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Morgan Stanley’s Cost Cuts Enough to Reach Brokerage Goal

December 04, 2012

Morgan Stanley’s wealth-management business can reach profitability targets solely through cost cuts, meaning revenue improvements may provide a further boost, said Greg Fleming, president of the unit.

Integration expenses will end this quarter, allowing the pretax profit margin to increase next year, said Fleming, who last year laid out a goal of a “mid-teens” margin by the middle of 2013. The brokerage is also trying to boost revenue through more lending and moving additional client assets into managed accounts, he said today at an investor conference in New York.

Integration of the brokerage joint venture with Citigroup Inc. (C:US) took longer than the firm expected and the business missed the 15 percent profit target Morgan Stanley Chief Executive Officer James Gorman had forecast for the end of 2010. The margin was 13 percent in the third quarter, excluding one-time items. Morgan Stanley (MS:US) plans to ask the Federal Reserve for approval to buy Citigroup’s remaining 35 percent stake next year, a person familiar with the strategy said in October.

Morgan Stanley today also quantified the impact improvements in the equity market would have on the New York- based firm’s pretax profit. The brokerage’s pretax earnings would climb $250 million if the Standard & Poor’s 500 Index (SPX) rose to 1,600 from yesterday’s close of 1409.46, according to Fleming’s presentation. Profit would jump $750 million if the S&P 500 increased to 2,000. The unit had pretax earnings of $1.28 billion in 2011.

If the Fed raised its benchmark funds rate by 1.5 percentage points and Morgan Stanley acquired the rest of the business from Citigroup, gaining access to $58 billion of additional deposits, the unit’s pretax profit would climb $1.1 billion, according to the presentation.

To contact the reporter on this story: Michael J. Moore in New York at

To contact the editor responsible for this story: David Scheer at

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