In the last few years, Morgan Stanley’s balance sheet has changed almost beyond recognition. From having almost $2 trillion in assets in 2010 (measured on an IRFS basis), the bank now has a third less. Derivatives notional fell to $14.9 trillion from $26.2 trillion, a 43% decline. And corporate debt in the bank’s trading book plunged by 58% from $69 billion to $28 billion.
Under Basel rules, these changes have had a huge impact on Morgan Stanley’s capital requirements. Market risk-weighted assets declined by 60% since the end of 2012, contributing to an 11% decline in capital requirements overall, the most of any large US bank. That helped boost Morgan Stanley’s return on RWAs to an average of 2.4% last year, ahead of its peers.
The bank achieved this return across different business segments, but noteworthy was fixed income sales and trading net revenues, which were $5.1 billion in 2016. That is the highest figure since 2012. Somehow, despite reducing fixed income assets in the last five years, and employing fewer staff, Morgan Stanley is still making money in this asset class.
This has led to some laudatory press coverage. Recalling the old days when Morgan Stanley’s proprietary trading desk could lose $9 billion in a single quarter, observers praised the bank’s ability to make more with less, particularly given the impact of Dodd-Frank regulations. It’s being argued CEO James Gorman’s strategy of ‘velocity’ – holding assets for shorter periods – has been vindicated.
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