Morgan Stanley (NYSE:MS) is set to trim the size of its fixed income unit according to a report in The Wall Street Journal.
The global investment bank is scaling back its ambition to be a top fixed-income company, by announcing its investors that its fixed income unit would aim to pull in $1.5 billion to $2 billion in quarterly revenue.
Morgan Stanley compared to rivals
The investment bank’s new revenue target is much below the $3 billion to $5 billion revenue generated by its rivals Goldman Sachs Group, Inc. (NYSE:GS) and JPMorgan Chase & Co. (NYSE:JPM) from fixed-income business during the first quarter.
During a dinner earlier this month, Morgan Stanley (NYSE:MS)’s president of Institutional Securities Colm Kelleher disclosed the revised revenue target that was much below its peak, $3.39 billion posted during the first quarter of 2007. During last quarter, its fixed-income unit could generate only $1.52 billion revenue.
Colm Kelleher further indicated that targeting much larger revenue would only hurt the investment bank’s profitability besides eating up too much of capital as risk escalates.
Morgan Stanley (NYSE:MS)’s new thinking is quite divergent from the view held by its ex-CEO John Mack, who pushed its Fixed Income, Currencies and Commodities unit to be the bank’s major profit center.
Fixed income trading is normally lumped along with currencies and commodities, under the acronym “FICC” and generated substantial profit for marquee investment banks such as Goldman Sachs Group, Inc. (NYSE:GS), Citigroup Inc (NYSE:C) and Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB). However Morgan Stanley (NYSE:MS) had to weather the 2008 financial crisis when it suffered $9-billion mortgage-trading loss.
James Gormon, who took over as the CEO of Morgan Stanley (NYSE:MS) in 2010 has set his focus on profitability as opposed to growth. Echoing his CEO’s view, Ruth Porat, the Chief Financial Officer told investors last July that the investment bank is not going after size, while emphasizing returns are the most important parameter.
The renewed focus to provide enhanced return led Morgan Stanley (NYSE:MS) to cut its employee count by 7,500, a reduction of 12 percent since 2010.
Amid concerns of lower credit rating by Moody’s Corporation (NYSE:MCO), last summer several bond-trading clients ignored Morgan Stanley (NYSE:MS), resulting its FICC market dropping to 5 percent in 2012 as against 6.1 percent posted in the previous year.
Over the years, Morgan Stanley (NYSE:MS) had to confront several trading losses and high management turnover at its FICC business unit. All these forced the investment bank to consider fixed-income trading not only as a stand-alone business unit but to buttress its other businesses.