Morgan Stanley’s earnings report just the latest indication all is not perfect with too big to fail.
An all too familiar story line has big banks on both sides of the border covering over their weaknesses with strong numbers in wealth management. Morgan Stanley’s Q4 report
highlights this conundrum.
Morgan Stanley’s top line was $7.5 billion in Q4, $8.0 billion if you add back $468 million in pre-tax charges for the initial implementation of funding valuation adjustments. That’s a $200 million decline from the same quarter in 2013. At the same time its income from continuing operations jumped $567 million or 169% year-over-year to $903 million.
What’s so bad about that you ask? Well, nothing really.
Except, if you consider that Morgan Stanley’s wealth management division generated $1.8 billion in income from continuing operations in Q4, almost double its overall operating profit, the rest of its businesses were operating at a loss.
Furthermore, if you exclude the $1.4 billion discrete income tax benefit ($2.2 billion for the entire 2014) it received related to the Morgan Stanley Smith Barney Holdings LLC (MSSBH) restructuring, the division’s actual operating profit was a far more modest $736 million.
Now, before any financial analysts take offence with these observations, it’s important to note that bank statements are definitely fluid by nature and what happens today doesn’t necessarily translate to tomorrow.
Discrete events – restructuring turned MSSBH from a partnership to a corporation altering the applicable tax rate which in turn led to the release of a deferred tax liability – are generally accounted for as they happen. The benefit is derived when the deferred tax liability is higher than the resulting income tax based on the change in its tax status.
Without wading any further into the murky tax waters we can wrap this up by pointing out that Morgan Stanley’s wealth management division (excluding tax benefit) saw operating profits increase by a very modest 2.9% in the fourth quarter but a very robust 15% for all of 2014. Take wealth management out of the equation and Morgan Stanley’s year becomes far less interesting.
Perhaps that’s why it released its strategic update
yesterday outlining how its turnaround is coming along. By the fourth quarter of fiscal 2015 it expects its wealth management division to have pre-tax margins between 22-25%, up from 20% in 2014.
That’s great news if you work in its wealth management division but like many of the big banks in Canada, it’s the rest of the business that’s worrisome.
Too big to fail’s definitely got issues.