U.S. Investment Bank Business Structure Case Study: Morgan Stanley

Morgan Stanley has adopted a structure consisting of several business units under a holding company. Each business unit specializes in a certain field of business as an independent profit center. Its organizational structure consists of the following four parts:

1. Institutional securities division

2. Individual investor division

3. Investment management division

4. Credit service division

In terms of revenue structure, its revenue consists of seven parts: ( 1 ) net interest and dividend income, (2) transaction income, (3) investment income, (4) asset management income, (5) investment banking income, (6) commission income, and (7) other incomes. (Figures 8.9 and 8.10 illustrate the revenue sources and revenue structure of Morgan Stanley.)

In terms of absolute amounts of revenues, from 2001 to 2007 revenues grew steadily, although the growth rates were not particularly high. The total revenue was USD 19.6 billion in 2001 and USD 26.9 billion in 2007. Revenue then dropped to USD 22.1 in 2008 due to the financial crisis. However, considering that the drop was mostly due to the loss from a USD 3.9 billion investment, the revenues from other sources didn't drop in 2008. The total revenue bounced back to USD 23.4 billion in 2009. Based on the track record of the company's income over the nine years, we can see that the commission revenue, investment banking revenue, and asset management

Comparison of Various Revenues of Morgan Stanley (2001-2009)

FIGURE 8.9 Comparison of Various Revenues of Morgan Stanley (2001-2009)

Source: Morgan Stanley Annual Report 2001-2009.

revenue were pretty stable without much fluctuation. The combined revenue from these three business lines grew from USD 10.8 billion in 2001 to USD 16.5 billion in 2007 and was not significantly affected by the subprime mortgage crisis. The combined revenue remained high in 2008 and 2009, reaching USD 13.4 billion and USD 15.1 billion, respectively. In contrast, the investment revenue, transaction revenue, net interest, and dividend revenue

Morgan Stanley Revenue Structure (2001-2009)

FIGURE 8.10 Morgan Stanley Revenue Structure (2001-2009)

Source: Morgan Stanley Annual Report 2001-2009.

were fluctuating. The investment income, swinging back and forth between positive and negative territory, registered a deficit of USD 400 billion in 2001, a deficit of USD 3.9 billion in 2008, and a deficit of USD 1.1 billion in 2009. The transaction revenue was also unsteady, reaching a small peak of USD 11.8 billion in 2006 before plummeting to a nine-year low of USD 3.2 billion. The net interest and dividend revenue stood at USD 1 billion in 2009, the lowest point of that phase. In most years, however, the revenue was near USD 3 billion.

In terms of relative amount of revenues, from 2001 to 2007 commissions, investment banking income, and asset management income were the three stable and important sources of revenues for Morgan Stanley, jointly accounting for approximately 55 percent of the total revenue consistently. Of these, investment banking accounted for an average of 17 percent, commissions accounted for an average of 16 percent, and asset management accounted for an average of 21 percent. Transactions were also an important source of revenue. However, due to the great uncertainties associated with transactions, the percentage of income from transactions fluctuated wildly. For example, the percentage was 34 percent in 2003 but only 12 percent in 2007. Therefore, transactions are not a stable source of income, but one with great potential. If transactions are combined with the three business lines mentioned earlier, the four together accounted for 83 percent of Morgan Stanley's total revenue. The percentage even hit as high as 97 percent in 2009. The income from investment generally had a small percentage in total revenue, which was usually below 6 percent, except in 2007.

Proprietary business, asset management business, and investment banking business are the income generators for Morgan Stanley. Considering that interest income also comes from proprietary and asset management business, the three business sectors are the dominant income contributors. The investment banking business with securities issuance and underwriting at the core is the leading business in Morgan Stanley. In 2004, Morgan Stanley overtook its rival Goldman Sachs as the top player in the IPO business, with a 10 percent share of the global IPO market.

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