On Wednesday, Morgan Stanley (MS) became the latest Wall Street biggie to announce job cuts. Starting this week, it is planning to retrench 1,600 workers. However, the news does not come as a surprise since many other global banks have been doing the same over the last few years. The market instability and weakening revenue sources prompted the company to take this decision for reducing costs.
The job elimination will take place in Morgan Stanley's Institutional Securities segment. This will represent about 6% of the segment's total workforce. Notably, nearly 50% of the reduction will be made in the U.S.
Employees at all levels - sales persons, traders and investment bankers - are about to receive pink slips. Also, support staff in areas such as technology will be in the danger zone. Senior employees, who receive high compensation, are likely to be targeted the most.
However, the 16,800 financial advisers of the Morgan Stanley Wealth Management unit are likely to remain unaffected as this division is a more stable source of revenue for the company than the volatile trading and banking operations.
These job cuts are over and above about 4,000 retrenchments that Morgan Stanley did last year. Such a step by the company could be viewed as an effort to save its own skin. It reflects Morgan Stanley's attempts to improve profitability amid revenue headwinds due to a weak economic recovery and stricter capital requirements.
Moreover, Morgan Stanley has been significantly lowering its fixed income and commodities risk weighted assets (RWAs) since 2009. The company continues to restructure its fixed income businesses by doing away with complex structured product businesses. It anticipates fixed income RWAs to be about 25% lower than that of the third quarter of 2011 (about $347 billion) by 2013 and 30% below by the end of 2014.
Notably, Morgan Stanley is not the only global institution rendering so many jobless. Over the past several months, companies such as Citigroup Inc. C), Credit Suisse Group (CS), Deutsche Bank AG (DB) and UBS AG (UBS) have outlined plans to slash workforce.
Morgan Stanley is expected to announce its fourth-quarter results on January 14. The Zacks Consensus Estimate for the quarter is 31 cents per share. Earnings ESP (Expected Surprise Prediction), the percentage difference between the most accurate estimate and the Zacks Consensus Estimate, for Morgan Stanley is -25.81%. This reflects that the company will likely miss the Zacks Consensus Estimate in the fourth quarter.
Currently, Morgan Stanley retains a Zacks Rank #3, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long term 'Neutral' recommendation on the stock.