London (CNN Business)A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here.
Since the financial crisis, Wall Street banks haven’t been too keen on massive acquisitions. That changed this week.
Morgan Stanley’s $13 billion purchase of online broker E*Trade, announced Thursday, is a huge play that shows how serious the investment bank is about catering to everyday customers.
With Morgan Stanley moving to prioritize wealth management, a more reliable source of income than the investment banking and trading operations that made its name, the play makes sense. But whether it will justify the massive price tag — Morgan Stanley is ponying up a premium of more than 30% — is an open question.
E*Trade shares finished Thursday up nearly 22%, while Morgan Stanley’s stock closed 4.6% lower.
What Morgan Stanley gains: E*Trade has more than 5.2 million investing clients and over $360 billion in assets. That will bring lots of diversity to the bank’s wealth management unit, which currently has 3 million clients and $2.7 trillion in assets, my CNN Business colleague Paul R. La Monica reports.
The companies said that once the deal is done, Morgan Stanley will generate about 57% of its pre-tax profits from its wealth management unit, up from about 26% a decade ago.
That’s not all: Morgan Stanley is also excited about E*Trade’s business of managing stock plans on behalf of corporate clients. CEO James Gorman referred to this as a “killer business” on a conference call with analysts. This unit has also helped soften the blow from moves by online brokers last year to eliminate commissions on trades.
But the cost is raising eyebrows among some analysts — and because the deal dilutes existing shareholders, it’s expected to weigh on Morgan Stanley’s stock price in the near term. “Shares could underperform relative to peers as investors digest the deal,” Brian Kleinhanzl of Keefe, Bruyette & Woods told clients.
Wells Fargo nears settlements over sales practices
Wells Fargo is preparing to settle with US prosecutors and the Securities and Exchange Commission over customer abuses in its banking, auto lending and mortgage businesses, the New York Times reports.
The settlements could be announced as soon as Friday. But a number of details remain fuzzy, including the size of the penalties and whether criminal charges would be brought against any individuals. The company has set aside $3.1 billion to pay legal costs related to its sales practices, according to the Times.
It wouldn’t be the first penalty Wells Fargo faced for its past misconduct: Last month, former CEO John Stumpf agreed to a lifetime ban from the banking industry as well as a $17.5 million fine for his role in the company’s fake accounts scandal and other sales practice malfeasance.
Wells Fargo’s new CEO, Charles Scharf, has so far struggled to right the ship. The bank missed Wall Street’s expectations in its most recent quarter, and shares are down 12% year-to-date. The broader KBW Bank Index, meanwhile, is off 3.5%.
Top priority: Scharf has made clear that getting the bank out from under the thumb of regulators is essential to getting back on track.
“During my first three months at Wells Fargo, my primary focus has been on advancing our required regulatory work with a different sense of urgency and resolve, while beginning to develop a path to improve our financial results,” he said when the company released results in January.
US dollar: The highest weekly close since 2017?
With concerns about the impact of the coronavirus outbreak on the global economy looming, the US dollar has been on a blitz — riding high on the relative strength of the US economy and the currency’s role as a safe haven asset.
The US Dollar Index is on track to finish the week at its highest level since April 2017. That comes at the expense of the euro, which this week hit its weakest level against the dollar in 34 months.
Kit Juckes of Societe Generale explains the phenomenon this way: “The dollar is king because the US economy is out performing all-comers.” Data on the health of the services and manufacturing sectors for Germany, France and the United States due Friday is only expected to confirm this trend.
Why it’s important: The strong dollar is yet another risk to corporate earnings during the first quarter, since money that multinational companies make abroad will lose value when converted back to USD.
- The composite US Purchasing Managers’ Index, which looks at the manufacturing and services sectors, arrives at 9:45 a.m. ET.
- US existing home sales for January posts at 10 a.m. ET.
Coming this weekend: The G20 finance ministers gather in Saudi Arabia for discussions on the global economic outlook.
Source: Read Full Article