Morgan Stanley — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Morgan Stanley is a global financial services firm reporting across Institutional Securities, Wealth Management and Investment Management. The interim financial statements were reviewed by Deloitte; they were not audited.
Financial results and key metrics
| Metric | Q3 2021 | Q3 2020 | Year to date 2021 | Year to date 2020 |
|---|---|---|---|---|
| Net revenues | $14.753 billion | $11.721 billion | $45.231 billion | $35.160 billion |
| Net income attributable to Morgan Stanley | $3.707 billion | $2.717 billion | $11.338 billion | $7.611 billion |
| Earnings applicable to common shareholders | $3.584 billion | $2.597 billion | $10.974 billion | $7.234 billion |
| Diluted EPS | $1.98 | $1.66 | $6.02 | $4.62 |
| Expense efficiency ratio | 67% | 69% | 67% | 69% |
| Pre-tax margin | 33% | 30% | 33% | 28% |
Q3 revenue increased about 26% year over year and net income attributable to Morgan Stanley increased about 36%. Compensation and benefits were $5.920 billion, up 16%; non-compensation expenses were $3.935 billion, up 30%. The effective tax rate was 23.6%, versus 21.1%, partly because the prior-year quarter included a discrete tax benefit. Adjusted diluted EPS was $2.04 and adjusted ROTCE was 20.2%, excluding integration-related costs; these are non-GAAP measures.
- Institutional Securities: Q3 net revenues of $7.495 billion, up 22%; net income attributable to Morgan Stanley was $2.229 billion. Record investment banking revenue reflected strong advisory and underwriting activity. Equity revenue increased, while fixed income revenue declined 16% year over year.
- Wealth Management: Net revenues of $5.935 billion, up 28%; net income was $1.157 billion. Client assets were $4.629 trillion and net new assets were a record $134.5 billion for the quarter. Management cited record asset-management revenues and continued bank-lending growth.
- Investment Management: Net revenues of $1.453 billion, up 38%; net income attributable to Morgan Stanley was $320 million. Assets under management or supervision were $1.522 trillion at quarter-end. Fee growth included Eaton Vance, acquired in March; performance-based income and other revenue was a $17 million loss in Q3.
Balance sheet, cash flow and capital
At September 30, 2021, total assets were $1.190 trillion, versus $1.116 trillion at December 31, 2020. Loans were $188.3 billion, deposits $329.0 billion and borrowings $229.8 billion. Common shareholders’ equity was $98.2 billion; tangible common equity was $72.8 billion. The standardized CET1 ratio was 16.0%, down from 17.4% at year-end 2020; the advanced CET1 ratio was 17.2%, down from 17.7%.
Liquidity resources totaled $346.3 billion. The average Q3 liquidity coverage ratio was 134%, above the 100% minimum; the Firm reported compliance with its net stable funding ratio requirement. For the nine months, operating cash flow was $33.6 billion, investing cash flow was negative $34.6 billion, and financing cash flow was $21.8 billion. Cash and cash equivalents rose to $123.9 billion from $105.7 billion at year-end. Cash-flow movements include substantial securities, lending and funding activity and should not be read like those of a non-financial company.
Material changes, outlook and risks
- Acquisitions and comparability: Results include E*TRADE prospectively from October 2020 and Eaton Vance from March 2021. These acquisitions contributed to growth in Wealth and Investment Management and increased expenses. Q3 integration-related expenses were $145 million pre-tax.
- Capital returns: The Firm repurchased $3.557 billion of common stock in Q3 and $8.631 billion in the first nine months. It authorized up to $12 billion of repurchases through June 30, 2022. The quarterly common dividend increased to $0.70 per share.
- Outlook: Management’s two-year ROTCE target, set in January 2021, is 14%–16% excluding integration-related expenses, based on a normal market environment. The filing gives no new earnings or revenue guidance. Management cautioned that market, macroeconomic, regulatory, legal, tax and expense factors could affect results.
- Regulatory capital: Morgan Stanley planned early adoption of SA-CCR in Q4 2021. Its preliminary estimate, absent further mitigation, was a $35–$45 billion increase in standardized RWA and an approximately 120-basis-point reduction in standardized CET1; management stressed that the actual impact could differ.
- Credit and legal matters: Total loans and lending commitments increased to $325.4 billion from $289.6 billion at year-end. COVID-19-sensitive sectors represented about 10% of Institutional Securities lending exposure; the Firm said roughly 90% of those exposures were investment grade and/or collateralized. Two mortgage-related cases each carried an estimated potential loss of up to approximately $277 million, with possible exposure potentially increasing. Dutch tax authorities are challenging approximately €124 million of tax credits plus interest.
- Other risks: The filing highlights ongoing COVID-19 uncertainty, market and credit exposure, LIBOR transition risk, legal and compliance matters, and possible additional collateral requirements after a credit-rating downgrade. The Firm also reported $774 million of cumulative unrealized carried interest potentially subject to reversal.
Investor verification priorities
- Separate underlying business growth from contributions of E*TRADE and Eaton Vance, and track integration costs and realized synergies.
- Monitor the CET1 and supplementary leverage ratios, the SA-CCR implementation impact, and capital distributions relative to regulatory buffers.
- Assess Wealth Management asset inflows, fee-based assets and deposit/lending trends, alongside Investment Management flows and performance-fee volatility.
- Review loan and commitment growth, allowance trends, event-driven exposures and the progress of COVID-sensitive borrower sectors.
- Track the cited mortgage litigation and Dutch tax dispute, as well as LIBOR transition milestones and any related costs or collateral needs.