The main reason Morgan Stanley's wealth management profits lag competitors is because the firm does not have as big of a lending business, Greg Fleming, the head of Morgan Stanley's wealth division said at an investor conference on Tuesday.
Morgan Stanley is focused on offering mortgages, tailored loans, securities-based lending and other lines of credit to high net worth clients to catch up to rivals, Fleming said.
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"This is one of the biggest areas for growth for us going forward," Fleming said at a Goldman Sachs Group Inc conference.
Morgan Stanley will also be able to lend more once it gains access to $58 billion in deposits that are still being held at Citigroup Inc because the two banks own the wealth business as a joint venture. Morgan Stanley plans to buy out Citi's remaining 35 percent stake by 2014.
Fleming, who is president of Morgan Stanley's wealth and asset management units, has promised investors that Morgan Stanley Wealth Management will achieve a pretax profit margin of roughly 15 percent by the middle of next year.
He reiterated that goal on Tuesday, but said the "key difference" between Morgan Stanley Wealth Management's profit margin and that of its rivals is net interest income, or the profit that banks earn from making loans.
Last quarter, Morgan Stanley Wealth Management reported a pretax profit that was 13 percent of net revenue, excluding one-time charges. By comparison, Bank of America Corp's wealth unit reported a pretax margin of 20.1 percent and Wells Fargo & Co's wealth business reported a pretax margin of 18.2 percent. Those two banks, which also have significant lending operations, are Morgan Stanley's top rivals in the U.S. brokerage business.
As Reuters reported earlier, some former Morgan Stanley brokers cited the firm's lack of lending ability as a reason they defected to rivals with bigger balance sheets.
Morgan Stanley has taken steps to build out its lending business over the past two years, though it started from a low base, Fleming said.
It now has 170 bankers working with financial advisers to offer loans to clients. Its loan balances were $32 billion at the end of the third quarter, up 28 percent since the end of 2009, while net interest income was $510 million, up 23 percent over the same period.
Still, its loan balances and net interest income are roughly one-third of its biggest rival, Bank of America, which has 600 bankers working with advisers.
(Reporting By Lauren Tara LaCapra; Editing by Kenneth Barry)