Morgan Stanley — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Morgan Stanley is a global financial services firm with Institutional Securities, Wealth Management and Investment Management businesses. The interim financial statements were reviewed by Deloitte & Touche, not audited.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenues | $13.13bn | $14.76bn | $27.93bn | $30.48bn |
| Net income applicable to Morgan Stanley | $2.50bn | $3.51bn | $6.16bn | $7.63bn |
| Earnings applicable to common shareholders | $2.39bn | $3.41bn | $5.93bn | $7.39bn |
| Diluted EPS | $1.39 | $1.85 | $3.41 | $4.04 |
| Net interest income | $2.28bn | $1.87bn | $4.50bn | $3.89bn |
| Non-interest expenses | $9.71bn | $10.12bn | $19.87bn | $20.59bn |
- Q2 expense efficiency ratio was 74% (73% adjusted for integration costs); ROTCE was 13.8% (14.3% adjusted). Q2 pre-tax margin was 25%.
- Q2 segment net revenues: Institutional Securities $6.12bn, Wealth Management $5.74bn, and Investment Management $1.41bn. Compared with Q2 2021, revenue declined 14%, 6%, and 17%, respectively.
- Institutional Securities was supported by Fixed Income revenue growth of 49% and Equity growth of 5%, while investment banking revenue fell 55%, reflecting sharply lower underwriting activity. Wealth Management benefited from 39% growth in net interest revenue, partly offset by a 75% decline in transactional revenue. Investment Management was affected by lower performance-based income and market declines.
- Q2 provision for credit losses was $101m, versus $73m a year earlier. First-half provision was $158m, compared with a $25m net release in the prior-year period.
- Six-month cash flows: operating activities provided $15.15bn (versus $31.49bn); investing activities used $8.37bn (versus $19.44bn); financing activities provided $1.31bn (versus $10.05bn). Cash and cash equivalents were $131.29bn at June 30, up from $127.73bn at December 31, 2021.
- At June 30, total assets were $1.174tn, loans $214.6bn, deposits $347.1bn, borrowings $226.2bn, and common shareholders’ equity $93.8bn. At December 31, 2021, these were $1.188tn, $200.8bn, $347.6bn, $233.1bn and $97.7bn, respectively.
- Average liquidity resources in Q2 were $306.4bn, compared with $351.9bn in Q2 2021. The liquidity coverage ratio was 128%; the Firm reported compliance with minimum LCR and NSFR requirements.
- Standardized CET1 capital ratio was 15.2%, down from 16.0% at year-end 2021; advanced CET1 was 15.5%, down from 17.4%. Tier 1 leverage was 6.6% and SLR 5.4%.
Material changes versus comparable periods
- Q2 revenue fell 11% year over year and common earnings fell 30%; diluted EPS declined 25%. For the first half, revenue decreased 8%, common earnings 20%, and diluted EPS 16%.
- Lower underwriting and Wealth Management transactional activity, as well as reduced Investment Management performance income, weighed on revenue. Higher rates and bank lending growth lifted net interest income.
- Compensation expense declined, but non-compensation expense increased 13% in Q2, including $200m of expense relating to a regulatory record-keeping matter, alongside higher legal, business-volume and technology costs.
- Assets under management or supervision were $1.351tn at June 30, 2022, down from $1.565tn at year-end, primarily reflecting market declines. Wealth Management client assets were $4.246tn, down from $4.989tn. Wealth Management nevertheless added $52.9bn of net new assets in Q2 and $194.9bn in the first half.
- Available-for-sale securities had $4.24bn of gross unrealized losses at June 30, versus $639m at year-end. The Firm said it expected to recover amortized cost and did not intend, and was not likely to be required, to sell the securities before recovery.
Outlook, commentary, risks and unusual items
- Management described a challenging environment of continued inflation, rising interest rates and volatile global markets. The Firm did not provide specific near-term earnings guidance in the supplied filing text.
- The Firm’s stated ROTCE goal is above 20%, excluding integration-related expenses, in a normal market environment; management cautioned that market and economic conditions could materially affect achievement.
- The Firm reached agreements in principle with the SEC for $125m and the CFTC for $75m to resolve investigations into use of unapproved messaging platforms and related record-keeping. The filing identifies $200m of Q2 expense associated with the matter.
- Other legal and regulatory matters include a Dutch tax dispute concerning approximately €124m (about $130m) of withholding tax credits, plus interest; the Firm also disclosed ongoing litigation and investigations. The timing and possible financial effects of some matters remain uncertain.
- The Firm said direct Russia and Ukraine exposure remained limited and that it was not entering new onshore Russian business. It continued to monitor effects of the war on economies and markets.
- Credit exposure increased with lending growth; management cited portfolio growth and a weaker macroeconomic outlook as drivers of the higher credit-loss provision. Market, credit, liquidity, legal/compliance, operational and model risks remain material. A credit-rating downgrade could trigger additional collateral or termination payments.
- Following Federal Reserve stress-test results, the Firm announced a quarterly common dividend increase to $0.775 per share, beginning with the dividend announced July 14, 2022, and a new authorization to repurchase up to $20bn of common stock beginning in Q3 2022. First-half repurchases totaled $5.61bn.
Important facts for investors to verify
- Whether reduced investment banking activity and lower market levels persist, and how they affect revenue, client assets and fee income.
- Progress toward the above-20% adjusted ROTCE goal, including the effects of integration costs and the market environment.
- Final resolution, total cost and any additional consequences of the record-keeping investigations and other legal or tax contingencies.
- Credit quality, allowance adequacy and growth in loan and lending-commitment exposures as economic conditions change.
- Capital and liquidity trends, including the impact of dividends and repurchases on regulatory capital ratios and the capacity to maintain distributions.
- The scale and duration of unrealized securities losses, and sensitivity of Wealth Management net interest income to changing rates.