Wall Street’s second-biggest investment bank signalled the move as it reported a better than expected 26 per cent rise in fourth-quarter profits, helped by a surge in mergers and acquisitions activity The decision to demerge Discover, America’s fourth-biggest credit card issuer, represents an about-turn for John Mack, Morgan Stanley’s chief executive, and rekindles a strategy first mooted by Philip Purcell, his predecessor, shortly before his ousting last year.

Morgan Stanley, which has previously argued that Discover generates cash and helps to stabilise its profits, has now concluded that it would be best served by being an independent entity with its own balance sheet and strategy.

Valued on a similar multiple to Mastercard, which this year became the biggest float on the New York Stock Exchange, Discover, due to be spun off in the third quarter of next year, can be expected to have a value of at least $16 billion. This year it produced profits of $1.6 billion on sales of $4.3 billion.

Discover, whose headquarters are in Chicago, paid $1 billion to acquire the Goldfish credit card business of Lloyds TSB this year and has bought the credit card operations of Liverpool Victoria, the friendly society. It employs 1,000 people in the UK, most of them in Cumbernauld, North Lanarkshire. Discover was launched in America by Sears, Roebuck and acquired by Dean Witter, the investment bank with which Morgan Stanley merged in 1997. Yesterday’s demerger announcement overshadowed the bank’s results. Full-year profits at its core investment banking division surged 72 per cent to a record $8.2 billion. Morgan Stanley was the sole adviser to Arcelor in its €26 billion (£17 billion) takeover by Mittal Steel and acted for ScottishPower, which last month agreed to a £11.6 billion bid from Spain’s Iberdrola.

The bank’s total remuneration bill was $14.4 billion, a rise of 27 per cent, or $260,000 per employee. That is signficantly below the average £319,000 payout reported last week by arch rival Goldman Sachs, reflecting the dilutive impact of the lower wages paid in Morgan Stanley’s credit card and retail stockbroking divisions.

It paid out 43 per cent of its revenues in remuneration, an increase from 42 per cent last year, indicating a rise in its bonus pool.

The numbers

$8.56bn

Morgan Stanley total revenues

$5.5bn

Institutional securities revenues

$1.4bn

Global wealth management revenues

$718m

Asset management revenues

$963m

Discover revenues

Source: Morgan Stanley

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