Morgan Stanley 2013 Form 10-K Summary
Business context and reporting period
Morgan Stanley is a global financial services firm operating through Institutional Securities, Wealth Management and Investment Management. This Form 10-K covers the year ended December 31, 2013; fourth-quarter figures are noted separately. The company reported 55,794 employees at year-end.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Net revenues | $32.417 billion | $26.102 billion |
| Income before tax, continuing operations | $4.482 billion | $520 million |
| Net income applicable to Morgan Stanley | $2.932 billion | $68 million |
| Diluted EPS | $1.36 | $(0.02) |
| Net income from continuing operations applicable to Morgan Stanley | $2.975 billion | $138 million |
| Total assets | $832.702 billion | $780.960 billion |
| Long-term borrowings | $153.575 billion | $169.571 billion |
| Deposits | $112.379 billion | $83.266 billion |
- Net interest income was $778 million, versus a $205 million net interest expense in 2012. Non-interest expenses rose 9% to $27.935 billion; compensation and benefits increased 4% to $16.277 billion, while other expenses rose 17% to $11.658 billion, primarily reflecting higher legal expense. The consolidated pretax margin was approximately 13.8%.
- Operating cash flow was $35.553 billion, investing cash flow was $(24.461) billion and financing cash flow was $2.633 billion. Cash and cash equivalents ended the year at $59.883 billion. Operating cash flow reflected substantial trading, collateral and other balance-sheet movements.
- The Global Liquidity Reserve was $202 billion at year-end, up from $182 billion. Management said liquidity stress tests indicated sufficient liquidity for current and contingent funding needs; reserve assets were considered monetizable within five business days under stress.
- Year-end Basel I capital ratios, including Basel 2.5 market-risk requirements, were 12.8% Tier 1 common, 15.7% Tier 1 and 16.9% total capital; Tier 1 leverage was 7.6%. These are not Basel III ratios.
Material changes and fourth-quarter results
- Versus 2012, reported revenue increased 24% and net income applicable to Morgan Stanley rose from $68 million to $2.932 billion. A major contributor to comparability was Debt Valuation Adjustment (DVA): its revenue impact was negative $681 million in 2013 versus negative $4.402 billion in 2012. Excluding DVA, a non-GAAP measure, revenue was $33.098 billion versus $30.504 billion and diluted continuing-operations EPS was $1.61 versus $1.64.
- Fourth-quarter 2013 net revenue was $7.830 billion, pretax continuing-operations loss was $217 million, net income applicable to Morgan Stanley was $84 million and diluted EPS was $0.02. In fourth-quarter 2012, these were $6.963 billion, $861 million, $594 million and $0.29, respectively. Fourth-quarter 2013 expenses included approximately $1.4 billion of litigation expense.
- Institutional Securities revenue increased to $15.443 billion from $11.025 billion; the segment returned to pretax income of $869 million from a $1.688 billion loss. Wealth Management revenue rose to $14.214 billion and pretax income to $2.629 billion. Investment Management revenue increased to $2.988 billion and pretax income to $984 million.
- On June 28, 2013, Morgan Stanley acquired Citi’s remaining 35% interest in the Wealth Management joint venture for $4.725 billion, bringing ownership to 100%. It recorded a $151 million after-tax reduction to retained earnings. The transaction also initiated the transfer of customer deposits from Citi; approximately $30 billion more was scheduled to transfer through June 2015.
Outlook, risks, contingencies and unusual items
- No quantified earnings or revenue guidance is provided. Management described an improving but uncertain global environment and highlighted market activity, rates, client flows and regulation as key influences on results.
- The company agreed to sell its global oil merchanting unit to Rosneft, subject to approvals and other conditions, with closing expected in the second half of 2014. It was not classified as discontinued operations at year-end. The company was also exploring strategic options for TransMontaigne.
- Litigation expense was approximately $1.952 billion in 2013, compared with $513 million in 2012. The filing says such expenses are expected to remain elevated and may fluctuate significantly. The company recorded a further $150 million fourth-quarter legal reserve increase related to the FHFA settlement after its January 17 earnings release.
- Significant mortgage-related matters included a $1.25 billion agreement to settle FHFA claims and a $275 million SEC agreement in principle concerning certain 2007 subprime RMBS transactions; the SEC settlement remained subject to Commission approval. The filing warns that other claims and investigations could result in material period-specific effects and that some losses cannot be reasonably estimated.
- Regulatory uncertainty includes implementation of Basel III, the Volcker Rule and derivatives rules. Basel III became effective for the company on January 1, 2014, with requirements phased in over time. The company estimated a pro forma advanced-approaches Common Equity Tier 1 ratio of approximately 10.5% at year-end 2013, subject to assumptions and regulatory conditions.
- Other material risks include funding access and credit ratings, market and counterparty exposures, mortgage representations and warranties, operational and cybersecurity incidents, litigation, regulatory changes and restrictions on moving capital from subsidiaries. A one-notch downgrade could trigger $1.522 billion in collateral or termination payments, with an incremental $3.321 billion under a two-notch scenario.
- Reported 2013 effective tax rate was 18.4%, including a $407 million discrete net tax benefit; excluding it, the rate would have been 27.5%. The company also reported $4.1 billion in unrecognized tax benefits.
Important facts for investors to verify
- Reconcile reported earnings with DVA-excluded non-GAAP figures and assess how much of the year-over-year improvement came from DVA, investment gains, tax benefits and the Japanese securities joint venture.
- Review the scale, timing and remaining uncertainty of mortgage-related settlements, claims, reserves and potential losses beyond amounts accrued.
- Confirm the Basel III capital position under finalized requirements, including the effects of model conditions, market-risk rules, buffers and the G-SIB surcharge.
- Assess liquidity and funding resilience, including deposit transfers, debt maturities, rating-triggered collateral needs and limits on subsidiary distributions.
- Track the Rosneft transaction, TransMontaigne strategic review and the planned Wealth Management deposit transfers through 2015.
The financial statements received an unqualified independent audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2013.