Flush with capital, Morgan Stanley eyes potential purchases

• Key insight: Morgan Stanley, whose capital level exceeds its minimum regulatory requirement, is keeping its eyes open for potential bolt-on acquisitions, according to CEO Ted Pick.
  
• What's at stake: The investment bank is looking for ways to deploy its excess capital, and buying another company is one way to put the capital to work.
  
• Supporting data: For the second quarter, Morgan Stanley's Common Equity Tier 1 capital ratio was 14.8%, 300 basis points above its minimum regulatory requirement.
  

Morgan Stanley is considering potential acquisitions as a way to deploy excess capital, but it has enough capital on hand to pursue more than one growth strategy, CEO Ted Pick said Wednesday.
The investment bank, whose capital level currently far exceeds the regulatory requirement, is using some of it to meet client demand. At the same time, it's reviewing certain opportunities that would get it "closer to clients" and "add some adjacent capabilities," Pick told analysts.

In responding to an analyst's question about the high capital levels, Pick said:

"Are we seeing opportunities come across the transom that are interesting? We are. Are we potentially looking at stuff that could bolt on to the strategy? We are. But I would tell you right now, the bias continues to be to go organic," Pick said on the bank's second-quarter earnings call. "Now you can do both. We could continue to expand organically and bolt something on."

Morgan Stanley's aggregate Common Equity Tier capital requirement is 11.8%. For the second quarter, its Common Equity Tier 1 capital ratio was 14.8%, meaning that it has much more capital than it would theoretically need to shield itself against unexpected financial downfalls.

It's not alone in holding excess capital. Among its big-bank peers, capital levels at Goldman Sachs, JPMorganChase, Bank of America and Citi also exceed their regulatory minimums.

Goldman Sachs' Common Equity Tier 1 capital ratio was 12.9% for the second quarter, well above its 11.4% requirement. JPMorganChase's was 14.1%, topping its 11.5% requirement. 

Other big banks are also thinking about doing deals. In May, JPMorganChase CEO Jamie Dimon said the bank could spend up to $20 billion on acquisitions in the coming years. 

"I do think there might be opportunities," Dimon said during an industry conference. "And so we are on the lookout, but it's got to make sense. It can't be just a pie-in-the-sky type of thing."

Morgan Stanley has completed a string of acquisitions in recent years. In the fall of 2020, it acquired discount brokerage E-Trade Financial for $13 billion, in a move that bolstered its wealth management franchise and included a hefty dose of low-cost deposits. Less than six months later, it acquired Eaton Vance, a wealth management firm, for approximately $7 billion, adding more fee-based revenues and elevating its position as a leading asset manager.

It completed the purchase of EquityZen, a private shares platform, in January.

The second quarter was a blowout period for the bank, which reported record net revenues of $21.3 billion, up from $16.8 billion in the year-earlier quarter. Earnings per share totaled $3.46, handily topping the estimate of $2.93 that analysts polled by S&P Capital IQ had predicted. 

It was the second consecutive quarter of record net revenues. During the first quarter, the Wall Street bank reported firmwide net revenues of $20.6 billion, an increase of 16% year over year. 

The wealth management business secured a record $148.1 billion in net new assets, Morgan Stanley said in a press release announcing its results. Notably, the bank reached a milestone of $10 trillion in total client assets across wealth and investment management, it said.

All three of its core businesses — wealth management, investment management and institutional securities — reported upticks in revenue for the quarter, which ended on June 30. Institutional securities, which includes investment banking, led the way with a year-over-year increase of 31%. Investment banking net revenues were up 58% from the year-ago period.

During the quarter, the bank repurchased $1.5 billion of common stock. Following its recent stress-test results, it will increase its quarterly dividend by 15 cents per share, bringing it to $1.15. 

The board of directors also reauthorized a multiyear common equity share repurchase program of up to $20 billion, beginning in the third quarter. There is no set expiration date, the bank said.

In June, Morgan Stanley received conditional approval from the Office of the Comptroller of the Currency to set up a digital asset-focused trust bank. The entity, which was named in the application as the Morgan Stanley Digital Trust National Association, or MSDTNA, would be a wholly owned subsidiary of Morgan Stanley and be headquartered in Purchase, New York.