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Nov. 5, 2019, 4:34 p.m. EST

10-Q: MORGAN STANLEY

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(EDGAR Online via COMTEX) -- Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction

Morgan Stanley is a global financial services firm that maintains significant market positions in each of its business segments-Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms "Morgan Stanley," "Firm," "us," "we" or "our" mean Morgan Stanley (the "Parent Company") together with its consolidated subsidiaries. We define the following as part of our consolidated financial statements ("financial statements"): consolidated income statements ("income statements"), consolidated balance sheets ("balance sheets") and consolidated cash flow statements ("cash flow statements"). See the "Glossary of Common Acronyms" for the definition of certain acronyms used throughout this Form 10-Q. A description of the clients and principal products and services of each of our business segments is as follows:

Institutional Securities provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions, and high to ultra-high net worth clients. Investment banking services consist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing, prime brokerage and market-making activities in equity and fixed income products, including foreign exchange and commodities. Lending activities include originating corporate loans, commercial mortgage lending, providing secured lending facilities and extending financing to sales and trading customers. Other activities include investments and research.

Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses and institutions covering brokerage and investment advisory services; financial and wealth planning services; annuity and insurance products; securities-based lending, residential real estate loans and other lending products; banking and retirement plan services.

1 September 2019 Form 10-Q

Table of Contents

Executive Summary

Earnings per Common Share1

[[Image Removed: earningspercommonshare19q3.jpg]]

We reported net revenues of $10,032 million in the quarter ended September 30, 2019 ("current quarter," or "3Q 2019"), compared with $9,872 million in the quarter ended September 30, 2018 ("prior year quarter," or "3Q 2018"). For the current quarter, net income applicable to Morgan Stanley was $2,173 million, or $1.27 per diluted common share, compared with $2,112 million or $1.17 per diluted common share, in the prior year quarter.

We reported net revenues of $30,562 million in the nine months ended September 30, 2019 ("current year period," or "YTD 2019"), compared with $31,559 million in the period ended September 30, 2018 ("prior year period," or "YTD 2018"). For the current year period, net income applicable to Morgan Stanley was $6,803 million, or $3.89 per diluted common share, compared with $7,217 million or $3.92 per diluted common share, in the prior year period.

September 2019 Form 10-Q 2

Table of Contents

Non-interest Expenses1

[[Image Removed: noninterestexpenses19q3.jpg]]

Compensation and benefits expenses of $4,427 million in the current quarter and $13,609 million in the current year period increased 3% from $4,310 million in the prior year quarter and decreased 2% from $13,845 million in the prior year period. In the current quarter, the increase was primarily attributed to higher discretionary incentive compensation and salaries, partially offset by decreases in the fair value of investments to which certain deferred compensation plans are referenced. In the current year period, the decrease was primarily attributed to lower discretionary incentive compensation and the roll-off of certain acquisition-related employee retention loans, partially offset by higher salaries, increases in the fair value of investments to which certain deferred compensation plans are referenced, and higher deferred compensation associated with carried interest.

Non-compensation expenses of $2,895 million in the current quarter and $8,385 million in the current year period increased 7% from $2,711 million in the prior year quarter and increased 1% from $8,334 million in the prior year period. The current quarter increase was primarily due to higher litigation costs, volume-related expenses and investments in technology, partially offset by decreases in professional services expenses. In the current year period, investments in technology were partially offset by a decrease in professional services expenses.

Income Taxes







          3 September 2019 Form 10-Q
        --------------------------------------------------------------------------------
          Table of Contents
        Management's Discussion and Analysis [[Image Removed: mslogo.jpg]]
        Selected Financial Information and Other Statistical Data
                                               Three Months Ended September 30,         Nine Months Ended September 30,
        $ in millions                               2019                2018                2019                2018
        Net income applicable to
         Morgan Stanley                     $          2,173     $          2,112   $          6,803     $          7,217
        Preferred stock dividends and other              113                   93                376                  356
        Earnings applicable to
         Morgan Stanley common shareholders $          2,060     $          2,019   $          6,427     $          6,861
        Expense efficiency ratio1                       73.0 %               71.1 %             72.0 %               70.3 %
        ROE2                                            11.2 %               11.5 %             11.8 %               13.1 %
        ROTCE2                                          12.9 %               13.2 %             13.5 %               15.1 %
                                                               At              At
                                                         September 30,    December 31,
        in millions, except per share and employee data       2019            2018
        GLR3                                            $       226,923  $      249,735
        Loans4                                          $       125,522  $      115,579
        Total assets                                    $       902,604  $      853,531
        Deposits                                        $       180,738  $      187,820
        Borrowings                                      $       193,659  $      189,662
        Common shares outstanding                                 1,624           1,700
        Common shareholders' equity                     $        73,862  $       71,726
        Tangible common shareholders' equity2           $        64,512  $       62,879
        Book value per common share5                    $         45.49  $        42.20
        Tangible book value per common share2, 5        $         39.73  $        36.99
        Worldwide employees                                      60,532          60,348
                                           At              At
                                      September 30,   December 31,
                                          2019            2018
        Capital ratios6
        Common Equity Tier 1 capital        16.3 %         16.9 %
        Tier 1 capital                      18.5 %         19.2 %
        Total capital                       20.9 %         21.8 %
        Tier 1 leverage                      8.2 %          8.4 %
        SLR                                  6.3 %          6.5 %
        


1. The expense efficiency ratio represents total non-interest expenses as a percentage of net revenues.

2. Represents a non-GAAP measure. See "Selected Non-GAAP Financial Information" herein.

3. For a discussion of the GLR, see "Liquidity and Capital Resources-Liquidity Risk Management Framework-Global Liquidity Reserve" herein.

4. Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 7 to the financial statements).

5. Book value per common share and tangible book value per common share equal common shareholders' equity and tangible common shareholders' equity, respectively, divided by common shares outstanding.

6. At September 30, 2019 and December 31, 2018, our risk-based capital ratios are based on the Standardized Approach rules. For a discussion of our capital ratios, see "Liquidity and Capital Resources-Regulatory Requirements" herein.

Business Segment Results

[[Image Removed: netrevenuessegment19q3.jpg]]

September 2019 Form 10-Q 4

Table of Contents

Net Income Applicable to Morgan Stanley by Segment1

[[Image Removed: netincomebysegment19q3.jpg]]

1. The percentages on the bars in the charts represent the contribution of each business segment to the total of the applicable financial category and may not total to 100% due to intersegment eliminations. See Note 18 to the financial statements for details of intersegment eliminations.

Institutional Securities net revenues of $5,023 million in the current quarter increased 2% from the prior year quarter primarily reflecting higher revenues in Fixed income sales and trading, partially offset by a decrease in Other revenues. Net revenues of $15,332 million in the current year period decreased 8% from the prior year period, primarily reflecting lower revenues from Equity sales and trading and Investment banking.

Wealth Management net revenues of $4,358 million in the current quarter and $13,155 million in the current year period were relatively unchanged compared with the prior year periods.

Investment Management net revenues of $764 million in the current quarter and $2,407 million in the current year period each increased 17% from the prior year periods. The current quarter results primarily reflected higher Investments and Asset Management revenues. The current year period results increased primarily due to higher Investments revenues.

Net Revenues by Region1, 2

2. The percentages on the bars in the charts represent the contribution of each region to the total.

5 September 2019 Form 10-Q

Table of Contents

Selected Non-GAAP Financial Information

Reconciliations from U.S. GAAP to Non-GAAP Consolidated Financial Measures







                                               Three Months Ended              Nine Months Ended
                                                  September 30,                  September 30,
        $ in millions, except per share
        data                                   2019            2018           2019            2018
        Net income applicable to Morgan
        Stanley                          $       2,173    $      2,112   $       6,803   $      7,217
        Impact of adjustments                      (89 )            (4 )          (190 )          (92 )
        Adjusted net income applicable
        to Morgan Stanley-non-GAAP1      $       2,084    $      2,108   $       6,613   $      7,125
        Earnings per diluted common
        share                            $        1.27    $       1.17   $        3.89   $       3.92
        Impact of adjustments                    (0.06 )             -           (0.12 )        (0.05 )
        Adjusted earnings per diluted
        common share-non-GAAP1           $        1.21    $       1.17   $        3.77   $       3.87
        Effective income tax rate                 18.2 %          24.4 %          19.1 %         21.9 %
        Impact of adjustments                      3.2 %           0.2 %           2.2 %          0.9 %
        Adjusted effective income tax
        rate-non-GAAP1                            21.4 %          24.6 %          21.3 %         22.8 %
                                                                    At              At
                                                               September 30,   December 31,
        $ in millions                                              2019            2018
        Tangible equity
        U.S. GAAP
        Morgan Stanley shareholders' equity                   $      82,382   $     80,246
        Less: Goodwill and net intangible assets                     (9,350 )       (8,847 )
        Tangible Morgan Stanley shareholders' equity-non-GAAP $      73,032   $     71,399
        U.S. GAAP
        Common shareholders' equity                           $      73,862   $     71,726
        Less: Goodwill and net intangible assets                     (9,350 )       (8,847 )
        Tangible common shareholders' equity-non-GAAP         $      64,512   $     62,879
        








        Consolidated Non-GAAP Financial Measures
                                                                  Average Monthly Balance
                                           Three Months Ended September 30,      Nine Months Ended September 30,
        $ in millions                           2019               2018               2019              2018
        Tangible equity
        Morgan Stanley shareholders'
        equity                           $        81,912    $        78,760    $        81,028    $        78,165
        Less: Goodwill and net
        intangible assets                         (9,389 )           (8,970 )           (9,097 )           (9,020 )
        Tangible Morgan Stanley
        shareholders' equity             $        72,523    $        69,790    $        71,931    $        69,145
        Common shareholders' equity      $        73,392    $        70,240    $        72,508    $        69,645
        Less: Goodwill and net
        intangible assets                         (9,389 )           (8,970 )           (9,097 )           (9,020 )
        Tangible common shareholders'
        equity                           $        64,003    $        61,270    $        63,411    $        60,625
                                 Three Months Ended      Nine Months Ended
                                   September 30,           September 30,
        $ in billions             2019        2018         2019       2018
        Average common equity
        Unadjusted            $    73.4    $    70.2   $    72.5    $  69.6
        Adjusted1                  73.4         70.2        72.4       69.6
        ROE2
        Unadjusted                 11.2 %       11.5 %      11.8 %     13.1 %
        Adjusted1, 3               10.7 %       11.5 %      11.5 %     13.0 %
        Average tangible common equity
        Unadjusted            $    64.0    $    61.3   $    63.4    $  60.6
        Adjusted1                  64.0         61.3        63.3       60.6
        ROTCE2
        Unadjusted                 12.9 %       13.2 %      13.5 %     15.1 %
        Adjusted1, 3               12.3 %       13.2 %      13.1 %     14.9 %
        








        September 2019 Form 10-Q 6
        --------------------------------------------------------------------------------
          Table of Contents
        Management's Discussion and Analysis [[Image Removed: mslogo.jpg]]
        Non-GAAP Financial Measures by Business Segment
                                                       Three Months Ended      Nine Months Ended
                                                         September 30,           September 30,
        $ in billions                                   2019        2018         2019       2018
        Pre-tax margin4
        Institutional Securities                           26 %         32 %        28 %       33 %
        Wealth Management                                  28 %         27 %        28 %       27 %
        Investment Management                              22 %         16 %        22 %       19 %
        Consolidated                                       27 %         29 %        28 %       30 %
        Average common equity5
        Institutional Securities                    $    40.4    $    40.8   $    40.4    $  40.8
        Wealth Management                                18.2         16.8        18.2       16.8
        Investment Management                             2.5          2.6         2.5        2.6
        Parent Company                                   12.3         10.0        11.4        9.4
        Consolidated average common equity          $    73.4    $    70.2   $    72.5    $  69.6
        Average tangible common equity5
        Institutional Securities                    $    39.9    $    40.1   $    39.9    $  40.1
        Wealth Management                                10.2          9.2        10.2        9.2
        Investment Management                             1.5          1.7         1.5        1.7
        Parent Company                                   12.4         10.3        11.8        9.6
        Consolidated average tangible common equity $    64.0    $    61.3   $    63.4    $  60.6
        ROE2, 6
        Institutional Securities                          9.8 %       10.3 %      10.8 %     12.8 %
        Wealth Management                                20.6 %       21.3 %      20.2 %     20.9 %
        Investment Management                            22.1 %       12.0 %      21.5 %     15.7 %
        Consolidated                                     11.2 %       11.5 %      11.8 %     13.1 %
        ROTCE2, 6
        Institutional Securities                          9.9 %       10.4 %      10.9 %     13.0 %
        Wealth Management                                36.9 %       38.9 %      36.2 %     38.1 %
        Investment Management                            35.6 %       18.8 %      34.7 %     24.5 %
        Consolidated                                     12.9 %       13.2 %      13.5 %     15.1 %
        


1. Adjusted amounts exclude net discrete tax provisions (benefits) that are intermittent and include those that are recurring. Provisions or (benefits) related to conversion of employee share-based awards are expected to occur every year and are considered recurring discrete tax items. For further information on the net discrete tax provisions (benefits), see "Supplemental Financial Information and Disclosures-Income Tax Matters" herein.

2. ROE and ROTCE represent annualized net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity and average tangible common equity, respectively. When excluding intermittent net discrete tax provisions (benefits), both the numerator and average denominator are adjusted.

3. The calculations used in determining our "ROE and ROTCE Targets" referred to in the following section are the Adjusted ROE and Adjusted ROTCE amounts shown in this table.

4. Pre-tax margin represents income from continuing operations before income taxes as a percentage of net revenues.

5. Average common equity and average tangible common equity for each business segment are determined using our Required Capital framework (see "Liquidity and Capital Resources-Regulatory Requirements-Attribution of Average Common Equity According to the Required Capital Framework" herein).

6. The calculation of ROE and ROTCE by segment uses net income applicable to Morgan Stanley by segment less preferred dividends allocated to each segment as a percentage of average common equity and average tangible common equity, respectively, allocated to each segment.

Return on Equity and Tangible Common Equity Targets We have an ROE Target of 10% to 13% and an ROTCE Target of 11.5% to 14.5%. Our ROE and ROTCE Targets are forward-looking statements that may be materially affected by many factors, including, among other things: macroeconomic and market conditions; legislative and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; outsized legal expenses or penalties and the ability to maintain a reduced level of expenses; and capital levels. For further information on our ROE and ROTCE Targets and related assumptions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Executive Summary-Return on Equity and Tangible Common Equity Targets" in the 2018 Form 10-K.

Business Segments







          7 September 2019 Form 10-Q
        --------------------------------------------------------------------------------
          Table of Contents
        Management's Discussion and Analysis [[Image Removed: mslogo.jpg]]
        Institutional Securities
        Income Statement Information
                                                       Three Months Ended
                                                          September 30,
        $ in millions                                 2019              2018           % Change
        Revenues
        Investment banking                     $         1,535    $        1,459               5  %
        Trading                                          2,533             2,573              (2 )%
        Investments                                        (18 )              96            (119 )%
        Commissions and fees                               643               589               9  %
        Asset management                                   100               112             (11 )%
        Other                                               51               244             (79 )%
        Total non-interest revenues                      4,844             5,073              (5 )%
        Interest income                                  3,112             2,425              28  %
        Interest expense                                 2,933             2,569              14  %
        Net interest                                       179              (144 )           N/M
        Net revenues                                     5,023             4,929               2  %
        Compensation and benefits                        1,768             1,626               9  %
        Non-compensation expenses                        1,948             1,747              12  %
        Total non-interest expenses                      3,716             3,373              10  %
        Income from continuing operations
        before income taxes                              1,307             1,556             (16 )%
        Provision for income taxes                         189               397             (52 )%
        Income from continuing operations                1,118             1,159              (4 )%
        Income (loss) from discontinued
        operations, net of income taxes                      -                (3 )           100  %
        Net income                                       1,118             1,156              (3 )%
        . . .
        


Nov 05, 2019

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