Gorman Says Three-Level Cut Would Be ‘Somewhat Stunning’

By Michael J. Moore - Jun 13, 2012 3:58 AM GMT+0700

Morgan Stanley (MS) Chief Executive Officer James Gorman said a three-level credit-rating downgrade by Moody’s Investors Service would be “somewhat stunning” given the firm’s increased capital.

Moody’s has said it may reduce the rating on New York-based Morgan Stanley by as much as three levels when it announces the results of an industrywide review this month. Morgan Stanley can manage through any potential cut, Gorman said today at an investor conference in New York.

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James Gorman, chairman and chief executive officer of Morgan Stanley. Photographer: Peter Foley/Bloomberg

“If Moody’s goes to the full extent of their initial guidance, we would find, given the numbers I just shared with you, that a somewhat stunning outcome, given the reality of how different the institution is from what it was,” Gorman, 53, said. “But we’ve prepared for all outcomes.”

Gorman highlighted the increase in the firm’s capital and liquidity since the financial crisis in his presentation to investors. The bank’s liquidity reserve is 23 percent of total assets, up from 11 percent at the end of 2007, while its shareholder equity has doubled, he said.

The maximum downgrade, which would be the largest among U.S. banks and place the firm’s rating two levels above junk, might increase borrowing costs and force Morgan Stanley to post more collateral on trades. It would also threaten a fixed-income trading turnaround as some counterparties would no longer be able to do derivatives deals with the firm.

Moody’s Review

“We’re not panicked over this, but we’re prepared for it,” Gorman said. “We’ll make whatever business adjustments, if necessary, once we get there.”

Moody’s announced the review in February and originally slated the ratings actions for the largest banks for the middle of May. The ratings firm later delayed the action, saying it would make cuts by the end of June.

Morgan Stanley has fallen 27 percent since the review was announced on Feb. 15. The shares climbed 56 cents, or 4.2 percent, to close at $13.93 in New York.

“It’s been a long process to be hanging out there in the wind waiting for this,” Gorman said.

Gorman said all of the firm’s retail brokers will be on the same technology system by July 9 as the integration of Morgan Stanley Smith Barney is completed. The unit will eventually be called Morgan Stanley Wealth Management, he said.

Cost Cuts

The unit’s pretax margin, which was 11 percent in the first quarter, will climb “absent extraordinary circumstances,” Gorman said. Cost cuts will drive a larger part of the increase than revenue-boosting initiatives as the bank seeks a “mid- teens” margin by the middle of next year without help from rising markets, according to a presentation accompanying Gorman’s remarks. Jim Wiggins, a spokesman for the bank, declined to provide a more specific margin target.

The entire firm is on pace to reduce its non-compensation expenses by $500 million this year, as it works toward its target of a $1.4 billion reduction, Gorman said.

Morgan Stanley expects to increase the dividend and stock- buyback program “over time” as markets “settle down,” he said.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net