DBRS: Morgan Stanley 2Q14 Results Show Improving Returns and Revenue Stability

Summary:
• Net income of $1.9 billion on net revenues of $8.5 billion (ex-DVA) underpinned by continued strength in Global Wealth Management (GWM) and strong revenues in Investment Banking (IB).
• FIC RWAs continue to be reduced, down to $192 billion at 2Q14 from $210 billion at year-end 2013, demonstrating execution of strategic initiatives.
• DBRS rates Morgan Stanley’s Issuer & Senior Debt at A (high) with a Stable trend.

DBRS, Inc. (DBRS) views Morgan Stanley as continuing to make progress with its strategic initiatives, particularly in its GWM and Fixed Income and Commodities (FIC) businesses. Earnings in 2Q14 continue to demonstrate the importance of having a global, diversified franchise to be successful in the capital markets businesses. Net income ticked up in the quarter benefitting from a lower provision for tax, but underlying earnings declined modestly on weaker revenues, particularly in the Company’s trading businesses. Positively, the bottom line is being helped by expense reductions with lower litigation costs and ongoing expense initiatives.

The importance of GWM as a stable revenue generator is evident in quarterly trends, as net revenues in GWM showed steady growth of 3% quarter-on-quarter to $3.7 billion, offsetting some weakness in other business segments. Pre-tax margin also continues to improve, reaching 21% in the quarter, up from 19% in 1Q14, with further growth opportunities available by deploying deposits through prudent lending. Net interest income in the quarter was up 30% year-on-year, demonstrating Morgan Stanley’s successful execution of this strategy, particularly in a low interest rate environment. The growth of GWM also contributes to deeper customer relationships, providing a vast distribution network for placement of underwriting transactions originated out of the IB, for example.

Morgan Stanley’s financial profile remains strong and is benefiting from efforts to make more efficient use of its balance sheet and capital, even as regulatory capital requirements evolve. Its liquidity reserve declined marginally to $192 billion reflecting increased bank lending, but still substantial relative to total assets of $827 billion. Under the currently applicable regime at 2Q14, the Company’s estimated Basel III Common Equity Tier 1 (CET1) ratio on a transitional basis was 13.8% and on a fully phased in basis under the advanced approach was 12.1%, up from 11.6% at 1Q14. Morgan Stanley estimates that its supplementary leverage ratio at the parent holding company under U.S. regulatory proposals increased to 4.6% from 4.2% at 1Q14 and expects to meet the 5% requirement by 2015.

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

Note:
All figures are in U.S. Dollars unless otherwise noted.