Now that Morgan Stanley's results are out, it's become apparent why its fixed income traders and salespeople might be complaining about their bonuses: revenues in Morgan Stanley's fixed income division fell by 31% last year, a far bigger decline than at rival banks.
The bank attributed the decline to, "a challenging trading environment in rates and lower volumes and tighter bid-offer spreads in credit." Insiders say the fixed income bonus pool was down 15%-20%.
Morgan Stanley's bankers are said to be happier with their lot, but today's results suggest that even they may not be that happy. - Revenues across Morgan Stanley's investment banking division (M&A, ECM and DCM) were up 43% last year. Revenues in markets were up 13%. Spending on compensation in the institutional securities (the investment bank) was only up by 10%.
As a result, after an excellent year, Morgan Stanley's compensation ratio (compensation as a percentage of revenues) fell to 31% for the full year and to a mere 21% in the final quarter when bonuses are accrued. In 2019, when times were normal, the fourth quarter compensation ratio in institutional securities was 41%.
While rival banks complain of aggressive pay inflation, therefore, Morgan Stanley appears to be dragging its feet. Morgan Stanley CFO Sharon Yeshaya today emphasized its "cost discipline." Instead of rewarding staff, the bank has its eye on shareholders. - The return on equity in the investment bank rose from 16% in 2019 to 20% last year. CEO James Gorman said that he believes a higher return on equity target is achievable in the future.
Morgan Stanley's hesitation about paying people in its investment bank substantially higher bonuses is a likely reflection of the business's underperformance compared to its wealth management and investment management businesses. Profits in the institutional securities business were up 29% last year, but profits in wealth management and investment management were up by 41% and 93% respectively. - Institutional securities was the laggard.
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