Morgan Stanley — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Morgan Stanley is a global financial services firm with Institutional Securities, Wealth Management and Investment Management businesses. The interim financial statements were reviewed by Deloitte; the review is not an audit.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenues | $14.517 billion | $14.801 billion | -2% |
| Net income applicable to Morgan Stanley | $2.980 billion | $3.666 billion | -19% |
| Earnings per diluted common share | $1.70 | $2.02 | -16% |
| Pre-tax margin | 26% | 31% | Down 5 percentage points |
| Expense efficiency ratio | 72% | 69% | Higher expenses relative to revenue |
| ROE / ROTCE | 12.4% / 16.9% | 14.7% / 19.8% | Both declined |
| Effective tax rate | 19.3% | 19.0% | Broadly unchanged |
Net interest was $2.346 billion, versus $2.216 billion. Interest income and expense both rose substantially, reflecting higher rates and balance-sheet funding costs. Provision for credit losses was $234 million, up from $57 million, primarily due to a weaker macroeconomic outlook and greater concern about commercial real estate borrowers. Non-interest expenses increased 4% to $10.523 billion; these included $77 million of integration-related expenses.
Business segments
- Institutional Securities: Revenue of $6.797 billion, down 11%; net income applicable to Morgan Stanley was $1.478 billion, down 33%. Investment banking revenue fell 24% to $1.247 billion, mainly on lower advisory activity. Equity revenue declined 14% and fixed income declined 12%, although management described performance in both markets businesses as strong amid challenging comparisons and volatile markets. Credit-loss provision rose to $189 million from $44 million.
- Wealth Management: Revenue of $6.559 billion, up 11%; net income was $1.376 billion, up 8%, and pre-tax margin was 26.1%. Higher net interest revenue and favorable mark-to-market results on employee deferred-compensation plan investments helped results. Net new assets were $109.6 billion, compared with $142.0 billion a year earlier. Client deposits were $341 billion at quarter-end, and the reported cost of deposits rose from year-end. Credit-loss provision was $45 million.
- Investment Management: Revenue of $1.289 billion, down 3%; net income applicable to Morgan Stanley was $134 million, down 34%. Lower average assets under management and cumulative long-term outflows weighed on fees. Quarter-end AUM was $1.362 trillion, compared with $1.447 trillion a year earlier.
Balance sheet, liquidity, capital and cash flow
- Total assets were $1.200 trillion at March 31, up from $1.180 trillion at December 31, 2022. Deposits declined to $347.5 billion from $356.6 billion; borrowings rose to $250.2 billion from $238.1 billion.
- Average liquidity resources were $321.2 billion, up from $312.3 billion in the prior quarter. The reported liquidity coverage ratio was 135%; the Firm stated it complied with minimum LCR and NSFR requirements.
- Standardized CET1 capital ratio was 15.1%, versus 15.3% at year-end; the standardized Tier 1 ratio was 17.0%. Supplementary leverage ratio was 5.5%. The Firm reported compliance with TLAC requirements.
- Operating cash flow was negative $9.865 billion, compared with positive $239 million in Q1 2022. Cash and cash equivalents decreased by $16.869 billion during the quarter to $111.258 billion. Cash flows at a broker-dealer are materially affected by changes in trading, collateral and client balances and should be interpreted in that context.
- Common shareholders’ equity was $92.1 billion; book value per common share was $55.13 and tangible book value was $40.68.
Material changes, outlook and risks
- Reported Wealth Management revenue benefited from a reversal in mark-to-market results on certain employee deferred-compensation plan investments: gains in Q1 2023 compared with losses in Q1 2022. On the company’s non-GAAP basis excluding these effects, consolidated revenue was $14.364 billion versus $15.242 billion; Wealth Management revenue was $6.458 billion versus $6.231 billion. These adjusted figures are non-GAAP measures.
- Management’s ROTCE goal remains above 20%, based on a normal market environment; Q1 ROTCE was 16.9%. The filing does not provide specific quarterly or full-year earnings guidance.
- Management cited elevated inflation, rising interest rates, market volatility and a deteriorating macroeconomic outlook. It said recent stress at certain financial institutions had not significantly affected Morgan Stanley’s results or financial condition, while noting that the broader impact remained uncertain.
- Deposit balances continued to shift away from brokerage sweep deposits toward alternative cash and longer-term products. Management said ongoing rate changes and client balance reallocations could affect future Wealth Management net interest income.
- Commercial real estate remains an area of heightened credit focus, particularly office properties. Institutional Securities CRE lending exposure was $10.4 billion; Wealth Management CRE exposure was $6.7 billion. The allowance for credit losses on loans and lending commitments increased to $1.509 billion from $1.343 billion at year-end.
- Investment securities included $74.0 billion of held-to-maturity securities with a reported fair value of $64.4 billion. Available-for-sale securities had $4.9 billion of gross unrealized losses; management stated it expected to recover amortized cost and did not intend, or expect to be required, to sell the securities before recovery.
- The FDIC may assess financial institutions, including Morgan Stanley, for additional Deposit Insurance Fund costs; the amount had not been determined and could affect future results. Other risks include legal and regulatory matters, market and credit exposures, deposit competition, and possible collateral calls following credit-rating downgrades.
- The Firm disclosed ongoing discussions with the SEC and U.S. Attorney’s Office concerning investigations into aspects of its block trading business; it cautioned that discussions might not result in resolution. Legal expenses were $151 million, versus $84 million a year earlier. The filing also describes Dutch tax proceedings and other litigation.
- The Board declared a common dividend of $0.775 per share, payable May 15, 2023. The Firm repurchased $1.5 billion of common stock in Q1, compared with $2.872 billion in Q1 2022.
Important facts for investors to verify
- How sustainable Wealth Management net interest income is as sweep deposits migrate and deposit costs rise.
- Further changes in CRE borrower conditions, especially office exposure, and whether credit provisions and nonaccrual loans increase.
- Investment-banking activity and Institutional Securities results if market volatility or economic uncertainty persists.
- The effect of deferred-compensation investment mark-to-market swings on reported revenue and expenses; compare GAAP results with the disclosed non-GAAP adjustments.
- Any FDIC special assessment, material developments in legal investigations or litigation, and potential changes in liquidity or capital requirements.
- Interest-rate-driven unrealized losses on held-to-maturity securities and the assumptions supporting management’s expectation of recovery without sale.