Morgan Stanley’s move to increase its stake in its wealth management joint venture with Citigroup, known as Morgan Stanley Smith Barney (MSSB), should improve the firm’s earnings diversification and stability, says Fitch Ratings.
Earlier this year, Morgan Stanley said it plans to buy another 14% stake in the joint venture from Citi. It already owns 51% of the firm, and has the option to increase its stake up to 100% by May 2014. The firms are currently engaged in a process to determine a purchase price for the additional 14%.
Fitch Ratings says that the move will help diversify and stabilize earnings at the firm, particularly if management’s operating margin target is reached. And, the prospect of incremental deposits and regulatory capital relief are additional positives, it notes.
For 2013, Morgan Stanley projects pre-tax margin expansion to the mid-teens from the current level of 11% for its global wealth management segment, Fitch reports. And, the rating agency believes this goal is feasible “as operating costs are expected to benefit from the completion of systems integration at MSSB this summer and other initiatives”. It notes that other large wealth management units of major U.S. banks already operate at higher margins.
“The combined effects of increased ownership and a higher margin are meaningful to Morgan Stanley’s bottom line and earnings mix,” it says, adding that a greater contribution from the wealth management business would also help to further insulate Morgan Stanley from the potential effects of difficult markets on its institutional securities segment.