The theory that the survivors on Wall Street should now have an easy time of it because their competitors have been squashed and they are repositioning for new market conditions may be a bit overblown. As an analyst from FBR argues today, the play of ramping up the brokerage business faces a lot of challenges from continued market volatility and aggressive recruitment/retention payments making it a much more expensive business to be in.
They urge caution on Morgan Stanley. Although Morgan Stanley seems to have won out in its joint venture with Citigroup’s Smith Barney, the brokerage business is far from easy street thiese days. “We entered 2009 with a negative view on the profitability of retail investor channels, given the significant declines in equity markets, and we have become more cautious due to the continued market volatility and the aggressive retention/recruitment packages currently being offered to brokers in the retail channel,” FBR explains.
Here’s the two important points from the report:
* Takeaways. Until capital markets activity stabilizes, competitive
pressures for retail brokers subside, and/or valuations become
more attractive, we will maintain a cautious stance on MS shares.
Although we expect Morgan Stanley to benefit from improved market
share due to the significant disruptions at competitors over the
past year, given the current market conditions, we see little
potential for return on equity (ROE) expansion much beyond 10%.
* Value add. Morgan Stanley’s recently announced joint venture with
Citigroup’s Smith Barney unit fulfils one of the company’s
strategic initiatives implemented in response to the changing
market environment. Morgan Stanley’s majority interest in the
joint venture expands the business with stable, less
capital-intensive revenue streams. Morgan Stanley appears to have
benefited most from the transaction; however, the up-front
payments required to retain talent in an environment of declining
revenues and aggressive recruiting from competitors reduce the
incremental benefit from the deal.
The bottom line is that FBR thinks there is a 10 per cent possible upside in Morgan Stanley, but risks involved still make them cautious on the stock.