealth management loans by year-end. "However, beyond $70 billion, we still see a significant opportunity to increase the mix further toward loans," he said.
For every $10 billion of loans that replace securities on its balance sheet, Morgan Stanley sees a roughly 5-cent boost to its earnings per share at current interest rates, the JMP analyst explained. The increased lending helps Morgan Stanley bolster its margins because the company is putting deposits to work in higher-yielding loans as opposed to investing in lower-yielding liquid assets such as Treasury securities, Vining Sparks analyst Marty Mosby said. Morgan Stanley saw its deposit base increase significantly in the wake of the Smith Barney acquisition from Citigroup Inc.
Mosby said Morgan Stanley has increased its lending by offering loans to wealth management clients who could use their investment portfolios as collateral. The company has also been offering the same client base mortgages, which had previously been an untapped avenue of growth.
"They have a readily available customer base that they haven't offered this product," Mosby said in an interview. "As that happens, you're going to have very high growth rates but off a very low base."
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