Morgan Stanley 2020 Form 10-K Summary
Reporting period: Year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. Morgan Stanley is a global financial services firm with Institutional Securities, Wealth Management and Investment Management segments. Results include E*TRADE only from its October 2, 2020 acquisition date.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenues | $48.198 billion | $41.419 billion | +16% |
| Income before taxes | $14.418 billion | $11.301 billion | +28% |
| Net income | $11.179 billion | $9.237 billion | +21% |
| Net income applicable to Morgan Stanley | $10.996 billion | $9.042 billion | +22% |
| Diluted EPS | $6.46 | $5.19 | +24% |
| Common-shareholder ROE / ROTCE | 13.1% / 15.2% | 11.7% / 13.4% | Improved |
| Pre-tax margin / expense efficiency ratio | 29.9% / 70.1% | 27.3% / 72.7% | Improved |
Non-interest expenses rose 12% to $33.780 billion. Compensation and benefits were $20.854 billion, up 11%; non-compensation expenses were $12.926 billion, up 15%. The effective tax rate increased to 22.5% from 18.3%, partly because prior-year discrete tax benefits were larger. The filing reports $231 million of pre-tax E*TRADE integration expenses; excluding these, adjusted ROTCE was 15.4% and adjusted expense efficiency was 69.6%.
- Institutional Securities: Revenue of $25.948 billion, up 27%; net income applicable to Morgan Stanley rose 52% to $7.012 billion. Sales and trading revenue increased 37% to $18.792 billion, while investment banking revenue rose 26% to $7.204 billion. Higher trading, underwriting and client activity drove the gains.
- Wealth Management: Revenue of $19.055 billion, up 7%, including E*TRADE from October 2. Net income fell 10% to $3.361 billion and pre-tax margin declined to 23.0% from 27.2%. Higher asset-management and transactional revenues were partly offset by lower net interest revenue and acquisition-related costs.
- Investment Management: Revenue was $3.734 billion, broadly unchanged; net income fell 14% to $615 million. Asset-management revenue rose 15%, while lower carried interest weighed on results. Year-end AUM was $781 billion, with $41 billion of long-term net flows.
Cash flow: Net cash used in operating activities was $25.231 billion, versus $40.773 billion provided in 2019; investing activities used $37.898 billion and financing activities provided $83.784 billion. Cash and cash equivalents increased $23.483 billion to $105.654 billion. These cash-flow totals are affected by the firm’s securities financing and balance-sheet activity.
Balance sheet, funding and capital at year-end: Total assets were $1.116 trillion, up from $895.429 billion; total liabilities were $1.013 trillion. Loans were $150.597 billion, deposits $310.782 billion and borrowings $217.079 billion. Common shareholders’ equity was $92.531 billion, and tangible common shareholders’ equity was $75.916 billion. Liquidity resources were $338.623 billion, compared with $215.868 billion; the average daily LCR was 129%, above the 100% minimum. Standardized CET1 was 17.4%, versus 16.4%; SLR was 7.4%, but benefited from a temporary regulatory exclusion of U.S. Treasuries and Federal Reserve deposits that was scheduled to end March 31, 2021.
Material changes and significant events
- Morgan Stanley acquired E*TRADE for approximately $11.9 billion, principally through issuance of about $11 billion in common shares, plus preferred shares. E*TRADE contributed approximately $600 million of revenue after closing; its net income contribution was not material. The deal materially increased Wealth Management assets, deposits and scale.
- Revenue and earnings growth was led by Institutional Securities amid elevated market volatility, client trading and capital-markets activity. Management cautioned that this activity may not recur.
- The provision for credit losses on loans and lending commitments was $762 million, up from $162 million in 2019. The year-end allowance for credit losses on loans and commitments was $1.231 billion. The increase primarily reflected COVID-19-related economic uncertainty and exposures in Institutional Securities.
- Low interest rates reduced Wealth Management net interest revenue by 5% to $4.022 billion, despite loan and deposit growth.
- Common-stock repurchases totaled $1.347 billion in 2020, down from $5.360 billion in 2019, amid voluntary and Federal Reserve restrictions. Common dividends declared totaled $2.295 billion.
Outlook, risks and contingencies
- In January 2021, management set a two-year ROTCE target of 14%–16%, excluding integration expenses, assuming a normal market environment. The filing says COVID-19 makes achievement within the stated timeframe uncertain.
- The Board authorized up to $10 billion of common-stock repurchases in 2021, subject to Federal Reserve limits and other regulatory requirements. The filing also reports a $0.35-per-share common dividend paid in February 2021.
- Morgan Stanley expected to close its announced Eaton Vance acquisition on March 1, 2021, subject to customary conditions. The transaction was valued at approximately $7 billion when announced.
- Key risks include the pandemic and economic recovery, market volatility and liquidity, credit deterioration, low interest rates, acquisition integration, cybersecurity and operational disruption, legal and regulatory developments, capital and liquidity requirements, Brexit-related uncertainty, and the transition from LIBOR and other interest-rate benchmarks.
- Credit exposure warrants attention: approximately $800 million of loans had COVID-related payment deferrals still in place at year-end, while about $2.7 billion of loans had exited deferral arrangements during 2020; the substantial majority of the latter were current at year-end. Management’s credit-loss forecasts assume continued recovery through 2021 supported by fiscal and monetary measures.
- Legal expenses rose to $336 million from $221 million. The filing identifies several significant mortgage-related matters and states estimated potential losses of up to approximately $240 million in one action and $277 million in another, plus interest, fees and costs; the possible range in the latter could increase. These are separate case-specific estimates, not a combined expected loss. The company also faces other litigation, investigations and contingencies whose ultimate losses may be difficult to estimate.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls. Critical audit matters included valuation of Level 3 financial instruments and E*TRADE customer-relationship intangible assets.
Important facts for investors to verify
- Whether Institutional Securities trading and underwriting activity, and the associated earnings growth, can be sustained at lower or more normal market activity levels.
- The underlying contribution of E*TRADE to Wealth Management earnings, and actual integration costs, synergies, client retention and platform performance.
- Credit-loss trends, loan deferrals, and the adequacy of the $1.231 billion allowance if economic conditions or focused sectors worsen.
- Capital and distribution capacity after temporary SLR relief expires and in light of Federal Reserve stress-test and capital-action restrictions.
- Progress and closing of the Eaton Vance acquisition, and the assumptions supporting the ROTCE target.
- Developments in material litigation and the valuation sensitivity of Level 3 assets and liabilities; the filing reports $18.4 billion of Level 3 fair-value assets and $10.2 billion of Level 3 liabilities at year-end.