Market Overview

Morgan Stanley Reports Second Quarter 2018

Share:
  • Net Revenues of $10.6 Billion and Earnings per Diluted Share of
    $1.30
    1
  • Results Reflect Strong Performance in Investment Banking and Sales
    and Trading
  • Wealth Management Continued to Deliver Solid Results with Pre-Tax
    Margin of 26.8%
    2
  • Quarterly Dividend Increased to $0.30 per Share; Share Repurchase
    of up to $4.7 Billion Authorized through 2Q19
    3

Financial Overview4

Morgan Stanley (NYSE:MS) today reported net revenues of $10.6
billion for the second quarter ended June 30, 2018 compared with $9.5
billion a year ago. For the current quarter, net income applicable to
Morgan Stanley was $2.4 billion, or $1.30 per diluted share,5 compared
with net income of $1.8 billion, or $0.87 per diluted share, for the
same period a year ago.5

Compensation expense of $4.6 billion increased from $4.3 billion a year
ago on higher revenues. Non-compensation expenses of $2.9 billion
increased from $2.6 billion a year ago primarily reflecting higher
volume driven expenses. The Firm's expense efficiency ratio for the
current quarter was 71% compared with 72% in the prior year quarter
reflecting continued expense discipline.6

The annualized return on average common equity was 13.0% and the
annualized return on average tangible common equity was 14.9% in the
current quarter.7

James P. Gorman, Chairman and Chief Executive Officer, said,
"We reported robust revenue and earnings growth this quarter with
strength across all businesses and geographies.
The second
quarter performance reflected active markets and healthy client
engagement.
Our strong global franchise positions us well to
continue to grow organically across each of our businesses and to
deliver operating leverage."

Summary of Segment Results
(dollars in millions)

 

Net Revenues1

 

Pre-Tax Income8

    2Q 2018   2Q 2017   2Q 2018   2Q 2017
Institutional Securities   $5,714   $4,762   $1,812   $1,443
Wealth Management   $4,325   $4,151   $1,157   $1,057
Investment Management   $691   $665   $140   $142
Firm   $10,610   $9,503   $3,109   $2,642

Business Highlights

  • Institutional Securities net revenues were $5.7 billion reflecting
    strong performance across our Sales and Trading franchise and
    Investment Banking, with Global Announced and Completed M&A and Global
    IPOs ranked #1.9
  • Wealth Management net revenues were $4.3 billion with a pre-tax margin
    of 26.8%2 reflecting continued improvement in operating
    leverage.
  • Investment Management net revenues were $691 million on higher
    management fees. Assets under management of $474 billion reflect
    continued positive long-term net flows in the quarter.10

Institutional Securities

Institutional Securities reported pre-tax income from continuing
operations of $1.8 billion compared with pre-tax income of $1.4 billion
a year ago. Net revenues for the current quarter were $5.7 billion
compared with $4.8 billion a year ago.1

  • Investment Banking revenues of $1.7 billion increased from $1.4
    billion a year ago:
    • Advisory revenues of $618 million increased from $504 million a
      year ago on higher levels of completed M&A activity across all
      regions.
    • Equity underwriting revenues of $541 million increased from $405
      million in the prior year quarter primarily driven by higher
      revenues on IPOs.
    • Fixed income underwriting revenues of $540 million increased from
      $504 million in the prior year quarter primarily driven by
      non-investment grade loan fees.
  • Sales and Trading net revenues of $3.8 billion increased from $3.2
    billion a year ago:
    • Equity sales and trading net revenues of $2.5 billion increased
      from $2.2 billion a year ago reflecting strong performance across
      all products, particularly in our financing business.
    • Fixed Income sales and trading net revenues of $1.4 billion
      increased from $1.2 billion a year ago primarily driven by higher
      results in commodities and credit products.
    • Other sales and trading net losses of $101 million compared with
      net losses of $208 million in the prior year quarter reflecting
      higher revenues on economic hedges related to the Firm's long-term
      debt and corporate loan hedging activity.
  • Investment revenues of $89 million compared with $37 million a year
    ago driven by higher gains on business related investments.
  • Compensation expense of $2.0 billion increased from $1.7 billion a
    year ago on higher revenues. Non-compensation expenses of $1.9 billion
    for the current quarter increased from $1.7 billion a year ago
    principally on higher volume driven expenses.1

Morgan Stanley's average trading Value-at-Risk (VaR) measured at the 95%
confidence level was $44 million compared with $46 million from the
first quarter of 2018 and $51 million in the second quarter of the prior
year.11

Wealth Management

Wealth Management reported pre-tax income from continuing operations of
$1.2 billion compared with $1.1 billion in the second quarter of last
year. The quarter's pre-tax margin was 26.8%.2 Net revenues
for the current quarter were $4.3 billion compared with $4.2 billion a
year ago.

  • Asset management revenues of $2.5 billion increased from $2.3 billion
    a year ago reflecting higher asset levels and positive flows.
  • Transactional revenues12 of $691 million decreased from
    $766 million a year ago reflecting lower fixed income revenues and
    lower gains on investments associated with certain employee deferred
    compensation plans.
  • Net interest income of $1.0 billion increased 3 percent compared with
    the same period a year ago. Wealth Management client liabilities13
    were $82 billion at quarter end compared with $77 billion in the prior
    year quarter.
  • Compensation expense for the current quarter of $2.4 billion increased
    from $2.3 billion a year ago on higher revenues. Non-compensation
    expenses of $812 million increased from $797 million a year ago.

Total client assets were $2.4 trillion14 and client assets in
fee-based accounts were $1.1 trillion at the end of the quarter.
Fee-based asset flows for the quarter were $15.3 billion.

Wealth Management representatives of 15,632 produced average annualized
revenue per representative of $1.1 million in the current quarter.15

Investment Management

Investment Management reported pre-tax income from continuing operations
of $140 million compared with $142 million in the second quarter of last
year. Net revenues of $691 million increased from $665 million in the
prior year.1

  • Asset management revenues of $610 million increased from $539 million
    in the prior year quarter driven by higher levels of assets under
    management.
  • Investment revenues of $55 million decreased from $125 million in the
    prior year quarter driven by lower investment gains and carried
    interest in infrastructure and private equity funds.
  • Compensation expense for the current quarter of $272 million decreased
    from $288 million a year ago principally due to a decrease in deferred
    compensation associated with carried interest. Non-compensation
    expenses of $279 million increased from $235 million a year ago driven
    by higher brokerage and clearing expenses.1
  • Total assets under management or supervision at June 30, 2018 were
    $474 billion compared with $435 billion a year ago.

Capital

As of June 30, 2018, the Firm's Common Equity Tier 1 and Tier 1
risk-based capital ratios under the fully phased-in Standardized
Approach were approximately 15.8% and 18.1%, respectively; the fully
phased-in Supplementary Leverage Ratio was approximately 6.4%.16,17

At June 30, 2018, book value and tangible book value per common share
were $40.34 and $35.19,18 respectively, based on
approximately 1.7 billion shares outstanding.

Other Matters

The effective tax rate from continuing operations for the quarter of
20.6% reflects the impact of intermittent net discrete tax benefits of
$88 million primarily associated with new information pertaining to the
resolution of multi-jurisdiction tax examinations and other matters.

During the quarter ended June 30, 2018, the Firm repurchased
approximately $1.25 billion of its common stock or approximately 24
million shares. The Board of Directors authorized a share repurchase of
up to $4.7 billion of common stock beginning in the third quarter of
2018 through the end of the second quarter of 2019.3

The Board of Directors also declared a quarterly dividend to $0.30 per
share (an increase from $0.25 per share), payable on August 15, 2018 to
common shareholders of record on July 31, 2018.3

Morgan Stanley is a leading global financial services firm providing a
wide range of investment banking, securities, wealth management and
investment management services. With offices in more than 41 countries,
the Firm's employees serve clients worldwide including corporations,
governments, institutions and individuals. For further information about
Morgan Stanley, please visit www.morganstanley.com.

A financial summary follows. Financial, statistical and business-related
information, as well as information regarding business and segment
trends, is included in the Financial Supplement. Both the earnings
release and the Financial Supplement are available online in the
Investor Relations section at www.morganstanley.com.

# # #

(See Attached Schedules)

NOTICE:

The information provided herein and in the financial supplement may
include certain non-GAAP financial measures. The definition of such
measures or reconciliation of such metrics to the comparable U.S. GAAP
figures are included in this earnings release and the Financial
Supplement, both of which are available on www.morganstanley.com.

This earnings release may contain forward-looking statements including
the attainment of certain financial and other targets, objectives and
goals. Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date on which
they are made, which reflect management's current estimates,
projections, expectations, assumptions, interpretations or beliefs and
which are subject to risks and uncertainties that may cause actual
results to differ materially. For a discussion of risks and
uncertainties that may affect the future results of the Firm, please see
"Forward-Looking Statements" immediately preceding Part I, Item 1,
"Competition" and "Supervision and Regulation" in Part I, Item 1, "Risk
Factors" in Part I, Item 1A, "Legal Proceedings" in Part I, Item 3,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Part II, Item 7 and "Quantitative and Qualitative
Disclosures about Market Risk" in Part II, Item 7A in the Firm's Annual
Report on Form 10-K for the year ended December 31, 2017 and other items
throughout the Form 10-K, the Firm's Quarterly Reports on Form 10-Q and
the Firm's Current Reports on Form 8-K, including any amendments thereto.

1 Effective January 1, 2018, the Firm adopted new accounting
guidance related to Revenue from Contracts with Customers, which among
other things, requires a gross presentation of certain costs that were
previously netted against net revenues. For the quarter ended June 30,
2018, this change in presentation resulted in an increase to net
revenues and non-compensation expenses of $108 million, of which $101
million was reported in the Institutional Securities segment and $21
million in the Investment Management segment. In addition, the Firm
included an intersegment elimination of $(14) million related to
intercompany activity. This change in presentation did not have an
impact on net income. Prior periods have not been restated pursuant to
this guidance.

2 Pre-tax margin is a non-GAAP financial measure that the
Firm considers useful for investors and analysts to assess operating
performance. Pre-tax margin represents income (loss) from continuing
operations before taxes divided by net revenues.

3 In the quarter ended June 30, 2018, Morgan Stanley
announced the capital actions in the Firm's 2018 Capital Plan ("Capital
Plan"). The Capital Plan includes the repurchase of up to $4.7 billion
of outstanding common stock for the four quarters beginning in the third
quarter of 2018 through the end of the second quarter of 2019, and an
increase in the Firm's quarterly common stock dividend to $0.30 per
share from the current $0.25 per share, beginning with the common
dividend declared for the third quarter of 2018. The Board of Governors
of the Federal Reserve System approved Morgan Stanley's Capital Plan
with a conditional non-objection, where the only condition was that the
capital distributions not exceed the greater of distributions in the
previous year, or the annualized average of distributions over the
previous two years. The total amount of expected 2018 capital
distributions is consistent with the $6.8 billion of actual dividends
and gross share repurchases included in the Firm's 2017 Capital Plan.

4 The Firm prepares its Consolidated Financial Statements
using accounting principles generally accepted in the United States
(U.S. GAAP). From time to time, Morgan Stanley may disclose certain
"non-GAAP financial measures" in the course of its earnings releases,
earnings conference calls, financial presentations and otherwise. The
Securities and Exchange Commission defines a "non-GAAP financial
measure" as a numerical measure of historical or future financial
performance, financial positions, or cash flows that is subject to
adjustments that effectively exclude, or include amounts from the most
directly comparable measure calculated and presented in accordance with
U.S. GAAP. Non-GAAP financial measures disclosed by Morgan Stanley are
provided as additional information to investors and analysts in order to
provide them with greater transparency about, or an alternative method
for assessing our financial condition, operating results, or prospective
regulatory capital requirements. These measures are not in accordance
with, or a substitute for U.S. GAAP, and may be different from or
inconsistent with non-GAAP financial measures used by other companies.
Whenever we refer to a non-GAAP financial measure, we will also
generally define it or present the most directly comparable financial
measure calculated and presented in accordance with U.S. GAAP, along
with a reconciliation of the differences between the non-GAAP financial
measure we reference and such comparable U.S. GAAP financial measure.

5 Includes preferred dividends and other adjustments related
to the calculation of earnings per share of $170 million for the second
quarter of 2018 and 2017.

6 The Firm Expense Efficiency Ratio represents total
non-interest expenses as a percentage of net revenues.

7 Annualized return on average common equity, annualized
return on average tangible common equity and tangible common equity are
non-GAAP financial measures that the Firm considers useful for investors
and analysts to allow better comparability of period-to-period operating
performance and capital adequacy. The calculation of return on average
common equity and return on average tangible common equity uses
annualized net income applicable to Morgan Stanley less preferred
dividends as a percentage of average common equity and average tangible
common equity, respectively. Tangible common equity represents common
equity less goodwill and intangible assets net of allowable mortgage
servicing rights deduction.

8 Pre-tax income represents income (loss) from continuing
operations before taxes.

9 Source: Thomson Reuters – for the period of January 1, 2018
to June 30, 2018 as of July 2, 2018.

10 Long-term net flows include the equity, fixed income and
alternative/other asset classes and exclude the liquidity asset class.

11 VaR represents the loss amount that one would not expect
to exceed, on average, more than five times every one hundred trading
days in the Firm's trading positions if the portfolio were held constant
for a one-day period. Further discussion of the calculation of VaR and
the limitations of the Firm's VaR methodology is disclosed in Part II,
Item 7A "Quantitative and Qualitative Disclosures about Market Risk"
included in the Annual Report on Form 10-K for the year ended December
31, 2017 ("2017 Form 10-K"). Refer to page 7 of Morgan Stanley's
Financial Supplement accompanying this release for the VaR disclosure.

12 Transactional revenues include investment banking,
trading, and commissions and fee revenues.

13 Wealth Management client liabilities reflect U.S. Bank
Subsidiaries' lending and broker dealer margin activity.

14 Approximately $1 trillion in the segment of customer
accounts with assets of $10 million or more.

15 The average annualized revenue per Wealth Management
representative metric represents annualized net revenues divided by
average representative headcount.

16 The Firm's risk-based capital ratios for purposes of
determining regulatory compliance are the lower of the capital ratios
computed under the (i) standardized approaches for calculating credit
risk and market risk risk-weighted assets ("RWAs") (the "Standardized
Approach"); and (ii) applicable advanced approaches for calculating
credit risk, market risk and operational risk RWAs (the "Advanced
Approach"). At June 30, 2018, the Firm's ratios are based on the
Standardized Approach fully phased-in rules. Regulatory compliance was
determined based on capital ratios calculated under transitional rules
until December 31, 2017. For information on the calculation of
regulatory capital and ratios for prior periods, please refer to Part
II, Item 7 "Liquidity and Capital Resources – Regulatory Requirements"
in the Firm's 2017 10-K.

17 The Supplementary Leverage Ratio became effective as a
capital standard on January 1, 2018. As such, the Firm must maintain a
Tier 1 supplementary leverage capital buffer of at least 2% in addition
to the 3% minimum supplementary leverage ratio (for a total of at least
5%), in order to avoid limitations on capital distributions, including
dividends and stock repurchases, and discretionary bonus payments to
executive officers. The Firm's Supplementary Leverage Ratio utilizes a
fully phased-in Tier 1 capital numerator of approximately $70.0 billion
and a fully phased-in supplementary leverage exposure denominator of
approximately $1.10 trillion.

18 Tangible book value per common share is a non-GAAP
financial measure that the Firm considers to be a useful measure of
capital adequacy for investors and analysts. Tangible book value per
common share represents tangible common equity divided by period end
common shares outstanding.

Morgan Stanley

Consolidated Financial Summary
(unaudited, dollars in millions, except for per share data)
                                 
 
Quarter Ended Percentage Change From: Six Months Ended Percentage

Jun 30, 2018

Mar 31, 2018

Jun 30, 2017

Mar 31, 2018

Jun 30, 2017

Jun 30, 2018

Jun 30, 2017

Change
Net revenues
Institutional Securities $ 5,714 $ 6,100 $ 4,762 (6 %) 20 % $ 11,814 $ 9,914 19 %
Wealth Management 4,325 4,374 4,151 (1 %) 4 % 8,699 8,209 6 %
Investment Management 691 718 665 (4 %) 4 % 1,409 1,274 11 %
Intersegment Eliminations   (120 )   (115 )   (75 ) (4 %) (60 %)   (235 )   (149 ) (58 %)
Net revenues $ 10,610   $ 11,077   $ 9,503   (4 %) 12 % $ 21,687   $ 19,248   13 %
 
Income (loss) from continuing operations before tax
Institutional Securities $ 1,812 $ 2,112 $ 1,443 (14 %) 26 % $ 3,924 $ 3,173 24 %
Wealth Management 1,157 1,160 1,057 -- 9 % 2,317 2,030 14 %
Investment Management 140 148 142 (5 %) (1 %) 288 245 18 %
Intersegment Eliminations   0     0     0   -- --   0     2   *
Income (loss) from continuing operations before tax $ 3,109   $ 3,420   $ 2,642   (9 %) 18 % $ 6,529   $ 5,450   20 %
 
Net Income (loss) applicable to Morgan Stanley
Institutional Securities $ 1,457 $ 1,627 $ 992 (10 %) 47 % $ 3,084 $ 2,206 40 %
Wealth Management 876 914 665 (4 %) 32 % 1,790 1,312 36 %
Investment Management 104 127 100 (18 %) 4 % 231 167 38 %
Intersegment Eliminations   0     0     0   -- --   0     2   *
Net Income (loss) applicable to Morgan Stanley $ 2,437   $ 2,668   $ 1,757   (9 %) 39 % $ 5,105   $ 3,687   38 %
Earnings (loss) applicable to Morgan Stanley common shareholders $ 2,267   $ 2,575   $ 1,587   (12 %) 43 % $ 4,842   $ 3,427   41 %
 
Financial Metrics:
 
Earnings per basic share $ 1.32 $ 1.48 $ 0.89 (11 %) 48 % $ 2.80 $ 1.91 47 %
Earnings per diluted share $ 1.30 $ 1.45 $ 0.87 (10 %) 49 % $ 2.75 $ 1.87 47 %
 
Return on average common equity 13.0 % 14.9 % 9.1 % 13.9 % 9.9 %
Return on average tangible common equity 14.9 % 17.2 % 10.4 % 16.0 % 11.4 %
 
Book value per common share $ 40.34 $ 39.19 $ 38.22 $ 40.34 $ 38.22
Tangible book value per common share $ 35.19 $ 34.04 $ 33.24 $ 35.19 $ 33.24
 
Excluding intermittent net discrete tax provision / benefit
Adjusted earnings per diluted share $ 1.25 $ 1.45 $ 0.87 (14 %) 44 % $ 2.70 $ 1.88 44 %
Adjusted return on average common equity 12.5 % 14.9 % 9.1 % 13.7 % 9.9 %
Adjusted return on average tangible common equity 14.3 % 17.2 % 10.5 % 15.7 % 11.4 %
 
Notes:  

-

 

Refer to End Notes, Definition of U.S. GAAP to Non-GAAP Measures
and Definition of Performance Metrics on pages 13 - 16 from the
Financial Supplement for additional information related to the
calculation of the financial metrics.

7

                           

Morgan Stanley

Consolidated Income Statement Information
(unaudited, dollars in millions)
     
Quarter Ended Percentage Change From: Six Months Ended Percentage
Jun 30, 2018 Mar 31, 2018 Jun 30, 2017 Mar 31, 2018 Jun 30, 2017 Jun 30, 2018 Jun 30, 2017 Change
Revenues:
Investment banking $ 1,793 $ 1,634 $ 1,530 10 % 17 % $ 3,427 $ 3,075 11 %
Trading 3,293 3,770 2,931 (13 %) 12 % 7,063 6,166 15 %
Investments 147 126 163 17 % (10 %) 273 328 (17 %)
Commissions and fees 1,039 1,173 1,027 (11 %) 1 % 2,212 2,060 7 %
Asset management 3,189 3,192 2,902 -- 10 % 6,381 5,669 13 %
Other   243     207     199   17 % 22 %   450     428   5 %
Total non-interest revenues 9,704 10,102 8,752 (4 %) 11 % 19,806 17,726 12 %
 
Interest income 3,294 2,860 2,106 15 % 56 % 6,154 4,071 51 %
Interest expense   2,388     1,885     1,355   27 % 76 %   4,273     2,549   68 %
Net interest   906     975     751   (7 %) 21 %   1,881     1,522   24 %
Net revenues   10,610     11,077     9,503   (4 %) 12 %   21,687     19,248   13 %
Non-interest expenses:
Compensation and benefits 4,621 4,914 4,252 (6 %) 9 % 9,535 8,718 9 %
 
Non-compensation expenses:
Occupancy and equipment 346 336 333 3 % 4 % 682 660 3 %
Brokerage, clearing and exchange fees 609 627 525 (3 %) 16 % 1,236 1,034 20 %
Information processing and communications 496 478 433 4 % 15 % 974 861 13 %
Marketing and business development 179 140 155 28 % 15 % 319 291 10 %
Professional services 580 510 561 14 % 3 % 1,090 1,088 --
Other   670     652     602   3 % 11 %   1,322     1,146   15 %
Total non-compensation expenses 2,880 2,743 2,609 5 % 10 % 5,623 5,080 11 %
         
Total non-interest expenses   7,501     7,657     6,861   (2 %) 9 %   15,158     13,798   10 %
 
Income (loss) from continuing operations before taxes 3,109 3,420 2,642 (9 %) 18 % 6,529 5,450 20 %
Income tax provision / (benefit) from continuing operations   640     714     846   (10 %) (24 %)   1,354     1,661   (18 %)
Income (loss) from continuing operations   2,469     2,706     1,796   (9 %) 37 %   5,175     3,789   37 %
Gain (loss) from discontinued operations after tax   (2 )   (2 )   (5 ) -- 60 %   (4 )   (27 ) 85 %
Net income (loss) $ 2,467 $ 2,704 $ 1,791 (9 %) 38 % $ 5,171 $ 3,762 37 %
Net income applicable to nonredeemable noncontrolling interests   30     36     34   (17 %) (12 %)   66     75   (12 %)
Net income (loss) applicable to Morgan Stanley   2,437     2,668     1,757   (9 %) 39 %   5,105     3,687   38 %
Preferred stock dividend / Other   170     93     170   83 % --   263     260   1 %
Earnings (loss) applicable to Morgan Stanley common shareholders $ 2,267   $ 2,575   $ 1,587   (12 %) 43 % $ 4,842   $ 3,427   41 %
 
Pre-tax profit margin 29 % 31 % 28 % 30 % 28 %
Compensation and benefits as a % of net revenues 44 % 44 % 45 % 44 % 45 %
Non-compensation expenses as a % of net revenues 27 % 25 % 27 % 26 % 26 %
Firm expense efficiency ratio 71 % 69 % 72 % 70 % 72 %
Effective tax rate from continuing operations 20.6 % 20.9 % 32.0 % 20.7 % 30.5 %
 
Notes:  

-

 

Refer to End Notes, Definition of U.S. GAAP to Non-GAAP Measures
and Definition of Performance Metrics on pages 13 - 16 from the
Financial Supplement for additional information.

8

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