Morgan Stanley 2019 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 Form 10-K covers the year ended December 31, 2019; financial comparisons are primarily with 2018. The filing also reports unaudited fourth-quarter results.
Financial performance and condition
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Net revenues | $41.419 billion | $40.107 billion | Up 3% |
| Income before taxes | $11.301 billion | $11.237 billion | Up 1% |
| Net income applicable to Morgan Stanley | $9.042 billion | $8.748 billion | Up 3% |
| Diluted EPS | $5.19 | $4.73 | Up 10% |
| Net interest income | $4.694 billion | $3.806 billion | Up 23% |
| Total non-interest expenses | $30.118 billion | $28.870 billion | Up 4% |
| Expense efficiency ratio | 72.7% | 72.0% | Higher ratio indicates expenses grew faster than revenues |
| Pre-tax margin | 27.3% | 28.0% | Down 0.7 percentage point |
| ROE / ROTCE | 11.7% / 13.4% | 11.8% / 13.5% | Slightly lower year over year |
The 2019 effective tax rate was 18.3%, versus 20.9% in 2018. Results included intermittent net discrete tax benefits of $348 million in 2019 and $203 million in 2018. Excluding these intermittent items, adjusted net income was $8.694 billion and adjusted diluted EPS was $4.98 in 2019, versus $8.545 billion and $4.61 in 2018; these are non-GAAP measures.
Segment results: Institutional Securities generated $20.386 billion in net revenues and $4.599 billion in net income attributable to Morgan Stanley; Wealth Management generated $17.737 billion and $3.728 billion; Investment Management generated $3.763 billion and $719 million. Institutional Securities revenue was nearly flat, Wealth Management revenue rose 3%, and Investment Management revenue rose 37%.
Fourth-quarter 2019 net revenues were $10.857 billion, income before taxes $2.733 billion, net income attributable to Morgan Stanley $2.239 billion and diluted EPS $1.30. The quarter included $172 million of severance-related costs and a $158 million intermittent tax benefit.
Cash from operating activities was $40.773 billion in 2019, compared with $7.305 billion in 2018. The filing attributes cash flows to substantial movements in trading assets and liabilities, collateralized financing and customer balances; this figure should not be read as recurring earnings or free cash flow. Investing activities used $33.561 billion and financing activities used $11.966 billion. Cash and cash equivalents ended the year at $82.171 billion, down from $87.196 billion.
At year-end, total assets were $895.429 billion, deposits $190.356 billion, borrowings $192.627 billion, total liabilities $812.732 billion, and Morgan Stanley shareholders’ equity $81.549 billion. The Global Liquidity Reserve was $217.457 billion, down from $249.735 billion. The fourth-quarter average liquidity coverage ratio was 134%, above the 100% minimum. Regulatory capital ratios were CET1 16.4%, Tier 1 18.6%, total capital 21.0%, Tier 1 leverage 8.3% and SLR 6.4%; the Firm reported compliance with applicable capital and TLAC requirements.
Material changes versus 2018
- Net interest income increased $888 million, while non-interest revenues increased $424 million. Higher interest income was partly offset by higher interest expense.
- Institutional Securities sales and trading was mixed: equity sales and trading revenue declined 10%, while fixed-income revenue increased 11%. Investment banking revenue declined 6%, mainly on lower advisory activity.
- Wealth Management client assets grew to $2.7 trillion from $2.3 trillion; fee-based client assets rose to $1.267 trillion from $1.046 trillion. Fee-based asset flows were $64.9 billion, compared with $65.9 billion.
- Investment Management benefited from higher investment gains and carried interest, including gains tied to an Asia private-equity investment’s IPO. The associated investment performance and carried interest may be volatile or subject to reversal.
- Loans held for investment, net of allowance, increased to $118.060 billion from $99.815 billion. Total loans and lending commitments increased to $262.031 billion from $232.232 billion; the allowance for loans and commitments rose to $590 million from $441 million.
- Common shares outstanding declined to 1.594 billion from 1.700 billion. The Firm repurchased $5.360 billion of common stock and declared $1.30 per share in dividends, up from $1.10.
Outlook, risks and unusual items
- In January 2020, management set a ROTCE target of 13%–15% over the next two years. The target is subject to market, regulatory, expense, legal and capital risks; 2019 adjusted ROTCE, excluding intermittent tax items, was 12.9%.
- On February 20, 2020, Morgan Stanley agreed to acquire E*TRADE in an all-stock transaction then valued at approximately $13 billion. Closing was expected in fourth-quarter 2020, subject to shareholder and regulatory approvals.
- Principal stated risks include market and credit volatility, concentrated exposures, funding and liquidity access, regulatory and capital requirements, litigation, cybersecurity and operational disruption, competition, and the transition from LIBOR and other benchmark rates.
- The filing identifies material legal matters with reasonably possible losses, including claims related to mortgage representations and warranties and the CDIB structured-credit litigation. For several proceedings, estimated potential losses were up to approximately $240 million or $277 million, plus interest and costs; some claims could expand. The Dutch tax-credit dispute involved approximately €124 million plus interest. These are potential exposures, not recorded outcomes.
- The Firm reported $221 million of legal expenses in 2019. It stated that litigation outcomes generally were not expected to materially affect its overall financial condition, but could materially affect results or cash flows in an individual period.
- Adoption of the CECL credit-loss standard on January 1, 2020 increased the allowance by $131 million and reduced retained earnings by $100 million, net of tax. The 2019 adoption of lease accounting increased reported assets and liabilities by approximately $4 billion at transition.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The identified critical audit matter was valuation of Level 3 financial instruments, which involves significant judgment and unobservable inputs.
Important facts for investors to verify
- Whether the 13%–15% ROTCE target is achieved, and how much depends on recurring operating performance versus tax items, investment gains or other volatile revenues.
- The durability of Wealth Management asset flows, fee rates and net interest income, as well as the performance and redemption risk in Investment Management.
- Credit quality and reserve adequacy as lending grows, particularly corporate and event-driven commitments, commercial real estate and securities-based lending.
- Liquidity reserve composition and accessibility across legal entities, and the sensitivity of funding costs and collateral needs to rating changes.
- Updates on significant litigation, tax disputes and mortgage representations-and-warranties claims, including changes in estimated exposure or reserves.
- Regulatory approvals, consideration, integration costs and expected benefits of the E*TRADE acquisition; the transaction was announced after the reporting date.
- Whether capital distributions, including the announced buyback authorization and dividends, remain within regulatory constraints.