Morgan Stanley Ratings Unchanged After 2Q13 Earnings – Senior at A (high)

DBRS, Inc. (DBRS) has today commented on the 2Q13 results of Morgan Stanley (the Company). The Issuer & Senior Debt rating of A (high) and Short-Term Instruments rating of R-1 (middle) remain unchanged. The trend on the long-term rating remains Negative. For the quarter, the Company reported net income applicable to Morgan Stanley of $898 million on total net revenues of $8.3 billion (excluding DVA), broadly higher than the average quarterly run-rate over the last three years.

In DBRS’s view, Morgan Stanley’s 2Q13 results showed the benefits of the extensive initiatives that the Company has undertaken across its technology platforms, products, regions, and businesses to reorient its franchise over the last three years. Reflecting its global franchise that has been strengthened by these initiatives, the Company delivered strong revenue growth in the Americas during the quarter, while also achieving growth in Asia and EMEA.

Reflecting the Company’s core strengths, the Institutional Securities segment delivered net revenues of $4.2 billion in 2Q13 (down 5% quarter-over-quarter (QoQ), but up 40% year-over-year (YoY)). Investment Banking contributed $1.1 billion in net revenues (up 14% QoQ, 22% YoY), driven by the Company’s top tier position in financial advisory and equity underwriting, with performance in debt underwriting supported by a favorable environment. Meanwhile, Sales & Trading generated net revenues of $2.9 billion during the quarter (down 9% QoQ, but up 32% YoY), with strength across products and regions in Equities ($1.8 billion: up 13% QoQ, 44% YoY). Importantly, despite continued deleveraging as part of the Company’s strategic plan, the Fixed Income & Commodities sub-segment recorded improving net revenues relative to last year ($1.2 billion: down 24% QoQ, but up 50% YoY) supported by higher revenues in foreign exchange and commodities.

Emphasizing its increasing importance within the organization, Wealth Management generated $3.5 billion in net revenues (up 2% QoQ, 10% YoY) driven by higher asset management fee income and transactional revenues with total client assets reaching $1.8 trillion. More importantly, the segment posted a record 18.5% pre-tax margin for the quarter. Having acquired the remaining 35% stake Morgan Stanley Smith Barney JV in June, DBRS expects the Company to capitalize on material growth opportunities going forward through cross-selling across products globally.

Investment Management recorded net revenues of $673 million, primarily reflecting gains on investments in Merchant Banking and higher results in Traditional Asset Management ($419 million), where assets under management or supervision grew 11.6% YoY to $347 billion.

Compensation was accrued at a lower 49% of net revenues, down from 50% in 1Q13 and 55% in 2Q12. As a result, compensation expenses were down QoQ, but up YoY with higher revenues. Meanwhile, non-compensation expenses were up QoQ driven by elevated litigation expenses.

Morgan Stanley continues to maintain a sound liquidity profile and solid capitalization. The Company’s liquidity reserve stood at $181 billion at the end of 2Q13, representing a substantial 22.5% of total assets. With regard to capital, the Company reported a Tier 1 common ratio of 11.8% under Basel I including the revised market risk regulatory capital requirements that became effective on January 1, 2013. Morgan Stanley also reported an estimated Basel III ratio of 9.9%, up from 9.5% at year-end 2012. The Company currently estimates that its supplementary leverage ratio is 4.2% at the holding company level and above 6% at the bank level. The Company anticipates that the move towards central clearing and planned asset reductions in Fixed Income & Commodities, along with sustained organic capital generation, should enable it to exceed the 5% minimum at the holding company level over the medium term phase-in period.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]