Fitch: Morgan Stanley 3Q'13 Performance Steadied by Revenue Diversity

Fri Oct 18, 2013 4:38pm EDT

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(The following statement was released by the rating agency) NEW YORK, October 18 (Fitch) Morgan Stanley delivered steady third-quarter 2013 (3Q'13) financial performance despite the volatile market conditions, reflecting the increasing ability of the company's wealth management platform to offset trading and investment banking activities. Given the stable performance, improving capital levels and increasing earnings diversity, these latest results have no rating implications on Morgan Stanley's 'A/F1' ratings or Stable Outlook. Morgan Stanley's overall profitability remained consistent with last quarter. As calculated by Fitch, pre-tax operating profits (excluding DVA impact) declined slightly to $1.5 billion in 3Q'13 from $1.6 billion in 2Q'13. Pre-tax operating return on assets (excluding DVA impact) improved to 0.7% at 3Q'13 from 0.4% at 3Q'12, however, slightly down from 0.8% reported at 2Q'13 as assets increased. Expenses remained unchanged from the prior quarter, and were down 7% from 3Q'12. Wealth management profits continued to grow, following the purchase of the remaining 35% stake in the Morgan Stanley Smith Barney joint venture in 2Q'13. Despite flat revenues on a quarter-over-quarter (QoQ) basis, wealth management pre-tax operating margin continued to improve, increasing to 19.2% at 3Q'13, up from 18.6% at 2Q'13, and 7.7% at 3Q'12 as Morgan Stanley now captures the full amount of order flow, and continues to onboard deposits previously held by the joint venture partner, Citigroup Inc. Fitch believes there is potential for additional margin improvement in future periods, particularly as Morgan Stanley executes on its strategy to deploy these deposits into securities and loans with higher returns. That said, the lending expansion is not without risk and the pace of growth and the strength of underwriting will be key determinants in the success of strategy. Institutional securities net revenues (excluding DVA impact) declined 7.5% sequentially, however, were up slightly (3.1%) on a year-over-year (YoY) basis. Fixed income and commodities net revenues declined 28% QoQ, a greater decline than the majority of peers. Lower revenues across all fixed income products were driven by reduced customer activity and market volumes due to uncertain macroeconomic environment regarding U.S. fiscal policy and interest rates. Lower equity sales and trading net revenues on a sequential basis resulted from weaker performance across asset classes and geographies. Investment banking net revenues were slightly lower than 2Q'13 as lower advisory revenues and equity underwriting were impacted by weakness in EMEA, APAC and the Americas. Debt underwriting revenues benefited from solid volumes during the quarter, as Morgan Stanley was the lead underwriter for several significant transactions, including the Verizon offering. The investment backlog remains strong, and Morgan Stanley should benefit from an up-tick in economic activity. Morgan Stanley continued to manage liquidity conservatively and strengthen its Basel III capital levels. The global liquidity reserve, which is comprised of cash and unencumbered liquid securities, stood at a solid $198 billion (24% of total assets), up 9% from 2Q'13. VaR was down significantly on a QoQ basis, and at its lowest level in nine quarters, primarily due to de-risking in fixed income and commodities, and lower client activity. Morgan Stanley estimates that it's Basel III Tier I common ratio was approximately 10.8% at 3Q'13, as compared with 9.9% at the end of the prior quarter. This ratio is comfortably above the 8.5% minimum (7% plus the 1.5% G-SIFI buffer). Morgan Stanley estimated that its supplementary leverage ratio for the holding company was 4.2%, below the 5% threshold. Fitch continues to believe that Morgan Stanley will be able to meet the supplementary leverage minimums ahead of the required timeframe through a combination of continued reduction in gross assets, retained earnings and compression trades to reduce gross derivative exposure. Morgan Stanley did not disclose an updated supplementary leverage ratio at the bank level, however, on their 2Q'13 earnings call, they estimated that the ratio exceeded 6%. During 3Q'13, Morgan Stanley repurchased approximately $123 million shares following its announced $500 million share buyback in the prior quarter. Given the firm's capital levels, Fitch would expect additional share repurchases in the coming quarters. Contact: Tara Kriss Senior Director +1-212-908-0369 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Ilya Ivashkov, CFA Director +1-212-908-0769 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. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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