colm kelleher

Morgan Stanley's president just explained the bank's 'WTF moment'

(Colm Kelleher.Morgan Stanley)
Morgan Stanley No. 2 executive Colm Kelleher said it took a “WTF moment” to trigger a major revamp of his firm’s fixed income business.

Kelleher, speaking at Morgan Stanley’s European Financial Conference Tuesday, described the problems that business was facing a couple of years ago — and how he and Ted Pick, who runs sales and trading, decided to address it.

“Clearly we were all running outsized fixed income businesses — far too much capital, far too much leverage, far too much liquidity trapped in, very sloppy way of dealing with derivatives — all that stuff,” Kelleher said.

Still, many banks held off from cutting back, fearing that if they cut too soon they might miss out on a hoped for rebound in revenues. Kelleher said that in the third quarter of 2015, the low point in global fixed income revenues, Morgan Stanley “had a WTF moment.”

“It’s like, what if we’re wrong?” he asked rhetorically. 

Rather than pushing ahead with the status quo, hoping to capture some of the revenue rebound, Kelleher and Pick thought strategically about what changes to make to the business.

They asked themselves:

“What do we know about fixed income for the next three years in terms of secular change and whatever else that will make a difference? What’s going electronic, what isn’t? What’s happening in terms of collateralization, counter-party credit and so on? What’s happening in the credit markets? And what’s happening with our investors in terms of portfolio turnover and so on?”

One thing that became clear was in rates and foreign exchange, Morgan Stanley was getting “the worst of both worlds,” referring to the fact that the business was electronifying, compressing the bid–offer spread, while volumes weren’t increasing. 

They also noticed that bonds had started trading differently in European credit markets. “The amount of primary trading to secondary has completely inverted,” Kelleher said, attributing that to increased regulations. 

They downsized both of those businesses. All in all, Morgan Stanley laid off 25% of its fixed income headcount in the fourth quarter of 2015.

Since then, revenues have actually improved markedly. Revenues came in at $1.5 billion in the most recent quarter, the three months to December 31, well ahead of the $1.01 billion expected by analysts, and down only marginally from the third quarter. A year earlier, fixed income revenues in the fourth quarter came in at a paltry $550 million. 

“We have improved our fixed income business, we have definitely climbed up the counter-party rankings to very good positions, and we feel we got it right,” Kelleher said. “Now does that mean I’m suddenly going to say, let’s grow fixed income dramatically here? I’m not. Neither is Ted.”

He said that we will see a gradual pickup in fixed income activity “when central banks get out of the way,” but not a significant pickup for the next several years.

And when it does happen, “It won’t be anything like in the glory days of leverage.”

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'There's a change in the geography': Here's what Morgan Stanley is saying about the first quarter

(John Nazca/Reuters)
Morgan Stanley’s president, Colm Kelleher, on Tuesday provided some insight into how the firm’s first-quarter results might look next month.

“It feels like the fourth quarter — maybe slightly better,” Kelleher said at the Morgan Stanley European Financial Services Conference. “Within that, though, there’s a change in the geography.”

He specified that the firm’s fixed income business was doing well this quarter, while client volumes are down in equities, which is Morgan Stanley’s most important franchise. But, Kelleher said, things will remain “broadly in line with the fourth quarter.”

In wealth management, he said, the firm is in line to achieve the margins it said it would for Q1. “I think Morgan Stanley continues to gain share,” Kelleher said.

He said comparing the firm’s performance to the first quarter of 2016 is not relevant because Morgan Stanley was “rebuilding the business” at that time.

The firm laid of 25% of its fixed income headcount at the end of 2015 in a major structural overhaul. Kelleher also described the thinking behind that process Tuesday.

Kelleher’s predictions are in line with the JPMorgan analyst Kian Abouhossein’s expectations for firms across Wall Street.

Fixed income, currency and commodities revenues are set to increase 34% in the first quarter from a year ago thanks to rising trading volumes, Abouhossein wrote in a note earlier this month, while the equities business is expected to see a contraction in revenues.

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MORGAN STANLEY: We will 'certainly' move people out of London before Brexit happens

(The City of
Morgan Stanley President Colm Kelleher on Tuesday said his firm will definitely move staff out of London within the next two years — before the end of the negotiation period leading to the UK’s departure from the European Union.

“It is the cost of doing business,” Kelleher said when asked about applying for European licenses now.

“We can’t wait two years to decide what we’re going to have to do, and we will have certainly to move some people well before that two years is up in order get ready and to be prepared for what will happen.”

He was speaking at Morgan Stanley’s European Financial Services Conference.

British Prime Minister Theresa May will trigger EU divorce proceedings on March 29, launching two years of negotiations that will shape the future of Britain and Europe.

“Of course what’s happening is we have various cities — Paris, Frankfurt, Dublin, and others — talking to us, and the rules are changing there as well,” Kelleher said.

“They are changing the dynamic of where we will be and what we will be and what we will do.”

He also said you may see some business moving to New York.

Kelleher said Morgan Stanley is trying to be as prudent and careful as can be in monitoring the Brexit negotiations, emphasizing that whatever the firm ends up doing will affect employees who have “children and so on” – so “you can’t just order them around like units on a board.”

Ultimately, he said, Brexit is a “distraction.”

“I would much rather it hadn’t happened, clearly,” he said.

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