Morgan Stanley — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are against December 31, 2019. Morgan Stanley operates Institutional Securities, Wealth Management, and Investment Management. The interim financial statements were reviewed by Deloitte, not audited.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 / prior year-end |
|---|---|---|
| Net revenues | $9.487 billion | $10.286 billion |
| Net income applicable to Morgan Stanley | $1.698 billion | $2.429 billion |
| Diluted EPS | $1.01 | $1.39 |
| Non-interest expenses | $7.341 billion | $7.331 billion |
| Pre-tax margin | 22.6% | 28.7% |
| Expense efficiency ratio | 77.4% | 71.3% |
| Net interest income | $1.356 billion | $1.014 billion |
- Net revenues fell 8%, net income applicable to Morgan Stanley fell 30%, and diluted EPS fell 27% year over year. Consolidated net income, before noncontrolling interests, was $1.780 billion versus $2.468 billion.
- Compensation and benefits expense decreased 8% to $4.283 billion; non-compensation expense increased 14% to $3.058 billion, including higher activity-related costs and credit-loss provisions. A $101 million intermittent tax benefit benefited Q1 2019; the comparable Q1 2020 benefit was $31 million.
- Segment results: Institutional Securities revenue was $4.905 billion (-6%); Wealth Management was $4.037 billion (-8%); Investment Management was $692 million (-14%). Net income applicable to Morgan Stanley was $757 million, $864 million, and $78 million, respectively.
- Cash flow: Operating activities provided $23.836 billion, investing activities used $21.108 billion, and financing activities provided $47.954 billion. Cash and cash equivalents increased $49.338 billion to $131.509 billion. Financing inflows included $44.694 billion from deposits; cash movements reflect substantial balance-sheet activity.
- Balance sheet and funding: Total assets were $947.795 billion, up from $895.429 billion. Loans were $148.697 billion, deposits $235.239 billion (up from $190.356 billion), borrowings $194.856 billion, and total equity $87.228 billion.
- Liquidity and capital: Liquidity resources were $255.134 billion, versus $215.868 billion at year-end; the average daily LCR was 127%, compared with 134% in Q4 2019, and remained above the 100% minimum. Reported CET1 was 15.2%, Tier 1 capital 17.3%, total capital 19.6%, Tier 1 leverage 8.1%, and SLR 6.2%. Regulatory capital comparisons are affected by use of the Advanced Approach at March 31 and the Standardized Approach at December 31.
Material changes and management commentary
- Management attributed the quarter’s deterioration primarily to COVID-19 market and economic disruption, particularly in March. Volatility also increased client trading activity, supporting Institutional Securities trading revenues and Wealth Management commissions.
- The Firm reported $610 million of mark-to-market losses on loans and lending commitments held for sale, $407 million of provisions for credit losses on loans and lending commitments held for investment, and $384 million of losses on fund and business-related investments, net of hedges.
- Wealth Management client assets declined to $2.397 trillion from $2.700 trillion at year-end; fee-based assets fell to $1.134 trillion from $1.267 trillion. Investment Management AUM rose to $584 billion from $552 billion, with inflows partly offset by market declines.
- Allowance for credit losses on loans and lending commitments increased to $921 million at quarter-end. The Firm adopted CECL on January 1, 2020, recording a $131 million increase in the allowance and a $100 million after-tax reduction to retained earnings.
- Management said the Firm remained operationally resilient with more than 90% of employees working remotely and no significant loss of operating capability to date. It also described capital and liquidity as strong. March deposit inflows were $38 billion; the Firm raised more than $5 billion in new long-term debt and accessed the Federal Reserve discount window and Primary Dealer Credit Facility.
Outlook, risks, and unusual items
- The January 2020 target of 13%–15% ROTCE over the next two years was based on a normal market environment. Management said COVID-19 and the global economic crisis make achievement within the original timeframe uncertain; it did not provide revised earnings guidance.
- The Firm suspended its share repurchase program on March 15, 2020. It announced a $0.35-per-share common dividend in April, payable May 15, 2020.
- The proposed all-stock acquisition of E*TRADE, announced February 20, 2020, remained subject to regulatory approvals, shareholder approval, and customary closing conditions. Morgan Stanley continued to expect closing in Q4 2020.
- Credit risks include borrower and counterparty deterioration, loan drawdowns, wider credit spreads, and possible loan forbearance. As of April 30, active near-term payment forbearance requests were approximately $2 billion for commercial real estate loans and $800 million for residential real estate loans; requests do not necessarily imply losses.
- Other exposures include market and liquidity volatility, potential collateral calls following rating downgrades, legal and tax contingencies, and uncertainty around the UK’s post-transition access to EU markets and the LIBOR transition. Fitch moved the Parent Company and MSBNA to Negative outlook in April; Moody’s had placed ratings under review for possible upgrade.
- Notable legal matters include several mortgage-related proceedings for which the Firm disclosed potential losses of up to approximately $240 million to $277 million in certain cases, plus interest, fees, and costs; the possible range could increase in some matters. The filing also describes a Dutch tax dispute involving approximately €124 million plus accrued interest.
Key facts for investors to verify
- Whether subsequent quarters confirm further credit deterioration, allowance increases, and losses on held-for-sale loans and investments.
- How market levels, client activity, asset flows, and interest rates affect segment revenues, client assets, and the stated ROTCE target.
- Whether liquidity resources, deposit funding, capital ratios, and regulatory distribution constraints change materially; note the different capital calculation approaches across comparison dates.
- Progress, approvals, financing and integration implications, and timing of the E*TRADE acquisition.
- Developments in loan forbearance, legal proceedings, tax examinations, and rating-agency outlooks.