Morgan Stanley Real Estate Investment Banking – In our previous analysis of Morgan Stanley ( NYSE:MS ) , we saw growth in the asset management business, which we believe will be strong with assets under management reaching $1.5 billion following the acquisition of Eaton Vance and forecast to increase its asset management revenue. 4.5% in 2022. Additionally, we forecast its investment banking growth to normalize to 5% in 2022 after a strong year and trading revenue to decline 11.8% in 2022 based on our estimate of a decline in volatility index. Finally, we note that its capital position is excellent with a capital ratio of 21.8% and project a net change in its capital requirements of -$278 million in 2022 as an investment forecast.
In this analysis, we identified the breakdown of the capital markets sector and analyzed the companies in the sub-sectors in terms of financial metrics to determine their financial performance relative to each other. We examine Morgan Stanley’s earnings distribution based on its exposure to the investment banking and asset management sub-sectors. Based on our analysis, we looked at its revenue distribution to determine its future financial performance.
Morgan Stanley Real Estate Investment Banking
We looked at Morgan Stanley’s revenue distribution by region to determine its overseas expansion based on the joint ventures and acquisitions we covered in our previous analysis, as well as its international IPO pipeline. We used it to identify their future capex requirements.
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We calculate the market share of Morgan Stanley and its competitors based on its investment banking and asset management revenues and examine how that has changed over the past five years. Based on this, we looked at all the geographic and fundamental factors that gave one of these companies an advantage and how Morgan Stanley performed against its competitors.
From the above chart, the capital markets industry in the financial sector is divided into buy side and sell side. As the buy side is engaged in managing mutual funds for their clients, the asset management sub-industry is made up. On the other hand, the sell side is represented by investment and brokerage banks and financial and data exchange providers, as they provide payment services related to clients’ investment activities.
To identify differences between these sub-industries in relative economic terms, we compiled data from 80 companies and classified them according to their sub-industries. Next, we calculated average gross and net margins (5 years), employees, and revenue per employee. We’ve plotted the data in the bubble chart below, where average number of employees and 5-year net margins are on the two axes, with each bubble size representing average revenue per employee.
Subsector Net Margins (5 Years) Employee Revenue per Employee (Millions of Dollars) Market CAGR Asset Management 18.83% 12,967 2.46 6.20% Investment Banking and Brokerage 12.17% 46 898 1.26 5.02% Data Providers 5.502% *Click to view
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From the table, the financial trading and data subsector has the best profitability as it has the highest 5-year average net margins (27.65%). This is because the sub-industry has the leanest working structures with the lowest average number of employees (6,291) as compared to other sub-industries. For example, Nasdaq ( NDAQ ) and ICE ( ICE ) (the largest exchanges by market capitalization of listed companies) have only 4,830 and 8,858 employees, respectively, below the average for asset management and investment banking. Financial exchanges and data providers are involved in selling market data. For example, according to Investopedia, these companies broadcast live data streams that are charged as a premium service to cover their costs, while deferred quotes are offered for free. They are similar to highly profitable software companies in terms of distribution, where they can sell the same product to many customers.
The asset management market is second in terms of margins. Compared to the investment banking market, it has a lean structure as a buy-side type company with fewer average employees than investment banking (sell-side). Also, as illustrated in the graph comparing buy-side and sell-side, asset management (buy-side) typically has a leaner structure that focuses on core functions and outsourcing than sell-side businesses such as investment banking (sell-side). – Household capacities. According to a Northern Trust survey of 300 asset managers, the top areas they plan to outsource are data management, back office operations and middle office functions.
Additionally, asset management has the highest average revenue per employee ($1.86 million), highlighting its high potential compared to other sub-industries. Also, asset management requires and generally prefers more substantive technical skills, such as quantitative and analytical, while investment banking requires more soft skills, compared to the difference between the buy side’s typically analyst recommendation and compensation based on fund success. . According to Investopedia.
In terms of growth prospects, financial exchange and data providers have the highest CAGR (8.25%), with growth in data analytics expected to grow at a CAGR of 11.5% till 2028. Property management follows with the second highest CAGR. (6.2%) driven by an increase in arrears forecast to 21% by 2025 according to Bloomberg.
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Based on the revenue streams reported by the company in its annual report, we have categorized its revenue into sub-segments. The investment banking segment is the largest accounting for more than half of its revenue, while asset management also accounts for a large chunk of revenue. We believe this reflects its diversified earnings in the capital markets segment, but not exposure to the financial trading and data subsector. To benchmark and determine Morgan Stanley’s position in the industry, we calculated industry weighted average net margins and revenue per employee based on a breakdown of the company’s revenue by sub-sector (asset management: 58.7%, investment banking and brokerage: 38.6%). Additionally, we calculated Morgan Stanley’s implied earnings based on the industry’s weighted average earnings compared to its actual earnings.
Morgan Stanley Net Margins Revenue per Employee ($ Million) Revenue ($ Million) Industry Weighted Average (Implemented) 13.74% 1.686 126,421 Morgan Stanley Actual 21.11% 0.797 59,755 Click to view
Based on the table, a company’s actual net margins are higher than the weighted average of industry margins, indicating its profitability strength. However, its revenue per employee ($0.797 million) was lower than the weighted industry average ($1.68 million). In fact, the company’s number of employees is more than 3 times the weighted industry average, highlighting its larger workforce than the industry average. Based on average revenue per employee, its actual revenue is almost half of the implied revenue because its average revenue per employee is lower. Overall, we think this highlights the strength of the company’s profitability, but its inability to extract a premium from its workforce with below-average earnings per employee.
We have updated our revenue forecast with full-year 2021 results from our previous analysis. To estimate the company’s revenue beyond 2022, we have based its investment banking and brokerage and asset management segments on CAGR market estimates through 2026, down 0.5% on the conservative estimate.
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Morgan Stanley Revenue break (in millions in dollars) 2021 2022 F 2023 F 2024 F 2025 F 2025 F 2026 F Investment Banking & Brokerage 30,701 29,596 32,474 32,474 33,773 34,956% growth -00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00 4.00%. Growth -1.9% 6.20% 5.20% 5.20% 4.70% other 9,087 9,432 9,432 9,744 10,016 10,247 10.431% growth 3.30% 2.30% 2.30% 2.30% 2.30% 1.80% 59,755 58,622 64,479 649 649 649 649 649 649 64
Morgan Stanley Geographic Revenue Revenue ($M) 10-Year Average GDP Forecast CAGR Americas 44,605 7.9% 2.30% EMEA 7,699 5.1% 2.70% Asia 7 451 10.4% 5.40% Click to view
Based on its annual report, the company expects the highest revenue from the Americas region in 2021, followed by EMEA and Asia. However, Asia has been the fastest growing region in 3 of the last 10 years, while EMEA has seen its lowest growth. We believe its exposure to Asia, albeit minimal, can continue to boost its growth prospects. The Asia region is also expected to have the highest GDP growth forecast by 2024, followed by EMA and the Americas.
According to data from Dealogic, Morgan Stanley dropped its market share in the United States for M&A advice in 2021, and JPMorgan ( JPM ) took second place. However, it has performed better in its international markets, where it has the second highest market share behind Goldman Sachs ( GS ) in Europe and JP Morgan in Asia. In 2021, the company’s market share increased in both regions, especially in Asia. In Europe, the top 7 out of 10 companies are located in the United States. Morgan Stanley, Goldman Sachs, Citi (C) were the only gainers.
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In Asia, 7 of the top 10 are from the United States and the biggest gainers are JPMorgan, Morgan
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