James Gorman, Morgan Stanley’s chief executive, said the worst effects of the pandemic had passed for the US labour market and economy, as he defended American banks’ plans to continue paying dividends during a deep recession.
Mr Gorman told bank clients at its annual financials conference, held virtually this year, that the unexpected gains in US employment for May shown in data released last week “suggests that the worst is behind us for broader economic growth and employment”. The Morgan Stanley chief confirmed earlier this year that he had himself recovered from coronavirus.
Morgan Stanley was already seeing some of its bad loans “recovering” and loan loss charges for the second quarter would be lower than in the first, he said. The bank’s provisions for the first quarter were $407m, or almost 1.5 times their level a year earlier, but reflected the fact that Morgan Stanley’s loan book was much smaller than those of its competitors.
Gordon Smith, JPMorgan Chase co-president, told the conference that delinquency rates among borrowers were “meaningfully better than what you would have expected with unemployment anywhere close to these levels”.
“I feel much more optimistic than pessimistic about what the next number of quarters are going to look like,” Mr Smith said, adding that JPMorgan would nonetheless be “on the conservative side” with its loan loss provisioning in the second quarter.
Backing up his counterparts, Dean Athenasia, head of Bank of America’s consumer banking unit, said requests for payment deferrals on consumer loans fell 80 per cent between May and April. June’s deferral requests were at 10 per cent of those May levels.
Against that improving backdrop, Mr Gorman justified the payouts to bank shareholders. “We should be paying out a dividend. I’ve said that right from the get-go . . . We’re going to cover our dividend very easily this year.”
European banks have been asked to suspend dividends to preserve their capital in order to absorb loan losses. US regulators are coming under pressure to implement similar restrictions as part of forthcoming bank stress tests, which include regulatory approval of banks’ capital return plans.
“What is the policy reason to shut down the dividend, other than that you can?” Mr Gorman said. “Yeah, more capital will always feel more prudent, but it’s not more prudent if it’s at the expense of people [shareholders] getting a decent income when they need a decent income.”
US banks voluntarily suspended their share buybacks — which are much bigger than their dividends — in March. Mr Gorman said he saw “no reason why . . . when we have enough clarity around the economic outlook, we wouldn’t be instituting our buy back again”.
On a less positive note, he said that the merger and acquisitions market was “basically dead” for the second half of the year. “I’m not worried about that, that’s just a cyclical thing, that’ll flow through just fine in time.”
Other Wall Street banks have estimated that second-quarter trading revenues will improve by anywhere between 10 per cent and 50 per cent. “I’d be surprised if we were an underperformer, that’s all I’ll say,” Mr Gorman replied in response to questioning about Morgan Stanley’s performance.
Mr Gorman also used the conference appearance to defuse speculation that Morgan Stanley was preparing an exodus from its big city offices, which was sparked by comments he made in a Bloomberg interview about having “much less real estate” in future.
“It’s not like we’re gonna suddenly cut our real estate footprint in half . . . that was a sort of ridiculous assumption based on a passing comment,” he said.
While the bank was looking for “opportunities to be a little smarter” about its offices, the “vast majority of employees for the vast majority of the time will continue to work in offices”.
Additional reporting by Robert Armstrong in New York