Morgan Stanley's fixed income traders had a very good third quarter, but the bank is not "running victory laps", according to its CEO James Gorman. In fact, Morgan Stanley appears to be generally lukewarm on its FICC division and seems unlikely to start building its team any time soon.
At this point last year, Morgan Stanley's FICC revenues were suffering like most of its peers as client demand slumped across most asset classes. But even amid poor results Morgan Stanley stood out - if you strip debt value adjustment gains out, its FICC revenues in Q3 2015 were a mere $583m. Despite Gorman's comments at the time that no hasty decisions would be taken on one "unusual" 13-week period, Morgan Stanley had cut 25% of FICC headcount by December.
Today, Morgan Stanley posted FICC revenues of $1.5bn in Q3 2016 - including DVA, this is a 153% uptick year on year. Even excluding DVA, it's a 61% increase. Morgan Stanley is targeting an annualised run rate of $1bn a quarter in FICC and while it's exceeded this for the past two quarters, it's still at $3.6bn for the first nine months of this year.
Gorman pointed out that Morgan Stanley benefited from an increase in rates trading, but it's more dependent than most investment banks on credit trading and "credit markets turned up" in Q3. In fact, both Gorman and CFO Jonathan Pruzan said they wanted to see "multiple years" of this type of performance before they can tell if the large-scale restructuring of its FICC business has really worked.
Two positive quarters seem unlikely to reverse the trend of cost-cutting in Morgan Stanley's FICC team. "What I'm most pleased about is that we did it with 25% less people," said Gorman.
Gorman insisted to analyst questions that Morgan Stanley hadn't increased risk in its FICC team - despite one-day average value-at-risk (VaR) in its credit trading team increasing from $12 in Q3 2015 to $22 in 2016. All in all, FICC is still a work in progress and clearly plays second fiddle to its equities business, which produced revenues of $1.8bn in the third quarter - or $100m than Q3 2015 including DVA.
Morgan Stanley wants to be number one in equities, its using its balance sheet to "increase concentration of market share among the top players". So far this year, equities are down by 5% on 2015, while FICC revenues have decreased by 15%. FICC remains a work in progress.
Generally, Morgan Stanley is still focused on reducing costs. Compensation in its investment bank has increased by 26% compared to Q3 2015, but it's still $120m down on 2014 levels. Meanwhile, Morgan Stanley is cutting jobs in expensive key locations like London and New York and moving them out to its 'centres of excellence' in lower cost cities. In the past quarter alone, 650 roles were relocated - it's targeting 1,250 by the end of 2017.