DBRS Confirms Ratings of Morgan Stanley – Senior at A (high), Stable Trend

DBRS, Inc. (DBRS) has today confirmed the ratings for Morgan Stanley (or the Company), including its Issuer & Senior Debt rating of A (high) and Short-Term Instruments rating of R-1 (middle). The trend on all long-term ratings remains Stable. These rating actions follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The ratings confirmation reflects the strength of Morgan Stanley’s franchise, including its substantial scale, strong market positions, and well-diversified global mix of businesses, which provide resilient core earnings power along with its strong risk management framework and favorable credit fundamentals. The current ratings level also considers the continued challenging operating environment as well as Morgan Stanley’s significant exposure to wide ranging capital markets activities and their inherent volatility.

Morgan Stanley’s franchise is supported by a strong Institutional Securities (IS) business and market leading Wealth Management (WM) platform, where effective systems and a cohesive culture support synergies across the franchise. Demonstrating its global diversification, 29% of the Company’s revenues were generated outside the Americas, reflecting its significant presence in Europe and Asia. Providing general stability to the top line, in 2015, 50% of net revenues were generated from the Company’s wealth and investment management segments, which DBRS views positively from a ratings perspective.

In 2015, Morgan Stanley generated $35.1 billion ($34.5 billion excluding DVA) of net revenues and $6.1 billion in net income, representing a return on average common equity (ROE) of 8.5%, reflecting an above global peer average performance. In what is typically a strong quarter for capital markets institutions, 1Q16 results represented a difficult start to the year for Morgan Stanley and most of its global peer group, primarily due to the difficult operating environment, with the Company producing a 6.2% ROE. Positive highlights in 1Q16 included strength in Advisory and solid production from its top-tier Equity sales and trading business, while WM revenues were only down modestly, but represented a sizable 47% of the Company’s total. Morgan Stanley’s Fixed Income and Commodities (FIC) businesses have been undergoing restructuring, refocusing the businesses on those with strategic importance to the Company, while also reducing more capital intensive businesses. FIC revenue, which represented just 12% of the consolidated total in 2015, fell 54% year-over-year (YoY), but was up sequentially, despite a 25% headcount reduction in the prior quarter.

Given its track record of executing on strategic initiatives, DBRS expects that Morgan Stanley has the ability to achieve its ROE target of 9-11% on a sustainable basis. The Company continues to demonstrate momentum in its wealth management strategy, while maintaining strong execution capabilities in its leading Equity sales and trading and Investment Banking franchises. Expense initiatives should also contribute to bottom line results, including improving support services efficiencies, leveraging technology and maintaining compensation discipline.

Morgan Stanley’s effective risk management capabilities and cohesive culture contributes to the strength of the franchise, as well as provides key support to the rating. While the Company will continue to face certain risks given that its businesses are highly connected to financial markets that are still beset with significant challenges, Morgan Stanley has demonstrated the ability to cope with and adapt to a stressed environment and DBRS expects this to continue. Importantly, the Company continues to de-risk its businesses by further reducing its non-strategic businesses and risk-weighted assets (RWAs), while growing its lower-risk lending book as it deploys deposits from its WM business. In addition, Morgan Stanley’s average daily management VaR ($50 million in 2015), a key indicator of market risk, remains substantially below pre-crisis ($78 million in 2007) and peak levels (greater than $150 million in 2009), reflecting the Company’s conservative posture.

Morgan Stanley’s financial profile remains strong, further underpinning the rating. The Company continues to enhance its funding and liquidity profile as it further shifts its funding mix into more durable sources, including deposits, long-term debt, and equity, which comprised 85% of its funding stack at year-end 2015, up from just 43% at year-end 2007. Importantly, the Company is well in excess of the 2022 requirements with respect to the Total Loss Absorbing Capacity (TLAC) and Long Term Debt (LTD) proposals, which compares favorably versus other Globally Systemically Important Banks (G-SIBs). Additionally, Morgan Stanley maintains a substantial amount of liquidity, including $190 billion of HQLA at 1Q16, and the Company estimates that it exceeds the fully-implemented LCR requirement. Finally, Morgan Stanley’s capitalization remains robust with a fully-loaded Basel III Common Equity Tier 1 (CET1) ratio under the advanced approach of 14.6% and a Supplementary Leverage Ratio (SLR) of 6.0% at 1Q16.

RATING DRIVERS
In the near to intermediate term, ratings are unlikely to trend upward given the continued challenging operating environment and the Company’s relative rating. Longer term, sustained above cost of capital returns, continued enhancement of the WM business and maintaining the Company’s strong credit fundamentals could result in positive ratings pressure.

Notable deterioration in credit fundamentals or risk management deficiencies, combined with any perceived franchise weakening, could negatively pressure ratings. If investor confidence is adversely impacted in a Morgan Stanley-specific scenario, which could particularly affect the Company given its sizable reliance on wholesale funding, ratings could also be impacted.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (December 2015), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), DBRS Criteria - Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: Roger Lister
Initial Rating Date: July 31, 1998
Most Recent Rating: May 26, 2015

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For additional information on this credit or on this industry, visit www.dbrs.com.