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Fitch: Morgan Stanley 4Q'13 Posts Strong Core Earnings Excluding Legal Charge

January 21, 2014

NEW YORK --(BUSINESS WIRE)-- Morgan Stanley reported strong fourth-quarter 2013 (4Q'13) core earnings, excluding legal expenses and other one-time items, according to Fitch Ratings. Core financial performance for the quarter continued to benefit from improved margins in the wealth management platform and solid investment banking revenues. These were partially offset by weaker fixed income and commodities net revenues. The firm's overall results were impacted by a $1.2 billion legal charge associated with pre-crisis mortgage securities. Given the increased earnings diversification, improving performance and capital levels, these latest results have no rating implications on Morgan Stanley's 'A/F1' ratings or Stable Outlook. Morgan Stanley's core profitability remained consistent with 3Q'13. Fitch calculated pre-tax operating profits (excluding debt-value adjustment [DVA] impact and legal expenses) of $1.5 billion for both quarters. As a result, pre-tax operating return on assets (excluding DVA impact and legal expenses) remained unchanged at 0.7%. Non-compensation expenses increased 49% to $3.9 billion , as 4Q'13 results included legal expenses of $1.2 billion for litigation related to pre-crisis residential mortgage-backed securities. For full year 2013, as calculated by Fitch, pre-tax operating profits (excluding DVA impact and legal expenses) of $6.5 billion were 32% higher than 2012. The significant mortgage-related legal charge taken during the quarter is consistent with the recent industry trend. Over the last six months, several large securities firms have settled lawsuits filed in 2011 by the Federal Housing Finance Agency (FHFA) over pre-crisis mortgage securities sold to Fannie Mae and Freddie Mac. As a result, significant charges have been incurred by these firms. The FHFA complaint against Morgan Stanley cited securities with $10.6 billion in face value. Morgan Stanley did not disclose what matters were related to the litigation expense this quarter. Wealth management profits were positively impacted by a 7% sequential increase in revenues. Pre-tax operating margin continued to improve increasing to 20% (excluding a one-time impairment charge) from 19.2% at 3Q'13 and is above the 2013 target margin of 18%. Fitch believes that Morgan Stanley's targeted pre-tax operating margin of 22%-25% in 4Q'15 is achievable if the company successfully executes on its strategy to deploy these deposits into securities and loans with higher returns. Institutional securities net revenues (excluding DVA impact) decreased sequentially but were up 3% year over year (YoY). The firm had a challenging quarter in fixed income and commodities, where net revenues declined 17% quarter over quarter (QoQ), which was weaker than peers. Weaker performance in commodities and interest rates were partially offset by increases in credit and foreign exchange business. For 2013, fixed income and commodities net revenues (excluding DVA impact) were 25% lower than 2012. Equity sales and trading net revenues of $1.5 billion (excluding DVA impact) were down 12% quarter over quarter as weaker derivatives revenues following a strong 3Q'13 was partially offset by strong client activity and higher cash volumes. Investment banking net revenues of $1.4 billion were 37% higher than 3Q'13 due to higher advisory revenues across all regions and increased underwriting volumes. Equity underwriting, which rebounded from a weak 3Q'13, benefited from strong IPO volumes. Debt underwriting revenues increased moderately in 3Q'13 due to higher loan syndication fees. The investment banking backlog continues to be strong, and Morgan Stanley should continue to benefit from a higher level of activity. On a full year basis, investment banking net revenues increased 11% to $4.4 billion . Morgan Stanley' global liquidity reserve was a solid $202 billion , or 24% of total assets, comprised of unencumbered liquid securities and cash. Liquidity continues to be managed conservatively. Value at risk (VaR) was virtually unchanged from 3Q'13 at $51 million . Morgan Stanley estimates that its Basel III Tier I common ratio was approximately 10.5% at 4Q'13, comfortably above the 8.5% minimum. The company estimated that its supplementary leverage ratio for the bank exceeded 6%. The holding company supplementary leverage ratio was 4.2%, below the 5% threshold. Fitch continues to believe that Morgan Stanley will be able to meet the supplementary leverage minimums ahead of the required timeframe. During 4Q'13, Morgan Stanley repurchased approximately $228 million shares following its announcement in 2Q'13 of a $500 million share buyback. For 2013, Morgan Stanley repurchased approximately $350 million shares. Given the firm's capital levels, Fitch would expect additional share repurchases in the coming quarters. Additional information is available at ' www.fitchratings.com '. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Tara Kriss Senior Director +1-212-908-0369 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 or Ilya Ivashkov , CFA Director +1-212-908-0769 or Media Relations: Brian Bertsch , New York , +1 212-908-0549 Email: brian.bertsch@fitchratings.com Source: Fitch Ratings


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