Morgan Stanley — Q3 2023 Form 10-Q
Business context and reporting period
Morgan Stanley is a global financial services firm with Institutional Securities, Wealth Management and Investment Management businesses. This unaudited quarterly report covers the three and nine months ended September 30, 2023; comparisons below are with the corresponding 2022 periods unless otherwise noted. Deloitte performed an interim review, not a full audit.
Financial results and key metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenues | $13.273B | $12.986B | $41.247B | $40.919B |
| Net income | $2.435B | $2.662B | $7.689B | $8.913B |
| Earnings applicable to common shareholders | $2.262B | $2.494B | $7.147B | $8.427B |
| Diluted EPS | $1.38 | $1.47 | $4.33 | $4.88 |
| Net interest income | $1.977B | $2.510B | $6.333B | $7.008B |
| Provision for credit losses | $134M | $35M | $529M | $193M |
| Non-interest expenses | $9.994B | $9.563B | $31.001B | $29.431B |
| Pre-tax margin | 24% | 26% | 24% | 28% |
| Expense efficiency ratio | 75% | 74% | 75% | 72% |
Q3 ROE was 10.0% and ROTCE was 13.5%; nine-month ROE and ROTCE were 10.5% and 14.2%, respectively. The Firm’s stated ROTCE goal is above 20%, based on a normal market environment.
- Segment results, Q3: Institutional Securities revenue was $5.669B, down 3%; Wealth Management was $6.404B, up 5%; Investment Management was $1.336B, up 14% year over year.
- Segment earnings, Q3: Net income applicable to Morgan Stanley was $912M for Institutional Securities, $1.320B for Wealth Management and $179M for Investment Management.
- Balance sheet at September 30: Assets were $1.169T; loans $224.957B; deposits $345.458B; borrowings $247.193B; common shareholders’ equity $90.461B. Average quarterly liquidity resources were $307.367B.
- Capital and liquidity: Standardized CET1 ratio was 15.6%, versus 15.3% at year-end 2022; Tier 1 leverage ratio was 6.8% and SLR 5.5%. Q3 average LCR was 127%, and the Firm reported compliance with minimum LCR and NSFR requirements.
- Cash flow, nine months: Operating activities used $15.784B, compared with $7.599B provided in 2022; investing activities provided $5.717B, and financing activities used $8.420B. Cash and cash equivalents ended at $108.401B, down from $128.127B at year-end 2022.
Material changes versus comparable periods
- Q3 revenue rose about 2%, but net income applicable to Morgan Stanley fell about 9% and diluted EPS fell about 6%. For the nine-month period, revenue was nearly flat while net income applicable to Morgan Stanley declined about 14%.
- Institutional Securities weakness reflected lower investment banking and fixed-income results. Q3 investment banking revenue fell 27%, mainly on lower advisory and fixed-income underwriting; nine-month segment revenue fell 8%.
- Wealth Management’s Q3 growth was led by asset management revenue, supported by higher average fee-based asset levels. Nine-month revenue increased 10%, including higher net interest revenue and DCP investment gains versus losses in 2022. Q3 net new assets were $35.7B, and fee-based flows were $22.5B.
- Investment Management’s Q3 revenue rose 14%, while nine-month revenue was approximately unchanged. Long-term AUM was $907B at quarter-end, down from $936B at June 30; total AUM was $1.388T.
- Credit-loss provisioning increased, principally due to deteriorating commercial real estate conditions and specific loans, mainly in the office portfolio. The total allowance for loans and lending commitments rose to $1.726B from $1.343B at year-end 2022.
- Deposits declined to $345.458B from $356.646B at year-end, primarily because clients moved brokerage sweep balances to alternative cash and other products. Time deposits increased, and the reported period-end weighted-average deposit cost rose to 2.86% from 1.59%.
Outlook, risks and unusual items
- Management described markets as mixed, with persistent inflation and uncertainty about interest rates; prolonged uncertainty could weigh on client confidence and activity. No specific quarterly or annual earnings guidance is provided in the supplied filing text.
- Management said deposit allocation trends and interest-rate changes may continue to affect Wealth Management net interest income. Investment Management fees may be pressured if markets weaken further or long-term AUM outflows continue.
- Commercial real estate remains a heightened credit-risk focus because of higher rates, refinancing risk and property-sector pressures, especially for offices. Institutional Securities CRE loans and commitments totaled $9.6B; Wealth Management direct CRE exposure was $7.1B.
- The proposed FDIC special assessment was estimated at approximately $270M under the proposal then in effect; the Firm expected to record the impact after a final rule is published.
- The proposed Basel III Endgame rules, if adopted, were estimated to raise Expanded Approach RWAs by approximately 40% versus actual Standardized Approach RWAs as of June 30, 2023, before mitigating actions. This is a preliminary, forward-looking estimate, not a finalized requirement.
- The Firm continues to cooperate with SEC and U.S. Attorney investigations into its block-trading business; the filing says discussions about potential resolution are ongoing and there is no assurance of resolution. A securities-lending antitrust class action settlement received preliminary court approval. In a separate VRDO antitrust case, class certification was granted and defendants sought leave to appeal.
- Other notable items include $4.0B of common-stock repurchases in the first nine months, a $0.85-per-share quarterly dividend, and a Board-reauthorized repurchase program of up to $20B. The filing also reports unrealized losses on securities, including $12.381B of fair-value shortfall on HTM securities versus amortized cost; management stated it did not intend, and was not likely required, to sell AFS securities in unrealized-loss positions before recovery.
Important facts for investors to verify
- Whether commercial real estate conditions, especially office exposure, lead to further provisions, charge-offs or allowance increases.
- How deposit outflows, deposit pricing and client cash reallocation affect Wealth Management net interest income and liquidity.
- Whether weak investment-banking activity persists and whether fee-based flows and AUM support recurring revenue.
- The final cost and timing of the FDIC assessment, and the ultimate capital impact of any Basel III Endgame or G-SIB rule changes.
- Developments and potential financial or business consequences from the block-trading investigations and other legal proceedings; the filing does not provide a clear estimate of possible losses for the investigations.
- How unrealized securities losses and balance-sheet funding needs evolve. The reported negative operating cash flow should be considered in the context of large trading-asset and liability movements typical of the Firm’s business.