Morgan Stanley — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Morgan Stanley is a global financial services firm operating through Institutional Securities, Wealth Management and Investment Management. The interim financial statements are unaudited; Deloitte & Touche performed a review, not an audit.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Net revenues | $13.46 billion | $13.13 billion | Up 2% |
| Net income applicable to Morgan Stanley | $2.18 billion | $2.50 billion | Down 13% |
| Earnings applicable to common shareholders | $2.05 billion | $2.39 billion | Down 14% |
| Diluted EPS | $1.24 | $1.39 | Down 11% |
| Pre-tax margin | 21% | 25% | Down 4 percentage points |
| Expense efficiency ratio | 78% | 74% | Higher indicates more expense per revenue dollar |
| ROE / ROTCE | 8.9% / 12.1% | 10.1% / 13.8% | Both lower |
For the first half of 2023, net revenues were $27.97 billion, essentially flat year over year; net income applicable to Morgan Stanley was $5.16 billion versus $6.16 billion, and diluted EPS was $2.95 versus $3.41. The six-month expense efficiency ratio was 75%, compared with 71%.
Q2 total non-interest expenses were $10.48 billion, up 8% year over year. Compensation expense was $6.26 billion, up 13%, including $308 million of severance tied to the May employee action; the quarter also included $99 million of integration-related expenses. Provision for credit losses was $161 million versus $101 million. The effective tax rate was 21.0%, compared with 23.6%.
Business segments
- Institutional Securities: Revenue of $5.65 billion, down 8%; net income applicable to Morgan Stanley of $759 million, down 32%. Investment banking revenue was nearly unchanged, as higher underwriting offset lower advisory. Equity revenue fell 14% and fixed income fell 31%, reflecting weaker client activity and less favorable market conditions.
- Wealth Management: Revenue of $6.66 billion, up 16%; net income of $1.31 billion, up 10%. Higher net interest revenue and gains on deferred cash-based compensation plan investments (DCP investments), compared with losses a year earlier, supported revenue. Pre-tax margin was 25.2%, versus 27% a year earlier. Net new assets were $89.5 billion in the quarter; total client assets were $4.89 trillion at quarter-end.
- Investment Management: Revenue of $1.28 billion, down 9%; net income applicable to Morgan Stanley of $127 million, down 32%. Lower performance-based income and other revenue contributed to the decline. AUM was $1.41 trillion at quarter-end, with positive net flows in long-term and liquidity asset classes during the quarter.
Balance sheet, cash flow, debt and liquidity
- Total assets were $1.165 trillion at June 30, 2023, versus $1.180 trillion at December 31, 2022. Loans, net of allowance, were $224.3 billion; the allowance for credit losses on loans and lending commitments was $1.64 billion, up from $1.34 billion at year-end.
- Deposits were $348.5 billion, down from $356.6 billion; the firm cited continued reductions in brokerage sweep deposits, partly offset by increases in time and savings deposits. Borrowings were $248.0 billion, up from $238.1 billion. Borrowings maturing within the next 12 months were reported at $22.3 billion.
- Average liquidity resources for Q2 were $310.7 billion, including $301.7 billion of HQLA. The firm reported a 132% LCR and 118% NSFR, both above the 100% minimums.
- Standardized CET1 capital ratio was 15.5%, versus 15.3% at year-end; the required ratio including buffers was 13.3%. Tier 1 leverage ratio was 6.7% and SLR was 5.5%.
- Cash and cash equivalents were $105.0 billion, down from $128.1 billion at year-end. First-half operating cash flow was negative $19.5 billion, compared with positive $15.2 billion a year earlier; movements in trading assets and other balance-sheet items were significant, so this measure should be interpreted in light of the firm’s financial-services activities.
- The investment securities portfolio included $72.2 billion of held-to-maturity securities with fair value of $62.0 billion, and $79.6 billion of available-for-sale securities. The firm stated it did not identify credit losses in AFS securities in unrealized-loss positions and did not expect to be required to sell them before recovery of amortized cost.
Changes, outlook, risks and unusual items
- Management described the global environment as affected by inflation, high interest rates, geopolitical uncertainty and recession concerns, contributing to muted client activity. It cautioned that continued uncertainty could weigh on client confidence and activity.
- Credit-loss provisions rose, driven primarily by deterioration in commercial real estate, especially office lending, modest portfolio growth and macroeconomic outlook. The firm’s base ACL scenario assumes weak U.S. economic growth in 2023 followed by gradual recovery in 2024. Institutional Securities CRE loans and commitments totaled $10.3 billion; Wealth Management CRE exposure was $7.0 billion.
- Management’s stated ROTCE goal remains above 20% in a normal market environment; this is a forward-looking goal, not a near-term earnings forecast. No specific quarterly revenue or EPS guidance is provided in the supplied filing text.
- After quarter-end, the firm announced a quarterly common dividend of $0.85 per share, up from $0.775, and a new multi-year authorization to repurchase up to $20 billion of common stock, beginning in Q3 2023, subject to conditions and regulatory limits. First-half buybacks totaled $2.5 billion.
- The Federal Reserve’s 2023 stress-test results led Morgan Stanley to expect a 5.4% stress capital buffer from October 1, 2023 through September 30, 2024; the firm stated this produces a 12.9% aggregate standardized CET1 requirement. Proposed U.S. Basel III capital revisions and G-SIB surcharge changes announced July 27, 2023 remain under evaluation.
- The FDIC proposed a special assessment related to bank-failure losses. Morgan Stanley estimated its charge at approximately $270 million under the proposal and expected to record it after the final rule is published.
- Legal and regulatory matters include ongoing SEC and U.S. Attorney investigations into aspects of the firm’s block-trading business; a U.K. competition authority’s provisional findings concerning historical gilt trading, which the firm contests; and a newly filed U.S. antitrust class action concerning gilts. The firm also reached an agreement in principle to settle a securities-lending antitrust case. A Dutch tax dispute concerns approximately €124 million of tax credits, plus accrued interest; the filing describes an ongoing criminal-authority investigation related to the matter.
- DCP investment mark-to-market results materially affected comparisons: Wealth Management benefited from gains in Q2 2023 versus losses in Q2 2022. The firm also reported that first-half regulatory transition effects from CECL are 50% phased in, with full phase-in beginning in 2025.
Important facts for investors to verify
- Whether Wealth Management’s revenue growth and net interest income can offset deposit repricing, continued sweep-deposit outflows and higher funding costs; reported growth also reflects DCP mark-to-market comparisons.
- Trends in Institutional Securities client activity, investment banking volumes and the sustainability of Investment Management flows, AUM and fee revenue.
- Further CRE credit deterioration, especially in office properties, and the effect on provisions, nonaccrual loans and charge-offs.
- Liquidity and capital levels, including deposit mix, near-term borrowing maturities, securities’ unrealized losses and any effect of proposed regulatory capital rules.
- The final FDIC assessment and developments in the block-trading, gilt-trading, Dutch tax and other legal matters, including any potential financial or business impact.