Fitch: Morgan Stanley's Wealth Management Segment Gains More Traction

CHICAGO--()--Morgan Stanley's (MS; 'A/F1', Outlook Stable) first quarter 2015 (1Q'15) reported earnings of $2.4 billion were strong in Fitch Ratings' view, driven by continued execution on the company's wealth management strategy, better results in its Equities Trading businesses and growth in net interest income (NII).

Fitch calculated pre-tax profits, which exclude CVA/DVA and various other gains/losses, amounted to $2.73 billion, or a 1.32% pre-tax adjusted return on ending assets. This is the strongest result that MS has delivered in the last several quarters, and Fitch believes it is evidence of the company's business model transformation gaining traction, supported by an improving economic backdrop.

Fitch believes that MS's continued growth and margin improvements in its wealth management business will help to reduce some of the earnings volatility in the company's overall business. Fitch believes that this could lead to some upwards rating momentum in MS's Viability Rating (VR) over a near-term time horizon.

Overall wealth management revenue expanded 1% relative to the sequential quarter and 6% relative to the year-ago quarter. This was due to both net new asset growth as well as market appreciation during the quarter. At the same time, the company's transactional based revenue in its wealth management segment decreased by approximately $46 million on a year-over-year basis indicating that the more sustainable and recurring sources of revenue are growing within the segment. Fitch views this positively from a creditors' perspective.

Additionally, due to continued expense management initiatives, the company's pre-tax margin in the wealth management unit was a good 22%. While Fitch would note the margin is still below that of some stronger peers, it has improved and now is solidly within the company's targets. Over time, Fitch believes it could further improve.

MS's Institutional Securities (IS) businesses also improved during the quarter. This was primarily driving by higher equity sales and trading net revenues as an improving economic backdrop and increased volatility led to higher client activity levels. Fixed Income Currency & Commodities (FICC) net revenue also increased relative to the year-ago quarter as higher macro products (foreign exchange and rates) revenue more than offset lower results in credit products.

Despite the higher net revenues in the IS businesses, MS's Value-at-Risk (VaR) measured at the 95% confidence interval was $47 million for 1Q'15, unchanged from the sequential quarter, and down from $50 million in the year-ago quarter. Fitch continues to believe that over time the company's VaR may increase should higher levels of volatility be sustained in the various markets that MS operates.

Traditional investment banking for MS was mixed with strong financial advisory revenues due to higher mergers & acquisitions activity offset by lower equity and debt underwriting revenues.

In Fitch's view MS kept a relatively good lid on expenses during the quarter with compensation and benefits as a percentage of net revenues clocking in at 46%, down from both the sequential and year-ago quarters. This good operating leverage helped the company's pre-tax profit margin expand to 29% at 1Q'15.

Fitch continues to believe that Morgan Stanley's capital and liquidity positions are good. MS's transitionally phased-in Basel III Common Equity Tier 1 (CET1) ratio was 13.1% under the advanced approach. Additionally, Fitch believes the company to be in early compliance with both the Liquidity Coverage Ratio (LCR) and Enhanced Supplementary Leverage Ratio (SLR), the latter being in compliance at both the bank and holding company.

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.

Contacts

Fitch Ratings
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Nathan Flanders
Managing Director
+1-212-908-0872
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Nathan Flanders
Managing Director
+1-212-908-0872
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com