Every bank's FICC team is suffering this year, but Morgan Stanley's has done particularly badly in Q1. Revenues dropped by 56% year on year - admittedly after stellar commodities revenues in Q1 2015 - and the bank has already cut 25% of its headcount in this area. So what next? How about becoming more like its equities team.
Morgan Stanley has long been top of the pile in equities trading. Unlike other banks, where FICC is the engine room, revenues at Morgan Stanley's equities trading division are more than double that of its fixed income traders. Morgan Stanley's equities business is number one among its peers, according to analysis from research firm Coalition, with both its cash equities team and prime services divisions at the top of the pile in 2015.
Even so, Morgan Stanley's equities business didn't have a great Q1. Revenues were down 10% thanks to a decline in the cash equities business, but this was better than competitors.
There are signs that Morgan Stanley wants fixed income to become more like equities. “We do think that there are trends in fixed income world with more electronification across certain areas such as FX and other places,” said CFO Jonathan Pruzan. “We have true leadership in the electronic suite in equities and can use some that learning to migrate into fixed income.” The buzzword as Morgan Stanley embarks on "Project Streamline" is to look for 'synergies' among the trading businesses.
To put Morgan Stanley's 56% decline in fixed income revenues into perspective, the FICC fall was 11% at Citi, 13% at J.P. Morgan and 17% at BAML.
Pruzan said Morgan Stanely has “reshaped and restructured” its FICC business in terms of “footprint and capital intensity”. CEO James Gorman warned that if revenues continue to be challenged, yet more cuts in FICC could be forthcoming. Morgan Stanley lags its U.S. peers in FICC, according Coalition. While J.P. Morgan, Goldman Sachs, BAML and Citi all have multiple top three ranked divisions within the FICC space, Morgan Stanley remains on the periphery across the board.
During today's call, Pruzan pointed out that Q1 2015 was particularly good for both Morgan Stanley's commodities trading business and its oil merchanting division (which it has since sold), so year-on-year comparisons would always be unflattering. But corporate credit aside, Morgan Stanley's fixed income business struggled across the board - commodities, FX, rates and credit all suffered in the first quarter. By comparison, Citi's FX team did well, as did its rates team.
"We had a decent quarter, I wouldn’t say it’s incredible, but it was decent," Pruzan said of the fixed income business.
In future, Morgan Stanley isn't suggesting that it will pull out of any one area of fixed income, but it's adjusting to the new normal. The target is to generate around $4.2bn in revenue from FICC in the coming years, even if they're a little behind this target after the first quarter, said Pruzan. The idea of cutting back so dramatically is to cut the "volatility" from the FICC revenues and try to instil some consistency, he said.
Elsewhere, Morgan Stanley will also be accelerating moving back office jobs to lower cost destinations in its ‘centres of excellence’, said Gorman. Currently, around 40% of its headcount is within these locations, he said, and the target is to increase “employees deployed” in these locations by 10-15% by 2017. Gorman said that M&A remains strong – they were up 25% year on year – and that there were some “green shoots” in equity issuance, despite the massive 48% drop in revenues year on year at Morgan Stanley.