Stanley has hired Wachovia’s retail banking head, Cece Sutton, to
run its new retail banking division, signalling that its newfound
status as a bank holding company could lead to a concerted push
into the consumer banking
space.
A spokesperson for Morgan Stanley told
RBI that the bank is considering both retail banking
acquisitions and a move into online banking, either of which could
significantly reduce its minimum deposit requirements.
The bank currently only provides checking
accounts to clients who open an active assets account, which
carries a minimum initial deposit of $20,000.
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The hiring of Sutton provides Morgan
Stanley with an industry figure well-versed in the needs of the US
consumer.
Starting at Wachovia as a desk clerk in
1977, her post-2003 role as head of the retail bank coincided with
five of the seven consecutive years in which Wachovia topped the
University of Michigan’s widely-respected American Customer
Satisfaction Index.
Sutton will be joined at Morgan Stanley by
Jonathan Witter, former executive vice-president and head of
distribution at Wachovia, who becomes chief operating officer of
the new retail banking group.
“If we acquire a retail bank, there are
lower account minimums in those institutions, so that is something
we’d look at. There might be some potential in online banking as
well. I’d say we’re at the front end of looking at that,” the
Morgan Stanley spokesperson told RBI.
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By GlobalData“It could end up being a large business
for us, could end up being not so large. But it’s something we’re
going to explore.”
New intentions
The full scope of Morgan Stanley’s retail
banking intentions will be announced in the New Year following the
arrival of Sutton and Witter on 1 January, but any decision could
yet be affected by the continuing upheavals within the US banking
sector.
The benefits to Morgan Stanley of a retail
banking acquisition, for example, would have to be weighed against
a US economy likely headed for a lengthy recession. The
Organisation for Economic Cooperation and Development has said that
both the US and the Eurozone will suffer four consecutive quarters
of negative growth, ending in mid-2009 at the earliest.
Figures released by the Federal Deposit
Insurance Corporation (FDIC), meanwhile, show that total
third-quarter net income for FDIC-insured institutions fell by 94
percent year-on-year, or $27 billion, to $1.7 billion. The list of
banks deemed at risk of failure rose by 46 percent from 117 to 171
between the second and third quarters of this year, the FDIC added
– the largest such figure since the fourth quarter of 1995.
Paying attention to leverage
ratios
Investors and analysts unconvinced by US
banks’ protestations that they are highly capitalised have begun to
pay attention to leverage ratios as a more accurate way of gauging
stability, a trend which is likely to have helped precipitate the
downfall of Citigroup. It has been forced to turn to the government
for a $300 billion rescue package after seeing its share price fall
by over 60 percent in just three days.
In a note to clients on 20 November, FBR
Capital Markets said the current average leverage ratio – measured
as assets versus tangible common equity – for eight of the largest
US financial institutions amounted to 29:1, with Citi’s among the
highest.
The US government’s rescue package
requires the bank to absorb the first $37 billion to $40 billion of
losses on a $306 billion pool of its troubled assets, with the
Treasury agreeing to absorb a further $5 billion, the FDIC a
further $10 billion, and the Federal Reserve absorbing any
subsequent losses.
Citi has also received a further $20
billion capital injection on top of the $25 billion injected by the
US Treasury in October as part of the Troubled Assets Relief
Programme (TARP).
The Treasury will receive $7 billion in
Citi preferred stock paying a dividend of 8 percent, with the FDIC
receiving a further $3 billion in preferred stock, while the bank
has been banned from paying common stock dividends for the next
three years. Citigroup “will comply with enhanced executive
compensation restrictions”, according to a joint statement from the
Treasury, Federal Reserve and the FDIC, though the bank’s
management, including CEO Vikram Pandit, have all kept their
positions.
Significant
controversy
There remains significant controversy over
the way in which the series of US bailouts appear to aid its
beleaguered banks without making adequate provision for US
consumers’ own financial wellbeing.
Tax demands on future generations
notwithstanding, the combination of rising foreclosure rates and a
continued absence of credit is hampering the government’s claim
that its measures will help restore a degree of normality to the
system.
The focus has begun to shift to the US
consumer: the Citi bailout means the bank will be implementing an
FDIC programme to systematically modify troubled mortgage payments.
And Fannie Mae and Freddie Mac, the two government sponsored
enterprises (GSEs) which were effectively nationalised in
September, are implementing similar programmes and have suspended
all foreclosures until January.
A separate effort by the Federal Reserve
will see it lend up to $200 billion to holders of triple A-rated
securities backed by consumer and small business loans, a move it
believes will “help market participants meet the credit needs of
households”.
The Fed also announced that it is to buy
up to $600 billion of mortgage bonds backed by the GSEs in a move
akin to the Treasury’s original intentions for the TARP (see
RBI 601). A subsequent fall in US mortgage rates indicates
that the Fed has had initial success in improving the availability
of credit, but wider systematic issues remain unresolved.
A quasi-nationalised
industry
The US banking industry as a whole
continues to operate on a quasi-nationalised basis under which no
bank of notable size will be allowed to fail. But the newly created
‘superbanks’ all remain especially exposed to any further downturn
– Bank of America has now come under extreme pressure following its
$50 billion acquisition of Merrill Lynch.
Even Citi’s $300 billion backstop may not
insulate it from further losses: analysts at CreditSights believe
the government guarantee largely covers its mortgage loans and
securities, but not the consumer and credit card loans seen as
likely to suffer from a fresh wave of defaults in 2009.
An analyst, who did not wished to be
named, said that an acquisition by Morgan Stanley “makes perfect
sense”, but suggested that the bank’s business model meant it would
have to continue to focus on relatively affluent clients.
Nonetheless, Morgan Stanley’s new emphasis on acquiring deposits
acknowledges the fact that the time of the highly-leveraged bank
model is now well and truly over.
Dan Jones
