Financial Times Weekend 22-23Feb2020

22 February/23 February 2020 ★ FT Weekend 15

COMPANIES

Morgan Stanley told analysts that the

ETrade deal would have only a small

impact on its risk measures — and

would actually improve its capital ratio.

While that bodes well for other trans-

actions in the financial services sector, it

does not necessarily signal open season

for all kinds of bank mergers.

Mr Spatt said that a multibillion-

dollar acquisition of a regional lender by

a large bank would be likely to attract

more regulatory scrutiny. Mr Abouhos-

sein noted that the deals that would

have an adverse impact on banks’ capi-

tal charges would be “more difficult” to

achieve.

A senior investment banker said that

Morgan Stanley’s deal did not immedi-

ately prompt calls from other banks that

wanted to explore their own moves, and

even the threat of a potentially less

favourable regulatory environment

under a different US administration

next year had not so far spurred much

activity. But if the ETrade deal “pans out

there might be a delayed reaction to it”,

he added.

Some observers have concerns sepa-

rate to those about the stability of the

financial system — not so much too big

to fail as too big to be good for consum-

ers.

Saule Omarova, a Cornell law profes-

sor, said the ETrade purchase was a “sig-

nal that it’s basically open season for

aggressive growth by acquisition”. She

added that regulators should consider

the extent to which Morgan Stanley

would use ETrade’s platform and con-

sumer base to win more customers for

the bank’s traditional businesses.

On a call with analysts, Morgan

Stanley executives described “very sig-

nificant revenue opportunities”, since

ETrade attracts only 10 per cent of its

clients’ total wealth and Morgan Stanley

will now have an ideal launch pad to vie

to manage the other 90 per cent through

the bank’s long-established advisory

business. Morgan Stanley also plans to

use ETrade’s technology to invigorate

the consumer banking platform it offers

wealth clients, where slow growth has

frustrated some executives.

If those plans come to fruition, Mor-

gan Stanley will reap far bigger financial

rewards than the “conservative” $550m

of annual synergies and efficiencies the

bank promised analysts within three

years.

But it would also bring US finance

closer to the future that Ms Omarova

foresees, where “we live in a world

where there are two or three providers

of financial and technology services, to

which we go to for everything we need”.

“If we are in that world then Ameri-

can consumers, and global consumers,

are definitely not winning because we

will not have any power,” she said.

Goldman Sachs, which last month

unveiled its road map to diversify away

from Wall Street into a broader financial

services group, is the obvious candidate

for another sizeable merger.

It did not look at the ETrade deal

because “it’s a business that’s been driv-

ing fees out of the [trading] business”,

said one person familiar with the bank’s

strategy. “We wouldn’t have found that

attractive.” That’s not to say the door is

closed to other opportunities.

Additional reporting by Eric Platt in

New York

‘If we are in

that world

consumers

are not

winning

because we

will not

have any

power’

A decade of bank deals*

Acquirer/target (deal value, bn)

* Selected large deals

Sources: Dealogic; Bloomberg

         

Jun 

Capital One Financial/

ING Direct USA



Jan 

Royal Bank of Canada/

City National



Jan 

Huntington

Bancshares/

FirstMerit



Jun 

CIBC/

PrivateBancorp



May 

Fifth Third Bancorp/

MB Financial



Jan 

Chemical Financial/

TCF Financial



Feb 

B B &T/

SunTrust Banks



Nov 

Charles Schwab/

TD Ameritrade



Nov 

First Horizon

National/IberiaBank



Feb 

Morgan Stanley/

ETrade Financial



Morgan Stanley makes move for ETrade

Revenues (bn)





     

TD Ameritrade

Charles Schwab

ETrade

L AU R A N O O N A N— N E W YO R K

Morgan Stanleyhas given a boost to
those who have long argued that a wave
of banking takeovers is on its way after
striking the biggest deal by a “global sys-
temically important bank” since the
label was created during the financial
crisis.
“As we enter the latter part of the eco-
nomic cycle and a slowdown in earnings
growth, we expect more transactions,”
said Kian Abouhossein, analyst at
JPMorgan, on the potential of other
deals to follow Morgan Stanley’s $13bn
acquisition of online brokerage ETrade.
The ETrade deal offers four big pluses
to the bank.
First, buying a company valued at
about 14 per cent of its own market capi-
talisation will allow Morgan Stanley to
boost annual revenues by far more than
the 3 per cent it posted last year.
Second, the bank aims to become
more profitable through $400m in syn-
ergies and $150m in lower funding costs
thanks to ETrade deposits, and because
the 45 per cent margins in its business
are better than the 28-30 per cent Mor-
gan Stanley makes in wealth manage-
ment even after ETrade embraced a
zero commission fee structure last year.
Third, the deal is also a strategic pivot
for the banking group. After it com-
pletes, Morgan Stanley will earn 57 per
cent of its pre-tax profits from invest-
ment management and asset manage-
ment, up from 51 per cent last year. This
is consistent with its stated strategy of
investing in “more durable” and “capital
light” business than the investment
banking and trading powerhouse that
the bank still insists it “loves”.
Finally, the acquisition gives Morgan
Stanley a greater stake in the younger
and less wealthy demographic that
makes up a significant portion of
ETrade’s 5.2m client base.
All of those reasons support the idea
that Morgan Stanley could be a trend-
setter for big banks in a way that last
year’s $28bn acquisition of US regional
group SunTrust by rival BB&T was not.
“The traditional [investment] bank-
ing business is not enough of a growth
platform,” said a partner in a leading
Wall Street law firm’s deal practice.
“That banks are wanting to find new
points of contact with retail investors
makes sense, and is one the regulators
allow.”
The ETrade deal requires approval
from the Federal Reserve and the Office
of the Comptroller of the Currency.
James Gorman, Morgan Stanley’s chief
executive, told Wall Street analysts his
team was in a “constant dialogue” with
both regulators and would not have pur-
sued the deal if it did not think it would
be “viewed favourably”.
Chester Spatt, professor of finance at
Carnegie Mellon and former economist
for the US Securities and Exchange
Commission, said he did not see “sys-
temic” hurdles for the acquisition since
“it’s not so much about banking, it’s
about the broking parts of the business
and investing”.
Policymakers’ post-crisis efforts to
curb the risk of banks becoming too big
to fail have largely focused on banking
businesses, specifically activities that
affect an institution’s assets as meas-
ured by risk.

Morgan Stanley’s ETrade deal paves

the way for more sector takeovers

Intensifying competition for middle America’s wallets is fuelling talk of further consolidation

Morgan Stanley

told analysts

that the ETrade

deal would have

only a small

impact on its

risk measures —

and would

improve its

capital ratio

Brendan McDermid/Reuters

L AU R A N O O N A N— N E W YO R K

Top investment banks’ revenues fell to

their lowest level since the financial cri-

sis last year, spurring increased job cuts

even as global equity markets boomed,

research from Coalition, the industry

monitor, shows.

The world’s 12 largest investment banks

posted combined revenues of $147.5bn

across their trading and investment

banking businesses last year, down

4 per cent year-on-year to the lowest

level since 2008. They responded by

cutting 6 per cent of workers in those

divisions — 2,900 people — the sharpest

rate of lay-offs since Coalition began col-

lecting that data in 2012.

The investment banking perform-

ance contrasts with the record profita-

bility at many of their parent groups,

such asJPMorgan Chase andMorgan

Stanley, where earnings were powered

by strong trends in other parts of their

businesses, including consumer bank-

ing and investment management.

Equities trading was the weakest busi-

ness last year, Coalition said, with reve-

nues down 10 per cent to $41.1bn across

the pack. Mike Mayo, analyst at Wells

Fargo, said “powerful secular trends”

meant equities trading revenues

dropped at the big banks even while

equities markets soared.

“Passive investing... has contrib-

uted to this mismatch between stock

prices and stock-related profits,” he

added, describing the phenomenon

where more wealth is kept in baskets of

stocks rather than actively traded, lead-

ing to fewer opportunities for banks to

make commissions.

Banks’ stock trading profits have also

been hit by a push towards lower com-

missions, partly because of European

regulations known as Mifid II, and by

increased competition from trading

houses outside the traditional banking

system.

Fixed income revenues rebounded

3 per cent to $66.2bn across the group

last year, from an abysmal 2018, while

investment banking revenues fell 3 per

cent to $40.2bn.

Analysts are not predicting an imme-

diate improvement.

“Investment bank revenues seem to

have stabilised in the last two years and

we expect them to remain at these levels

in [the] short term,” said Amrit Shahan,

head of research at Coalition.

Mr Mayo said overall investment

bank revenues “should be bouncing

along the bottom now. The question is

when and to what extent could revenues

improve? At some point lower margins

can get mitigated by higher volumes,

though that’s a story the industry has

been telling for the last few years.”

The world’s biggest banks have spent

much of the past decade trying to pivot

their businesses away from trading and

investment banking businesses, which

are more volatile than other divisions

and attract high capital charges.

Financials

Investment

banking

revenues fall

to lowest since

2008 crisis

‘Passive investing... has

contributed to this

mismatch between stock

prices and profits’

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FEBRUARY 22 2020 Section:Companies Time: 21/2/2020 - 17: 18 User: cathy.pryor Page Name: CONEWS3, Part,Page,Edition: LON, 15 , 1