DBRS Comments on Morgan Stanley’s 3Q13 Earnings; Ratings Unchanged – Sr. at A (high), Negative Trend

DBRS, Inc. (DBRS) has today commented on the 3Q13 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 $1.0 billion on total net revenues of $8.1 billion (excluding DVA).

Highlights of the quarter include solid results in investment banking, strong performance in Equity sales and trading (S&T), high level of pre-tax margin in Global Wealth Management (GWM) in line with its stated goal, continued fee-based asset inflows in GWM, and gains on investments in the Merchant Banking and Real Estate Investing businesses within Investment Management (IM). DBRS views Morgan Stanley as continuing to have success in its build-out businesses which provide more stable revenue generation and are less capital intensive, such as GWM and traditional asset management. Indicative of this success, these two businesses combined to generate 47% of total Company net revenues in 9M13, as compared to 43% in 2010 (ex-DVA). While reduced client activity and an uncertain operating environment negatively impacted S&T revenues, particularly within Fixed Income S&T, which saw net revenues decline 28% QoQ (ex-DVA), this revenue volatility is having a lesser impact on overall profitability with the Company’s reoriented franchise. DBRS continues to view the Company as now much better positioned to cope with the post-crisis environment and the ongoing regulatory and legislative changes.

This quarter was the first to include 100% of the GWM business following the Company’s acquisition of the remaining 35% stake in the Morgan Stanley Smith Barney JV in June. In addition to adding stability to revenues, this business has helped to bolster the Company’s liquidity profile. It onboarded $21 billion in additional deposits following the closing of the acquisition, raising firmwide deposits to $105 billion in 3Q13 (vs. 2Q13: $82 billion). These deposits can be deployed to fund the Company’s lending business in WM as well as IS.

Within IM, Morgan Stanley recorded net revenues of $828 million in 3Q13, up from $673 million in 2Q13, primarily reflecting gains on investments in the Merchant Banking and Real Estate Investing businesses. Reflecting the nature of these generally longer-term investments, these businesses have the potential to generate significant positive mark-to-market revenues for the Company over time, but revenues can be volatile in the short-term driven by market movements. From a risk perspective, DBRS views these businesses differently than the traditional asset management business, which generated $369 million in net revenues, or 45% of IM net revenues, in 3Q13.

Morgan Stanley continues to maintain a sound liquidity profile and solid capitalization. The Company’s liquidity reserve stood at $198 billion at the end of 3Q13, up from $181 billion at 2Q13, driven by the recently onboarded deposits that have not yet been deployed. With regard to capital, the Company reported a Tier 1 common ratio of 12.6% 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 10.8% at 3Q13. The Company currently estimates that its supplementary leverage ratio is 4.2% at the holding company level; Morgan Stanley expects to exceed the 5% required minimum in 2015 by focusing on compression opportunities to reduce the numerator and capital accretion to boost the denominator in this capital ratio.

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

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