Morgan Stanley 10-Q Summary: Quarter Ended June 30, 2020
Business context and reporting period
Morgan Stanley is a global financial services firm operating through Institutional Securities, Wealth Management and Investment Management. This Form 10-Q reports second-quarter and first-half 2020 results; comparisons are with the corresponding 2019 periods unless otherwise noted.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 |
|---|---|---|
| Net revenues | $13.414 billion | $10.244 billion |
| Net income applicable to Morgan Stanley | $3.196 billion | $2.201 billion |
| Diluted EPS | $1.96 | $1.23 |
| Pre-tax margin | 32.5% | 28.0% |
| Expense efficiency ratio | 67.5% | 71.7% |
| Annualized ROE / ROTCE | 15.7% / 17.8% | 11.2% / 12.8% |
For the first half of 2020, net revenues were $22.901 billion, net income applicable to Morgan Stanley was $4.894 billion, and diluted EPS was $2.96, compared with $20.530 billion, $4.630 billion and $2.62, respectively, in first-half 2019. First-half pre-tax margin was 28.4% versus 28.5%.
- Institutional Securities: Q2 net revenues rose 56% to $7.977 billion, led by strong sales and trading and underwriting. Fixed-income sales and trading rose 168%; investment banking revenues rose 39%.
- Wealth Management: Q2 net revenues increased 6% to $4.680 billion; pre-tax income was $1.142 billion and pre-tax margin was 24%. First-half revenues declined 1% to $8.717 billion as lower net interest income and trading revenues offset higher asset-management revenues.
- Investment Management: Q2 net revenues increased 6% to $886 million. Long-term net flows were $15.4 billion and period-end AUM was $665 billion. First-half revenues declined 4%, mainly reflecting lower investment revenues and reversal of accrued carried interest.
At June 30, 2020, total assets were $975.4 billion, loans were $142.0 billion and deposits were $236.8 billion. Borrowings were $205.5 billion, up from $192.6 billion at year-end 2019. Common shareholders’ equity was $78.1 billion. Liquidity resources totaled $301.4 billion, versus $215.9 billion at year-end; the average daily LCR was 147% in Q2, above the 100% minimum. CET1 was 16.1% under the Advanced Approach and 16.5% under the Standardized Approach; the reported SLR was 7.3%, reflecting temporary Federal Reserve relief.
First-half operating cash flow was $7.0 billion, down from $27.6 billion in 2019; investing cash outflow was $33.6 billion and financing cash inflow was $51.6 billion. Cash and cash equivalents ended June at $106.3 billion. These cash flows are affected by the balance-sheet movements typical of the Firm’s financial activities.
Material changes, outlook and risks
- COVID-19-related market volatility increased client trading activity and helped drive Institutional Securities results. The Firm recorded $239 million of credit-loss provision in Q2 and $646 million in the first half; the total allowance for loans and lending commitments was $1.163 billion at June 30.
- Low interest rates pressured Wealth Management net interest margin. Management warned that trading activity may normalize, advisory activity may remain subdued, and pandemic-related economic effects could adversely affect future results.
- The January 2020 ROTCE target of 13%–15% over two years was established for a normal market environment; management said achievement within the original timeframe was uncertain.
- The all-stock E*TRADE acquisition remained subject to customary conditions and regulatory approvals; the Firm continued to expect closing in Q4 2020. E*TRADE shareholders approved the transaction on July 17.
- Common-stock repurchases were suspended. Federal Reserve restrictions generally limited capital distributions in Q3 2020; the announced common dividend was $0.35 per share, payable August 14, subject to the applicable restrictions.
- Q2 included $134 million of intermittent net discrete tax costs, principally related to a foreign tax matter. CECL adoption on January 1 increased the allowance for credit losses by $131 million and reduced retained earnings by $100 million after tax.
- Disclosed legal matters include mortgage-related cases with estimated potential losses of up to approximately $240 million and $277 million in two matters, plus interest, fees and costs; plaintiffs may expand claims. The Dutch tax dispute concerns approximately €124 million plus interest. Outcomes and any ultimate losses remain uncertain.
Important facts for investors to verify
- Whether elevated Institutional Securities trading and underwriting revenues persist, and how results respond if market volatility or client activity declines.
- Subsequent credit-loss provisions, loan performance, borrower modifications and exposure to sectors affected by COVID-19.
- Execution, regulatory approvals, closing timing and integration costs for the E*TRADE acquisition.
- Capital distributions, liquidity and reported capital ratios as temporary regulatory relief expires and stress-capital requirements take effect.
- Developments in the disclosed legal and tax contingencies and the potential effect on earnings.
The interim financial information was reviewed by Deloitte & Touche, not audited; the auditor reported no material modifications identified in its review.