Fitch: Morgan Stanley Reports Solid 3Q'14 Results

Morgan Stanley (rated 'A/F1') reported solid third quarter 2014 (3Q'14) results, driven by continued expansion of the wealth management platform and modest outperformance, relative to Fitch Ratings' expectations, with respect to trading activities. Furthermore, the company's results were not significantly impacted by litigation expenses and the slowdown in mortgage originations that affected its larger U.S. peers.

The solid performance across the firm's businesses continues to support potential upward momentum to Morgan Stanley's 'a-' Viability Rating.

The impact on Morgan Stanley and its peers from the recent increase in volatility remains to be seen in 4Q'14. A healthy pick-up in client activity would likely drive revenues higher, while a material sell-off in the markets could reduce client confidence to transact, amplify potential trading losses and impact profitability.

Morgan Stanley's core profitability improved from the prior quarter. Adjusted pre-tax operating profits, as calculated by Fitch and excluding the impact of debt-valuation adjustment (DVA), increased to $2 billion at 3Q'14, up 10% from the prior quarter. Adjusted pre-tax operating return on assets was 1.1% at 3Q'14 as compared with 0.9% for 2Q'14. Expenses were virtually unchanged from the prior quarter. Morgan Stanley reported adjusted return on average equity of 8.0% (excluding DVA and a $237 million tax benefit), up from 7.5% for 2Q'14. Return on equity, while improved, remains challenged relative to certain peers and historical averages.

Wealth Management pre-tax operating margin continued to improve to 22% from 21% at 2Q'14, due primarily to an increase in net revenues. Asset management fees increased 5% sequentially, driven by net inflows and market appreciation, but were partially offset by lower transactional fees, which decreased by 8% due to lower trading revenues. Wealth Management client assets were unchanged at $2 trillion.

Institutional net revenues (excluding DVA impact) increased 3% to $4.3 billion at 3Q'14. FICC adjusted net revenues were virtually unchanged from the prior quarter despite 3Q'14 being a seasonally weaker period. While foreign exchange benefitted from improved market conditions and higher volatility, commodities were significantly lower, reflecting Morgan Stanley's product mix, difficult market conditions and lower client activity. Equity sales and trading adjusted net revenues remained unchanged at $1.8 billion as a result of higher client activity across products.

Investment banking net revenues of $1.3 billion decreased 6% from a strong 2Q'14. The decrease in advisory revenues was driven by lower revenues in EMEA and Asia Pacific. Modestly lower equity underwriting revenues reflected lower Americas and EMEA volumes, which was partially offset by higher volumes in Asia. The decrease in fixed income underwriting was driven by a decline investment grade and high yield bond issuances, which was partially offset by higher loan volumes. On a year-over-year basis, investment banking benefitted from a higher level of completed M&A and IPO volumes.

Morgan Stanley's global liquidity reserve, which includes unencumbered liquid securities and cash, was a solid $190 billion or 23% of total assets at 3Q'14. Morgan Stanley has consistently maintained liquidity at conservative levels. Value at Risk (VaR) was $42 million, down from $48 million at 2Q'14, due to lower commodities risk, and interest rate and credit spread risk.

Morgan Stanley estimated that its fully-phased-in Tier I common ratio under the Basel III advanced approach was 12.6% at Sept. 30, 2014. The firm estimated that its supplementary leverage ratio (SLR) for the holding company was approximately 4.9%, up from 4.6% at 2Q'14, slightly below the 5% threshold. The increase was due to retained earnings, reduced balance sheet and the issuance of preferred stock during the quarter. Fitch continues to believe that Morgan Stanley will be able to meet the holding company SLR minimum threshold ahead of the required timeframe.

As part of its share repurchase program, Morgan Stanley repurchased approximately $195 million shares during 3Q'14. Fitch views this level of share repurchase activity is manageable given current capital levels.

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: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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.