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

DBRS, Inc. (DBRS) has today confirmed the ratings for Morgan Stanley (MS or the Company), including its Long-Term Senior Debt rating of A (high) and Short-Term Instruments rating of R-1 (middle). The trend on all ratings is Stable. MS’s Intrinsic Assessment (IA) is A (high), while its Support Assessment remains SA3.

The ratings confirmation reflects the strength of Morgan Stanley’s franchise, including its well-diversified global mix of businesses that have substantial scale and strong market positions, and contribute to resilient earnings generation. Additionally, MS’s strong risk management and operational capabilities, which support its strategic initiatives and contribute to its franchise momentum, also support the current rating level. The ratings also consider the current evolving regulatory environment, which requires significant investments in order to adhere to more stringent requirements, at a time when headwinds continue to impact capital markets revenues. DBRS further notes that Morgan Stanley’s exposure to wide ranging capital markets activities contributes to a notable level of market risk. While these activities support the franchise value, the related exposure elevates the Company’s risk profile and can lead to more volatile earnings.

Morgan Stanley’s franchise is supported by its top-tier positioning within its global capital markets businesses and its market leading Wealth Management (WM) platform. While a lesser contributor to overall earnings, MS’s Investment Management segment adds to franchise diversity. The Company’s investments in technology are evident across the franchise. Particularly noteworthy are investments within MS’s WM franchise where it is focusing on advancing its digital presence, and DBRS sees this as contributing to the momentum within this business. Also, MS maintains a dominant global position within its Equities Sales & Trading (S&T) franchise where technology supports the strong execution capabilities that are critical to its success. DBRS sees MS as well-positioned to benefit from an improving global landscape, given its strong positioning and scalable business model.

In 2016, net revenues of $34.6 billion ticked up slightly versus the prior year, and have continued to trend upward since 2011. In 1H17, net income was a strong $3.4 billion on net revenues of $19.2 billion, representing a return on average common equity (ROE) of 9.9%. The Company is generating about 43% of net revenues from WM, providing general stability to the top line. The revenue generating environment continues to be challenging, particularly in the trading businesses where activity levels remain relatively low. Nonetheless, 1H17 net revenues have increased by a strong 15%, while expenses increased 11% year-over-year (YoY) resulting in positive operating leverage.

Given its track record of executing on strategic initiatives, DBRS sees MS as having a strong ability to continually adjust to the evolving operating environment. Critical to the Company’s success is its strong operational infrastructure, which supports risk management, compliance and control functions, as well as its cost-efficient execution capabilities. Also important is the Company’s streamlined organizational structure, which includes successfully streamlining its S&T businesses under one management team. While DBRS acknowledges the risks associated with sizable capital markets businesses, particularly on a global scale, DBRS sees MS as having effective risk management capabilities that allow it to make appropriate risk/reward decisions.

Further underpinning the rating, MS has a sound financial profile. While the Company has a higher reliance on wholesale funding than its global peer group, Morgan Stanley dedicates significant time and resources to aligning the characteristics of its funding sources with those of the assets being funded. Indeed, less liquid assets are funded by more stable and long-dated sources, such as deposits, long-term debt, and equity. Funding for shorter-term assets utilize committed lines and other secured borrowings for better alignment. The Company also maintains a significant level of liquidity with an average Global Liquidity Reserve of $200 billion in 2Q17, or about 24% of total assets. MS reported a strong level of capitalization, with a fully-loaded Basel III Common Equity Tier 1 (CET1) ratio under the advanced approach of 16.0%, and a Supplementary Leverage Ratio of 6.5% at 2Q17.

The Grid Summary Grades for Morgan Stanley are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong; Risk Profile – Strong; Funding & Liquidity – Strong; Capitalisation – Strong.

RATING DRIVERS
DBRS sees MS’s rating as well-placed at the current level with upward pressure constrained by various factors, including the still evolving regulatory environment with its potential impact on the Company’s franchise, as well as its business model, which generally runs with a higher level of risk than higher-rated institutions. Over the longer-term, continued revenue growth and sustained above cost of capital returns, without altering its risk profile, could result in positive ratings pressure.

Conversely, 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 Global Methodology for Rating Banks and Banking Organisations (May 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents, SNL Financial, Coalition, Dealogic and regulatory data. 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, Senior Vice President – Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President – Global Credit Policy
Initial Rating Date: July 31, 1998
Last Rating Date: August 2, 2017

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.