Morgan Stanley may continue cutting assets in its fixed-income business for another five years as it seeks higher returns, said Howard Chen, a Credit Suisse analyst.
Bloomberg reports that Morgan Stanley must return capital freed up by the reductions to shareholders, buy the rest of its brokerage joint venture and lower its funding and operating costs, New York-based Chen wrote in a note to clients yesterday. Achieving those goals can allow the firm, which will probably produce a 5% return on tangible equity this year, to earn a 9% ROTE even without an improving environment, Chen said.
Chief Executive Officer James Gorman pledged to improve returns as his bank’s stock has lagged below its book value for more than two-and-a-half years. Gorman, 54, said in October that it didn’t take 'heroic assumptions' to see how his plans will get the New York-based firm’s returns to its cost of capital, usually estimated at around 10%.
'We believe franchise restoration, healthier market conditions and the absence of new negatives from here should drive further share-price outperformance', Chen wrote. 'Further proof points and effectuation of the ROTE expansion plan, with hopefully a better revenue backdrop, will drive a re-rating of Morgan Stanley (MS) shares from still depressed valuations'.
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