Morgan Stanley — 2009 Form 10-K Summary
Business context and reporting period
Morgan Stanley is a global financial services firm operating through Institutional Securities, Global Wealth Management Group (GWM) and Asset Management. This 10-K covers the year ended December 31, 2009. The company changed its fiscal year-end from November 30 to December 31, so fiscal 2008 covers 12 months ended November 30, 2008; comparisons are not fully aligned. Results also include seven months of Morgan Stanley Smith Barney (MSSB), consolidated from May 31, 2009, following formation of the 51%-owned joint venture with Citigroup.
Financial results and key metrics
| Metric | 2009 | Prior comparable period |
|---|---|---|
| Net revenues | $23.358 billion | $22.111 billion, fiscal 2008 |
| Net income | $1.406 billion | $1.778 billion, fiscal 2008 |
| Net income applicable to Morgan Stanley | $1.346 billion | $1.707 billion, fiscal 2008 |
| Income from continuing operations applicable to Morgan Stanley | $1.149 billion | $1.125 billion, fiscal 2008 |
| Common shareholder earnings and diluted EPS | Loss of $907 million; loss per share of $0.77 | Earnings of $1.495 billion; diluted EPS of $1.39 |
| Non-interest expenses | $22.501 billion | $20.974 billion, fiscal 2008 |
| Net interest revenue | $990 million | $3.367 billion, fiscal 2008 |
| Cash flow from operating activities | $(45.951) billion | $73.417 billion, fiscal 2008 |
Net revenues rose 6%, while net income applicable to Morgan Stanley fell 21%. The comparison reflects MSSB consolidation and significant fair-value effects: 2009 included approximately $5.510 billion of losses from tightening Morgan Stanley credit spreads on certain fair-value borrowings, versus $5.594 billion of gains from spread widening in fiscal 2008. Net interest revenue also declined, primarily due to lower rates and reduced average interest-earning assets and liabilities. The 2009 common-share loss included an $850 million negative EPS adjustment from accelerated amortization of the Series D preferred-stock issuance discount after its redemption.
For calendar Q4 2009, net revenues were $6.842 billion, non-interest expenses $6.204 billion, and pre-tax income from continuing operations $638 million. Income from continuing operations was $566 million; net income applicable to Morgan Stanley was $617 million, and common shareholder earnings were $376 million, or $0.29 per diluted share. Versus Q3 2009, net revenues declined from $8.425 billion and pre-tax continuing income from $1.442 billion.
Segments and material changes
- Institutional Securities: Net revenues were $12.777 billion, down 13%; pre-tax continuing income was $982 million. Investment banking revenues increased 23% to $4.454 billion, mainly on stronger underwriting. Equity sales and trading declined 66% to $3.353 billion; fixed-income sales and trading rose 30% to $5.017 billion. Own-credit-spread losses and lower equity-market activity weighed on results.
- GWM: Net revenues were $9.390 billion, up 34%, while pre-tax continuing income fell to $559 million from $1.154 billion. Results include seven months of MSSB; the prior period included a $687 million gain on the sale of the Spanish wealth-management business. Year-end client assets were $1.560 trillion, primarily reflecting MSSB consolidation; fee-based assets were $379 billion.
- Asset Management: Net revenues were $1.337 billion; pre-tax continuing loss narrowed to $673 million from $1.423 billion. Assets under management or supervision were $266 billion, down 8% from December 2008, with $41.1 billion of net outflows. Real estate and other principal-investment losses remained material.
Liquidity, capital and debt
- Total assets were $771.462 billion at year-end, up from $676.764 billion. Cash and cash equivalents were $31.991 billion, down from $78.654 billion.
- Year-end liquidity reserves were $163 billion ($64 billion at the parent); average total liquidity reserves for 2009 were $154 billion. These reserves are distinct from cash and cash equivalents.
- Long-term borrowings were $193.374 billion, versus $179.835 billion; short-term borrowings were $2.378 billion, versus $10.102 billion. Deposits were $62.215 billion. The company issued approximately $44 billion of notes and repaid approximately $33 billion during 2009.
- Regulatory capital ratios at December 31 were 16.4% total capital, 15.3% Tier 1 capital, 5.8% Tier 1 leverage and 8.2% Tier 1 common. Shareholders’ equity was $46.688 billion; tangible common equity was $29.479 billion.
- The company issued approximately $6.9 billion of common stock, repurchased its $10 billion Series D preferred stock and bought back the Treasury warrant for $950 million. No common shares were repurchased under the capital-management program during 2009.
Outlook, risks, contingencies and unusual items
- No quantitative earnings or revenue guidance is provided. Management described improving global markets in 2009, but noted continuing weakness in real estate and challenging consumer and business conditions. Management expected substantial regulatory changes in 2010 and subsequent years; their effects were uncertain.
- The planned sale of substantially all retail Asset Management, including Van Kampen, to Invesco was expected to close in mid-2010, subject to approvals. Morgan Stanley was to receive a 9.4% minority interest in Invesco. In February 2010, the company received $775 million from Discover Financial Services in settlement of a special-dividend dispute; the payment was expected in Q1 2010 discontinued operations.
- Key risks include liquidity and funding access, market and credit losses, real-estate exposure, counterparty and operational risks, litigation, regulatory change, competition, and the possibility that hedges or risk models may not protect against extreme market conditions. Aggregate year-end 95%/one-day VaR was $187 million, versus $144 million at December 31, 2008.
- Legal matters include mortgage-related investigations and class actions, securities and ERISA litigation, and an FCPA investigation concerning conduct by a China-based employee in an overseas real-estate subsidiary. The company said it could not reliably estimate outcomes or losses in many matters; it believed pending matters would not materially affect consolidated financial condition, though results or cash flows in a particular period could be affected.
- A bankruptcy-claim sale generated a $319 million gain, but the company could be required to refund up to $429 million plus interest if claims are disallowed beyond specified limits. At year-end, real-estate-related contractual commitments, guarantees, lending facilities and counterparty arrangements totaled $1.5 billion. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How much of 2009 performance reflects underlying business results versus own-credit-spread valuation effects, the preferred-stock EPS adjustment and other unusual items.
- The full-year and Q4 results on a comparable basis, accounting for the fiscal-year change and MSSB’s partial-year consolidation.
- MSSB integration costs, ongoing profitability, client-asset trends and the terms or timing of any future purchase of Citi’s remaining interest.
- Liquidity-reserve composition and accessibility across legal entities, debt maturities, rating-trigger collateral needs and regulatory capital requirements.
- Potential exposures from real estate, legal proceedings, the bankruptcy claims, guarantees and the planned Invesco transaction.