Morgan Stanley (MS) finds itself in the crosshairs of investor concerns, disappointing earnings, and mounting regulatory concerns, mirroring the struggles faced by its Wall Street counterpart, Goldman Sachs (GS).
For the better part of this year, Goldman Sachs bore the brunt of scrutiny, grappling with a costly retreat from consumer banking, a slowdown in dealmaking, workforce reductions, reports of partner discontent, and questions surrounding the tenure of CEO David Solomon. However, attention has now shifted to Morgan Stanley, its crosstown rival in New York City, as it prepares for a change in leadership. Ted Pick is set to replace James Gorman as CEO on January 1.
Morgan Stanley’s stock has experienced a 14% dip over the past three months and an 8.5% decline over the last six months, marking the steepest drop among major banks with a significant Wall Street presence. In contrast, Goldman Sachs has seen a modest 4.5% decrease in the last three months and a nearly 2% increase in the last six.
The most substantial single-day stock plunge for Morgan Stanley in over three years occurred in October, coinciding with the revelation of a 27% decline in investment-banking revenue for the third quarter. While the entire financial sector grappled with a prolonged downturn in dealmaking, Morgan Stanley’s performance placed it at the bottom among major banks.
Adding to the bank’s challenges are regulatory hurdles, notably a long-running federal investigation into its handling of block trades, or private stock sales. Reports suggest that Morgan Stanley may face a settlement ranging between $500 million and $1 billion with the Justice Department and Securities and Exchange Commission. Simultaneously, efforts to enhance internal controls are underway.
Another regulatory concern revolves around the Federal Reserve’s scrutiny of Morgan Stanley’s controls for preventing money laundering among foreign wealth-management clients. The bank is reportedly working to assure the Fed that any identified weaknesses have been addressed.
Analysts within the firm believe that once the block-trading probes are resolved, Morgan Stanley’s stock price will rebound. The bank also boasts strong performance in critical metrics such as price-to-tangible book value, price-to-earnings ratio, and total tangible common equity compared to its peers.
However, Wells Fargo banking analyst Mike Mayo remains cautious, pointing to various headwinds facing Morgan Stanley including concerns ranging from ongoing regulatory inquiries to business fundamentals, such as slowed growth in its wealth management unit and a slip in investment-banking revenue during the third quarter. Mayo also highlighted governance risks tied to substantial bonuses recently awarded to top executives.
The disclosure of a $20 million share-based bonus to incoming CEO Ted Pick, as well as identical bonuses for co-presidents Andy Saperstein and Dan Simkowitz, raised eyebrows. Mayo questioned the necessity of such retention bonuses, stating, “Do they really need a retention bonus on top of that? I struggle to find a precedent for that unless there’s some unusual flight risk.”
The impending leadership transition from James Gorman to Ted Pick marks the end of one of Wall Street’s longest-serving CEOs. Gorman assumed the role in 2010 when Morgan Stanley faced existential questions in the aftermath of the 2008 financial crisis. Gorman’s strategic shift towards wealth management, including acquisitions of E*Trade and Eaton Vance, proved successful, propelling Morgan Stanley’s stock to a 154% increase under his leadership.
Analysts anticipate that incoming CEO Ted Pick will need to steer the company in a new direction, especially considering the evolving landscape of Wall Street profits, with a focus on dealmaking. Gorman, in his last month as CEO, predicted increased deal activity in 2024 once the Federal Reserve concludes its interest rate hikes.
Despite acknowledging Morgan Stanley’s decade-long run of success, Mayo expressed concerns about a recent change in tone during earnings calls, signaling a potential overconfidence. As the bank faces a pivotal leadership transition and navigates regulatory challenges, its ability to address investor concerns and adapt to the evolving financial landscape will be closely watched.
Source: Yahoo Finance
