Updated Sunday, August 31, 2014 as of 6:20 AM ET

Morgan Stanley Aims to Boost Profitability on Brokers' Pay Ratio, Commodities

(Bloomberg) -- Morgan Stanley will boost profitability as it pays brokers a smaller cut of revenue and the firm’s commodities business earns better returns following sales of two units, Chief Executive Officer James Gorman said.

The company, which earned a return on equity of about 5% each of the past two years, has a plan to “in 2015 and beyond, sustainably drive ROE at 10% or higher,” Gorman said yesterday at his bank’s investor conference in New York. He didn’t provide a return target for this year. Last year, he said the firm could post a 10% ROE by 2014 if regulators allowed it to return a “reasonable” amount of capital to shareholders through dividends and buybacks.

Morgan Stanley’s shares jumped 64% last year as the company increased brokerage margins and equity-trading revenue. Gorman yesterday laid out the potential drivers of further growth in revenue and profitability, including additional lending, lower cost ratios and greater payouts of capital.

The bank will seek to lower the compensation-to-revenue ratio in its wealth-management unit to 55% or less from 58% in 2013, Gorman said. He also set targets of a 40% ratio for the New York-based firm’s investment bank and asset-management divisions.

Morgan Stanley’s commodities division eventually can more than double its return on equity from less than 5% in 2012 following sales of two oil businesses, he said. ROE is a measure of how well a firm reinvested profit to generate additional earnings.

The bank announced this week an agreement to sell its stake in oil-transportation company TransMontaigne Inc. to NGL Energy Partners LP for $200 million. Morgan Stanley agreed in December to sell its oil-merchanting business to Moscow-based OAO Rosneft.

Gorman said yesterday he expects the Rosneft deal to be completed in the third quarter. Bloomberg News reported in April that the two companies probably would wait to seek regulatory approval until political tensions cooled after the U.S. sanctioned Rosneft CEO Igor Sechin, an ally of Russian President Vladimir Putin, over the turmoil in Ukraine.

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Comments (1)
Another reason I'm glad I left MS.

Profits may be getting better for shareholders of MS, but Mr. Gorman is so focused on everything but the driving force of his business - THE ADVISORS. He is making some grave mistakes by continuing to discount the fact that Advisors are the backbone of the business... and their compensation needs to remain competitive to keep them onboard.

Profitability for the firm will not continue until Gorman learns that he cannot continue to squeeze the Advisors for more and more.

We see it every day - the continued trickle of defection from MS to other firms. As retention bonus paybacks diminish, more will leave the firm.

Another interesting note - the online survey that us 'defectors' were asked to fill out had no questions about upper management or the direction of the company as driven by Mr. Gorman. I believe that the king just doesn't want to hear that he is wearing no clothes.

I feel for those who remain. Believe me, there is a better life outside of MS.
Posted by don g | Thursday, June 12 2014 at 8:51AM ET
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