Nuances of Project Streamline
Morgan Stanley (MS) reported better-than-expected profits for 4Q15. It also announced strategic initiatives that would enhance its profitability further in the coming year. If we look at Morgan Stanley, J.P. Morgan (JPM), Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC), we see that their profits were driven by cost-cutting initiatives.
In 2015, Morgan Stanley cut its expenses by 13% to $26.6 billion. For the fourth quarter, the bank’s expenses were 41% lower than the same period last year. The company has announced a new efficiency plan called Project Streamline. The plan is expected to reduce costs by $1 billion by 2017, assuming no growth in revenues.
“Project Streamline is designed to identify significant expense reductions,” Morgan Stanley CEO (chief executive officer) James Gorman said in a conference call with investors and analysts. He added that the cutbacks will eliminate redundant legal entities and relocate employees out of high-cost centers to less costly locations, among other simplification efforts.
Project Streamline will rely on the use of technology to automate its infrastructure, outsource to third-party vendors to reduce costs, and move employees in high-cost areas to low-cost locations. Morgan Stanley aims to utilize these cost savings to boost its return on equity from the current 8.5% to its target range of 9% to 11%.
The company has also been restructuring its fixed income and commodities trading business in the past year. Last month, it announced it would lay off a quarter of its fixed income staff. It also made several changes in top management. Morgan Stanley aims to reduce the regulatory capital required to run the fixed income business, which acts as a drag on the company’s profitability. Banks (XLF) that rely heavily on revenues from trading activities have been suffering from a slowdown in trading activity as a result of global weakness.