Morgan Stanley — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Comparisons are with Q1 2021 unless otherwise noted. Morgan Stanley operates Institutional Securities, Wealth Management and Investment Management. Results include Eaton Vance prospectively from its March 1, 2021 acquisition date.
Financial performance
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net revenues | $14.801 billion | $15.719 billion; down 6% |
| Net income | $3.715 billion | $4.168 billion |
| Earnings applicable to common shareholders | $3.542 billion | $3.982 billion |
| Diluted EPS | $2.02 | $2.19 |
| Adjusted diluted EPS (non-GAAP) | $2.06 | $2.22 |
| Pre-tax margin | 31% | 34% |
| Expense efficiency ratio | 69% | 67% |
| ROE / ROTCE | 14.7% / 19.8% | 16.9% / 21.1% |
| Effective tax rate | 19.0% | 22.0% |
Adjusted measures are non-GAAP and exclude specified E*TRADE and Eaton Vance integration costs. Compensation expense fell 8% to $6.274 billion; non-compensation expense rose 6% to $3.882 billion. The credit-loss provision was $57 million, versus a $98 million net release a year earlier.
Segments and material changes
- Institutional Securities: Revenue was $7.657 billion, down 11%; net income attributable to Morgan Stanley was $2.191 billion, down 16%. Investment banking revenue fell 37% to $1.634 billion as equity and fixed-income underwriting declined, partly offset by advisory revenue rising to $944 million, up 97%. Equity revenue rose 10%; fixed-income revenue was nearly unchanged.
- Wealth Management: Revenue was $5.935 billion, essentially flat; net income was $1.272 billion, up 2%. Asset management revenue increased 14% and net interest revenue rose 11%, while transactional revenue fell 48%. The segment added $142 billion of net new assets, including an asset acquisition; $75 billion of fee-based assets came from that acquisition.
- Investment Management: Revenue was $1.335 billion, up 2%, while net income attributable to Morgan Stanley fell 26% to $203 million. Asset management and related fees increased 26%, largely reflecting Eaton Vance and higher average AUM; performance-based income and other revenue was a loss of $53 million.
Cash flow, balance sheet, liquidity and capital
- Operating cash flow was $239 million, compared with $26.879 billion in Q1 2021; investing cash flow was $158 million versus a $22.561 billion outflow. Financing cash flow was $9.291 billion. Cash and cash equivalents increased $8.361 billion to $136.086 billion. These cash flows are influenced by substantial trading and financing balance movements.
- At March 31, total assets were $1.222 trillion and total liabilities $1.118 trillion. Loans, net of allowance, were $208.750 billion; deposits were $360.840 billion; borrowings were $229.817 billion. Compared with December 31, 2021, loans and deposits increased, while borrowings declined modestly.
- Liquidity resources were $323.227 billion, down from $356.003 billion at year-end. The average LCR was 130%, above the 100% minimum; the filing states the Firm and U.S. bank subsidiaries complied with minimum LCR and NSFR requirements.
- Standardized CET1 was 14.5%, down from 16.0% at year-end; standardized Tier 1 capital was 16.0%, and SLR was 5.5%. The filing attributes higher risk-weighted assets partly to derivatives, securities financing activity and lending growth.
- Common shareholders’ equity was $95.151 billion, down from $97.691 billion. Accumulated other comprehensive loss widened by $1.8 billion in the quarter, primarily reflecting a $2.395 billion after-tax loss on unrealized available-for-sale securities, partly offset by debt valuation adjustments.
- The Firm repurchased $2.872 billion of common stock in Q1 and declared a $0.70-per-share dividend, payable May 13, 2022.
Outlook, commentary and risks
- Management set a goal in January 2022 of ROTCE above 20%, excluding integration-related expenses, based on a “normal market environment”; the filing cautions that results may be materially affected by many factors. Q1 adjusted ROTCE was 20.3%.
- Management cited continued strong performance across businesses, client engagement in volatile markets, expense discipline and ongoing investment. The filing does not provide specific quarterly revenue or earnings guidance.
- The Firm said direct Russia and Ukraine exposure was limited, it was not entering new onshore business in Russia, and Russian activity was limited to helping global clients close out existing obligations. Broader war-related market and economic effects remain uncertain.
- Key risks discussed include market volatility, credit and counterparty exposure, liquidity and funding access, legal and regulatory matters, operational and model risk, and market-sensitive asset-management fees. The Firm reported two trading-loss days that did not exceed its 95% one-day Total Management VaR.
- Potentially material legal matters include Dutch tax-credit litigation involving approximately €124 million plus accrued interest, potential civil claims connected with block trading, and regulatory requests concerning business communications on unapproved messaging platforms. The filing also reports final settlements and dismissals in two residential-mortgage-related matters. Management notes that some legal exposures are difficult to estimate.
- Interest-rate benchmark transition remains underway: most non-U.S. dollar LIBOR settings ceased at year-end 2021, and remaining U.S. dollar LIBOR tenors were expected to continue through June 30, 2023. The Firm reported progress but still had a significant number of U.S. dollar LIBOR-linked contracts.
Important facts for investors to verify
- Whether underwriting weakness and lower transaction activity persist, and how advisory, trading and client activity develop.
- Whether Wealth Management asset flows and higher net interest income offset market-driven declines in client assets and transactional revenue.
- Whether the stated ROTCE goal is achieved, noting its normal-market assumption and exclusion of integration costs.
- How rising rates and market movements affect the securities portfolio, accumulated other comprehensive income, liquidity resources and regulatory capital ratios.
- Changes in credit provisions, loan and commitment growth, and exposure to legal contingencies, Russia-related developments and LIBOR transition costs or risks.