Fitch: Good 3Q16 Earnings for Morgan Stanley

CHICAGO--()--Morgan Stanley (MS) delivered another good quarter of earnings in the third quarter of 2016 (3Q16), with net income to common shareholders up 7% from the sequential quarter and 62% from the prior year period, which was impacted by a litigation accrual, according to Fitch Ratings.

The improvement was largely driven by year-over-year improved trading results and the firm continuing to gain traction in its wealth management business.

The company's reported annualized return on average equity (ROE) was 8.7% in 3Q16, and 7.7% over the first nine months of the year. While these results continue to improve, they remain below MS's long-term target of 9% - 11%, though the management team is continuing to close the gap.

This quarter's results generally are in line with peer banks, as all have benefited from improved market conditions for trading activity within their Fixed Income, Currency, and Commodities divisions (FICC).

Sales and trading net revenue in MS's FICC business grew 14% relative to the sequential quarter and 61% from the year-ago quarter, which was somewhat weak. This improvement was primarily driven by improvements in the company's rates and credit businesses.

Equity trading net revenue remained more muted with net revenue down 12% from the sequential quarter and essentially flat from the year-ago quarter. The sequential decline was due to more challenging environment for cash equities.

Investment banking net revenue was satisfactory, but lower than results in the trading businesses. Advisory net revenue was up 1% from the sequential quarter, but down 10% from the year-ago quarter on lower levels of completed mergers & acquisition (M&A) activity, as Fitch continues to believe the industry is in the late innings of a long M&A cycle.

Underwriting results were more mixed with equity underwriting net revenue declining amid a relatively weak initial public offering market as well as a product mix shift. Fixed income net underwriting revenue was up 6% relative to the sequential quarter, but down 3% relative to the year-ago quarter as investment grade issuance remained robust across the industry.

Fitch notes that MS's wealth management business continues to grow, and generate good and stable earnings for the company. Net revenue in the wealth management segment was up 2% relative to the sequential quarter and 7% relative to the year-ago quarter.

At the same time, the wealth management segment's pre-tax profit margin was 23%, which is generally in-line with the company's target of 23-25% and Fitch's expectations. The margin was driven by continued growth of net interest income (NII) of 7% relative to the sequential quarter and 18% relative to the year-ago quarter, offset by lower commission revenue.

MS's investment management segment's results continue to be somewhat challenged amid the continued shift from traditional long-only asset management products towards more passive oriented products. Nevertheless the pre-tax profit margin remains relatively good at 18% in 3Q16.

MS continues to manage its expense base, and relative to the year-ago quarter generated positive operating leverage but relative to the sequential quarter generated modest negative operating leverage. As such, the overall pre-tax margin incrementally declined to a still good 27% in 3Q16.

The company's strong capital and liquidity positions continue to support its ratings in Fitch's opinion. MS' fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the advanced approaches improved to 15.9% in 3Q16, up from 15.7% in 2Q16. MS's CET1 ratio is at the top end of peer group averages

MS's 3Q'16 fully phased-in Enhanced Supplementary Leverage Ratio improved to 6.2% in 3Q16, up from 6.1% in 2Q16.

Liquidity remained good with the company's Global Liquidity Reserve (GLR) down to $197bn, or 24.2% of total assets. MS's deposit balances were essentially unchanged from the sequential quarter at $151.8bn.

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: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

Contacts

Fitch Ratings
Justin Fuller, CFA, +1-312-368-2057
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Nathan Flanders, +1-212-908-1872
Managing Director
or
Media Relations:
Hannah James, +1-646-582-4947
New York
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Justin Fuller, CFA, +1-312-368-2057
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Nathan Flanders, +1-212-908-1872
Managing Director
or
Media Relations:
Hannah James, +1-646-582-4947
New York
hannah.james@fitchratings.com