Morgan Stanley Sees ROE Climb on Brokers’ Pay Ratio, Commodities

Jun 11, 2014 2:33 am ET

June 11 (Bloomberg) -- Morgan Stanley will boost profitability as it pays brokers a smaller cut of revenue and the firm’s commodities business earns better returns following sales of two units, Chief Executive Officer James Gorman said.

The company, which earned a return on equity of about 5 percent each of the past two years, has a plan to “in 2015 and beyond, sustainably drive ROE at 10 percent or higher,” Gorman said yesterday at his bank’s investor conference in New York. He didn’t provide a return target for this year. Last year, he said the firm could post a 10 percent ROE by 2014 if regulators allowed it to return a “reasonable” amount of capital to shareholders through dividends and buybacks.

Morgan Stanley’s shares jumped 64 percent last year as the company increased brokerage margins and equity-trading revenue. Gorman yesterday laid out the potential drivers of further growth in revenue and profitability, including additional lending, lower cost ratios and greater payouts of capital.

The bank will seek to lower the compensation-to-revenue ratio in its wealth-management unit to 55 percent or less from 58 percent in 2013, Gorman said. He also set targets of a 40 percent ratio for the New York-based firm’s investment bank and asset-management divisions.

Morgan Stanley’s commodities division eventually can more than double its return on equity from less than 5 percent in 2012 following sales of two oil businesses, he said. ROE is a measure of how well a firm reinvested profit to generate additional earnings.

The bank announced this week an agreement to sell its stake in oil-transportation company TransMontaigne Inc. to NGL Energy Partners LP for $200 million. Morgan Stanley agreed in December to sell its oil-merchanting business to Moscow-based OAO Rosneft.

Gorman said yesterday he expects the Rosneft deal to be completed in the third quarter. Bloomberg News reported in April that the two companies probably would wait to seek regulatory approval until political tensions cooled after the U.S. sanctioned Rosneft CEO Igor Sechin, an ally of Russian President Vladimir Putin, over the turmoil in Ukraine.