Q Please assess the potential of Morgan Stanley stock - PW, via the Internet

A Change brings uncertainty, even when the goal is to steady the course.

It is encouraging that this global investment giant is strong and confident enough to pay back the $10 billion it received from the federal government's Troubled Asset Relief Program.

Much of its business is, after all, based on how potential customers around the world perceive its strength as a going concern. Shares of Morgan Stanley (MS) are up 80 percent this year after last year's 68 percent drop.

Yet because it was converted from an investment bank to a bank holding company regulated by the Federal Reserve, it must play it safe by acting more conservatively and holding a larger amount of cash. A bank faces tougher regulations and debt ratios that are less generous than what Morgan Stanley had enjoyed in the past.

A more stable deposit base should result, but return on capital will be lower unless the firm posts some worthy efficiency gains. CEO John Mack, long known for his cost-cutting abilities, says the bank is firmly focused "on prudent stewardship of our balance sheet, capital and risk profiles".

Consensus analyst rating of shares of Morgan Stanley is "hold", according to Thomson Reuters, consisting of six "strong buys", two "buys", 12 "holds" and one "underperform".

Like Morgan Stanley, investment bank Goldman Sachs was converted to a bank holding company at the height of the market collapse that followed the Lehman Bros. bankruptcy. It has opted to emphasise its trading and investment banking businesses.

Morgan Stanley, on the other hand, wants a more stable income steam. Mack is looking toward underwriting and fee-based businesses and will consider opportunities to buy a bank in an "important" US market.

The merger of Morgan Stanley's wealth management business with Citigroup Inc.'s Smith Barney is an example of this strategy, with Morgan Stanley the majority owner of that income-producing joint venture.

Morgan Stanley is considered to be in good financial health despite its first back-to-back quarterly losses since going public in 1986 due to lower revenue from trading and losses on real estate. Its sub-prime mortgage exposure remains moderate in relation to its enormous overall size.

Earnings are expected to increase 225 percent next year compared with the 54 percent rise forecast for the diversified investment industry. The five-year annualised return is projected to be 12 percent versus 11 percent expected for its peers.

Q What's an acceptable credit score these days and what's the quickest way that I can improve mine? - WD, via the Internet

A What's acceptable varies according to the lender considering it. In the current tight credit market, however, lenders are definitely looking for better scores.

"For a large purchase such as home or car, lenders are generally looking for scores in the 700s," said Catherine Williams, vice president of financial literacy for the nonprofit Money Management International in Houston, who considers the mid-600s the low end of the acceptable range. "That doesn't mean you can't get financing if your score is lower, but you might have to pay a higher interest rate if you do."

FICO, developed by Fair Isaac Corp., is a method of calculating a credit score that uses a range between 300 and 850. It is employed by many mortgage lenders, though the credit reporting agencies Equifax, Experian and TransUnion also have their own scoring systems.

"You can't really improve your score quickly, expecting it to whipsaw overnight, because it takes months," Williams said. "In the meantime, pay your bills on time, pay as agreed upon, keep your balances low and keep your ratio of utilised debt to available debt low."

Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N Central Ave., Suite 302, Phoenix, AZ 85004-1248, or by e-mail at andrewinv@aol.com

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