Morgan Stanley 2023 Form 10-K Summary
Business context and reporting period
Morgan Stanley is a global financial services firm operating through Institutional Securities, Wealth Management and Investment Management. This audited Form 10-K covers the fiscal year ended December 31, 2023; it is an annual report, not a stand-alone fourth-quarter report. Comparisons below are primarily with 2022.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net revenues | $54.1 billion | $53.7 billion | Up 1% |
| Net income | $9.2 billion | $11.2 billion | Down 17% |
| Net income applicable to Morgan Stanley | $9.1 billion | $11.0 billion | Down 18% |
| Earnings applicable to common shareholders | $8.5 billion | $10.5 billion | Down 19% |
| Diluted EPS | $5.18 | $6.15 | Down 16% |
| ROE / ROTCE | 9.4% / 12.8% | 11.2% / 15.3% | Both lower |
| Expense efficiency ratio | 77% | 73% | Higher (less efficient) |
| Net interest | $8.2 billion | $9.3 billion | Down 12% |
| Provision for credit losses | $532 million | $280 million | Up 90% |
Net income applicable to Morgan Stanley is distinct from net income and from earnings applicable to common shareholders, which deduct preferred dividends. The Firm’s 20% ROTCE goal is a forward-looking target based on a normal market environment, not a near-term earnings forecast.
Segments: Institutional Securities revenue was $23.1 billion, down 5%, and net income applicable to Morgan Stanley was $3.5 billion, down 34%. Wealth Management revenue was $26.3 billion, up 8%, with net income of $5.0 billion, down 2%; its reported pre-tax margin was 24.9%. Investment Management revenue was $5.4 billion, roughly unchanged, with net income of $639 million, down 3%.
Balance sheet and liquidity at December 31, 2023: Total assets were $1.194 trillion, borrowings $263.7 billion, deposits $351.8 billion, common shareholders’ equity $90.3 billion, and loans net of allowance $226.8 billion. Average liquidity resources for the fourth quarter were $314.5 billion. The standardized CET1 ratio was 15.2% (15.3% in 2022); the supplementary leverage ratio was 5.5%. LCR was 129% and NSFR 120%, both above the 100% minimum. These regulatory liquidity ratios are period-end/quarter-average disclosures as defined in the filing.
Cash flow: Cash and cash equivalents fell $38.9 billion to $89.2 billion. Operating cash flow was negative $33.5 billion, compared with negative $6.4 billion in 2022; investing cash flow was negative $3.1 billion and financing cash flow negative $2.7 billion. The filing attributes cash movements in part to trading-asset and other balance-sheet activity; operating cash flow should be interpreted in the context of a large financial institution’s changing trading and financing balances.
Material changes versus 2022
- Revenues edged higher, but net income applicable to Morgan Stanley and diluted EPS declined materially. The expense efficiency ratio rose to 77%, reflecting expense growth outpacing revenue.
- Institutional Securities was weaker, with investment banking revenue down 13% and lower Equity and Fixed Income results. Advisory revenue fell 24%, primarily on fewer completed M&A transactions. Fixed Income revenue declined 15% and Equity revenue 7%.
- Wealth Management revenue growth reflected higher net interest revenue and a swing in gains on deferred cash compensation (DCP) investments versus prior-year losses. Excluding DCP mark-to-market effects, Wealth Management revenue was $26.0 billion versus $25.3 billion. Net new assets were $282.3 billion, down from $311.3 billion, while client assets rose to $5.129 trillion.
- Investment Management AUM ended the year at $1.459 trillion, versus $1.305 trillion. Long-term AUM rose to $974 billion, supported by market gains and flows; reported average total AUM was approximately flat at $1.379 trillion.
- Net interest revenue declined despite higher Wealth Management net interest revenue: the consolidated measure reflects the firm-wide mix of assets, liabilities, trading and funding costs. Interest income and expense both rose sharply as rates increased.
- Borrowings rose $25.7 billion; deposits declined $4.8 billion. Common stock repurchases were $5.3 billion, down from $9.9 billion, and common dividends totaled $5.4 billion.
Outlook, commentary, risks and unusual items
- Management described 2023 markets as mixed, with inflation and uncertainty over interest rates; conditions improved late in the year amid expectations of lower rates in 2024, but their timing and pace remained uncertain. The filing provides no specific 2024 revenue or earnings guidance.
- Management’s 20% ROTCE goal assumes a normal market environment. Results remain exposed to market activity, rates, client asset flows, competition, funding costs and regulatory changes.
- Non-interest expenses included $353 million of severance, a $286 million FDIC special assessment, $249 million of higher legal expense associated with a specific matter, and $293 million of integration-related expense. The filing reported total 2023 legal expenses of $488 million, versus $443 million in 2022.
- The $532 million credit-loss provision was primarily driven by deteriorating commercial real estate conditions, including specific loans mainly in the office portfolio, and growth in other lending. Institutional Securities CRE loans and commitments totaled $9.4 billion; Wealth Management direct CRE exposure was $7.1 billion. Management cited higher rates, refinancing pressure and property-specific concerns.
- On January 12, 2024, after year-end, the Firm announced settlements with the U.S. Attorney’s Office and SEC concerning its block-trading business. It paid approximately $249 million in total and entered a three-year non-prosecution agreement; related civil claims may continue.
- The proposed Basel III Endgame rules could materially increase capital needs. Based on its current understanding, the Firm estimated fully phased-in Expanded Approach RWAs could have been about 40% higher than actual standardized RWAs at year-end 2023, before mitigating actions. The proposal was not final, and the estimate is uncertain.
- Other key exposures include market and counterparty credit risk, concentrated or illiquid positions, cyber and third-party disruption, legal and regulatory proceedings, deposit and funding outflows, rating downgrades, geopolitical events, climate-related risks and model/valuation uncertainty. The auditor identified Level 3 fair-value valuations as a critical audit matter. The audit opinion was unqualified, and management and the auditor concluded internal control over financial reporting was effective.
- Edward Pick became CEO in January 2024, succeeding James Gorman, who became Executive Chairman.
Most important facts for investors to verify
- How much of Wealth Management’s reported growth and margins reflects DCP mark-to-market timing, and whether underlying revenue and expense trends persist.
- Commercial real estate credit quality, particularly office exposure, nonaccruals, charge-offs, collateral values and allowance adequacy.
- Whether deposit mix and pricing, client cash reallocations and higher funding costs support or pressure future net interest revenue.
- The final Basel III capital rules and resulting RWA, capital-buffer, dividend and repurchase implications; the 40% RWA estimate is preliminary.
- Further developments, potential civil liability and financial impact from the block-trading settlement and other disclosed legal or regulatory matters.
- Cash-flow movements, liquidity resources and funding maturities in the context of the Firm’s trading balance sheet; also confirm the definitions and periods for regulatory liquidity metrics.
- Progress toward the 20% ROTCE goal, recognizing the filing provides no specific near-term earnings guidance and the goal assumes normal markets.