Morgan Stanley CFO says companies still cautious on deal-making; bank rejiggers business plan

April 18 NEW YORK — After getting bludgeoned in the financial crisis, Morgan Stanley is staking its future on the steadier, if less spectacular, business of wealth management.

In the first quarter, the strategy looked prudent: Profit and revenue soared in wealth management, even as they dipped in investment banking.

The wealth management unit generated more fees, and clients shuttled more assets to the bank. Profit margins rose and so did employees’ productivity. In contrast, the company’s investment banking unit brought in less revenue from trading bonds and commodities, and made less money on advising companies on mergers and acquisitions.

Overall earnings slipped 12 percent from a year earlier — to $1.2 billion, or 61 cents a share. While that beat expectations of analysts polled by FactSet, investors weren’t impressed. The stock fell $1.16, or 5.4 percent, to close at $20.31 Thursday.

CEO James Gorman said the first quarter represented “solid momentum.” He’s been investing in the wealth management unit, emphasizing products like home loans, and steering the purchase of the rest of Morgan Stanley Smith Barney, the retail brokerage it owns with Citigroup.

Analysts, however, described the first quarter almost like a holding period. They said the bank was moving toward the correct positions but were disappointed by weaknesses in the investment bank. They’re also anxious for the Morgan Stanley Smith Barney deal to be completed.

Gorman, the CEO since the start of 2010, is under pressure to restore Morgan Stanley’s share price and measures of profitability, including its return on equity. His direction for the bank is borne from previous losses: Risky investment banking activities slammed Morgan Stanley in the financial crisis, and regulators are phasing out some of the investment bank’s old sources of revenue, like trading for its own profit.

The CEO’s response has been to expand the bank’s work with individual investors. That business can provide a steady source of revenue even when financial markets are volatile. It also gives the bank more earnings power and access to deposits, which helps it fund lending and other initiatives.

A big part of that plan is the retail brokerage, Morgan Stanley Smith Barney. Morgan Stanley is in the process of buying out Citi’s remaining 35 percent stake. It has said it plans to do so by the end of this year, though it still needs Federal Reserve approval for part of the process.

The bank’s different units are also being encouraged to work together. For example, the investment bank usually deals with companies and other institutional clients, helping them broker deals or trading on their behalf. But those corporate clients also have executives who would make prime customers for the wealth management unit, which advises individuals as well as small and medium-sized companies.

Thursday’s results reinforced the shifting focus. The wealth management unit accounted for about 41 percent of revenue, after stripping out an accounting charge. Three years ago, when Gorman took over, it accounted for 34 percent.