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

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Morgan Stanley (MS or the Company), including the Company’s Long-Term Issuer Rating of A (high) and the Short-Term Issuer Rating of R-1 (middle). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Company is AA (low), while its Support Assessment remains SA3. The Company’s Long-Term Issuer Rating is positioned one notch below the IA.

KEY RATING CONSIDERATIONS
The ratings confirmation reflects the strength of Morgan Stanley’s franchise that is supported by its powerful Institutional Securities business and market leading Wealth Management business, which have substantial scale and strong market positions globally, contributing to resilient earnings generation. Additionally, MS’s effective risk management capabilities, along with its strong credit fundamentals, support the current rating level. 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, elevating the Company’s risk profile.

RATING DRIVERS
Broadening and diversifying revenues, coupled with sustained positive operating leverage, while not increasing its risk profile, could have positive ratings implications. Conversely, notable deterioration in credit fundamentals or risk management deficiencies, combined with any perceived franchise weakening, could negatively pressure ratings.

RATING RATIONALE
Morgan Stanley has a very strong franchise that is supported by top-tier or leading market positions globally across all investment banking and most trading activities. With $2.6 trillion in client assets, the Company’s Wealth Management business is the third largest globally. 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 Morningstar views favorably from a ratings perspective.

DBRS Morningstar views MS’s risk management capabilities and cohesive culture as contributing to the strength of the franchise. Morgan Stanley’s business activities inherently require it to take significant risk, making skillful risk management a critical component of its success. Considering its long and successful track record, DBRS Morningstar sees MS as having the appropriate processes and governance for managing risk that have generally worked well across its businesses.

Even with a more challenging operating environment during 9M19, Morgan Stanley reported good results, including $30.6 billion in net revenues, $6.8 in net income and a ROE of 11.8%. Performance was led by Wealth Management, which generated a pre-tax margin of 28%, atop the Company’s targeted range of 26% to 28%. Consistent with industry trends, MS’s investment banking and sales and trading net revenues were down across categories versus 9M18, but results compared favorably versus peers and the Company maintained its strong market positions globally.

MS has a strong financial profile, which further underpins the ratings. While the Company has a higher reliance on wholesale funding than its global peer group, DBRS Morningstar views MS’s wholesale funding as well managed. Specifically, the Company 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 investor base, limiting rollover risk. Deposits continue to grow and comprise a larger portion of the funding stack, totaling $181 billion at the end of 3Q19, which was up 3% from the prior year. In addition, MS had a global liquidity reserve of $227 billion, representing one-quarter of total assets and a peer-leading CET1 ratio of 16.2% at the end of 3Q19.

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 principal methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2019) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), which can be found on our website under Methodologies & Criteria.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies/principal asset class methodologies and criteria employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision, Specifically, the “Global Methodology for Rating Banks and Banking Organisations” was utilized to evaluate the Issuer, while the “DBRS Criteria: Guarantees and Other Forms of Support” was used to rate the subsidiary guaranteed by the Issuer.

The last rating action on this issuer took place on October 5, 2018.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

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

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