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Morgan Stanley boosts targets after blowout trading quarter

Ambar Warrick, Matt Scuffham and Noor Zainab Hussain
·3-min read
FILE PHOTO: A sign is displayed on the Morgan Stanley building in New York

By Ambar Warrick, Matt Scuffham and Noor Zainab Hussain

(Reuters) - Morgan Stanley boosted both its short and long-term operating targets on Wednesday after coronavirus-induced volatility in financial markets helped the Wall Street bank post a quarterly profit that sailed past estimates.

The company also confirmed plans to buy back $10 billion of shares this year, more than three times the figures announced by its retail banking peers, as it wrapped up results for U.S. lenders, which pointed to a modest rebound in the economy.

"We are in the growth phase of this company for the next decade," Morgan Stanley Chief Executive Officer James Gorman told analysts on a conference call.

Morgan Stanley increased its two-year target for return on tangible equity to 14%-16%, from an earlier forecast of 13%-15%. The metric measures how well a bank is using its capital to produce profit.

The company also raised its longer term target for the same metric to more than 17%, from its previous outlook of 15%-17%.

"If we'd said to you 3 years ago, our aspiration was to have a 17-plus ROTCE, you would have thought we're off the planet," Gorman said, responding to one analyst, who commented that the target looked conservative.

Gorman's comments came after high trading volumes during the final quarter of 2020, stemming from the U.S. elections and the release of coronavirus vaccines, benefited Morgan Stanley's trading unit, which is housed within the institutional securities business.

The bank's revenue from sales and trading rose to $4.22 billion from $3.19 billion a year earlier.

Net revenue rose to $13.64 billion from $10.86 billion last year, while revenue from the company's investment banking division rose to $2.30 billion from $1.58 billion.

Gorman has, however, been taking steps to insulate the bank from its reliance on trading, and engineered two large back-to-back acquisitions, those of Eaton Vance and E*Trade, to bolster its investment management and broking arms.

Morgan Stanley's equity underwriting revenue soared 81% from a year earlier, driven by high profile IPOs and follow-on offerings as clients continued to access capital markets.

Morgan Stanley was among underwriters for IPOs of companies including Airbnb Inc, gaming firm Playtika Holding Corp, fintech startup Affirm Holdings Inc and cloud-based data warehouse firm Snowflake Inc.

"The environment is clearly exceptional, and we are not counting on it to persist in our forward estimates. Nevertheless, there is nothing not to like in these results," Oppenheimer analyst Chris Kotowski said in a note.

The bank's shares, which rose about 34% in 2020, hit their highest level in over 20 years in early trading.

Morgan Stanley's most comparable rival, Goldman Sachs Group Inc, on Tuesday posted a blockbuster fourth-quarter profit that dwarfed Wall Street estimates, but executives warned that capital markets activity fueling results lately will probably slow down.

Morgan Stanley reported a net income applicable to common shareholders of $3.27 billion, or $1.81 per share, in the fourth quarter ended Dec. 31, compared with $2.09 billion, or $1.30 per share, a year earlier.

Analysts had expected a profit of $1.27 per share, according to Refinitiv IBES data.

Fourth-quarter return on tangible equity came in at 17.7%, compared with 13.0% last year and 15.0% in the third quarter.

(Reporting by Ambar Warrick in Bengaluru and Matt Scuffham in New York; Editing by Shounak Dasgupta)