DBRS: Morgan Stanley 4Q Earnings Demonstrate Stability of Wealth Management and Strong IB Franchise

Summary:

• 4Q13 net income from continuing operations of $433 million ex-DVA, down 56% YoY despite strong revenues, driven by a pre-tax litigation charge of $1.2 billion for mortgage related matters
• Net revenues ex-DVA of $8.2 billion showed leadership in Investment Banking, solid Equity Sales & Trading revenues and key contribution from Wealth Management
• DBRS rates Morgan Stanley’s Issuer & Senior Debt at A (high) with a Negative trend

Highlights of Morgan Stanley’s (the Company) 4Q13 results include another strong performance in Investment Banking (IB) and continued improvement in performance metrics in the Global Wealth Management (GWM) franchise. Solid results in Equity Sales and Trading (S&T) were somewhat offset by another difficult quarter in Fixed Income & Commodities S&T (FIC S&T), though the impact on overall revenues was more muted with the Company’s reoriented franchise.

Institutional Securities (IS) revenues of $3.7 billion in 4Q13 and $16.1 billion in the full year were supported by the Company’s continued strength in IB, where it benefits from its leading position in financial advisory and strength in underwriting, plus solid underlying revenue generation in Equity S&T. Demonstrating the importance of its global reach and product range, revenues were supported by cross-border activity. FIC S&T revenues remain subdued; reduced exposure is a factor with $210 billion in risk-weighted assets at 4Q13, well below $390 billion at 3Q11.

Reaching its pre-tax margin target well in advance of the Company’s 2015 timeline, GWM reported record net income of $476 million and a pre-tax margin of 20% (ex-impairment charge in intangibles) in the second full quarter to include the entire GWM business. Given this momentum, management revised targets for pre-tax margin upward to 22%-25% by 2015. Importantly, total client assets continued on an upward trajectory, particularly in the highest net worth client segment, which was up 26% YoY.

Besides adding stability to revenues, GWM contibutes to Morgan Stanley’s improved liquidity profile with firmwide deposits up to $112 billion from $83 billion in 4Q12 with the onboarding of deposits following the close of the acquisition and ongoing contractual deposit inflows. Reflecting the Company’s focus on deploying these deposits to fund its lending activities, firmwide loans and lending commitments increased to $141 billion, up 16% YoY.

Morgan Stanley maintains significant liquidity levels with a reserve of $202 billion, or 24% of total assets, some of which has yet to be deployed into higher-margin lending. Capitalization was ample with an estimated Tier 1 Common ratio under Basel 3 of 10.5%. The Company estimates its supplementary leverage ratio under U.S. rules to be 4.2% at the holding company level with a 5% minimum requirement by 2015. Morgan Stanley expects to exceed the minimum requirement with continued focus on balance sheet reduction opportunities and the capital accretion.

DBRS rates Morgan Stanley’s Issuer & Senior debt at A (high) with a Negative trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]