Morgan Stanley — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Morgan Stanley is a global financial services firm with Institutional Securities, Wealth Management and Investment Management segments. Results include E*TRADE from its October 2020 acquisition and Eaton Vance from March 1, 2021; consequently, comparisons with Q1 2020 are affected by acquisitions. Interim financial information was reviewed by Deloitte & Touche, not audited.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net revenues | $15.719 billion | $9.779 billion; up 61% |
| Net income applicable to Morgan Stanley | $4.120 billion | $1.698 billion; up 143% |
| Earnings applicable to common shareholders | $3.982 billion | $1.590 billion |
| Diluted EPS | $2.19 | $1.01 |
| Pre-tax income / margin | $5.344 billion / 34.0% | $2.146 billion / 21.9% |
| Net interest income | $2.028 billion | $1.356 billion |
| Non-interest expenses | $10.473 billion | $7.226 billion; up 45% |
| Credit-loss provision | $98 million net release | $407 million provision |
| Expense efficiency ratio | 66.6%; adjusted 66.1% | 73.9% |
| ROE / ROTCE | 16.9% / 21.1%; adjusted ROTCE 21.4% | 8.5% / 9.7% |
Adjusted figures are non-GAAP measures. The $75 million of integration-related expenses (net of tax benefit, $58 million) were excluded from adjusted earnings; adjusted diluted EPS was $2.22.
- Institutional Securities: Revenue of $8.577 billion, up 66%; net income attributable to Morgan Stanley was $2.601 billion. Growth reflected stronger investment banking, equity and fixed-income activity, partly offset by a major single-client credit event.
- Wealth Management: Revenue of $5.959 billion, up 47%; net income was $1.242 billion and pre-tax margin 26.9% (27.9% adjusted). Net new assets were $104.9 billion and fee-based asset flows $37.2 billion. Total client assets reached $4.231 trillion.
- Investment Management: Revenue of $1.314 billion, up 90%; net income was $275 million. AUM was $1.419 trillion at quarter-end, including $589 billion attributed to Eaton Vance.
Cash flow: Operating activities provided $26.879 billion (versus $23.836 billion); investing activities used $22.561 billion (versus $21.108 billion); financing activities provided $9.564 billion (versus $47.954 billion). Cash and cash equivalents increased $12.464 billion to $118.118 billion. These cash-flow movements include substantial changes in trading and financing balances.
Balance sheet and liquidity at March 31: Total assets were $1.159 trillion; deposits $323.138 billion; borrowings $215.826 billion; and loans, as presented in selected balance-sheet metrics, $159.123 billion. Liquidity resources were $353.304 billion, including $344.270 billion of HQLA. Average LCR was 125%, and management reported compliance with the 100% minimum. Common shareholders’ equity was $98.509 billion; tangible common equity was $72.828 billion.
Capital: Standardized CET1 ratio was 16.7%, down from 17.4% at year-end 2020; advanced CET1 was 17.4%, down from 17.7%. SLR was 6.7%, versus 7.4%, and Tier 1 leverage was 7.5%, versus 8.4%. The reported SLR reflected a temporary Federal Reserve exclusion that expired March 31, 2021; the exclusion’s removal applies beginning in Q2.
Material changes and unusual items
- Institutional Securities recorded a $644 million loss tied to a single client credit event, followed by $267 million of related trading losses through quarter-end. Management said the event drove a one-day peak in trading Management VaR of $175 million; there were four trading loss days and none exceeded Firm VaR.
- Q1 revenue and earnings benefited from robust client activity and market conditions, including higher equity underwriting, M&A and credit-product revenues, as well as gains on certain employee deferred-compensation investments. The prior-year quarter included pandemic-related market disruption and a $407 million credit provision; the current quarter’s $98 million release reflected improved macroeconomic expectations and corporate-loan paydowns.
- Eaton Vance was acquired for approximately $8.7 billion in total consideration: about $5.3 billion in Morgan Stanley shares and $3.4 billion in cash. Its results were included for March only. The purchase price allocation was preliminary and included $5.270 billion of goodwill and $3.956 billion of intangible assets.
- Common-stock repurchases were $2.135 billion. The Board had authorized up to $10 billion of repurchases for 2021, subject to regulatory limits. A $0.35-per-share common dividend was announced for payment May 14, 2021.
- Management established a two-year ROTCE target of 14%–16%, excluding integration expenses, in a normal market environment. The filing cautions that COVID-19 effects and other factors may prevent achievement within the original timeframe.
Outlook, risks and contingencies
- Management stated that COVID-19’s future economic and operating effects remain uncertain; approximately 90% of employees were working from home at March 31. The filing provides no specific quarterly revenue or earnings guidance.
- Risk exposures include market, credit, liquidity, operational, model, legal and compliance risks. Loans and lending commitments grew by about $15 billion from year-end, primarily from event-driven Institutional Securities exposures and Wealth Management lending. COVID-sensitive sectors under heightened monitoring represented less than 10% of Institutional Securities lending exposure; about 90% of those exposures were investment grade and/or collateralized.
- Approved payment deferrals still outstanding and not classified as troubled debt restructurings were approximately $300 million in Institutional Securities and $200 million in Wealth Management. The firm also reported approximately $3.2 billion of loans that had exited deferral arrangements; the substantial majority were current at quarter-end.
- Two mortgage-related lawsuits were disclosed with potential losses of up to approximately $277 million each, plus interest, fees and costs; plaintiffs may seek to expand the loans at issue. The Dutch tax dispute concerns approximately €124 million (about $145 million) of withholding tax credits plus interest; an Advocate General issued an adverse advisory opinion, and the firm and tax authority responded.
- The firm remained party to significant LIBOR-linked contracts extending beyond 2021, including U.S. dollar LIBOR contracts beyond June 30, 2023, and was continuing its transition plan. Management also noted that rating downgrades could trigger additional collateral or termination payments.
Important facts for investors to verify
- How the single-client credit event and related trading losses affected Institutional Securities revenue, risk limits and subsequent-period exposure.
- How much reported growth reflects underlying business performance versus E*TRADE and Eaton Vance acquisitions, and the subsequent integration costs and benefits.
- Whether the 14%–16% ROTCE target remains achievable, given its normal-market assumption and management’s COVID-19 caveat.
- Capital and leverage ratios after the temporary SLR treatment ended, and the effects of regulatory requirements on planned repurchases and dividends.
- Developments in the disclosed mortgage litigation and Dutch tax matter, as well as credit quality, loan modifications and credit-loss allowances.