Morgan Stanley — 2010 Form 10-K
Reporting period: Year ended December 31, 2010. Although the request references 2010 Q4, this is an annual filing; selected fourth-quarter figures are identified separately below. The 2009 comparison includes Morgan Stanley Smith Barney (MSSB) only from May 31, 2009, limiting comparability. Amounts are U.S. dollars unless noted.
Business context and financial performance
Morgan Stanley is a global financial services firm operating through Institutional Securities, Global Wealth Management Group (including its 51% interest in MSSB), and Asset Management. It reported 62,542 employees at year-end.
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Net revenues | $31.622 billion | $23.434 billion |
| Income from continuing operations before tax | $6.202 billion | $983 million |
| Net income | $5.702 billion | $1.406 billion |
| Net income applicable to Morgan Stanley | $4.703 billion | $1.346 billion |
| Earnings applicable to common shareholders | $3.594 billion | $(907) million |
| Diluted EPS | $2.63 | $(0.77) |
| Non-interest expenses | $25.420 billion | $22.451 billion |
| Net interest income | $864 million | $772 million |
Net revenues rose 35% and net income applicable to Morgan Stanley increased 249% year over year. The consolidated pre-tax margin was approximately 19.6%, versus 4.2% in 2009. The 2010 effective tax rate was 11.9%; excluding specified tax benefits, management said it would have been 28.0%. Return on average common shareholders’ equity was 8.5%.
Selected Q4 2010: Net revenues were $7.807 billion, income from continuing operations before tax was $1.183 billion, net income applicable to Morgan Stanley was $836 million, common-shareholder earnings were $600 million, and diluted EPS was $0.41.
Segments
- Institutional Securities: Revenue of $16.366 billion, up from $12.853 billion; continuing pre-tax income was $4.338 billion, versus $1.088 billion. Improved trading and investment results were partly offset by lower investment banking revenue, challenging markets, Monoline-related losses and the Japanese joint-venture transaction.
- Global Wealth Management Group: Revenue of $12.636 billion, versus $9.390 billion; continuing pre-tax income was $1.156 billion, versus $559 million. Growth reflected a full year of MSSB consolidation and improved client activity and markets.
- Asset Management: Revenue of $2.723 billion, versus $1.337 billion; continuing pre-tax income was $723 million, compared with a $653 million loss. Investment gains contributed materially. Results exclude the retail asset management business sold in 2010.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow was $40.307 billion; investing cash flow was $(29.157) billion; financing cash flow was $4.163 billion. Cash and cash equivalents increased $15.624 billion to $47.615 billion. Operating cash flow included substantial movements in trading and securities-financing balances.
- Total assets were $807.698 billion, up from $771.462 billion. Morgan Stanley shareholders’ equity was $57.211 billion, up from $46.688 billion; book value per common share was $31.49.
- Year-end long-term borrowings were $192.457 billion, including $183.514 billion of senior debt. The company issued approximately $33 billion of notes during 2010; approximately $34 billion of long-term borrowings matured. Long-term borrowings due in 2011 totaled $26.911 billion.
- Regulatory capital ratios were 16.5% total capital, 16.1% Tier 1 capital, 6.6% Tier 1 leverage and 10.5% Tier 1 common. The company reported compliance with Basel I requirements.
- The Global Liquidity Reserve was $171 billion at year-end, including $42 billion cash and cash equivalents; average total liquidity during 2010 was $159 billion. The company said it maintained sufficient liquidity under its modeled stress tests. These reserves are distributed among the parent and subsidiaries and are not all freely transferable.
Material changes, unusual items and outlook
- Drivers and comparability: The MSSB combination materially expanded wealth management revenue and expenses; 2009 includes MSSB for only part of the year. Total non-interest expenses increased 13% in 2010, including higher MSSB costs and a $272 million U.K. payroll tax charge on discretionary bonuses.
- Credit-spread effects: Tightening of Morgan Stanley’s own credit spreads on certain fair-value borrowings reduced 2010 revenue by $873 million, compared with a $5.510 billion reduction in 2009. These valuation effects make reported period comparisons less representative of underlying operating trends.
- Disposals and other items: 2010 included a $1.2 billion loss related to the planned Revel disposition, a $775 million gain from a Discover Financial Services legal settlement, an approximately $570 million after-tax gain recorded from the sale of Retail Asset Management, and a $668 million pre-tax gain on the sale of the CICC stake. The sale of the Invesco shares generated a further $102 million gain.
- Other significant items: Monoline counterparty credit exposure generated $865 million of losses in 2010. Adoption of the OIS curve for substantially all collateralized interest-rate derivatives produced a $176 million pre-tax gain. Tax benefits of $382 million, $345 million and $277 million contributed to the unusually low reported effective tax rate.
- Outlook: The filing provides no specific earnings or revenue guidance. Management described improving but uncertain global markets, citing persistent unemployment, European sovereign debt concerns, low interest rates and regulatory uncertainty. Dodd-Frank implementation, the Volcker Rule, derivatives reforms and Basel III were expected to increase compliance demands and could affect costs, capital, liquidity and business activities. Management’s preliminary Basel III analysis estimated a net increase of about $140 billion in risk-weighted assets after assumed runoff and mitigation; this estimate was subject to change as rules were finalized.
- Risks and contingencies: Principal risks include funding and liquidity access, market and credit losses, real estate exposures, counterparty defaults, operational and cyber risks, competition, regulatory change and litigation. The filing identifies reasonably possible losses of approximately $245 million in the Citi/Capmark dispute and approximately $273 million related to the Tourmaline dispute. It also describes numerous mortgage-related claims and investigations, and a China-related FCPA investigation. The company said legal outcomes could materially affect results or cash flows in a particular period, even if not materially adverse to consolidated financial condition.
Most important facts for investors to verify
- Separate recurring operating performance from debt credit-spread marks, investment gains, tax benefits and discontinued-operation items; check the related notes and reconciliations.
- Assess MSSB’s contribution and the comparability of 2010 results with 2009, including the 49% noncontrolling interest in MSSB earnings.
- Review the quality and availability of the $171 billion liquidity reserve, subsidiary transfer restrictions, debt maturities and downgrade-related collateral calls.
- Track Basel III and Dodd-Frank rulemaking, including whether the preliminary risk-weighted-asset estimate and capital requirements change.
- Update the status and potential financial impact of mortgage-related litigation, the Capmark and Tourmaline disputes, and the China FCPA matter.