Morgan Stanley CEO Skeptical of Possible Downgrade

Morgan Stanley CEO James Gorman told CNBC Thursday that the bank's strong first-quarter earnings made him more skeptical about a possible ratings downgrade by Moody's Investors Service.

James Gorman
James Gorman

“I like these results because they’re clean,” Gorman said on Squawk on the Street. He highlighted continued strength in equity trading and an investment banking business that held up in a “tough environment.”

Morgan Stanley posted earningsearlier Thursday, excluding items, of 71 cents a share and beat the Street’s consensus estimate by 27 cents a share. Excluding a special accounting item known as debt valuation adjustment (DVA), revenue was $8.9 billion, up from $7.8 billion a year earlier.

The report sent Morgan Stanley's shares higher.

As for Morgan Stanley’s problem areas, fixed income revenues of $2.5 billion without special accounting items, were improved across the board, according to Gorman.

The wealth management business was making progress toward achieving the 20 percent margin that Gorman had promised before the crisis. Currently the bank’s pretax margin is around 11 percent, and Gorman predicts it will be in the mid-teens next year. “We’ll get there,” he said.

The Federal Reserve gave them the green light to buy 14 percent more of the Morgan Stanley Smith Barney brokerage joint venture this year, and an additional 15 percent next year, Gorman said, even though they did not ask the Fed to speed up that investment process when it submitted its capital plan for the 2012 stress test.

He is, however, skeptical of a Moody’s downgrade.

“Morgan Stanley made only $1.3-$1.4 billion in earnings,” he said. "This is not the profile of an institution that would typically be downgraded three notches." He went on to add that the improving economy would only help Morgan Stanley’s profile in Moody’s eyes.

Even if Moody’s did downgrade Morgan Stanley , the event would affect only about 8 percent of Morgan Stanley’s derivatives contracts, and require additional collateral of $6.5 billion. That money has already been built into the company's liquidity plan, Gorman said.

Gorman also had some thoughts on Europe and the economy. “The U.S. is recovering better than most people think,” he said. “U.S. financial institutions are clean. They came through the stress test strongly.”

As for Europe, whose fortunes have caused gyrations in Morgan Stanley’s stock price over the past two years, Gorman says, “A lot of important countries are growing surprisingly well.”

He sees the global macroeconomic environment affecting stock prices more than earnings, but he is confident that Europe will muddle through. He sees two possible paths. One would be for the euro to break up, but Gorman says that doesn’t seem to be happening.

The other is what’s actually happening — a move towards tightening fiscal coordination among European countries. “Ultimately you can’t have a shared currency without shared fiscal authority,” he said.