DBRS: Morgan Stanley 3Q Earnings Reflect Cont’d Momentum in WM and Solid Sales & Trading Performance

Summary:
• Net income of $1.5 billion on net revenues of $8.7 billion (ex-DVA) underpinned by continued strength in Wealth Management (WM) and solid performance in Sales & Trading (S&T) businesses.
• Continued success in deployment of deposits into loans and AFS with balances in WM of $87 billion, up 25% YoY, and bank lending in IS of $22 billion, up 77% YoY.
• 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 WM business with continued growth in securities-based lending and residential real estate lending. Net asset inflows in WM, particularly growth in fee-based assets, and in Investment Management (IM) are supporting the franchise build and adding to revenue stability. Highlights of the quarter also include continued leadership in investment banking and strong customer activity, which drove solid S&T revenues.

The importance of WM as a stable revenue generator is evident in quarterly trends, as net revenues continued to show steady growth, up 2% quarter-on-quarter and 9% year-on-year (YoY) to $3.8 billion, with notable growth in net interest income despite the low interest rate environment driven by growth in lending. With bank deposits of $116 billion and total bank loans of $57 billion, the bank loan-to-deposit ratio stood at 49% at 3Q14, up from 37% a year ago, demonstrating the successful deployment of these deposits into lending that supports its franchise. WM’s pre-tax margin continues to improve, reaching 22% in the quarter, up from 19% a year ago. Client assets were $2 trillion at 3Q14, flat to the prior quarter and up 10% YoY, of which 38% were fee-based client assets.

Institutional Securities (IS) reported solid revenues, supported by important contributions from the Company’s diverse investment banking (IB) and S&T business segments. IB net revenues demonstrated Morgan Stanley’s continued leadership in financial advisory and a particularly strong performance in equity underwriting, in which Morgan Stanley outperformed its U.S. peers. Sequential improvements were also evident in diverse S&T activities; equities, driven by strong performance across products and geographies; and fixed income, driven by significant improvement in macro products, notably foreign exchange products.

Morgan Stanley’s financial profile remains strong and is benefiting from its efforts to make more efficient use of its balance sheet and capital, even as some regulatory requirements have yet to be finalized. Balance sheet reduction of $13 billion to $814 billion contributed to a 30 bps improvement in the supplementary leverage ratio to 4.9%. The Company reported an estimated common equity Tier 1 ratio of 12.6% at quarter end, under Basel III advanced approach, fully phased-in. Its global liquidity reserve of $190 billion remains substantial relative to total assets (23%) and is appropriately sized to meet Morgan Stanley’s estimated liquidity needs. The Company opportunistically tapped the credit markets in the quarter, given the strong, global demand for its credit, which should contribute to lower funding costs as higher cost debt matures. DBRS notes that Morgan Stanley’s consolidated interest expense has declined substantially over the past year, down 28% to $827 million.

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.