Morgan Stanley — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Morgan Stanley is a global financial-services firm operating through Institutional Securities, Wealth Management and Investment Management. Results include E*TRADE from its October 2020 acquisition and Eaton Vance from March 1, 2021; these acquisitions affect comparisons with 2020.
Financial performance
Amounts in millions of dollars except per-share data and percentages.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenues | $14,759 | $13,660 | $30,478 | $23,439 |
| Net income applicable to Morgan Stanley | $3,511 | $3,196 | $7,631 | $4,894 |
| Earnings applicable to common shareholders | $3,408 | $3,047 | $7,390 | $4,637 |
| Diluted EPS | $1.85 | $1.96 | $4.04 | $2.96 |
| Net interest income | $1,865 | $1,600 | $3,893 | $2,956 |
| Provision for credit losses | $73 | $239 | $(25) net release | $646 |
| Non-interest expenses | $10,120 | $9,066 | $20,593 | $16,292 |
| Income before taxes | $4,566 | $4,355 | $9,910 | $6,501 |
| Effective tax rate | 23.1% | 25.7% | 22.5% | 22.8% |
Q2 net revenue increased 8% and net income applicable to Morgan Stanley increased 10% year over year, while diluted EPS declined from $1.96 to $1.85. For the first half, revenue rose about 30%, net income applicable to Morgan Stanley rose about 56%, and diluted EPS increased to $4.04.
- Q2 expense efficiency ratio was 69% versus 66%; adjusted for $90 million of integration-related expenses, it was 68%. Q2 return on average tangible common equity (ROTCE) was 18.6%, or 19.0% adjusted.
- Six-month expense efficiency was 68% (67% adjusted) and ROTCE was 19.8% (20.1% adjusted). These adjusted measures are non-GAAP.
- Six-month cash flows were $31.5 billion from operating activities, $(19.4) billion from investing activities and $10.0 billion from financing activities. Cash and cash equivalents ended at $126.5 billion, up from $105.7 billion at December 31, 2020. Operating cash flow can be materially affected by changes in trading and financing balances.
Segments and material changes
- Institutional Securities: Q2 revenue was $7.1 billion, down 14%; net income applicable to Morgan Stanley was $1.9 billion, down 13%. Investment banking revenue rose 16%, led by advisory and equity underwriting. Fixed-income revenue fell 45% as markets normalized from unusually strong prior-year conditions. First-half segment revenue rose 17% and net income rose 53%.
- Wealth Management: Q2 revenue was $6.1 billion, up 30%, and net income was $1.3 billion, up 48%. Growth reflected higher asset-management fees, E*TRADE contributions and lending. Net new assets were $71.2 billion; fee-based asset flows were $33.7 billion; client assets were $4.546 trillion. First-half revenue rose 38% and net income rose 46%.
- Investment Management: Q2 revenue was $1.7 billion, up 92%, and net income applicable to Morgan Stanley was $341 million, up 121%. Results benefited from Eaton Vance, higher average assets and performance-based income. Assets under management or supervision were $1.524 trillion, including $13.5 billion of positive long-term net flows in the quarter. First-half revenue rose 91% and segment net income rose 166%.
- Consolidated Q2 non-interest expenses increased 12%, including higher compensation and technology, professional-services and acquisition-related costs. First-half expenses increased 26%, also reflecting acquisition costs and higher compensation.
Balance sheet, funding and capital
- Total assets were $1.162 trillion, versus $1.116 trillion at year-end 2020. Loans were $166.1 billion, up from $150.6 billion; deposits were $320.4 billion, up from $310.8 billion; borrowings were $224.1 billion, up from $217.1 billion.
- Liquidity resources were $343.8 billion, versus $338.6 billion at year-end. The average Q2 liquidity coverage ratio was 126%, above the 100% minimum; the firm reported compliance with applicable liquidity requirements.
- Standardized Common Equity Tier 1 capital ratio was 16.6%, down from 17.4% at year-end; standardized Tier 1 ratio was 18.3%. The supplementary leverage ratio was 5.9%, compared with 7.4% at year-end, a comparison affected by expiration of a temporary regulatory exclusion for Treasuries and Federal Reserve deposits.
- Common shareholders’ equity was $99.1 billion. Tangible common shareholders’ equity was $73.6 billion; tangible book value per share was $40.12.
- The firm repurchased $5.1 billion of common stock in the first half. Following the end of temporary Federal Reserve capital-distribution restrictions, the board doubled the quarterly common dividend to $0.70 per share and authorized up to $12 billion of repurchases from July 1, 2021 through June 30, 2022.
Outlook, risks and contingencies
- Management’s stated two-year ROTCE target is 14%–16%, excluding integration-related expenses, based on a normal market environment. Q2 adjusted ROTCE exceeded that range, but management cautioned that results depend on markets, rates, volumes, expenses, regulation and other factors. No additional near-term earnings guidance is provided in the supplied filing text.
- COVID-19 conditions remained uncertain; most employees worked from home during the quarter, with office-return plans subject to local conditions. Management noted possible effects on markets, borrowers and operating results.
- Credit-loss provision was lower than in Q2 2020, and the first half recorded a net release, reflecting improved macroeconomic assumptions and corporate-loan paydowns, partly offset by a provision for one secured lending facility. Total loans and lending commitments exposure was approximately $320.5 billion. The filing identifies COVID-sensitive sectors and concentration, collateral and borrower risks.
- The firm remains exposed to market, credit, liquidity, operational, model, legal and regulatory risks. LIBOR transition is a notable operational and contractual risk: the firm has significant LIBOR-linked contracts, including contracts extending beyond 2021 and, for U.S. dollar LIBOR, June 2023.
- Legal matters include mortgage-related lawsuits with estimated potential loss of up to approximately $277 million in each of two proceedings, plus interest, fees and costs; the possible range could increase if claims expand. A Dutch tax dispute concerns approximately €124 million (about $147 million) of withholding-tax credits plus interest; Dutch criminal authorities also sought documents relating to the matter. The filing does not establish a final outcome for these cases.
- The interim financial information received an independent accountant’s review, not a full audit; the accountant reported no material modifications needed for conformity with U.S. GAAP.
Investor verification priorities
- Separate organic growth and operating performance from the acquired contributions of E*TRADE and Eaton Vance; confirm integration costs and realized synergies.
- Track whether Wealth Management flows, client assets and lending growth persist, and whether Investment Management flows and performance-based income remain durable.
- Assess normalization in Institutional Securities, particularly fixed-income revenue, and the impact of market volatility and trading conditions.
- Monitor capital and leverage ratios, liquidity buffers, loan growth and credit-loss allowances alongside the enlarged dividend and $12 billion buyback authorization.
- Review developments in the Dutch tax and mortgage litigation matters, LIBOR transition, and the continuing effects of COVID-19 and regulatory changes.