Morgan Stanley 2015 Form 10-K Summary
Business context and reporting period
Morgan Stanley is a global financial services firm with three segments: Institutional Securities, Wealth Management and Investment Management. This annual report covers the year ended December 31, 2015; fourth-quarter figures are noted where useful. The company had 56,218 employees at year-end.
Financial performance and position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net revenues | $35.2 billion | $34.3 billion | +3% |
| Income before tax | $8.5 billion | $3.6 billion | More than doubled |
| Net income applicable to Morgan Stanley | $6.1 billion | $3.5 billion | +77% |
| Diluted EPS | $2.90 | $1.60 | +81% |
| Net cash from operating activities | $3.7 billion | $1.1 billion | Increased |
| Total assets | $787.5 billion | $801.5 billion | −2% |
| Long-term borrowings | $153.8 billion | $152.8 billion | +1% |
| Deposits | $156.0 billion | $133.5 billion | +17% |
Net interest income rose to $3.1 billion from $1.7 billion as interest expense declined. Non-interest expenses fell 13% to $26.7 billion, including compensation and benefits of $16.0 billion (down 10%) and other expenses of $10.6 billion (down 17%). The consolidated pre-tax margin was 24%, versus 10% in 2014; the expense-efficiency ratio excluding debt valuation adjustment (DVA) was 77%. Return on average common equity was 8.5% (7.8% excluding DVA).
Cash and cash equivalents were $54.1 billion at year-end. The Global Liquidity Reserve was $203.3 billion, up from $193.2 billion. Cash flows were $3.7 billion from operations, negative $20.0 billion from investing and positive $24.4 billion from financing. These flows reflect balance-sheet and funding activity, not just earnings.
Transitional Basel III capital ratios were 15.5% Common Equity Tier 1, 17.4% Tier 1, 20.7% total capital and 8.3% Tier 1 leverage. The transitional supplementary leverage ratio was 6.1%; management estimated a fully phased-in ratio of approximately 5.8%.
Segments and comparison with prior periods
- Institutional Securities: Net revenues rose 6% to $18.0 billion. Sales and trading net revenues increased 16% to $12.5 billion, while investment banking revenues declined 4% to $5.0 billion, mainly due to lower underwriting. Segment income applicable to Morgan Stanley was $3.7 billion, compared with a loss of $96 million in 2014, when legacy legal costs were unusually high.
- Wealth Management: Net revenues rose 1% to $15.1 billion. Net interest income increased 26% to $3.0 billion, supporting growth as transactional revenues declined 14%. Segment income fell 35% to $2.1 billion, partly reflecting a higher tax provision and the absence of exceptional prior-year tax benefits. Client assets were $1.985 trillion, down from $2.025 trillion; fee-based client assets were $795 billion, up from $785 billion.
- Investment Management: Net revenues fell 15% to $2.3 billion and segment income applicable to Morgan Stanley declined 7% to $346 million. The company cited reversal of previously accrued carried interest, principal-investment markdowns and lower revenues attributable to noncontrolling interests. Assets under management or supervision increased slightly to $406 billion.
For fourth-quarter 2015, net revenues were $7.7 billion, pre-tax income was $1.4 billion, and net income applicable to Morgan Stanley was $908 million. Diluted EPS was $0.39. Fourth-quarter results included approximately $155 million of restructuring-related severance costs.
Outlook, commentary, risks and unusual items
- Management targeted 9%–11% return on average common equity excluding DVA by 2017, subject to execution and market conditions. Targets included a 23%–25% Wealth Management pre-tax margin and a 74% expense-efficiency ratio excluding DVA under a flat-revenue assumption and excluding outsized litigation expense or penalties. These are goals, not guaranteed guidance.
- Reported 2015 net income included $564 million of net discrete tax benefits; 2014 included $2.226 billion. Excluding DVA and these tax benefits, diluted EPS was $2.41 in 2015 versus $0.26 in 2014. DVA added $618 million to 2015 net revenues. Prior-year comparisons were also affected by $3.083 billion of litigation costs, approximately $1.137 billion of compensation actions and a $468 million funding valuation adjustment implementation charge in 2014.
- Legal expenses were $563 million in 2015, down from $3.364 billion in 2014. On February 10, 2016, the company finalized a $2.6 billion U.S. Department of Justice settlement and reached agreements with the New York and Illinois Attorneys General; the company stated the amounts had been accrued previously. Legal outcomes remain uncertain, and some claims may materially affect results or cash flows in a particular period.
- The company sold its global oil merchanting unit on November 1, 2015, recognizing a loss of approximately $71 million. Management described 2015 global growth as slowing in the second half amid weaker emerging markets, lower energy prices and decelerating Chinese growth.
- Key risks include volatile markets and valuation uncertainty; credit exposure, including energy-sector lending; liquidity, funding costs and credit-rating downgrades; extensive and changing capital, liquidity, derivatives and resolution rules; litigation and regulatory investigations; operational and cybersecurity incidents; and competitive pricing pressure.
Important facts for investors to verify
- Reconcile GAAP earnings with results excluding DVA, discrete tax benefits and exceptional legal or compensation items; assess how repeatable 2015 earnings are.
- Review the final settlement terms and remaining legal exposures, including mortgage-related claims and the disclosed $475 million Wealth Management arbitration claim.
- Assess energy-sector credit quality and provisions: Institutional Securities energy loans and commitments were $15.9 billion, and the filing cites a deteriorating energy environment among drivers of higher credit allowances.
- Verify capital and liquidity headroom against fully phased-in requirements, planned distributions and $22.4 billion of long-term debt maturities due within 12 months of year-end.
- Track Wealth Management asset flows, lending growth and margin progress, and Investment Management flows, performance fees and investment marks against management’s stated targets.