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

DBRS, Inc. (DBRS) confirmed the ratings for Morgan Stanley (MS or the Company), including its Long-Term Issuer Rating of A (high) and Short-Term Issuer Rating of R-1 (middle). The trend on all ratings is Stable. Concurrently, DBRS upgraded MS’s Intrinsic Assessment (IA) to AA (low) from A (high), while its Support Assessment remains SA3. The Company’s Long-Term Issuer Rating, which was previously positioned in line with its IA, is now positioned one notch below the IA, reflecting the structural subordination of the holding company (the Parent).

KEY RATING CONSIDERATIONS
The ratings confirmation reflects the strength and diversity of Morgan Stanley’s franchise, including a business mix that generates a significant amount of stable, recurring revenues, as well as the Company’s effective risk management framework and strong credit fundamentals. The ratings also consider Morgan Stanley’s exposure to a wide range of capital markets activities that are integral to the value of its franchise, but also contribute a notable level of market risk, which elevates the Company’s risk profile.

In upgrading the IA to AA (low), DBRS considers the resiliency of Morgan Stanley’s fundamental strengths, including its competitive positioning and sustained earnings generation capacity, which DBRS views as comparable to other AA (low)-rated financial institutions. At the same time, the ratings now incorporate a one notch differential between Morgan Stanley’s main operating entities reflected in its IA and its holding company. DBRS views this differential as appropriate, considering the significant industry-wide progress made with respect to resolution planning, which further supports the likely outcome of Parent company debt obligations in the event of a wind-down. The differential also considers the continued growth of bank-level funding, which now represents a more meaningful portion of the Company’s funding stack.

RATING DRIVERS
DBRS sees MS’s ratings as well placed at the current level. Over the long term, continued revenue growth and sustained top-tier profitability metrics, without altering its risk profile, could have positive rating implications. 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.

RATING RATIONALE
Morgan Stanley’s powerful franchise includes top tier or leading market positions globally across all investment banking and most trading activities. In addition, with $2.4 trillion in client assets, the Company’s Wealth Management business is the third largest globally. While a smaller contributor to firmwide earnings, MS’s Investment Management segment enhances franchise diversity. In aggregate, Morgan Stanley’s Wealth and Investment Management businesses generate roughly half of the Company’s total net revenues, providing stability and predictability to results, which DBRS views favorably from a ratings perspective. Importantly, Morgan Stanley’s scale, market positions and diversification provide significant versatility, allowing the Company to leverage its strengths in response to changing market opportunities.

In 2017, Morgan Stanley reported solid and improved results, including growth in net revenues (up 10%) and pre-tax profit (up 18%), with an adjusted ROE of 9.4%, excluding the impact of U.S. tax reform. During 1H18, Morgan Stanley also generated double-digit revenue and pre-tax earnings growth (up 13% and 20%, respectively) compared to the prior year, resulting in a strong 13.9% ROE. Performance reflected significantly improved trading results and higher investment banking net revenues across business lines, as results were among the best in class. Additionally, Wealth Management demonstrated continued momentum, with a pre-tax margin of 27% in 1H18. DBRS notes that the compensation accrual in 1H18 was 44%, in line with other recent periods, although non-compensation expenses were up moderately on higher volume driven expenses.

MS’s funding profile remains strong despite a higher reliance on wholesale funding than its global peer group. Mitigating the wholesale funding reliance concern, Morgan Stanley dedicates significant time and resources to aligning the characteristics of its funding sources with those of the assets being funded. Indeed, longer-term or 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, including trading assets, is typically done via secured borrowings. MS’s long-term debt and secured borrowings have well-laddered maturities and a diversified base, limiting rollover risk.

During 1H18, the Company’s deposits increased $13.4 billion (to $172.8 billion), largely due to a redesign of the Company’s cash suite options, which added about $10 billion of balances at the end of 2Q18, partially offset by client cash deployment into investment alternatives and tax payment-related outflows. MS continues to hold a considerable level of liquidity, as its Global Liquidity Reserve totaled $226 billion at the end 2Q18, or 26% of total assets. Finally, the Company’s capitalization remains strong, with a global peer-leading Common Equity Tier 1 (CET1) ratio of 15.8% (under the Standardized Approach) at the end of 2Q18.

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

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations (July 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and 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: Michael McTamney, CFA, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 10 April 1992
Last Rating Date: 9 August 2017

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

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