April 19, 2017 / 7:41 PM / 8 months ago

Fitch: Strong 1Q17 Earnings for Morgan Stanley

(The following statement was released by the rating agency) NEW YORK, April 19 (Fitch) Strong underwriting and fixed income trading results drove good earnings performance for Morgan Stanley (MS) according to Fitch Ratings. MS's 1Q17 net income was up 16% from the sequential quarter and 70% from the year-ago quarter, which was particularly weak. This quarter's results also included a $112 million tax benefit attributable to the employee share-based payment accounting change adopted in January. Excluding this benefit, MS's net income was up 60.3% YoY. These results equated to a return on average common equity (ROAE) of 10.7% in 1Q17, up from 6.2% in 1Q16. This is in-line with MS's long-term ROAE target of 9%-11%. Excluding the tax benefit, however, the ROAE in 1Q17 would have been 10%. MS's overall Investment Banking (IB) net revenues increased 11% sequentially and 43% from the year-ago period. While advisory net revenue declined 16% year over year, MS indicates that its backlog remains strong. Offsetting the lower advisory net revenues was a strong increase in equity underwriting net revenues which were up 144% compared to the prior year, reflecting strong industry volumes. Debt underwriting net revenue increased 122% YoY, driven by higher investment grade and non-investment-grade issuance activity. Overall Sales & Trading net revenue increased 30% versus the year-ago quarter, given strength in the firm's Fixed Income trading businesses, which saw net revenue increase 96% YoY. This included good performance in credit and securitized products, which benefited from spread tightening and strong client demand. Equity trading net revenue was more muted, increasing 3% sequentially but decreasing 2% YoY on lower industrywide volumes. MS's wealth management segment continued to perform well. Net revenue increased 11% YoY due, in part, to higher net interest income (NII). In 1Q17, NII comprised 24.5% of the wealth management segment's net revenue and Fitch would expect this to increase as the company adds more wealth management-related loans to its balance sheet. The overall wealth management pre-tax operating margin increased to 24% in 1Q17, up from 21% a year ago. Fitch notes that this is now solidly within management's targeted range of 22%-25%. Overall investment management results improved on higher investment gains, though asset management fees were relatively flat, up 1% sequentially but down 2% YoY. Total assets under supervision (AUS) increased to $421 billion due largely to market appreciation. The firm had $1.8 billion of flows into alternative products, which was more than offset by $10 billion of seasonal outflows from liquidity products. There were no inflows or outflows in fixed income or equity products during the quarter. Expense management continues to be a key area of focus for the management team. Relative to both the sequential and the year-ago quarter the company generated positive operating leverage. The ratio of compensation and benefits to net revenue ticked up to 46%, impacted by seasonal compensation accruals and the effect of mark-to-market changes on deferred compensation plans. This was offset by lower business development and professional services expenses. Overall pre-tax margin increased to 29% in 1Q17, up from 22% in 1Q16. MS's fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the advanced approach increased 70bps sequentially, to 16.6%, due to a combination of growth in retained earnings and a $10 billion decline in risk weighted assets (RWA), led by declines in operational risk-related RWAs. MS's CET1 ratio remains at the top end of its peer group, although it is expected to decline modestly over time via capital returns, subject to regulatory approval. During the quarter, MS repurchased $750 million of common stock and declared a quarterly dividend of $0.20 per share payable on May 15, 2017. MS's 1Q17 fully phased-in Enhanced Supplementary Leverage Ratio ticked up to 6.4% from 6.2% in the sequential quarter. MS's funding and liquidity position remained solid with the company's Global Liquidity Reserve (GLR) at $197.6 billion, or 23.7% of total assets. In addition, Fitch believes MS is in compliance with Liquidity Coverage Ratio (LCR) requirements. Contact: Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Meghan Neenan, CFA Managing Director +1-212-908-0121 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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