DBRS: Morgan Stanley Demonstrates Power of Diversified Business Model with Strong 1Q14 Results

Summary:
• Strong net revenues of $8.8 billion (ex-DVA) demonstrate power of diversified business model with all major business lines reporting YoY gains.
• Highlights of the quarter include strength in Sales & Trading and momentum in Global Wealth Management.
• DBRS rates Morgan Stanley’s Issuer & Senior Debt at A (high) with a Negative trend.

Demonstrating the power of its global, diversified franchise, Morgan Stanley (or the Company) reported net income (to common) of $1.4 billion on net revenues of $8.8 billion (ex-debt value adjustment (DVA)) in another quarter characterized by an uneven global economic recovery, uncertainty regarding final regulatory requirements and overall subdued client demand and risk appetite. Indicating its successful refocusing of its business mix toward more stable revenue sources, close to half of the Company’s net revenues in 1Q14 were attributable to its Global Wealth Management (GWM) and Traditional Asset Management businesses. Solid investment banking (IB) net revenues of $1.1 billion and a growing pipeline across products and regions demonstrate the strength and breadth of Morgan Stanley’s well-entrenched IB franchise. Evolving regulatory requirements remain a key issue, and could prove to be more constraining depending on how the Company is able to modify its business model to comply with finalized rules and what adjustments may be needed to comply with proposed frameworks.

While solid contributions across all businesses supported overall results, highlights of 1Q14 included strong Sales & Trading (S&T) results and momentum in GWM. Morgan Stanley continues to demonstrate its progress in executing its strategy in the capital markets businesses, with S&T net revenues up year-on-year (YoY) across all business lines to $3.1 billion (ex-DVA). Notably, net revenues in Fixed Income & Commodities S&T increased 138% sequentially and 9% YoY. Net revenues increased across all major products versus 4Q13, with particular strength in commodities and credit products. Morgan Stanley also operates an important prime brokerage business, which contributed to the growth in Equity S&T net revenues.

GWM continues to generate relatively stable net revenues ($3.6 billion in 1Q14) and net income ($423 million in 1Q14). With a pre-tax margin of 19%, GWM is generating solid returns. While below the revised target range of 22%-25% announced last quarter, DBRS views this level as attainable by 2015, given the Company’s sustained execution of its strategy. As the Company’s growing deposit base is successfully deployed through its lending program, DBRS expects to see further growth in net interest income, which grew 31% YoY in GWM.

Morgan Stanley’s financial profile remains strong with significant liquidity levels ($203 billion) and an estimated Basel III Common Equity Tier 1 (CET1) ratio of 14.1%, on a transitional basis, and 11.6%, on a fully phased in basis, under the advanced approach at quarter-end. The Company provided a current estimate of its supplementary leverage ratio of 4.2% at the parent holding company level. Morgan Stanley expects to meet the 5% requirement by 2015.

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.]