DBRS: MS 4Q Results Benefit from Revenue Diversity, Stability Despite FIC Headwinds

Summary:
• Net income of $920 million on net revenues of $7.8 billion, as record Wealth Management (WM) revenues were supported by strong fee based asset inflows and growing loan balances
• Bottom line pressured by increased compensation expenses and weaker Fixed Income & Commodities (FIC) revenues
• DBRS Rates Morgan Stanley’s Issuer and Senior Debt at A (high) with a Stable Trend.

DBRS, Inc. (DBRS) views Morgan Stanley’s (MS or the Company) 4Q results as sound, as the Company’s business mix contributes to overall revenue stability. WM reported a record $3.8 billion in revenues in the quarter with strong fee based asset inflows and growing loan balances. Solid results in Equity Sales and Trading (S&T) were somewhat offset by another difficult quarter in Fixed Income & Commodities S&T, though the impact on overall revenues was more muted with MS’s reoriented franchise.

In addition to stability to revenues, WM contributes to Morgan Stanley’s improved liquidity profile with firmwide deposits up to $134 billion at end-2014, from $112 billion at end-2013 and $83 billion at end-2012 with the contractual onboarding of deposits from Citi. Reflecting the Company’s focus on deploying these deposits to fund its lending activities, firmwide loans and lending commitments increased to $170 billion, an increase of 21% YoY and up a substantial 40% from 2012. Importantly, with a focus on high net worth clients, MS reported significant increases in assets under management with clients who have assets in excess of $10 million, as well as clients with assets in the range of $1 million to $10 million.

In its annual Strategic Update, Morgan Stanley demonstrated continued progress with its multi-year strategic plan, including WM margin improvement and execution of its bank strategy. Tailwinds include continued deposit growth, which provides opportunity for increased lending, the optimization of assets from cash into lending, and the upside from higher interest rates. More challenging has been the progress in FIC, given continued headwinds, as the Company continues to reduce RWAs and expenses in order to meet its cost of capital in these businesses. Looking forward, the roll off of higher-cost wholesale funding will continue to lower interest expense, providing a boost to net interest income.

Regulatory requirements continue to be a focus, as the updated list of G-SIB capital buffers was announced in November 2014. MS’s buffer requirement remains at 1.5% over the regulatory minimum, resulting in a Basel 3 CET1 minimum requirement of 8.5% by January 1, 2019. While MS’s fully-loaded CET1 ratio under the advanced approach of 12.4% currently exceeds the requirement well in advance of the 2019 deadline, DBRS notes that the US interpretation of the rules is still being adjusted and the Company’s requirement could increase further. DBRS views Morgan Stanley as having the ability to adjust by generating capital organically, but generating targeted returns on capital have the potential to become a greater challenge and competitive disadvantage, if buffers are increased further on a selective basis.

The Company also disclosed its supplementary leverage ratio of 5.0% at-end 4Q14 at the parent holding company level, meeting the elevated leverage ratio requirement of 5% well in advance of the January 2018 deadline.

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