Morgan Stanley — 2014 Form 10-K Summary
Business context and reporting period
Morgan Stanley is a global financial services firm reporting for the year ended December 31, 2014, with comparisons to 2013. Its three segments are Institutional Securities, Wealth Management, and Investment Management. The filing was signed March 2, 2015. Although the request references 2014 Q4, this is an annual report; fourth-quarter figures are noted where relevant.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Net revenues | $34.275 billion | $32.493 billion |
| Income before tax, continuing operations | $3.591 billion | $4.558 billion |
| Net income | $3.667 billion | $3.613 billion |
| Net income applicable to Morgan Stanley | $3.467 billion | $2.932 billion |
| Earnings applicable to common shareholders | $3.152 billion | $2.655 billion |
| Diluted EPS | $1.60 | $1.36 |
| Operating cash flow | $1.131 billion | $35.553 billion |
| Total assets | $801.510 billion | $832.702 billion |
| Deposits | $133.544 billion | $112.379 billion |
| Long-term borrowings | $152.772 billion | $153.575 billion |
| Global Liquidity Reserve | $193 billion | $202 billion |
| Common Equity Tier 1 ratio | 12.6% | Not directly comparable; different capital framework |
Net revenues rose 5.5%, but pre-tax continuing income fell about 21% as expenses increased. Total non-interest expenses were $30.684 billion, up 9.8%; compensation and benefits rose 9.5% to $17.824 billion, and other expenses increased 10.3% to $12.860 billion. The reported consolidated pre-tax margin was about 10.5%, versus 14.0% in 2013. Net interest income improved to $1.735 billion from $778 million.
Operating cash flow declined sharply year over year, reflecting large balance-sheet and financing-flow movements typical of the business; investing cash flow was negative $35.324 billion and financing cash flow positive $23.143 billion. Cash and cash equivalents ended the year at $46.984 billion, down from $59.883 billion. Management said liquidity stress tests showed sufficient liquidity for current and contingent obligations. The $193 billion Global Liquidity Reserve comprised cash and unencumbered liquid securities and was held across bank and non-bank entities.
Material changes versus 2013
- Institutional Securities revenue increased to $16.871 billion from $15.519 billion, but the segment recorded a $58 million pre-tax loss versus $946 million income. Investment banking revenue rose 19%; fixed-income and commodities sales-and-trading revenue, excluding DVA, fell 10% to $3.795 billion and included a $466 million FVA charge.
- Wealth Management revenue increased to $14.888 billion from $14.143 billion; pre-tax income rose to $2.985 billion from $2.604 billion. Fee-based client assets grew to $785 billion, 39% of client assets, and fee-based asset flows increased to $58.8 billion from $51.9 billion.
- Investment Management revenue fell to $2.712 billion from $3.059 billion, and pre-tax income declined to $664 million from $1.008 billion. The reduction reflected lower investment gains and no repeat of prior-year carried interest; assets under management or supervision increased to $403 billion from $377 billion.
- Loans increased to $66.577 billion from $42.874 billion, driven by growth in corporate, real-estate, and Wealth Management lending. Deposits grew 18.8%, partly as customer deposits continued transferring from Citi to Morgan Stanley-affiliated banks.
- Reported net income attributable to Morgan Stanley rose, but was materially affected by tax benefits and DVA. Excluding DVA, net revenues were $33.624 billion versus $33.174 billion, while diluted continuing-operations EPS was $1.39 versus $1.61.
Outlook, commentary, risks, contingencies, and unusual items
- Legal reserve and Q4 loss: After the January 20, 2015 earnings release, the company increased 2014 legal reserves by $2.798 billion for a DOJ-related agreement in principle and other legacy mortgage matters. This reduced 2014 continuing income by $2.670 billion and diluted continuing-operations EPS by $1.35. The agreement in principle contemplated a $2.6 billion payment; final settlement documentation was not assured. The adjustment contributed to Q4 net revenues of $7.764 billion, a pre-tax loss of $2.931 billion, and a net loss applicable to Morgan Stanley of $1.630 billion, or diluted loss per share of $0.91.
- Taxes: The reported continuing-operations tax benefit was $90 million, including $2.226 billion of discrete net tax benefits, among them a $1.390 billion benefit from a legal-entity restructuring. The company said the effective tax rate would have been 59.5% excluding discrete benefits. Non-deductible litigation and regulatory costs included approximately $900 million of tax provision.
- Compensation and valuation: Changes to incentive deferrals and acceleration of certain prior-year deferred cash awards increased 2014 compensation expense by $1.137 billion. In Q4, adoption of FVA for certain derivatives resulted in a $468 million charge.
- Management targets: The company aims for at least 10% return on average common equity excluding DVA, subject to successful execution of its strategy. Wealth Management targeted a 22%–25% pre-tax margin by year-end 2015. The company seeks fixed-income and commodities ROE above 10% over time. These are forward-looking goals, not assurances.
- Capital and regulation: The company estimated a 4.7% supplementary leverage ratio at year-end 2014 and expected to exceed 5% in 2015 through capital accretion and balance-sheet actions. Basel III, a proposed G-SIB surcharge, liquidity rules, the Volcker Rule, derivatives regulation, and resolution-plan requirements may constrain capital returns or raise costs. Regulators identified shortcomings in the 2013 resolution plan that were to be addressed in a submission due July 1, 2015.
- Principal risks and contingencies: Market and credit volatility, funding access and rating downgrades, legal and regulatory proceedings, mortgage representations and warranties, commodities and environmental exposures, cybersecurity and operational disruptions, and evolving regulation could materially affect results. The company reported $3.411 billion of legal expense in 2014, compared with $1.952 billion in 2013, and expected legal expenses to remain elevated and volatile.
- Other notable developments: The proposed sale of the global oil merchanting business to Rosneft terminated after the purchase agreement expired. The company sold its TransMontaigne stake and CanTerm. The audit firm issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Review the final terms, timing, and cash consequences of the $2.6 billion DOJ-related settlement, and whether additional legacy mortgage reserves or claims arise.
- Reconcile reported 2014 earnings with the $2.798 billion reserve adjustment, $2.226 billion discrete tax benefit, $651 million positive DVA impact, and $468 million FVA charge; assess recurring earnings apart from these items.
- Assess why operating cash flow fell to $1.131 billion and distinguish trading-related balance-sheet movements from underlying cash generation; confirm liquidity reserve availability and location within legal entities.
- Monitor loan growth and credit quality, including securities-based, residential real-estate, wholesale real-estate, and energy exposures, as well as unfunded lending commitments and collateral protections.
- Check capital and leverage ratios under evolving regulatory calculations, the 2015 CCAR outcome, supervisory requirements, and the effect on dividends and repurchases.
- Track Wealth Management margin progress, fee-based asset flows, and the sustainability of lending and deposit growth; compare the 10% ROE goal with results excluding DVA and exceptional tax/legal items.