(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. See the "Glossary of Common Terms and Acronyms" for the definition of certain terms and 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 and commercial real estate loans, providing secured lending facilities, and extending financing to sales and trading customers. Other activities include Asia wealth management services, 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; stock plan administration services; annuity and insurance products; securities-based lending, residential real estate loans and other lending products; banking; and retirement plan services.
Investment Management provides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products, which are offered through a variety of investment vehicles, include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are generally served through intermediaries, including affiliated and non-affiliated distributors.
June 2020 Form 10-Q 2
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The Firm delivered an annualized ROE of 15.7% and an annualized ROTCE of 17.8% (see "Non-GAAP measures" herein).
Each of our businesses contributed meaningfully to this result, in particular the Institutional Securities business segment, which showed an increase in net revenues of 56% on strong client engagement.
Wealth Management delivered pre-tax income of $1.1 billion with a pre-tax margin of 24% despite a challenging market and rate environment.
Investment Management reported long-term net flows of $15.4 billion and AUM of $665 billion driving revenue growth of 6%.
Given economic conditions, we continued to increase our ACL on loans and lending commitments with a provision of $239 million.
Our capital and liquidity ratios remain strong. At June 30, 2020, our Common Equity Tier 1 capital ratio was 16.1% and our Liquidity Coverage ratio was 147%.
Earnings per Common Share
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1. The percentages on the bars in the chart represent the contribution of compensation and benefits expenses and non-compensation expenses to the total.
Compensation and benefits expenses of $6,035 million in the current quarter increased 33% from $4,531 million in the prior year quarter, primarily as a result of increases in discretionary incentive compensation driven by higher revenues and higher expenses related to certain deferred compensation plans linked to investment performance. Compensation and benefits expenses of $10,318 million in the current year period increased 12%, from $9,182 million in the prior year period, primarily as a result of increases in discretionary incentive compensation driven by higher revenues, partially offset by lower expenses related to certain deferred compensation plans linked to investment performance.
Non-compensation expenses of $3,024 million in the current quarter and $6,082 million in the current year period increased 8% and 11%, respectively, from $2,810 million in the prior year quarter and $5,490 million in the prior year period, primarily reflecting higher volume-related expenses and increased information processing and communications expenses, partially offset by a decrease in marketing and business development expenses. In addition, the current year period reflects an increase in the provision for credit losses for lending commitments and off-balance sheet instruments.
June 2020 Form 10-Q 4
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Selected Financial Information and Other Statistical Data
Three Months Ended June 30, Six Months Ended June 30, $ in millions 2020 2019 2020 2019 Net income applicable to Morgan Stanley $ 3,196 $ 2,201 $ 4,894 $ 4,630 Preferred stock dividends 149 170 257 263 Earnings applicable to Morgan Stanley common shareholders $ 3,047 $ 2,031 $ 4,637 $ 4,367 Expense efficiency ratio1 67.5 % 71.7 % 71.6 % 71.5 % ROE2 15.7 % 11.2 % 12.2 % 12.1 % Adjusted ROE3 16.4 % 11.2 % 12.5 % 11.8 % ROTCE2,3 17.8 % 12.8 % 13.9 % 13.8 % Adjusted ROTCE3 18.6 % 12.8 % 14.2 % 13.5 % Pre-tax margin4 32.5 % 28.0 % 28.4 % 28.5 % Pre-tax margin by segment4 Institutional Securities 38 % 29 % 31 % 30 % Wealth Management 24 % 28 % 25 % 28 % Investment Management 24 % 24 % 23 % 23 % At At June 30, December 31, in millions, except per share and employee data 2020 2019 Liquidity resources5 $ 301,407 $ 215,868 Loans6 $ 141,973 $ 130,637 Total assets $ 975,363 $ 895,429 Deposits $ 236,849 $ 190,356 Borrowings $ 205,464 $ 192,627 Common shares outstanding 1,576 1,594 Common shareholders' equity $ 78,125 $ 73,029 Tangible common shareholders' equity3 $ 68,839 $ 63,780 Book value per common share7 $ 49.57 $ 45.82 Tangible book value per common share3,7 $ 43.68 $ 40.01 Worldwide employees 61,596 60,431 Capital ratios8 Common Equity Tier 1 capital-Advanced 16.1 % 16.9 % Common Equity Tier 1 capital-Standardized 16.5 % 16.4 % Tier 1 capital-Advanced 18.1 % 19.2 % Tier 1 capital-Standardized 18.6 % 18.6 % Tier 1 leverage 8.1 % 8.3 % SLR9 7.3 % 6.4 %
1. The expense efficiency ratio represents total non-interest expenses as a percentage of net revenues.
2. ROE and ROTCE represent annualized earnings applicable to Morgan Stanley common shareholders as a percentage of average common equity and average tangible common equity, respectively.
3. Represents a non-GAAP measure. See "Selected Non-GAAP Financial Information" herein.
4. Pre-tax margin represents income before income taxes as a percentage of net revenues.
5. For a discussion of Liquidity resources, see "Liquidity and Capital Resources-Liquidity Risk Management Framework-Liquidity Resources" herein.
6. 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 9 to the financial statements).
7. 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.
8. At June 30, 2020 and December 31, 2019, our risk-based capital ratios are based on the Advanced Approach and the Standardized Approach rules, respectively. For a discussion of our capital ratios, see "Liquidity and Capital Resources-Regulatory Requirements" herein.
9. At June 30, 2020, our SLR reflects the impact of a Federal Reserve interim final rule in effect until March 31, 2021. For further information, see "Liquidity and Capital Resources-Regulatory Requirements-Regulatory Developments" herein.
Business Segment Results
Net Revenues by Segment1
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Net Income Applicable to Morgan Stanley by Segment1
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Institutional Securities net revenues of $7,977 million in the current quarter increased 56% from $5,113 million in the prior year quarter. Net revenues of $12,882 million in the current year period increased 25% from $10,309 million in the prior year period. Increases in the current quarter and current year period are primarily due to higher sales and trading and underwriting revenues, driven by increased client engagement, partially offset by increases in the provision for credit losses on loans held for investment. In the current year period, the increase in revenues was also partially offset by losses on loans and lending commitments held for sale.
Wealth Management net revenues of $4,680 million in the current quarter increased 6% from $4,408 million in the prior year quarter, primarily due to higher gains from investments associated with certain employee deferred compensation plans, while Asset management revenues and net interest income were relatively unchanged. Net revenues of $8,717 million in the current year period were relatively unchanged from $8,797 million in the prior year period, as higher Asset management revenues were offset by the absence of gains
from investments associated with certain employee deferred compensation plans in the current year period and lower net interest income.
Net Revenues by Region1, 2
2. For a discussion of how the geographic breakdown of net revenues is determined, see Note 19 to the financial statements in the 2019 Form 10-K.
Current quarter and current year period revenues in the Americas and Asia regions increased, primarily driven by the Institutional Securities business segment. With respect to the EMEA region, revenues increased primarily within Fixed Income sales and trading in the Institutional Securities business segment in the current quarter, while revenues were relatively unchanged in the current year period.
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Coronavirus Disease ("COVID-19") Pandemic The COVID-19 pandemic and related government-imposed shelter-in-place restrictions have had, and will likely continue to have, a severe impact on global economic conditions and the environment in which we operate our businesses. We have begun implementing a return-to-workplace program, which is phased based on role, location and employee willingness and ability to return, and focused on the health and safety of all returning staff. Recognizing that our offices around the world face different local conditions, time lines for return may vary significantly, though we are currently planning for the return of additional employees to offices by the end of 2020. The Firm continues to be fully operational, with approximately 90% of global employees and 95% of employees in the Americas working from home as of June 30, 2020. Economic conditions have had mixed effects on our businesses. High levels of client trading activity, related to market volatility, have significantly increased revenues in the Sales and Trading businesses within the Institutional Securities business segment in both the current quarter and current year period. In addition, in the current quarter, certain of the negative impacts to our results in the first quarter have subsided given recoveries in public asset prices, tightening of credit spreads and an increase in underwriting activity. We have recognized provisions for credit losses on loans and lending commitments of $239 million in the current quarter and $646 million in the current year period. In addition, the persistence of low interest rates will continue to negatively affect our net interest margin in the Wealth Management business segment.
Selected Non-GAAP Financial Information
7 June 2020 Form 10-Q -------------------------------------------------------------------------------- Table of Contents Management's Discussion and Analysis [[Image Removed: mslogo2q20.jpg]] Reconciliations from U.S. GAAP to Non-GAAP Consolidated Financial Measures Three Months Ended Six Months Ended June 30, June 30, $ in millions, except per share data 2020 2019 2020 2019 Net income applicable to Morgan Stanley $ 3,196 $ 2,201 $ 4,894 $ 4,630 Impact of adjustments 134 - 103 (101 ) Adjusted net income applicable to Morgan Stanley-non-GAAP1 $ 3,330 $ 2,201 $ 4,997 $ 4,529 Earnings per diluted common share $ 1.96 $ 1.23 $ 2.96 $ 2.62 Impact of adjustments 0.08 - 0.07 (0.06 ) Adjusted earnings per diluted common share-non-GAAP1 $ 2.04 $ 1.23 $ 3.03 $ 2.56 Effective income tax rate 25.7 % 22.6 % 22.8 % 19.5 % Impact of adjustments (3.1 )% - % (1.5 )% 1.8 % Adjusted effective income tax rate-non-GAAP1 22.6 % 22.6 % 21.3 % 21.3 % Average Monthly Balance Three Months Ended June 30, Six Months Ended June 30, $ in millions 2020 2019 2020 2019 Tangible equity Morgan Stanley shareholders' equity $ 86,118 $ 81,155 $ 84,512 $ 80,622 Less: Goodwill and net intangible assets (9,268 ) (9,098 ) (9,246 ) (8,978 ) Tangible Morgan Stanley shareholders' equity-Non-GAAP $ 76,850 $ 72,057 $ 75,266 $ 71,644 Common shareholders' equity $ 77,598 $ 72,635 $ 75,992 $ 72,102 Less: Goodwill and net intangible assets (9,268 ) (9,098 ) (9,246 ) (8,978 ) Tangible common shareholders' equity-Non-GAAP $ 68,330 $ 63,537 $ 66,746 $ 63,124 Three Months Ended Six Months Ended June 30, June 30, $ in billions 2020 2019 2020 2019 Average common equity Unadjusted-GAAP $ 77.6 $ 72.6 $ 76.0 $ 72.1 Adjusted1-Non-GAAP 77.6 72.6 76.0 72.0 ROE2 Unadjusted-GAAP 15.7 % 11.2 % 12.2 % 12.1 % Adjusted-Non-GAAP1, 3 16.4 % 11.2 % 12.5 % 11.8 % Average tangible common equity-Non-GAAP Unadjusted $ 68.3 $ 63.5 $ 66.7 $ 63.1 Adjusted1 68.4 63.5 66.7 63.1 ROTCE2-Non-GAAP Unadjusted 17.8 % 12.8 % 13.9 % 13.8 % Adjusted1, 3 18.6 % 12.8 % 14.2 % 13.5 %
Non-GAAP Financial Measures by Business Segment
Three Months Ended Six Months Ended June 30, June 30, $ in billions 2020 2019 2020 2019 Average common equity4, 5 Institutional Securities $ 42.8 $ 40.4 $ 42.8 $ 40.4 Wealth Management 18.2 18.2 18.2 18.2 Investment Management 2.6 2.5 2.6 2.5 Average tangible common equity4, 5 Institutional Securities $ 42.3 $ 39.9 $ 42.3 $ 39.9 Wealth Management 10.4 10.2 10.4 10.2 Investment Management 1.7 1.5 1.7 1.5 ROE6 Institutional Securities 19.3 % 9.8 % 12.8 % 11.3 % Wealth Management 18.1 % 20.1 % 18.3 % 20.0 % Investment Management 23.4 % 20.5 % 17.5 % 21.2 % ROTCE6 Institutional Securities 19.6 % 9.9 % 13.0 % 11.5 % Wealth Management 31.6 % 36.1 % 31.9 % 35.8 % Investment Management 36.2 % 33.0 % 27.1 % 34.2 %
1. Adjusted amounts exclude net discrete tax provisions (benefits) that are intermittent and include those that are recurring. Provisions (benefits) related to conversion of employee share-based awards are expected to occur every year and, as such, are considered recurring discrete tax items. For further information on the net discrete tax provisions (benefits), see "Supplemental Financial Information-Income Tax Matters" herein.
2. ROE and ROTCE represent annualized earnings applicable to Morgan Stanley common shareholders 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. Average common equity and average tangible common equity for each business segment is 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).
5. The sums of the segments' Average common equity and Average tangible common equity do not equal the Consolidated measures due to Parent equity.
6. The calculation of ROE and ROTCE by segment uses annualized 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.
June 2020 Form 10-Q 8
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Return on Tangible Common Equity Target
Aug 04, 2020
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