'Overcapitalized' Morgan Stanley looks to reinstate share buybacks as profits swell

October 15, 2020.

hopes to resume share buybacks early next year that could exceed 100% of the investment bank’s quarterly earnings, CEO James Gorman said Thursday, as executives sit on a growing pile of excess capital but their hands remain tied by U.S. regulators.

“There is absolutely no reason — given Morgan Stanley’s current condition, the shape of our balance sheet, our liquidity profile and the mix of businesses — why we wouldn’t be distributing capital, except that for right now, it’s the right thing to do for the broader community as we work through this pandemic exercise,” Gorman told analysts on a quarterly earnings call.

The , which suspended bank share buybacks after several major institutions, including Morgan Stanley, voluntarily suspended them as the pandemic spiked, is conducting special pandemic-related bank stress tests, and Gorman anticipates receiving the results before the end of this year.

“I would expect us to be doing buybacks in the first quarter,” Gorman continued. “Obviously if the economy completely tanks between now and then or if the results are less positive than I expect them to be, then all bets are off. But you’ve got to run the business as you see it likely to be, and that’s my likely scenario.”

The country’s sixth-largest bank pulled in $11.7 billion in quarterly revenues driven by strong earnings in capital markets, a 16% jump from $10 billion a year ago. Net profit climbed about 25% to $2.7 billion from $2.2 billion in the third quarter of 2019.

“With the accretion from the E* transaction, we’re making $2.5 billion a quarter, net,” while paying out a total dividend of around $2.2 billion, Gorman said. “We’re clearly accreting a lot of excess capital — about probably $7 billion net capital without buyback on a base where we’re 300 basis points above the minimum requirement.”

Gorman is eager to put that money to use for shareholders, but last month regulators extended through the fourth quarter a suspension of share buybacks and a cap on dividends meant to keep banks stable through the pandemic. Morgan Stanley had voluntarily halted share repurchases in March, and declared a third-quarter dividend of $0.35 per share.

Based on the annual stress test that preceded those restrictions, Morgan Stanley was ultimately ordered to maintain a Common Equity Tier 1 ratio of 13.2% as of Oct. 1, one of the highest requirements faced by the country’s largest banks in the first time the Federal Reserve has doled out custom capital requirements. Banks were asked to subsequently update and resubmit their capital plans during the third quarter to reflect the restrictions.

During that time, Morgan Stanely’s standardized CET1 ratio creeped up to 17.3% from 16.1% at the end of the second quarter and 16.3% 12 months ago.

“We’re overcapitalized; I mean, that’s the bottom line,” Gorman said. “It’s something that we’ve felt for a long time, and it’s starting to be recognized.”

Kicking off the fourth quarter with a bang, on Oct. 8 Morgan Stanley revealed a surprise $7 billion purchase of fund manager Eaton Vance to boost more stable fee-based revenues — “a tremendous opportunity” to make good use of the excess capital, Gorman noted Thursday. By financing the acquisition with 50% cash, Morgan Stanley ate up about 100 basis points, representing 1 percentage point of the CET1 ratio — but that was essentially a wash because of recent accretion.

“So we’re sort of back to where we started, but we own a new company; that’s a nice thing,” Gorman said. “You can tell I’m a little animated on the subject … I think it’s fair to say we are carrying the most capital surplus, and I don’t think there’s any reason why once we get through the COVID stress test, if you will, that that will perpetuate, unless we get a result which is adverse, which I don’t expect.”

Gorman also said he would be comfortable distributing in excess of 100% of earnings.

“At some point you have to do something with this capital,” he said. “Our shareholders who own the company are entitled to generate a decent return on the capital they’ve invested in the company.”

Morgan Stanley’s earnings per share were $1.66 in the third quarter, up from $1.27 at this time last year.

Overall, the bank exceeded analyst expectations, continuing a pandemic-resilient showing that in the second quarter saw Morgan Stanley post record-breaking revenues.