Fitch: Morgan Stanley's Operating Results Strengthen

Thu Apr 18, 2013 1:24pm EDT

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(The following statement was released by the rating agency) NEW YORK, April 18 (Fitch) First-quarter 2013 (1Q'13) operating income of Morgan Stanley showed continued improvement, narrowing the gap between the firm and higher rated peers, according to Fitch Ratings. Morgan Stanley continues to manage liquidity and funding conservatively and reported a comparatively strong Basel III capital ratio. Operating profits benefited from higher results in institutional securities and global wealth management (GWM). Pre-tax operating profits as calculated by Fitch increased to $1.9 billion in 1Q'13 from $1.4 billion in 4Q'12. Operating profitability, as measured by the pre-tax operating return on assets (ROA), was 1% versus 0.7%. This performance was below the profitability of higher rated U.S. banks, but the performance gap continued to narrow. These figures exclude DVA adjustments and various other one-time gains/charges. Morgan Stanley recorded continued growth in global wealth management (GWM) revenues and profits. When Morgan Stanley purchases Citi's remaining 35% stake in the MSSB joint venture (pending regulatory approval), the contribution from GWM will likely increase further, providing greater earnings stability and enhancing overall returns for Morgan Stanley. The pre-tax operating margin in GWM continued to tick up, reaching 17.2% versus 16.9% in 4Q'12. The margin improved substantially from just 12.2% a year ago due to operating efficiency efforts including the completion of systems integration in 2012. Other factors contributing to higher margins include greater share of the order flow agreement and joint venture deposits as Morgan Stanley increases its ownership. Margins will likely be enhanced over time by increased lending activities to GWM customers. The margin remains below those of major U.S. peers in the wealth management business, but the difference has been diminishing. Within institutional securities, results (excluding DVA) improved considerably from a seasonally weak 4Q'12, but declined year-over-year. Revenues in fixed income and commodities were up substantially from 4Q'12, but declined from a robust level in 1Q'12. In the prior year, revenues in the rates business were boosted by a snap back in the European bond markets following ECB actions. In addition, commodities related revenues were weaker year-over-year after favorable results in 1Q'12. Equity sales and trading revenues rebounded from 4Q'12 but were lower year-over-year in view of sluggish volumes. Investment banking results continued to benefit from strong debt underwriting volumes and an improving equity underwriting revenues from a low base. In 1Q'13, Morgan Stanley continued to manage liquidity conservatively and further strengthen its Basel III capital. Morgan Stanley's global liquidity reserve stood at $186 billion or 23% of total assets (in line with the level at year end). This level of liquidity provides ample coverage of upcoming long-term debt maturities of $22 billion over the next 12 months. Reliance on short-term unsecured funding is minimal and Morgan Stanley has lengthened out the weighted average maturity (WAM) of its secured funding. VaR remained at a subdued level reflecting low market volatility in the 1Q'13 combined with efforts by management to focus on more liquid/less volatile trading products, downsize the fixed income business and take a more cautious approach to trading risk generally. Under Basel III, Morgan Stanley's Tier I common ratio is estimated by management to be 9.8% (above the 9.3% average of U.S. competitors with sizeable capital markets operations). As expected, reported Basel I capital ratios were negatively affected by the adoption of revised market risk capital requirements. Nevertheless, capital ratios remain quite comfortable under Basel I. Morgan Stanley has made solid progress in reducing risk-weighted assets particularly in the fixed income and commodities businesses and plans to further drive down risk-weighted assets and capital needs, particularly in these areas. Contact: Joseph Scott Senior Director +1-212-908-0624 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Nathan Flanders Managing Director +1-212-908-0827 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. . ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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