Morgan Stanley Chairman (Europe), Donald Moore gives The Gateway an exclusive perspective on prospects for Morgan Stanley and the banking industry in general.
The new year started for Morgan Stanley with the arrival of James Gorman as the new CEO. What does this change mean for Morgan Stanley?
James will be only the sixth CEO in my 35 years at Morgan Stanley, so the firm has a long history of stability and successful transition at the senior executive level.
Fortunately or unfortunately, James came into his job at the end of the financial crisis, which means he's had a reason to take a fresh look at all of our businesses and the people running them and make some judgements about which are core to our franchise, and which leaders are best suited to take those businesses to the next level.
In addition, James is a big believer in individual responsibility and accountability. Prior to joining Morgan Stanley, he was a senior executive for many years at another leading investment bank and a partner at McKinsey. He has a keen analytical mind and has brought new discipline to our business. I think he will carefully monitor performance by business, by department, and by region, and hold individual executives accountable for their absolute and relative performances.
Could you tell The Gateway more about James Gorman's strategy with regard to specific departments in the bank?
At the beginning of the first half of 2009, we began to shift our IRCC (interest rate, currency and credit) business from being perhaps too orientated towards structured products to being a client-focused business, building on our footprint in sales and trading to serve clients in our core markets, and we're seeing the results of that this year in how we've been ranked by clients, as well as in our revenues.
In terms of maintaining our leading market share in other areas, for example, equities and investment banking, so far this year we've been number one in global IPOs, number two in global M&A and number three in equities, and we have avoided costly mistakes.
In general, James Gorman has made it very clear that 2010 is about executing on our plan - building out our businesses, increasing our market share, particularly in IRCC, and maintaining our market share where we have a top three position, as well as integrating Morgan Stanley Smith Barney - this will also be the agenda for 2011-2012.
Do you think there will be a change in the relative importance of divisions within banks over the coming years as a result of regulatory change and change in the economy?
It's very difficult to speculate in a highly uncertain world! As a general observation, I would say that fixed income, which has benefited from a decades-long debt supercycle, will represent a smaller revenue opportunity in the near to medium term as the deleveraging process continues. In general in the institutional securities sector, it could account for around 50% of the business in the next couple of years, down from 75% over the past several years - equities and investment banking revenues accounting for the remaining 50%.
You also have to look at the issue firm by firm. Even if the fixed income business in general may not be as robust as it has been historically, certain firms, including Morgan Stanley, have opportunities here. It is James Gorman's - and Morgan Stanley's - strategy that we take significant market share in fixed income over the coming two to three years, and achieve a strength in this area that is commensurate with our global network, our brand and our client footprint. And therefore I would expect to see our fixed income business, on a relative basis, increase substantially over the coming two to three years.
Can you talk about how things have gone with the bank's wealth management arm, Morgan Stanley Smith Barney, since its creation as a joint venture with Citi in January 2009?
James Gorman was the architect of the Smith Barney merger - we own 51% of Morgan Stanley Smith Barney and Citi owns 49% - and ultimately we will have an opportunity to own 100% of the business.
It is a very complex merger, which involved over 2000 people working full time just on the integration. Morgan Stanley Smith Barney is the largest securities distribution force in the largest capital market in the world. So for our corporate clients, when we pitch for IPO mandates or other mandates involving retail distribution, we now have something both unique and powerful to offer. I would expect Morgan Stanley Smith Barney to become even more important to Morgan Stanley over time, especially as individual investors in the US, who have largely remained on the sidelines over the past year or two, re-enter the market and start to buy securities again.
This business tends to be less volatile than the institutional securities business and, in the new world financial services find itself in, we believe that having a lower risk, more balanced business model will serve us very well.
It was hoped that the stake in Morgan Stanley sold to Mitsubishi UFJ would allow the bank access to the Japanese market. Do you think that this result has been achieved?
The co-operation between the two firms has been excellent. In addition to combining our Japanese business with theirs, we now have access to the largest corporations in Japan. These corporations operate throughout the world and the loan joint venture that we have with Mitsubishi UFJ has resulted in approximately 57 deals having been done for a total of 18 billion dollars - and we have an even larger pipeline of upcoming deals.
We also have access to Japanese companies in Japan, leveraging our product skills and our global network for the benefit of MUFG's traditional clients.
Will some financial institutions and/or entities be hit harder than others by increased regulation?
I think it's still too early to be definitive on this issue, but we know enough about the Basel III proposals on capital and liquidity, as well as specific proposals by a number of countries, to make some general observations.
It looks like Swiss banks will be hit the hardest because they have to maintain more, perhaps significantly more, capital than their competitors. Regulators in Switzerland took the Basel III proposals and added what they call a "Swiss finish", which is essentially a top-up to capital adequacy requirements.
Then I would add that those banks that have significant proprietary trading operations will be hit by the Dodd-Frank Act, which severely limits these activities.
I also think that UK-headquartered banks could be at a disadvantage, though that depends on how things evolve from a political and regulatory standpoint - there's been talk about bonus taxes, bonus limits, bank levies, and breaking up the banks.
What steps is Morgan Stanley taking to respond to the growing significance of emerging market economies? Which countries or regions do you think will be most significant in the future for the bank's development?
Let's start by taking the biggest emerging market - China. We were one of the first to see the investment banking opportunities in China. Morgan Stanley started covering China out of Hong Kong over 25 years ago. We sent one of the most senior partners in the firm from New York to Asia. Then, 15 years ago, Morgan Stanley established the first major Chinese investment bank, China International Capital Corporation or CICC, a joint venture between Morgan Stanley and China itself. This has been a hugely successful business both for us and for them.
I think also Korea and India and some countries in Southeast Asia will be important in the future. Asia continues to grow in terms of its contribution to Morgan Stanley - it accounted for about 17% of revenues in our last quarter.
We're also focusing on Brazil, where we've had a presence for a long period of time. Last year we sent one of our most senior bankers in the firm to head up our operation there, and we're extremely pleased with the results. We were the co-global coordinator and sole stabilisation agent for the $70 billion equity offering for Petrobras, the Brazilian energy company, the largest equity offering in history.
We also have a major presence in Russia. Brazil is an incredible success story, as is China with its enormous population and tremendous economic growth, but Russia in some respects is a different market. It is a very rich country in terms of natural resources, but is in many ways a European nation.
Do you think that Morgan Stanley will come to face increased competition from banks based in emerging market nations?
There's always been tough competition in this business. In the 1980s, there were Japanese banks who were going to take over the world. In the 1990s, it was the universal banks. I expect the smart and strong will prosper in the new environment and the weak will perish. This is how capitalism is supposed to work. We're not in any way hoping for or expecting another systemic failure, but we do expect to see clear winners and losers.
But don't underestimate what it takes to build a successful full-service global securities business. It's not just a matter of capital, or size, or ambition. It's about people, relationships, and culture, and brand. Today's market leaders took decades to build their franchises, if not centuries. There are very few stories of new market entrants succeeding. In fact, there's a long history of failures. Having said that, I do expect emerging market banks to provide stiff competition for global banks in their local markets.
What else do you see on the horizon for investment banking in the coming years?
We're going to see continued regulatory and political pressure, and an uncertain and uneven economic recovery, so there will be challenges. But the coming years are also going to hold tremendous opportunities. Globalisation is here to stay. Governments and corporations will have a continued need to refinance. Pension funds will need funding. Corporates will continue to engage in mergers and acquisitions to achieve their strategic objectives. New markets will emerge. New solutions will present themselves. All in all, I'm bullish on banking.
- Debt supercycle: Refers to a steady long-term growth of debt and a build-up of leverage during the post-Second World War period.
- Deleveraging: A company's or country's attempt to decrease its financial leverage, often by paying off some of the debt on its balance sheet, or raising equity, or selling assets, or a combination of all of these.
- Equity offering: Invitation by a corporate to the general public or a certain group of investors to purchase a new issue of shares in that corporate.
- Fixed income product: Any type of investment which yields a fixed return, including the whole asset class commonly referred to as "bonds" .
- Global co-ordinator: A lead underwriter on an equity offering or a debt offering which is made in several countries or on several exchanges simultaneously. They are responsible for co-ordinating the activities of the underwriters in charge of each country or exchange, the investors and the issuer.
- Proprietary trading: The practice of banks investing their own money in order to generate a profit for the institution, as opposed to trading to accommodate customer orders.
- Universal bank: A bank which is both an investment bank and a commercial bank.