Morgan Stanley 2018 Form 10-K Summary
Business context and reporting period
This is Morgan Stanley’s annual report for the year ended December 31, 2018, not a standalone fourth-quarter filing. The firm is a global financial-services company operating through Institutional Securities, Wealth Management and Investment Management. It reported 60,348 employees at year-end.
Financial performance and key metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenues | $40.107 billion | $37.945 billion |
| Income before taxes from continuing operations | $11.237 billion | $10.403 billion |
| Net income applicable to Morgan Stanley | $8.748 billion | $6.111 billion |
| Diluted EPS | $4.73 | $3.07 |
| Total non-interest expenses | $28.870 billion | $27.542 billion |
| Net interest income | $3.806 billion | $3.300 billion |
| ROE / ROTCE | 11.8% / 13.5% | 8.0% / 9.2% |
| Expense efficiency ratio | 72.0% | 72.6% |
Net revenues increased about 6%, while net income applicable to Morgan Stanley rose about 43%. The effective tax rate fell to 20.9% from 40.1%, materially affecting the year-over-year earnings comparison. Excluding intermittent net discrete tax items, non-GAAP net income was $8.545 billion and diluted EPS was $4.61, versus $7.079 billion and $3.60 in 2017.
By segment, net revenues were $20.582 billion for Institutional Securities, $17.242 billion for Wealth Management and $2.746 billion for Investment Management. Segment net income applicable to Morgan Stanley was $4.906 billion, $3.472 billion and $376 million, respectively.
Fourth-quarter 2018 net revenues were $8.548 billion, versus $9.500 billion in fourth-quarter 2017 and $9.872 billion in third-quarter 2018. Fourth-quarter income before taxes was $1.857 billion and net income applicable to Morgan Stanley was $1.531 billion; diluted EPS was $0.80. The comparable 2017 quarter included a large Tax Act-related tax charge, so the year-over-year increase in quarterly net income is not a clean measure of operating improvement.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow was $7.305 billion in 2018, versus cash used of $4.505 billion in 2017. Investing cash flow was negative $22.881 billion; financing cash flow was positive $24.205 billion. Cash and cash equivalents increased $6.801 billion to $87.196 billion.
- Total assets were $853.531 billion, nearly unchanged from $851.733 billion. Loans reported on the balance sheet were $115.579 billion, net of allowance for loan losses where applicable.
- Deposits increased to $187.820 billion from $159.436 billion; borrowings decreased to $189.662 billion from $192.582 billion. Total liabilities were $772.125 billion and total equity was $81.406 billion.
- The Global Liquidity Reserve was $249.735 billion, up from $192.660 billion. The firm reported a 145% average daily LCR for fourth-quarter 2018, up from 135% in the prior quarter, and said it met the required 100% minimum.
- Year-end regulatory capital ratios included CET1 of 16.9%, Tier 1 capital of 19.2%, total capital of 21.8%, Tier 1 leverage of 8.4% and SLR of 6.5%. The firm stated it was in compliance with applicable TLAC requirements as of their January 1, 2019 compliance date.
Material changes, outlook, risks and unusual items
- Institutional Securities revenue rose 9% year over year, supported by investment banking and sales and trading. Wealth Management revenue increased 2%, with higher asset-management revenue partly offset by lower transactional revenue. Investment Management revenue increased 6%, mainly on higher asset-management fees, partly offset by lower investment gains.
- Compensation and benefits rose 3% to $17.632 billion; non-compensation expenses rose 8% to $11.238 billion. The filing attributes expense growth to compensation, business volumes, technology investment and the gross presentation of certain costs following adoption of new revenue-recognition guidance.
- The accounting update adopted January 1, 2018 increased reported revenues and expenses by approximately $350 million each through gross presentation; timing changes added a net $30 million to 2018 revenue. Prior periods were not restated. Adoption also reduced retained earnings by $32 million, net of tax.
- Management’s stated targets are ROE of 10%–13% and ROTCE of 11.5%–14.5%. Excluding intermittent net discrete tax items, 2018 ROE was 11.5% and ROTCE was 13.2%. These targets are forward-looking and depend on markets, business volumes, regulation, expenses and capital levels; the filing gives no specific revenue or earnings guidance.
- Fourth-quarter market conditions included significant interest-rate moves and credit-spread widening, which hurt fixed-income credit trading results and increased basis risk in rates and foreign exchange. Market volatility, liquidity, credit exposures, cybersecurity and operational disruption, regulatory change, litigation, Brexit uncertainty and the planned LIBOR transition are among the disclosed risks.
- Legal proceedings include legacy mortgage-related and other claims. The firm disclosed potential losses in certain matters, including up to approximately $240 million in the CDIB action and up to approximately $240 million in one mortgage representation-and-warranty matter; other claims could expand, and losses may exceed reserves. The filing says some legal losses cannot be reasonably estimated.
- The 2018 effective tax rate reflected the lower U.S. corporate rate enacted under the Tax Act and $203 million of intermittent net discrete tax benefits, primarily related to tax-examination resolutions. In 2017, intermittent net discrete tax provisions were $968 million, primarily related to the Tax Act.
- The auditor 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
- Separate recurring operating performance from the effects of the Tax Act, discrete tax benefits and accounting-presentation changes.
- Review fourth-quarter segment results and the impact of late-2018 market volatility on trading, client activity and investment valuations.
- Assess the composition, availability and legal-entity distribution of the $249.7 billion liquidity reserve, alongside deposit funding and borrowing maturities.
- Monitor corporate and Wealth Management lending growth, the $105.7 billion of lending commitments, credit quality and allowance adequacy.
- Track outcomes and reserve developments for identified litigation and tax matters, as well as Brexit, LIBOR transition and regulatory-capital changes.
- Confirm the conditions governing capital distributions: the firm repurchased $4.860 billion of common stock in 2018 and declared $1.10 per share in dividends for the year.