Slowly but surely

Morgan Stanley homes in on underwhelming target

Morgan Stanley is homing in on its underwhelming financial target. The investment bank earned $1.7-billion profit in the third quarter. Adjusting for one-off gains, though, it falls to $1.3 billion, which is just shy of Chairman and Chief Executive James Gorman's goal of hitting a nine per cent return on equity by next year.

That's not bad for what is meant to be the slowest three months of the year in the money business. Until the bank can find its way to more profitable returns, though, shareholders shouldn't get too excited.

That's not to deprive Morgan Stanley of what was a marked improvement on last year's summer months. All its major businesses contributed to the 11-per cent increase in revenue from last year - though that was lower than the 25-per cent jump rival Goldman Sachs reported on Thursday.

Its fixed-income traders, for example, raked in 44 per cent more than last year, after stripping out accounting gains on the firm's own liabilities. That's a better showing than all its peers except Goldman, and should mean the unit is getting closer to the 10-per cent annualised return on equity target Gorman set for it. Equities traders solidified their position at the industry's top with revenue of $1.8 billion, while wealth management's pre-tax margin jumped to a decent 22 per cent.

Such solid progress is not to be sniffed at. But as with the second quarter, Morgan Stanley's results were skewed by a tax break. This time, it was only $237 million, a little over half the benefit in the three months to June. Exclude that and the accounting gains, and the headline annualised return of 10 per cent, which just about equates to the firm's cost of capital, drops to eight per cent.

In the context of the bank's slow turnaround since the financial crisis, that's pretty good. It also means that Gorman can point to several quarters of either growth or consistency, depending on the business.

All of this has helped convince investors Morgan Stanley is getting somewhere. On the back of results Friday, the stock jumped as much as 3.5 per cent to trade just shy of book value - a rare event. Gorman's next trick, though, is to show that the bank is worth more than that. And that is some way off.