Although names like JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), and Goldman Sachs (NYSE: GS) often come to mind when you think of the top players on Wall Street, the highest-valued large U.S. bank on the street is actually Morgan Stanley (NYSE: MS).
It wasn’t always this way, and Morgan Stanley has transformed its business a lot in recent years to achieve the top spot, largely by focusing on wealth and investment management. But now Morgan Stanley is in a very enviable position.
Let’s take a look at how Morgan Stanley’s valuation has progressed in recent years and how the bank has become a darling of Wall Street.
Evolving the business model
One popular way to value banks is on a price-to-tangible book value (TBV) basis, where you compare a bank’s market capitalization or share price to its net worth or tangible book value per share. As you can see below, Morgan Stanley’s valuation has come a long way since the coronavirus pandemic began.
MS Price to Tangible Book Value. Data by YCharts.
The bank now trades at close to 240% of its TBV, which is more than Bank of America and JPMorgan. For much of the last 13 years, Morgan Stanley has traded in the middle of the pack of the Wall Street giants. What changed is the bank’s progression from more of a pure-play investment banking and trading shop to one that is now equally focused on wealth and investment management.
Morgan Stanley has shifted from a bank that made close to three-fourths of its revenue from investment banking and trading to one that just made more than half of its revenue from wealth and investment management in 2022.
In recent years, Morgan Stanley has added scale with the monumental acquisitions of E*Trade and Eaton Vance. Even in a tough year like the one we saw in 2022, the business generated a 16% return on tangible common equity (ROTCE), which is much higher than in 2010. Morgan Stanley’s long-term ROTCE ambitions of 20% are also greater than its peers’.
A big part of this is because wealth and investment management revenues are more consistent and durable, while investment banking, in particular, can be more boom-or-bust. In times like 2021, the investment banking business is great, with surging profits. But then it can fall off quickly as it did in 2022 with the size of the investment banking fee pool dropping by 50%.
This has nothing to do with Morgan Stanley’s performance; it’s more of a reflection of the industry. As such, pure-play investment banks do not get high multiples from the market.
Morgan Stanley’s investment and wealth management business is also more fee-based and much less capital-intensive, which has become more advantageous as major Wall Street banks have faced higher regulatory capital requirements. Morgan Stanley ended 2022 with more excess capital than any of its peers, which has allowed it to return a significant amount of capital to shareholders.
Competition likely to heat up
The way that bank capital rules have changed since the Great Recession has encouraged more capital-light models because the less capital a bank holds, the higher its returns can be and the more money it can return to shareholders.
Make no mistake — Morgan Stanley’s peers have recognized this and are all trying to grow their wealth and asset management business. JPMorgan and Goldman Sachs have talked about it at length, and Citigroup is looking to become a major international wealth management player.
But Morgan Stanley has developed the scale first, and as such has built a moat that it will only look to grow more aggressively in the years ahead, so hats off to CEO James Gorman for his execution.
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