DBRS: MS 2Q Results Supported by Momentum Across Businesses

Summary:
• Net income to common of $1.7 billion on net revenues of $9.7 billion (or $9.6 billion ex-DVA) supported by momentum across businesses
• Balance sheet remains strong with fully-loaded CET1 ratio of 12.5% (advanced approach) and supplementary leverage ratio of 5.3%
• 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) 2Q15 results as strong, supported by momentum across its businesses. MS reported net income to common of $1.7 billion on net revenues of $9.7 billion (or $9.6 billion ex-DVA). Overall trends point to continued franchise strength across wide-ranging regions and products, supporting the current rating level. Furthermore, Morgan Stanley appears to be appropriately positioned to cope with future regulatory change, including the recently announced Fed final rule that establishes risk-based capital charges for G-SIBs, as well as to seize opportunities and gain wallet share.

Highlights of the quarter include strength in Investment Banking (IB) and Equity Sales & Trading (S&T), continued margin improvement in Wealth Management (WM) and sequential improvement in Investment Management (IM) driven by real estate and merchant banking gains. This across-the-board momentum further demonstrates the success of the multi-year franchise repositioning that has been completed, with MS now delivering tangible results.

IB strength was supported by improved underwriting revenues, up 45% sequentially to $1 billion in 2Q15, driven by primary equity issuance and US investment grade debt volumes, some of which was linked to M&A related financing. MS’s traditionally strong Equity S&T franchise also generated substantial revenues of $2.3 billion, largely flat quarter-on-quarter (QoQ), with high levels of client activity across all products. This global franchise also benefitted from strength in Asia, with strength in cash volumes, and the US, with strength led by prime brokerage and derivatives. Fixed Income & Commodities S&T revenues declined sequentially with lower levels of client activity, but were up when compared to 2Q14. While the environment for MS’s traditionally strong credit businesses remained relatively weak, Fixed Income & Commodities S&T revenues benefitted from strength in rates. Also, competitor restructurings could be contributing to share gains.

WM pre-tax margin improved to 23%, up 1 percentage point sequentially, as the recovery in the US continues to benefit the franchise. Revenues continue to gradually trend upward as MS deploys its deposit base into loan products. The contractual onboarding of deposits from Citi concluded in the quarter, with deposits now reaching $139 billion, or 17% of total assets, up from deposits of $118 billion as of 2Q14, or 14% of total assets. IM revenues increased a notable 12% sequentially, as the Company recorded both realized and unrealized gains in its real estate and merchant banking businesses.

MS’s balance sheet remains strong with a fully-loaded Common Equity Tier 1 (CET1) ratio under the advanced approach of 12.5% and a supplementary leverage ratio 5.3% at 2Q15.

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

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