Morgan Stanley Q1 2013 Form 10-Q Summary
Business context and reporting period
Morgan Stanley is a global financial services firm with Institutional Securities, Global Wealth Management Group and Asset Management segments. This unaudited quarterly report covers the three months ended March 31, 2013, compared primarily with the three months ended March 31, 2012. The independent accountant performed an interim review, not an audit, and reported no material modifications needed to conform the statements to U.S. GAAP.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 or prior date |
|---|---|---|
| Net revenues | $8.158 billion | $6.924 billion |
| Income from continuing operations before tax | $1.582 billion | $202 million |
| Net income applicable to Morgan Stanley | $962 million | Loss of $94 million |
| Earnings applicable to common shareholders | $936 million | Loss of $119 million |
| Diluted EPS | $0.48; $0.49 from continuing operations | Loss of $0.06; loss of $0.05 from continuing operations |
| Non-interest expenses | $6.576 billion | $6.722 billion |
| Operating cash flow | $4.600 billion | $8.000 billion |
| Cash and cash equivalents, quarter-end | $42.902 billion | $46.904 billion at 2012 year-end |
| Total assets / total equity, quarter-end | $801.383 billion / $66.072 billion | $780.960 billion / $65.428 billion at 2012 year-end |
| Long-term borrowings, quarter-end | $165.142 billion | $169.571 billion at 2012 year-end |
| Global Liquidity Reserve | $186 billion | $182 billion at 2012 year-end |
Reported pre-tax margin was about 19% of net revenues, versus about 3% in Q1 2012. The effective tax rate was 21.0%; excluding $142 million of discrete tax benefits, management said the annualized rate for the quarter would have been 30.0%.
Changes versus the prior comparable quarter
- Reported net revenues rose about 18%, but revenue excluding the negative debt valuation adjustment (DVA) was $8.475 billion versus $8.902 billion, down about 5%. DVA reduced revenue by $317 million in Q1 2013 versus $1.978 billion in Q1 2012; this smaller DVA drag materially improved the reported comparison.
- Institutional Securities net revenues were $4.089 billion versus $3.135 billion; continuing pre-tax income was $798 million versus a $329 million loss. Investment banking rose to $945 million, while sales and trading excluding DVA weakened in equity and fixed income/commodities.
- Global Wealth Management net revenues increased to $3.470 billion from $3.291 billion and pre-tax income to $597 million from $403 million. Fee-based client assets were $621 billion, 35% of client assets; quarterly fee-based flows were $15.3 billion versus $10.2 billion.
- Asset Management net revenues rose to $645 million from $533 million and pre-tax income to $187 million from $128 million. Assets under management or supervision increased to $341 billion from $304 billion, though Q1 net flows were negative $3 billion.
- Compensation and benefits fell 5% company-wide to $4.216 billion; non-compensation expenses rose 3% to $2.360 billion. Severance costs were $132 million, compared with $138 million.
- Cash decreased by $4.002 billion during the quarter. Financing cash outflow included $12.018 billion of long-term debt repayments, partly offset by $10.046 billion of issuance. Investing cash flow was negative $3.244 billion.
Outlook, risks and unusual items
- The filing provides no company earnings or revenue guidance. Management described modest improvement in global markets, but cited ongoing European sovereign debt concerns, U.S. fiscal and debt-ceiling uncertainty, and slower emerging-market growth.
- The company reported Basel I capital ratios, including the Basel 2.5 market-risk changes effective January 1, 2013: Tier 1 common 11.5%, Tier 1 13.9%, total capital 14.5%, and Tier 1 leverage 7.0%. Management’s preliminary estimated Basel III Tier 1 common ratio was 9.7%; it is subject to rulemaking, modeling approvals and other assumptions.
- Morgan Stanley held a 65% interest in its Wealth Management joint venture and is committed, subject to regulatory approvals, to buy the remaining 35% for $4.725 billion by June 1, 2015. The transaction includes an expected $57 billion deposit transfer at no premium.
- Legal matters include significant residential-mortgage and securities litigation. The filing describes potential losses in certain cases but notes that loss estimates are uncertain; for example, FHFA claims involve certificates with an approximately $2.87 billion unpaid balance. Subsequent to the April 18 earnings release, legal accruals were increased by $32 million for Q1, reducing diluted EPS by $0.01.
- Potential contingent liquidity demands include rating-downgrade collateral calls. At March 31, the filing estimates potential calls under specified Moody’s/S&P downgrade scenarios of $397 million at Baa1/BBB+ and $2.257 billion at Baa2/BBB in one disclosure; a broader table reports higher amounts under additional agreement categories and more severe scenarios.
- Commitments totaled $141.424 billion, including $63.397 billion of forward-starting reverse repos and securities borrowing agreements; reported commitments may expire unused. Other risks include large derivatives and credit-protection positions, Level 3 valuation uncertainty, regulatory change, and exposure to market, funding, credit and legal conditions.
- Discontinued operations recorded a $19 million net loss applicable to Morgan Stanley in Q1 2013. The quarter also included $125 million of income from the company’s 40% stake in the Japanese securities joint venture and $142 million of discrete tax benefits.
Investor facts to verify
- Reconcile GAAP results with the non-GAAP, DVA-excluded measures; assess whether the underlying revenue and EPS trends support reported growth.
- Review segment drivers, particularly weaker sales and trading excluding DVA, Wealth Management fee-based flows, and Asset Management outflows.
- Assess liquidity quality and availability, including the $186 billion liquidity reserve, its legal-entity location, and the quarter’s cash decline.
- Track capital under final Basel III rules and the effect of risk-weighted-asset changes; current and prior-period capital ratios are not fully comparable because Basel 2.5 was implemented in 2013.
- Monitor litigation developments, legal accruals and potential rating-related collateral calls, and verify the terms and regulatory status of the planned Wealth Management JV purchase.