Morgan Stanley (MS:US) can reach its return-on-equity goals for fixed-income trading even if revenue falls below $6 billion, the average for the past three years, Chief Financial Officer Ruth Porat said.
Expense cuts and reductions in risk-weighted assets can produce an ROE for the business above the New York-based firm’s cost of equity even with annual revenue of less than $6 billion, Porat, 55, said today on a conference call. The bank previously said its cost of equity was 10 percent, and it posted an average of $6 billion in fixed-income revenue in the past three years.
Porat’s statement means Morgan Stanley can produce a higher margin from trading in the fixed-income, currency and commodity unit, or FICC, or devote less capital to the business. A person with knowledge of the matter said in May that unit would have to generate at least $1.5 billion of average revenue each quarter to earn a 10 percent return on equity.
“The main thing is controlling that which we control to drive ROEs greater than the cost of capital within fixed income,” Porat said today. “If there’s one metric to stay focused on, it’s the ROE. That’s the way we’re managing the business.”
Morgan Stanley generated $3.5 billion in fixed-income trading revenue in the first nine months of this year, down from $4.8 billion in the same period of 2012. This year’s revenue is less than half any of its major U.S. competitors.
Chief Executive Officer James Gorman, 55, said in June that four of the five units within fixed income failed to meet their cost of equity in 2012. Once the firm completed its risk-weighted asset reduction plans, four of the groups would exceed that level, he said.
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