As Morgan Stanley finishes integrating its brokerage joint venture with Citigroup Inc and considers spending $10 billion to buy the whole business years ahead of plan, investors are anxiously awaiting signs that the long-promised profit machine will finally start to purr.
Since agreeing to buy Citi's Smith Barney in 2009, Morgan Stanley executives have told shareholders that returns from the retail brokerage, the world's largest, will soar and create a more consistently profitable bank. Investors are still waiting.
From the end of 2009 to the end of last year, client assets climbed by $89 billion, or 5.7 percent, to $1.65 trillion, even as volatile markets continued to spook clients. Revenue per adviser rose to $755,000 last year from $692,000 in 2009.
Yet the integration is taking longer than expected and market conditions remain difficult years after the financial crisis. Low interest rates, fearful investors and a wave of broker departures also hurt results.
Greg Fleming, the head of Morgan Stanley's wealth management unit, last year scaled back the original pre tax profit margin target of 20 percent to the mid-teens."Those targets are pretty bold because a retail brokerage firm, if they're operating reasonably well, will bring about a 12 to 15 percent return," said Stanley Crouch, chief investment officer of Aegis Capital Corp, whose clients own Morgan Stanley shares.
"Twenty is a pretty big number, especially with all the integration challenges it's been having." Morgan Stanley Smith Barney is a joint venture controlled by Morgan Stanley, which owns 51 percent, with an agreement to buy the rest of Citi's 49 percent stake in three pieces over the next three years.
Morgan Stanley Chief Executive James Gorman is eager to buy the entire 49 percent this year if he and Citi CEO Vikram Pandit can agree on price, sources familiar with the matter have said. Analysts estimate Citi's stake is worth about $10 billion.
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