UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-11758
(Exact Name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
1585 Broadway New York, NY 10036 (Address of principal executive offices, including zip code) |
36-3145972 (I.R.S. Employer Identification No.) |
(212) 761-4000 (Registrants telephone number, including area code) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☒ |
Accelerated Filer ☐ | |
Non-Accelerated Filer ☐ |
Smaller reporting company ☐ | |
(Do not check if a smaller reporting company) |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2018, there were 1,770,260,439 shares of the Registrants Common Stock, par value $0.01 per share, outstanding.
QUARTERLY REPORT ON FORM 10-Q
For the quarter ended March 31, 2018
Part | Item | Page | ||||||||||
Financial Information | I | 1 | ||||||||||
Managements Discussion and Analysis of Financial Condition and Results of Operations | I | 2 | 1 | |||||||||
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Quantitative and Qualitative Disclosures about Market Risk | I | 3 | 29 | |||||||||
Report of Independent Registered Public Accounting Firm | 39 | |||||||||||
Financial Statements | I | 1 | 40 | |||||||||
Consolidated Financial Statements and Notes | 40 | |||||||||||
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Consolidated Statements of Changes in Total Equity (Unaudited) |
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7. Loans, Lending Commitments and Allowance for Credit Losses |
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12. Variable Interest Entities and Securitization Activities |
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Financial Data Supplement (Unaudited) | 84 | |||||||||||
Glossary of Common Acronyms | 86 | |||||||||||
Other Information | II | 88 | ||||||||||
Legal Proceedings | II | 1 | 88 | |||||||||
Unregistered Sales of Equity Securities and Use of Proceeds | II | 2 | 89 | |||||||||
Controls and Procedures | I | 4 | 90 | |||||||||
Exhibits | II | 6 | 90 | |||||||||
Exhibit Index | E-1 | |||||||||||
Signatures | S-1 |
i |
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file with the SEC at the SECs public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site, www.sec.gov, that contains annual, quarterly and current reports, proxy and information statements and other information that issuers file electronically with the SEC. Our electronic SEC filings are available to the public at the SECs internet site.
Our internet site is www.morganstanley.com. You can access our Investor Relations webpage at www.morganstanley.com/about-us-ir. We make available free of charge, on or through our Investor Relations webpage, our Proxy Statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (Exchange Act), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We also make available, through our Investor Relations webpage, via a link to the SECs internet site, statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.
You can access information about our corporate governance at www.morganstanley.com/about-us-governance. Our Corporate Governance webpage includes:
| Amended and Restated Certificate of Incorporation; |
| Amended and Restated Bylaws; |
| Charters for our Audit Committee, Compensation, Management Development and Succession Committee, Nominating and Governance Committee, Operations and Technology Committee, and Risk Committee; |
| Corporate Governance Policies; |
| Policy Regarding Corporate Political Activities; |
| Policy Regarding Shareholder Rights Plan; |
| Equity Ownership Commitment; |
| Code of Ethics and Business Conduct; |
| Code of Conduct; |
| Integrity Hotline Information; and |
| Environmental and Social Policies. |
Our Code of Ethics and Business Conduct applies to all directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer and Deputy Chief Financial Officer. We will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC (NYSE) on our internet site. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036 (212-761-4000). The information on our internet site is not incorporated by reference into this report.
ii |
Managements Discussion and Analysis of Financial Condition and Results of Operations
Morgan Stanley is a global financial services firm that maintains significant market positions in each of its business segmentsInstitutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms Morgan Stanley, Firm, us, we or our mean Morgan Stanley (the Parent Company) together with its consolidated subsidiaries. We define the following as part of our consolidated financial statements (financial statements): consolidated income statements (income statements), consolidated balance sheets (balance sheets), and consolidated cash flow statements (cash flow statements). See the Glossary of Common Acronyms for definitions of certain acronyms used throughout this Form 10-Q.
A description of the clients and principal products and services of each of our business segments is as follows:
Institutional Securities provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions, and high to ultra-high net worth clients. Investment banking services consist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing, prime brokerage and market-making activities in equity and fixed income products, including foreign exchange and commodities. Lending services include originating and/or purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending, financing extended to equities and commodities customers, and loans to municipalities. Other activities include investments and research.
Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses and institutions covering brokerage and investment advisory services, financial and wealth planning services, annuity and insurance products, credit and other lending products, banking and retirement plan services.
Investment Management provides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are serviced through intermediaries, including affiliated and non-affiliated distributors.
The results of operations in the past have been, and in the future may continue to be, materially affected by competition; risk factors; and legislative, legal and regulatory developments; as well as other factors. These factors also may have an adverse impact on our ability to achieve our strategic objectives. Additionally, the discussion of our results of operations herein may contain forward-looking statements. These statements, which reflect managements beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, see Forward-Looking Statements, BusinessCompetition and BusinessSupervision and Regulation, Risk Factors in the 2017 Form 10-K and Liquidity and Capital ResourcesRegulatory Requirements herein.
1 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
Overview of Financial Results
Consolidated Results
Net Revenues
($ in millions)
Net Income Applicable to Morgan Stanley
($ in millions)
Earnings per Common Share1
1. | For the calculation of basic and diluted EPS, see Note 15 to the financial statements. |
| We reported net revenues of $11,077 million in the quarter ended March 31, 2018 (current quarter, or 1Q 2018), compared with $9,745 million in the quarter ended March 31, 2017 (prior year quarter, or 1Q 2017). For the current quarter, net income applicable to Morgan Stanley was $2,668 million, or $1.45 per diluted common share, compared with $1,930 million, or $1.00 per diluted common share, in the prior year quarter. |
Non-interest Expenses
($ in millions)
| Compensation and benefits expenses of $4,914 million in the current quarter increased 10% from $4,466 million in the prior year quarter, primarily due to increases in discretionary incentive compensation across segments, the formulaic payout to Wealth Management representatives linked to higher revenues and salaries, partially offset by a decrease in the fair value of investments to which certain deferred compensation plans are referenced. |
| Non-compensation expenses were $2,743 million in the current quarter compared with $2,471 million in the prior year quarter representing an 11% increase. This increase was primarily a result of higher volume-related expenses and the gross presentation of certain expenses due to the adoption of the accounting update Revenue from Contracts with Customers (see Notes 2 and 20 to the financial statements for further information). These results were partially offset in the current quarter by the reversal of a portion of previously recorded provisions related to U.K. VAT matters. |
March 2018 Form 10-Q | 2 |
Managements Discussion and Analysis |
Expense Efficiency Ratio1
Return on Average Common Equity2
Return on Average Tangible Common Equity2
1. | The expense efficiency ratio represents total non-interest expense as a percentage of net revenues. |
2. | Represents a non-GAAP measure. See Selected Non-GAAP Financial Information herein. |
Business Segment Results
Net Revenues by Segment1, 2
($ in millions)
Net Income Applicable to Morgan Stanley by Segment1, 3
($ in millions)
1. | The percentages in the charts represent the contribution of each business segment to the total. Amounts do not necessarily total to 100% due to intersegment eliminations, where applicable. |
2. | The total amount of Net Revenues by Segment also includes intersegment eliminations of $(115) million and $(74) million in the current quarter and prior year quarter, respectively. |
3. | The total amount of Net Income Applicable to Morgan Stanley by Segment also includes intersegment eliminations of $2 million in the prior year quarter. |
| Institutional Securities net revenues of $6,100 million in the current quarter increased 18% from the prior year quarter, primarily reflecting higher sales and trading and Investment banking revenues across all regions. |
| Wealth Management net revenues of $4,374 million in the current quarter increased 8% from the prior year quarter, primarily reflecting growth in Asset management revenues. |
| Investment Management net revenues of $718 million in the current quarter increased 18% from the prior year quarter, primarily reflecting higher revenues from Asset management. |
3 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
Net Revenues by Region1
($ in millions)
1. | For a discussion of how the geographic breakdown for net revenues is determined, see Note 19 to the financial statements. |
Selected Financial Information and Other Statistical Data
Three Months Ended March 31, |
||||||||
$ in millions | 2018 | 2017 | ||||||
Income from continuing operations applicable to Morgan Stanley |
$ | 2,670 | $ | 1,952 | ||||
Income (loss) from discontinued operations applicable to Morgan Stanley |
(2 | ) | (22 | ) | ||||
Net income applicable to Morgan Stanley |
2,668 | 1,930 | ||||||
Preferred stock dividends and other |
93 | 90 | ||||||
Earnings applicable to Morgan Stanley common shareholders |
$ | 2,575 | $ | 1,840 |
in millions, except per share and employee data |
At March 31, 2018 |
At December 31, 2017 |
||||||
GLR1 |
$ | 206,463 | $ | 192,660 | ||||
Loans2 |
$ | 109,135 | $ | 104,126 | ||||
Total assets |
$ | 858,495 | $ | 851,733 | ||||
Deposits |
$ | 160,424 | $ | 159,436 | ||||
Borrowings |
$ | 194,964 | $ | 192,582 | ||||
Common shareholders equity |
$ | 69,514 | $ | 68,871 | ||||
Common shares outstanding |
1,774 | 1,788 | ||||||
Book value per common share3 |
$ | 39.19 | $ | 38.52 | ||||
Worldwide employees |
57,810 | 57,633 |
in millions, except per share and employee data |
At March 31, 2018 |
At December 31, 2017 |
||||||
Capital ratios4 |
||||||||
Common Equity Tier 1 capital ratio |
15.5 | % | 16.5 | % | ||||
Tier 1 capital ratio |
17.7 | % | 18.9 | % | ||||
Total capital ratio |
20.3 | % | 21.7 | % | ||||
Tier 1 leverage ratio |
8.2 | % | 8.3 | % |
1. | For a discussion of the GLR, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesLiquidity Risk Management FrameworkGlobal Liquidity Reserve in the 2017 Form 10-K. |
2. | Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 7 to the financial statements). |
3. | Book value per common share equals common shareholders equity divided by common shares outstanding. |
4. | Beginning in 2018, our capital ratios are based on the Standardized Approach fully phased-in rules. At December 31, 2017, our capital ratios were based on the Standardized Approach transitional rules. For a discussion of our regulatory capital ratios, see Liquidity and Capital ResourcesRegulatory Requirements herein. |
Selected Non-GAAP Financial Information
We prepare our financial statements using U.S. GAAP. From time to time, we may disclose certain non-GAAP financial measures in this document or in the course of our earnings releases, earnings and other conference calls, financial presentations, Definitive Proxy Statement and otherwise. A non-GAAP financial measure excludes, or includes, amounts from the most directly comparable measure calculated and presented in accordance with U.S. GAAP. We consider the non-GAAP financial measures we disclose to be useful to us, investors and analysts by providing further transparency about, or an alternate means of assessing, our financial condition, operating results, prospective regulatory capital requirements or capital adequacy. 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 U.S. GAAP financial measure and the non-GAAP financial measure.
The principal non-GAAP financial measures presented in this document are set forth below.
March 2018 Form 10-Q | 4 |
Managements Discussion and Analysis |
Reconciliations from U.S. GAAP to Non-GAAP Consolidated Financial Measures
Three Months Ended March 31, |
||||||||
$ in millions, except per share data | 2018 | 2017 | ||||||
Net income applicable to Morgan Stanley |
$ | 2,668 | $ | 1,930 | ||||
Impact of adjustments |
| 14 | ||||||
Adjusted net income applicable to Morgan Stanleynon-GAAP1 |
$ | 2,668 | 1,944 | |||||
Earnings per diluted common share |
$ | 1.45 | $ | 1.00 | ||||
Impact of adjustments |
| 0.01 | ||||||
Adjusted earnings per diluted common sharenon-GAAP1 |
$ | 1.45 | $ | 1.01 | ||||
Effective income tax rate |
20.9% | 29.0% | ||||||
Impact of adjustments |
% | (0.5)% | ||||||
Adjusted effective income tax rate non-GAAP1 |
20.9% | 28.5% |
Average Monthly Balance |
||||||||||||||||
At March 31, 2018 |
At December 31, 2017 |
Three Months Ended March 31, |
||||||||||||||
$ in millions | 2018 | 2017 | ||||||||||||||
Tangible Equity |
||||||||||||||||
U.S. GAAP |
||||||||||||||||
Morgan Stanley shareholders equity |
$ | 78,034 | $ | 77,391 | $ | 77,507 | $ | 77,259 | ||||||||
Less: Goodwill and net intangible assets |
(9,129 | ) | (9,042 | ) | (9,043 | ) | (9,262 | ) | ||||||||
Morgan Stanley tangible shareholders equitynon-GAAP |
$ | 68,905 | $ | 68,349 | $ | 68,464 | $ | 67,997 | ||||||||
U.S. GAAP |
||||||||||||||||
Common equity |
$ | 69,514 | $ | 68,871 | $ | 68,987 | $ | 68,989 | ||||||||
Less: Goodwill and net intangible assets |
(9,129 | ) | (9,042 | ) | (9,043 | ) | (9,262 | ) | ||||||||
Tangible common equitynon-GAAP |
$ | 60,385 | $ | 59,829 | $ | 59,944 | $ | 59,727 |
Consolidated Non-GAAP Financial Measures
Three Months Ended March 31, |
||||||||
$ in billions | 2018 | 2017 | ||||||
Average common equity |
||||||||
Unadjusted |
$ | 69.0 | $ | 69.0 | ||||
Adjusted1 |
69.0 | 69.0 | ||||||
ROE2 |
|
|||||||
Unadjusted |
14.9% | 10.7% | ||||||
Adjusted1, 3 |
14.9% | 10.7% | ||||||
Average tangible common equity |
|
|||||||
Unadjusted |
$ | 59.9 | $ | 59.7 | ||||
Adjusted1 |
59.9 | 59.7 | ||||||
ROTCE2 |
|
|||||||
Unadjusted |
17.2% | 12.3% | ||||||
Adjusted1, 3 |
17.2% | 12.4% |
At March 31, 2018 |
At December 31, 2017 |
|||||||
Tangible book value per common share4 |
$ | 34.04 | $ | 33.46 |
Non-GAAP Financial Measures by Business Segment
Three Months Ended March 31, |
||||||||
$ in billions | 2018 | 2017 | ||||||
Pre-tax profit margin5 |
||||||||
Institutional Securities |
35% | 34% | ||||||
Wealth Management |
27% | 24% | ||||||
Investment Management |
21% | 17% | ||||||
Consolidated |
31% | 29% | ||||||
Average common equity6 |
||||||||
Institutional Securities |
$ | 40.8 | $ | 40.2 | ||||
Wealth Management |
16.8 | 17.2 | ||||||
Investment Management |
2.6 | 2.4 | ||||||
Parent Company |
8.8 | 9.2 | ||||||
Consolidated average |
$ | 69.0 | $ | 69.0 | ||||
Average tangible common equity6 |
|
|||||||
Institutional Securities |
$ | 40.1 | $ | 39.6 | ||||
Wealth Management |
9.2 | 9.3 | ||||||
Investment Management |
1.7 | 1.6 | ||||||
Parent Company |
8.9 | 9.2 | ||||||
Consolidated average |
$ | 59.9 | $ | 59.7 | ||||
ROE2, 7 |
|
|||||||
Institutional Securities |
15.2% | 11.4% | ||||||
Wealth Management |
21.3% | 14.6% | ||||||
Investment Management |
19.3% | 11.1% | ||||||
Consolidated |
14.9% | 10.7% | ||||||
ROTCE2, 7 |
|
|||||||
Institutional Securities |
15.5% | 11.5% | ||||||
Wealth Management |
38.9% | 27.0% | ||||||
Investment Management |
30.3% | 16.3% | ||||||
Consolidated |
17.2% | 12.3% |
1. | Adjusted amounts exclude intermittent net discrete tax provisions (benefits). Income tax consequences associated with employee share-based awards are recognized in Provision for income taxes in the income statements but are excluded from the intermittent net discrete tax provisions (benefits) adjustment as we anticipate conversion activity each quarter. For further information on the net discrete tax provisions (benefits), see Supplemental Financial Information and DisclosuresIncome Tax Matters herein. |
2. | ROE and ROTCE equal net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity and average tangible common equity, on a consolidated basis as indicated. When excluding intermittent net discrete tax provisions (benefits), both the numerator and denominator are adjusted. |
3. | The calculations used in determining the Firms ROE and ROTCE Targets referred to below are the Adjusted ROE and Adjusted ROTCE amounts shown in this table. |
4. | Tangible book value per common share equals tangible common equity divided by common shares outstanding. |
5. | Pre-tax profit margin represents income from continuing operations before income taxes as a percentage of net revenues. |
6. | Average common equity and average tangible common equity for each business segment are determined using our Required Capital framework (see Liquidity and Capital ResourcesRegulatory RequirementsAttribution of Average Common Equity According to the Required Capital Framework herein). |
7. | The calculation of ROE and ROTCE by segment uses net income applicable to Morgan Stanley by segment less preferred dividends allocated to each segment as a percentage of average common equity and average tangible common equity, allocated to each segment. |
5 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
Return on Equity and Tangible Common Equity Targets
In January 2018, we established an ROE Target of 10% to 13% for the medium term, which is equivalent to an ROTCE Target of 11.5% to 14.5%.
Our ROE and ROTCE Targets are forward-looking statements that may be materially affected by many factors, including, among other things: macroeconomic and market conditions; legislative and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; outsize legal expenses or penalties and the ability to maintain a reduced level of expenses; capital levels; and intermittent discrete tax items. For further information on our ROE and ROTCE Targets and related assumptions, see Managements Discussion and Analysis of Financial Condition and Results of OperationsExecutive SummaryReturn on Equity and Tangible Common Equity Targets in the 2017 Form 10-K.
Substantially all of our operating revenues and operating expenses are directly attributable to the business segments. Certain revenues and expenses have been allocated to each business segment, generally in proportion to its respective net revenues, non-interest expenses or other relevant measures.
As a result of treating certain intersegment transactions as transactions with external parties, we include an Intersegment Eliminations category to reconcile the business segment results to our consolidated results.
Net Revenues, Compensation Expense and Income Taxes
For an overview of the components of our net revenues, compensation expense and income taxes, see Managements Discussion and Analysis of Financial Condition and Results of OperationsBusiness Segments in the 2017 Form 10-K.
March 2018 Form 10-Q | 6 |
Managements Discussion and Analysis |
Institutional Securities
Income Statement Information
Three Months Ended March 31, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues |
||||||||||||
Investment banking |
$ | 1,513 | $ | 1,417 | 7% | |||||||
Trading |
3,643 | 3,012 | 21% | |||||||||
Investments |
49 | 66 | (26)% | |||||||||
Commissions and fees |
744 | 620 | 20% | |||||||||
Asset management |
110 | 91 | 21% | |||||||||
Other |
136 | 173 | (21)% | |||||||||
Total non-interest revenues |
6,195 | 5,379 | 15% | |||||||||
Interest income |
1,804 | 1,124 | 60% | |||||||||
Interest expense |
1,899 | 1,351 | 41% | |||||||||
Net interest |
(95) | (227) | 58% | |||||||||
Net revenues |
6,100 | 5,152 | 18% | |||||||||
Compensation and benefits |
2,160 | 1,870 | 16% | |||||||||
Non-compensation expenses |
1,828 | 1,552 | 18% | |||||||||
Total non-interest expenses |
3,988 | 3,422 | 17% | |||||||||
Income from continuing operations before income taxes |
2,112 | 1,730 | 22% | |||||||||
Provision for income taxes |
449 | 459 | (2)% | |||||||||
Income from continuing operations |
1,663 | 1,271 | 31% | |||||||||
Income (loss) from discontinued operations, net of income taxes |
(2) | (22) | 91% | |||||||||
Net income |
1,661 | 1,249 | 33% | |||||||||
Net income applicable to |
34 | 35 | (3)% | |||||||||
Net income applicable to |
$ | 1,627 | $ | 1,214 | 34% |
Investment Banking
Investment Banking Revenues
Three Months Ended March 31, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Advisory |
$ | 574 | $ | 496 | 16% | |||||||
Underwriting: |
||||||||||||
Equity |
421 | 390 | 8% | |||||||||
Fixed income |
518 | 531 | (2)% | |||||||||
Total underwriting |
939 | 921 | 2% | |||||||||
Total investment banking |
$ | 1,513 | $ | 1,417 | 7% |
Investment Banking Volumes
Three Months Ended March 31, |
||||||||
$ in billions | 2018 | 2017 | ||||||
Completed mergers and acquisitions1 |
$ | 145 | $ | 163 | ||||
Equity and equity-related offerings2, 3 |
21 | 10 | ||||||
Fixed income offerings2, 4 |
54 | 75 |
Source: Thomson Reuters, data as of April 2, 2018. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or change in the value of a transaction.
1. | Amounts include transactions of $100 million or more. Completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction. |
2. | Equity and equity-related offerings and fixed income offerings are based on full credit for single book managers and equal credit for joint book managers. |
3. | Amounts include Rule 144A issuances and registered public offerings of common stock and convertible securities and rights offerings. |
4. | Amounts include non-convertible preferred stock, mortgage-backed and asset-backed securities, and taxable municipal debt. Amounts include publicly registered and Rule 144A issuances. Amounts exclude leveraged loans and self-led issuances. |
Investment banking revenues are composed of fees from advisory services and revenues from the underwriting of securities offerings and syndication of loans, net of syndication expenses.
Investment banking revenues of $1,513 million in the current quarter increased 7% from the prior year quarter. The adoption of the accounting update Revenue from Contracts with Customers had the effect of increasing the revenues reported in investment banking by approximately $60 million compared with the prior year quarter (see Notes 2 and 20 to the financial statements for further information). The drivers of the increase in our Investment banking revenues, other than the effect of the above accounting update, were:
| Advisory revenues increased in the current quarter primarily reflecting higher M&A fee realizations on larger transactions. |
| Equity underwriting revenues increased in the current quarter primarily as a result of higher market volumes (see Investment Banking Volumes table), partially offset by the effect of lower fee realizations. |
| Fixed income underwriting revenues decreased in the current quarter primarily due to lower market volumes, which resulted in lower bond fees, partially offset by higher loan fees. |
7 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
Sales and Trading Net Revenues
By Income Statement Line Item
Three Months Ended March 31, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Trading |
$ | 3,643 | $ | 3,012 | 21% | |||||||
Commissions and fees |
744 | 620 | 20% | |||||||||
Asset management |
110 | 91 | 21% | |||||||||
Net interest |
(95) | (227) | 58% | |||||||||
Total |
$ | 4,402 | $ | 3,496 | 26% |
By Business
Three Months Ended March 31, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Equity |
$ | 2,558 | $ | 2,016 | 27% | |||||||
Fixed income |
1,873 | 1,714 | 9% | |||||||||
Other |
(29) | (234) | 88% | |||||||||
Total |
$ | 4,402 | $ | 3,496 | 26% |
Sales and Trading RevenuesEquity and Fixed Income
Three Months Ended March 31, 2018 |
||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 |
Total | ||||||||||||
Financing |
$ | 1,234 | $ | 107 | $ | (146 | ) | $ | 1,195 | |||||||
Execution services |
791 | 664 | (92 | ) | 1,363 | |||||||||||
Total Equity |
$ | 2,025 | $ | 771 | $ | (238 | ) | $ | 2,558 | |||||||
Total Fixed income |
$ | 1,715 | $ | 83 | $ | 75 | $ | 1,873 |
Three Months Ended March 31, 2017 |
||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 |
Total | ||||||||||||
Financing |
$ | 931 | $ | 89 | $ | (188 | ) | $ | 832 | |||||||
Execution services |
664 | 568 | (48 | ) | 1,184 | |||||||||||
Total Equity |
$ | 1,595 | $ | 657 | $ | (236 | ) | $ | 2,016 | |||||||
Total Fixed income |
$ | 1,598 | $ | 54 | $ | 62 | $ | 1,714 |
1. | Includes Commissions and fees and Asset management revenues. |
2. | Funding costs are allocated to the businesses based on funding usage and are included in Net interest. |
As discussed in Managements Discussion and Analysis of Financial Condition and Results of OperationsBusiness SegmentsNet Revenues by Segment in the 2017 Form 10-K, we manage each of the sales and trading businesses based on its aggregate net revenues. We provide qualitative commentary in the discussion of results that follow on the key drivers of period over period variances, as the quantitative impact of the various market dynamics typically cannot be disaggregated.
For additional information on total Trading revenues, see the table Trading Revenues by Product Type in Note 4 to the financial statements.
Equity
Equity sales and trading net revenues of $2,558 million in the current quarter increased 27% from the prior year quarter, reflecting higher results in both our financing businesses and execution services.
| Financing revenues increased from the prior year quarter, primarily reflecting higher client activity across all products as reflected in Trading revenues. |
| Execution services increased from the prior year quarter, primarily reflecting higher Trading revenues driven by higher client activity in derivatives products. In addition, Commissions and fees increased from higher client activity in cash equities products. |
Fixed Income
Fixed income net revenues of $1,873 million in the current quarter were 9% higher than in the prior year quarter, driven by higher results in global macro products and commodities products and other, partially offset by lower results in credit products.
| Global macro products increased due to higher Trading revenues in foreign exchange driven by inventory management and client activity, partially offset by lower client activity in structured rates. |
| Credit products Trading revenues decreased primarily due to the effect of the widening of corporate credit spreads on inventory prices. |
| Commodities products and other increased primarily due to higher Trading revenues from hedging counterparty risk and increased Commodities structured transactions and customer flow in power and natural gas products. |
Other
Other sales and trading net losses of $29 million in the current quarter decreased from the prior year quarter, primarily reflecting higher revenues on economic hedges related to our long-term debt and lower losses associated with corporate loan hedging activity.
March 2018 Form 10-Q | 8 |
Managements Discussion and Analysis |
Investments, Other Revenues and Non-interest Expenses
Investments
| Net investment gains of $49 million in the current quarter decreased from the prior year quarter as a result of losses on investments to which certain deferred compensation plans are referenced in the current quarter compared with gains in the prior year quarter. |
Other Revenues
| Other revenues of $136 million in the current quarter decreased from the prior year quarter, primarily reflecting lower gains associated with held-for-sale corporate loans. |
Non-interest Expenses
Non-interest expenses of $3,988 million in the current quarter increased from the prior year quarter, primarily reflecting a 16% increase in Compensation and benefits expenses and an 18% increase in Non-compensation expenses in the current quarter.
| Compensation and benefits expenses increased in the current quarter, primarily due to increases in discretionary incentive compensation driven by higher revenues and salaries. |
| Non-compensation expenses increased in the current quarter, primarily as a result of higher volume-related expenses and the gross presentation of certain expenses due to the adoption of the accounting update Revenue from Contracts with Customers (see Notes 2 and 20 to the financial statements for further information). These results were partially offset in the current quarter by the reversal of a portion of previously recorded provisions related to U.K. VAT matters. |
9 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
Wealth Management
Income Statement Information
Three Months Ended March 31, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues |
||||||||||||
Investment banking |
$ | 140 | $ | 145 | (3)% | |||||||
Trading |
109 | 238 | (54)% | |||||||||
Investments |
| 1 | N/M | |||||||||
Commissions and fees |
498 | 440 | 13% | |||||||||
Asset management |
2,495 | 2,184 | 14% | |||||||||
Other |
63 | 56 | 13% | |||||||||
Total non-interest revenues |
3,305 | 3,064 | 8% | |||||||||
Interest income |
1,280 | 1,079 | 19% | |||||||||
Interest expense |
211 | 85 | 148% | |||||||||
Net interest |
1,069 | 994 | 8% | |||||||||
Net revenues |
4,374 | 4,058 | 8% | |||||||||
Compensation and benefits |
2,450 | 2,317 | 6% | |||||||||
Non-compensation expenses |
764 | 768 | (1)% | |||||||||
Total non-interest expenses |
3,214 | 3,085 | 4% | |||||||||
Income from continuing operations before income taxes |
1,160 | 973 | 19% | |||||||||
Provision for income taxes |
246 | 326 | (25)% | |||||||||
Net income applicable to Morgan Stanley |
$ | 914 | $ | 647 | 41% |
Financial Information and Statistical Data
$ in billions | At March 31, 2018 |
At December 31, 2017 |
||||||
Client assets |
$ | 2,371 | $ | 2,373 | ||||
Fee-based client assets1 |
$ | 1,058 | $ | 1,045 | ||||
Fee-based client assets as a percentage of total client assets |
45% | 44% | ||||||
Client liabilities2 |
$ | 80 | $ | 80 | ||||
Investment securities portfolio |
$ | 60.7 | $ | 59.2 | ||||
Loans and lending commitments |
$ | 78.7 | $ | 77.3 | ||||
Wealth Management representatives |
15,682 | 15,712 |
Three Months Ended March 31, |
||||||||
2018 | 2017 | |||||||
Per representative: |
||||||||
Annualized revenues ($ in thousands)3 |
$ | 1,115 | $ | 1,029 | ||||
Client assets ($ in millions)4 |
$ | 151 | $ | 139 | ||||
Fee-based asset flows ($ in billions)5 |
$ | 18.2 | $ | 18.8 |
1. | Fee-based client assets represent the amount of assets in client accounts where the basis of payment for services is a fee calculated on those assets. |
2. | Client liabilities include securities-based and tailored lending, residential real estate loans and margin lending. |
3. | Annualized revenues per representative equal Wealth Managements annualized revenues divided by the average representative headcount. |
4. | Client assets per representative equal total period-end client assets divided by period-end representative headcount. |
5. | Fee-based asset flows include net new fee-based assets, net account transfers, dividends, interest and client fees and exclude institutional cash management-related activity. |
Transactional Revenues
Three Months Ended March 31, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Investment banking |
$ | 140 | $ | 145 | (3)% | |||||||
Trading |
109 | 238 | (54)% | |||||||||
Commissions and fees |
498 | 440 | 13% | |||||||||
Total |
$ | 747 | $ | 823 | (9)% | |||||||
Transactional revenues as a % of Net revenues |
17% | 20% |
Net Revenues
Transactional Revenues
Transactional revenues of $747 million in the current quarter decreased 9% from the prior year quarter primarily as a result of decreased Trading revenues, partially offset by increased Commissions and fees.
| Investment banking revenues were relatively unchanged in the current quarter compared with prior year quarter. |
| Trading revenues decreased in the current quarter primarily as a result of losses related to investments associated with certain employee deferred compensation plans and lower client activity in fixed income products. |
| Commissions and fees increased in the current quarter primarily as a result of higher client trading activity in equities. |
March 2018 Form 10-Q | 10 |
Managements Discussion and Analysis |
Asset Management
Asset management revenues of $2,495 million in the current quarter increased 14% from the prior year quarter primarily due to the effect of market appreciation and net positive flows on average fee-based client assets.
See Fee-Based Client Assets Rollforwards herein.
Net Interest
Net interest of $1,069 million in the current quarter increased 8% from the prior year quarter primarily as a result of higher interest rates and higher loan balances.
Non-interest Expenses
Non-interest expenses of $3,214 million in the current quarter increased 4% from the prior year quarter.
| Compensation and benefits expenses increased in the current quarter primarily due to the formulaic payout to Wealth Management representatives linked to higher revenues and increases in salaries, partially offset by decreases in the fair value of investments to which certain deferred compensation plans are referenced. |
| Non-compensation expenses were relatively unchanged in the current quarter compared with prior year quarter. |
Fee-Based Client Assets
For a description of fee-based client assets, including descriptions of the fee based client asset types and rollforward items in the following tables, see Managements Discussion and Analysis of Financial Condition and Results of OperationsBusiness SegmentsWealth ManagementFee-Based Client Assets in the 2017 Form 10-K.
Fee-Based Client Assets Rollforwards
$ in billions | At December 31, |
Inflows | Outflows | Market Impact |
At March 31, |
|||||||||||||||
Separately managed1 |
$ | 252 | $ | 10 | $ | (6 | ) | $ | 4 | $ | 260 | |||||||||
Unified managed |
250 | 14 | (8 | ) | (2 | ) | 254 | |||||||||||||
Mutual fund advisory |
21 | | (1 | ) | | 20 | ||||||||||||||
Advisor |
149 | 9 | (9 | ) | (2 | ) | 147 | |||||||||||||
Portfolio manager |
353 | 21 | (12 | ) | (6 | ) | 356 | |||||||||||||
Subtotal |
$ | 1,025 | $ | 54 | $ | (36 | ) | $ | (6 | ) | $ | 1,037 | ||||||||
Cash management |
20 | 4 | (3 | ) | | 21 | ||||||||||||||
Total fee-based client assets |
$ | 1,045 | $ | 58 | $ | (39 | ) | $ | (6 | ) | $ | 1,058 |
$ in billions | At December 31, |
Inflows | Outflows | Market Impact |
At March 31, |
|||||||||||||||
Separately managed1 |
$ | 222 | $ | 9 | $ | (5) | $ | 4 | $ | 230 | ||||||||||
Unified managed |
204 | 13 | (9) | 9 | 217 | |||||||||||||||
Mutual fund advisory |
21 | | (1) | 1 | 21 | |||||||||||||||
Advisor |
125 | 10 | (7) | 5 | 133 | |||||||||||||||
Portfolio manager |
285 | 20 | (11) | 11 | 305 | |||||||||||||||
Subtotal |
$ | 857 | $ | 52 | $ | (33) | $ | 30 | $ | 906 | ||||||||||
Cash management |
20 | 3 | (2) | | 21 | |||||||||||||||
Total fee-based client assets |
$ | 877 | $ | 55 | $ | (35) | $ | 30 | $ | 927 |
Average Fee Rates
Three Months Ended March 31, |
||||||||
Fee rate in bps | 2018 | 2017 | ||||||
Separately managed |
16 | 16 | ||||||
Unified managed |
98 | 100 | ||||||
Mutual fund advisory |
119 | 120 | ||||||
Advisor |
85 | 86 | ||||||
Portfolio manager |
96 | 98 | ||||||
Subtotal |
76 | 77 | ||||||
Cash management |
6 | 6 | ||||||
Total fee-based client assets |
75 | 75 |
1. | Includes non-custody account values reflecting prior quarter-end balances due to a lag in the reporting of asset values by third-party custodians. |
11 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
Investment Management
Income Statement Information
Three Months Ended March 31, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues |
||||||||||||
Trading |
$ | 5 | $ | (11 | ) | 145% | ||||||
Investments |
77 | 98 | (21)% | |||||||||
Asset management |
626 | 517 | 21% | |||||||||
Other |
10 | 4 | 150% | |||||||||
Total non-interest revenues |
718 | 608 | 18% | |||||||||
Interest income |
1 | 1 | % | |||||||||
Interest expense |
1 | | N/M | |||||||||
Net interest |
| 1 | N/M | |||||||||
Net revenues |
718 | 609 | 18% | |||||||||
Compensation and benefits |
304 | 279 | 9% | |||||||||
Non-compensation expenses |
266 | 227 | 17% | |||||||||
Total non-interest expenses |
570 | 506 | 13% | |||||||||
Income from continuing operations before income taxes |
148 | 103 | 44% | |||||||||
Provision for income taxes |
19 | 30 | (37)% | |||||||||
Net income |
129 | 73 | 77% | |||||||||
Net income (loss) applicable to noncontrolling interests |
2 | 6 | (67)% | |||||||||
Net income applicable to |
$ | 127 | $ | 67 | 90% |
Net Revenues
Investments
Investments gains of $77 million in the current quarter decreased 21% from the prior year quarter primarily as a result of lower carried interest in certain private equity funds.
Asset Management
Asset management revenues of $626 million in the current quarter increased 21% from the prior year quarter primarily as a result of higher average AUM across all asset classes. In addition, Asset management revenues increased as a result of the gross presentation of distribution fees due to the adoption of the accounting update Revenue from Contracts with Customers (see Notes 2 and 20 to the financial statements for further details).
In addition to the gross presentation described above, the timing of the recognition of certain performance fees not in the form of carried interest is generally expected to be deferred within a fiscal year until the fees are no longer probable of being reversed. Thus, the recognition of a greater portion of such revenues is expected to be recognized in the second half of each fiscal year based on current fee arrangements.
See Assets Under Management or Supervision herein.
Non-interest Expenses
Non-interest expenses of $570 million in the current quarter increased 13% from the prior year quarter primarily as a result of increases in both Compensation and benefits expenses and Non-compensation expenses.
| Compensation and benefits expenses increased in the current quarter primarily as a result of increases in discretionary incentive compensation driven mainly by higher revenues, increases in salaries, and deferred compensation associated with carried interest. |
| Non-compensation expenses increased in the current quarter primarily as a result of the gross presentation of distribution fees due to adoption of the accounting update Revenue from Contracts with Customers along with higher fee sharing on increased AUM balances. See Asset Management above. |
Assets Under Management or Supervision
For a description of the asset classes and rollforward items in the following tables, see Managements Discussion and Analysis of Financial Condition and Results of OperationsBusiness SegmentsInvestment ManagementAssets Under Management or Supervision in the 2017 Form 10-K.
AUM Rollforwards
$ in billions | At December 31, 2017 |
Inflows | Outflows | Market Impact |
Other1 | At March 31, 2018 |
||||||||||||||||||
Equity |
$ | 105 | $ | 9 | $ | (7 | ) | $ | 1 | $ | 1 | $ | 109 | |||||||||||
Fixed income |
73 | 7 | (8 | ) | (1 | ) | 1 | 72 | ||||||||||||||||
Alternative/Other |
128 | 4 | (4 | ) | | 3 | 131 | |||||||||||||||||
Long-term AUM subtotal |
306 | 20 | (19 | ) | | 5 | 312 | |||||||||||||||||
Liquidity |
176 | 325 | (344 | ) | | | 157 | |||||||||||||||||
Total AUM |
$ | 482 | $ | 345 | $ | (363 | ) | $ | | $ | 5 | $ | 469 | |||||||||||
Shares of minority stake assets |
7 | 7 | ||||||||||||||||||||||
$ in billions | At December 31, 2016 |
Inflows | Outflows | Market Impact |
Other1 | At March 31, 2017 |
||||||||||||||||||
Equity |
$ | 79 | $ | 5 | $ | (5 | ) | $ | 8 | $ | | $ | 87 | |||||||||||
Fixed income |
60 | 5 | (5 | ) | 1 | 1 | 62 | |||||||||||||||||
Alternative/Other |
115 | 7 | (4 | ) | 1 | | 119 | |||||||||||||||||
Long-term AUM subtotal |
254 | 17 | (14 | ) | 10 | 1 | 268 | |||||||||||||||||
Liquidity |
163 | 328 | (338 | ) | | | 153 | |||||||||||||||||
Total AUM |
$ | 417 | $ | 345 | $ | (352 | ) | $ | 10 | $ | 1 | $ | 421 | |||||||||||
Shares of minority stake assets |
8 | 7 |
1. | Includes distributions and foreign currency impact for both periods and the impact of the Mesa West Capital, LLC acquisition in the current quarter. |
March 2018 Form 10-Q | 12 |
Managements Discussion and Analysis |
Average AUM
Three Months Ended March 31, |
||||||||
$ in billions | 2018 | 2017 | ||||||
Equity |
$ | 109 | $ | 83 | ||||
Fixed income |
73 | 62 | ||||||
Alternative/Other |
129 | 117 | ||||||
Long-term AUM subtotal |
311 | 262 | ||||||
Liquidity |
163 | 157 | ||||||
Total AUM |
$ | 474 | $ | 419 | ||||
Shares of minority |
7 | 7 |
Average Fee Rate
Three Months Ended March 31, |
||||||||
Fee rate in bps | 2018 | 2017 | ||||||
Equity |
76 | 74 | ||||||
Fixed income |
35 | 33 | ||||||
Alternative/Other |
68 | 71 | ||||||
Long-term AUM |
63 | 63 | ||||||
Liquidity |
18 | 18 | ||||||
Total AUM |
47 | 46 |
13 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
Supplemental Financial Information and Disclosures
Income Tax Matters
Effective Tax Rate from Continuing Operations
Three Months Ended March 31, |
||||||||
2018 | 2017 | |||||||
U.S. GAAP |
20.9% | 29.0% | ||||||
Adjusted effective income tax ratenon-GAAP1 |
20.9% | 28.5% |
1. | Adjusted amounts exclude an intermittent net discrete tax provision of $14 million in the prior year quarter. Income tax consequences associated with employee share-based awards are recognized in Provision for income taxes in the income statements but are excluded from the intermittent net discrete tax provisions (benefits) adjustment as we anticipate conversion activity each quarter. For further information on non-GAAP measures, see Selected Non-GAAP Financial Information herein. |
The effective tax rates include recurring-type discrete tax benefits associated with employee share-based payments of $147 million and $112 million in the current quarter and prior year quarter, respectively.
The effective tax rate reflects our current assumptions, estimates and interpretations related to the U.S. Tax Cuts and Jobs Act (Tax Act) and other factors. The Tax Act, enacted on December 22, 2017, significantly revised U.S. corporate income tax law by, among other things, reducing the corporate income tax rate to 21%, and implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries; imposes a minimum tax on global intangible low-taxed income (GILTI) and an alternative base erosion and anti-abuse tax (BEAT) on U.S. corporations that make deductible payments to non-U.S. related persons in excess of specified amounts; and broadens the tax base by partially or wholly eliminating tax deductions for certain historically deductible expenses.
Our estimates may change as additional clarification and implementation guidance continue to be received from the U.S. Treasury Department and as the interpretation of the Tax Act evolves over time. Taking into account continuing developments related to provisions of the Tax Act such as the modified territorial tax system and GILTI, we expect our effective tax rate from continuing operations for 2018 to be approximately 22% to 25% (see Forward-Looking Statements in the 2017 Form 10-K).
U.S. Bank Subsidiaries
We provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, primarily through our U.S. bank subsidiaries, Morgan Stanley Bank N.A. (MSBNA) and Morgan Stanley Private Bank, National Association (MSPBNA) (collectively, U.S. Bank Subsidiaries). The lending activities in the Institutional Securities business segment primarily include loans and lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily include: securities-based lending, which allows clients to borrow money against the value of qualifying securities; and residential real estate loans.
We expect our lending activities to continue to grow through further market penetration of the client base. For a further discussion of our credit risks, see Quantitative and Qualitative Disclosures about Market RiskRisk ManagementCredit Risk. For further discussion about loans and lending commitments, see Notes 7 and 11 to the financial statements.
U.S. Bank Subsidiaries Supplemental Financial Information1
$ in billions |
At 2018 |
At December 31, 2017 |
||||||
Assets |
$ | 188.3 | $ | 185.3 | ||||
Investment securities portfolio: |
||||||||
Investment securitiesAFS |
43.1 | 42.0 | ||||||
Investment securitiesHTM |
18.0 | 17.5 | ||||||
Total investment securities |
$ | 61.1 | $ | 59.5 | ||||
Deposits2 |
$ | 160.1 | $ | 159.1 | ||||
Wealth Management |
| |||||||
Securities-based lending and other loans3 |
$ | 41.7 | $ | 41.2 | ||||
Residential real estate loans |
26.6 | 26.7 | ||||||
Total |
$ | 68.3 | $ | 67.9 | ||||
Institutional Securities |
| |||||||
Corporate loans |
$ | 27.4 | $ | 24.2 | ||||
Wholesale real estate loans |
12.4 | 12.2 | ||||||
Total |
$ | 39.8 | $ | 36.4 |
1. | Amounts exclude transactions with the Parent Company and between the bank subsidiaries. |
2. | For further information on deposits, see Liquidity and Capital ResourcesFunding ManagementUnsecured Financing herein. |
3. | Other loans primarily include tailored lending. |
March 2018 Form 10-Q | 14 |
Managements Discussion and Analysis |
Accounting Development Updates
The Financial Accounting Standards Board has issued certain accounting updates that apply to us. Accounting updates not listed below were assessed and determined to be either not applicable or are not expected to have a significant impact on our financial statements.
The following accounting updates are currently being evaluated to determine the potential impact of adoption:
| Leases. This accounting update requires lessees to recognize in the balance sheet all leases with terms exceeding one year, which results in the recognition of a right of use asset and corresponding lease liability, including for those leases that we currently classify as operating leases. The accounting for leases where we are the lessor is largely unchanged. |
The right of use asset and lease liability will initially be measured using the present value of the remaining rental payments. This change to the accounting for leases where we are lessee requires modifications to our lease accounting systems and determining the present value of the remaining rental payments. Key aspects of the latter include concluding upon the discount rate and determining whether to include non-lease components in rental payments. This update is effective as of January 1, 2019 with early adoption permitted. |
| Financial InstrumentsCredit Losses. This accounting update impacts the impairment model for certain financial assets measured at amortized cost by requiring a CECL methodology to estimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase. CECL will replace the loss model currently applicable to loans held for investment, HTM securities and other receivables carried at amortized cost. |
The update also eliminates the concept of other-than-temporary impairment for AFS securities. Impairments on AFS securities will be required to be recognized in earnings through an allowance, when the fair value is less than amortized cost and a credit loss exists or the securities are expected to be sold before recovery of amortized cost. |
Under the update, there may be an ability to determine there are no expected credit losses in certain circumstances, e.g., based on collateral arrangements for lending and financing transactions or based on the credit quality of the borrower or issuer. |
Overall, the amendments in this update are expected to accelerate the recognition of credit losses for portfolios |
where the CECL models will be applied. This update is effective as of January 1, 2020 with early adoption permitted as of January 1, 2019. |
Our financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions (see Note 1 to the financial statements). We believe that of our significant accounting policies (see Note 2 to the financial statements in the 2017 Form 10-K and Note 2 to the financial statements), the fair value, goodwill and intangible assets, legal and regulatory contingencies and income taxes policies involve a higher degree of judgment and complexity. For a further discussion about our critical accounting policies, see Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies in the 2017 Form 10-K.
Liquidity and Capital Resources
Senior management, with oversight by the Asset and Liability Management Committee and the Board of Directors (Board), establishes and maintains our liquidity and capital policies. Through various risk and control committees, senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity, interest rate and currency sensitivity of our asset and liability position. The Treasury department, Firm Risk Committee, Asset and Liability Management Committee, and other committees and control groups assist in evaluating, monitoring and controlling the impact that our business activities have on our balance sheet, liquidity and capital structure. Liquidity and capital matters are reported regularly to the Board and the Risk Committee of the Board.
Balance Sheet
We monitor and evaluate the composition and size of our balance sheet on a regular basis. Our balance sheet management process includes quarterly planning, business-specific thresholds, monitoring of business-specific usage versus key performance metrics and new business impact assessments.
We establish balance sheet thresholds at the consolidated and business segment levels. We monitor balance sheet utilization and review variances resulting from business activity or market fluctuations. On a regular basis, we review current performance versus established thresholds and assess the need to re-allocate our balance sheet based on business unit needs. We also monitor key metrics, including asset and liability size and capital usage.
15 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
Total Assets by Business Segment
At March 31, 2018 | ||||||||||||||||
$ in millions | IS | WM | IM | Total | ||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents1 |
$ | 74,096 | $ | 13,173 | $ | 75 | $ | 87,344 | ||||||||
Trading assets at fair value |
269,200 | 85 | 3,759 | 273,044 | ||||||||||||
Investment securities |
19,913 | 60,728 | | 80,641 | ||||||||||||
Securities purchased under agreements to resell |
72,460 | 7,786 | | 80,246 | ||||||||||||
Securities borrowed |
135,608 | 227 | | 135,835 | ||||||||||||
Customer and other receivables |
48,257 | 17,973 | 605 | 66,835 | ||||||||||||
Loans, net of allowance2 |
40,804 | 68,326 | 5 | 109,135 | ||||||||||||
Other assets3 |
14,447 | 9,305 | 1,663 | 25,415 | ||||||||||||
Total assets |
$ | 674,785 | $ | 177,603 | $ | 6,107 | $ | 858,495 | ||||||||
At December 31, 2017 | ||||||||||||||||
$ in millions | IS | WM | IM | Total | ||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents1 |
$ | 63,597 | $ | 16,733 | $ | 65 | $ | 80,395 | ||||||||
Trading assets at fair value |
295,678 | 59 | 2,545 | 298,282 | ||||||||||||
Investment securities |
19,556 | 59,246 | | 78,802 | ||||||||||||
Securities purchased under agreements to resell |
74,732 | 9,526 | | 84,258 | ||||||||||||
Securities borrowed |
123,776 | 234 | | 124,010 | ||||||||||||
Customer and other receivables |
36,803 | 18,763 | 621 | 56,187 | ||||||||||||
Loans, net of allowance2 |
36,269 | 67,852 | 5 | 104,126 | ||||||||||||
Other assets3 |
14,563 | 9,596 | 1,514 | 25,673 | ||||||||||||
Total assets |
$ | 664,974 | $ | 182,009 | $ | 4,750 | $ | 851,733 |
ISInstitutional Securities
WMWealth Management
IMInvestment Management
1. | Cash and cash equivalents includes Cash and due from banks, Interest bearing deposits with banks and Restricted cash. |
2. | Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 7 to the financial statements). |
3. | Other assets primarily includes Goodwill, Intangible assets, premises, equipment, software, other investments, and deferred tax assets. |
A substantial portion of total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. Total assets increased to $858.5 billion at March 31, 2018 from $851.7 billion at December 31, 2017, primarily driven by an increase in Customer and other receivables and growth within the Institutional Securities loan portfolios. Trading Assets within the Institutional Securities business segment declined as we sold inventory in Equities to support increased demand and changes in client positioning. This was offset by increases in Securities borrowed and GLR cash deposits. For further information regarding our GLR, see Global Liquidity Reserve herein.
Securities Repurchase Agreements and Securities Lending
Securities borrowed or securities purchased under agreements to resell and securities loaned or securities sold under agreements to repurchase are treated as collateralized financings (see Note 2 to the financial statements in the 2017 Form 10-K and Note 6 to the financial statements).
Collateralized Financing Transactions
$ in millions | At March 31, 2018 |
At December 31, 2017 |
||||||
Securities purchased under agreements to resell and Securities borrowed |
$ | 216,081 | $ | 208,268 | ||||
Securities sold under agreements to repurchase and Securities loaned |
$ | 65,131 | $ | 70,016 | ||||
Securities received as collateral1 |
$ | 8,693 | $ | 13,749 | ||||
Average Daily Balance Three Months Ended |
||||||||
$ in millions | March 31, 2018 |
December 31, 2017 |
||||||
Securities purchased under agreements to resell and Securities borrowed |
$ | 211,753 | $ | 214,343 | ||||
Securities sold under agreements to repurchase and Securities loaned |
$ | 65,684 | $ | 66,879 |
1. | Included in Trading assets in the balance sheets. |
Customer Securities Financing
The customer receivable portion of securities financing transactions primarily includes customer margin loans, collateralized by customer-owned securities, which are segregated in accordance with regulatory requirements. The customer payable portion of securities financing transactions primarily includes payables to our prime brokerage customers. Our risk exposure on these transactions is mitigated by collateral maintenance policies that limit our credit exposure to customers and liquidity reserves held against this risk exposure.
Liquidity Risk Management Framework
The primary goal of our Liquidity Risk Management Framework is to ensure that we have access to adequate funding across a wide range of market conditions and time horizons. The framework is designed to enable us to fulfill our financial obligations and support the execution of our business strategies.
The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the GLR, which support our target liquidity profile. For further discussion about the Firms Required Liquidity Framework and Liquidity Stress Tests, see Managements Discussion and Analysis of Financial
March 2018 Form 10-Q | 16 |
Managements Discussion and Analysis |
Condition and Results of OperationsLiquidity and Capital ResourcesLiquidity Risk Management Framework in the 2017 Form 10-K.
At March 31, 2018 and December 31, 2017, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.
Global Liquidity Reserve
We maintain sufficient global liquidity reserves pursuant to our Required Liquidity Framework. For further discussion of our GLR, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesLiquidity Risk Management FrameworkGlobal Liquidity Reserve in the 2017 Form 10-K.
GLR by Type of Investment
$ in millions | At March 31, |
At December 31, 2017 |
||||||
Cash deposits with banks1 |
$ | 9,930 | $ | 7,167 | ||||
Cash deposits with central banks1 |
37,243 | 33,791 | ||||||
Unencumbered highly liquid securities: |
||||||||
U.S. government obligations |
84,155 | 73,422 | ||||||
U.S. agency and agency mortgage-backed securities |
51,805 | 55,750 | ||||||
Non-U.S. sovereign obligations2 |
20,334 | 19,424 | ||||||
Other investment grade securities |
2,996 | 3,106 | ||||||
Total |
$ | 206,463 | $ | 192,660 |
1. | Primarily included in Cash and due from banks and Interest bearing deposits with banks in the balance sheets. |
2. | Non-U.S. sovereign obligations are primarily composed of unencumbered German, French, Dutch, U.K. and Japanese government obligations. |
GLR Managed by Bank and Non-Bank Legal Entities
At 2018
|
At 2017
|
Average Daily
|
||||||||||
$ in millions | March 31, 2018 | |||||||||||
Bank legal entities |
||||||||||||
Domestic |
$ | 68,826 | $ | 70,364 | $ | 69,955 | ||||||
Foreign |
4,602 | 4,756 | 4,263 | |||||||||
Total Bank legal entities |
73,428 | 75,120 | 74,218 | |||||||||
Non-Bank legal entities |
|
|||||||||||
Domestic: |
||||||||||||
Parent Company |
48,998 | 41,642 | 44,184 | |||||||||
Non-Parent Company |
32,415 | 35,264 | 32,356 | |||||||||
Total Domestic |
81,413 | 76,906 | 76,540 | |||||||||
Foreign |
51,622 | 40,634 | 44,216 | |||||||||
Total Non-Bank legal entities |
133,035 | 117,540 | 120,756 | |||||||||
Total |
$ | 206,463 | $ | 192,660 | $ | 194,974 |
Regulatory Liquidity Framework
Liquidity Coverage Ratio
We and our U.S. Bank Subsidiaries are subject to the LCR requirements including a requirement to calculate each entitys LCR on each business day. The requirements are designed to ensure that banking organizations have sufficient HQLA to cover net cash outflows arising from significant stress over 30 calendar days, thus promoting the short-term resilience of the liquidity risk profile of banking organizations. We and our U.S. Bank Subsidiaries are compliant with the minimum required LCR of 100%.
HQLA by Type of Asset and LCR
Average Daily Balance Three Months Ended |
||||||||
$ in millions | March 31, 2018 | December 31, 2017 | ||||||
HQLA |
||||||||
Cash deposits with central banks |
$ | 33,350 | $ | 33,450 | ||||
Securities1 |
125,015 | 125,269 | ||||||
Total |
$ | 158,365 | $ | 158,719 | ||||
LCR |
121% | 128% |
1. | Primarily includes U.S. Treasuries; U.S. agency mortgage-backed securities; sovereign bonds; investment grade corporate bonds; and publicly traded common equities. |
The decrease in the LCR in the current quarter is due to an increase in net outflows (the denominator of the ratio) driven by the impact of an increase in lending commitments, primarily within the Institutional Securities business segment.
The regulatory definition of HQLA is substantially the same as our GLR. GLR includes cash placed at institutions other than central banks that is considered an inflow for LCR purposes. HQLA includes a portion of cash placed at central banks, certain unencumbered investment grade corporate bonds and publicly traded common equities, which do not meet the definition of our GLR.
Net Stable Funding Ratio
The objective of the NSFR is to reduce funding risk over a one-year horizon by requiring banking organizations to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress.
The Basel Committee on Banking Supervision (Basel Committee) has previously finalized the NSFR framework. In May 2016, the U.S. banking agencies issued a proposal to implement the NSFR in the U.S., which would apply to us and our U.S. Bank Subsidiaries. Our preliminary estimates, based on the current proposal, indicate that actions will be necessary to meet the requirement, which we would expect to
17 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
accomplish by the effective date of any final rule. Our preliminary estimates are subject to risks and uncertainties that may cause actual results based on the final rule to differ materially from estimates. For an additional discussion of the NSFR, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesRegulatory Liquidity FrameworkNet Stable Funding Ratio in the 2017 Form 10-K.
Funding Management
We manage our funding in a manner that reduces the risk of disruption to our operations. We pursue a strategy of diversification of secured and unsecured funding sources (by product, investor and region) and attempt to ensure that the tenor of our liabilities equals or exceeds the expected holding period of the assets being financed.
We fund our balance sheet on a global basis through diverse sources. These sources may include our equity capital, borrowings, Securities sold under agreements to repurchase, securities lending, deposits, letters of credit and lines of credit. We have active financing programs for both standard and structured products targeting global investors and currencies.
Secured Financing
For a discussion of our secured financing activities, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesFunding ManagementSecured Financing in the 2017 Form 10-K.
At March 31, 2018 and December 31, 2017, the weighted average maturity of our secured financing of less liquid assets was greater than 120 days.
Unsecured Financing
For a discussion of our unsecured financing activities, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesFunding ManagementUnsecured Financing in the 2017 Form 10-K and see Note 4 to the financial statements.
Deposits
$ in millions | At March 31, 2018 |
At December 31, 2017 |
||||||
Savings and demand deposits: |
||||||||
Brokerage sweep deposits1 |
$ | 129,177 | $ | 135,946 | ||||
Savings and other |
9,181 | 8,541 | ||||||
Total Savings and demand deposits |
138,358 | 144,487 | ||||||
Time deposits2 |
22,066 | 14,949 | ||||||
Total |
$ | 160,424 | $ | 159,436 |
1. | Represents balances swept from client brokerage accounts. |
2. | Certain time deposit accounts are carried at fair value under the fair value option (see Note 3 to the financial statements). |
Deposits are primarily sourced from our Wealth Management clients and are considered to have stable, low-cost funding characteristics. Total deposits at March 31, 2018 were up slightly compared with December 31, 2017, primarily driven by measures to increase Time deposits and Savings and other deposits, partially offset by a reduction in Brokerage sweep deposits due to client deployment of cash into investments.
Borrowings
We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of borrowings with original maturities greater than one year allows us to reduce reliance on short-term credit sensitive instruments. Borrowings with original maturities greater than one year are generally managed to achieve staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients across regions, currencies and product types.
The availability and cost of financing to us can vary depending on market conditions, the volume of certain trading and lending activities, our credit ratings and the overall availability of credit. We also engage in, and may continue to engage in, repurchases of our borrowings in the ordinary course of business.
March 2018 Form 10-Q | 18 |
Managements Discussion and Analysis |
Borrowings by Remaining Maturity at March 31, 20181
$ in millions | Parent Company |
Subsidiaries | Total | |||||||||
Original maturities of one year or less |
$ | | $ | 1,256 | $ | 1,256 | ||||||
Original maturities greater than one year |
|
|||||||||||
2018 |
$ | 12,783 | $ | 3,318 | $ | 16,101 | ||||||
2019 |
21,765 | 3,769 | 25,534 | |||||||||
2020 |
18,775 | 2,284 | 21,059 | |||||||||
2021 |
20,163 | 2,650 | 22,813 | |||||||||
2022 |
15,261 | 1,985 | 17,246 | |||||||||
Thereafter |
78,873 | 12,082 | 90,955 | |||||||||
Total |
$ | 167,620 | $ | 26,088 | $ | 193,708 | ||||||
Total Borrowings |
$ | 167,620 | $ | 27,344 | $ | 194,964 | ||||||
Maturities over next 12 months2 |
|
$ | 23,029 |
1. | Original maturity in the table is generally based on contractual final maturity. For Borrowings with put options, remaining maturity represents the earliest put date. |
2. | Includes only borrowings with original maturities greater than one year. |
Borrowings increased to $194,964 million as of March 31, 2018 compared with $192,582 million at December 31, 2017. This increase is a result of issuances, partially offset primarily by maturities and retirements as presented in the following table.
$ in millions | Three Months Ended March 31, 2018 |
|||
Issued |
$ | 15,370 | ||
Matured or retired |
11,377 |
For further information on Borrowings, see Note 10 to the financial statements.
Credit Ratings
We rely on external sources to finance a significant portion of our daily operations. The cost and availability of financing generally are impacted by our credit ratings, among other things. In addition, our credit ratings can have an impact on certain trading revenues, particularly in those businesses where longer-term counterparty performance is a key consideration, such as OTC derivative transactions, including credit derivatives and interest rate swaps. When determining credit ratings, rating agencies consider company-specific factors, other industry factors such as regulatory or legislative changes, and the macroeconomic environment, among other things.
Our credit ratings do not include any uplift from perceived government support from any rating agency given the significant progress of U.S. financial reform legislation and regulations. Some rating agencies have stated that they
currently incorporate various degrees of credit rating uplift from non-governmental third-party sources of potential support.
Parent Company and MSBNA Senior Unsecured Ratings at April 30, 2018
| ||||||
Parent Company | ||||||
Short-Term Debt |
Long-Term Debt |
Rating Outlook | ||||
DBRS, Inc. |
R-1 (middle) | A (high) | Stable | |||
Fitch Ratings, Inc. |
F1 | A | Stable | |||
Moodys Investors Service, Inc. |
P-2 | A3 | Stable | |||
Rating and Investment Information, Inc. |
a-1 | A- | Stable | |||
S&P Global Ratings |
A-2 | BBB+ | Stable |
MSBNA | ||||||||
Short-Term Debt |
Long-Term Debt |
Rating Outlook |
||||||
Fitch Ratings, Inc. |
F1 | A+ | Stable | |||||
Moodys Investors Service, Inc. |
P-1 | A1 | Stable | |||||
S&P Global Ratings |
A-1 | A+ | Stable |
In connection with certain OTC trading agreements and certain other agreements where we are a liquidity provider to certain financing vehicles associated with the Institutional Securities business segment, we may be required to provide additional collateral, immediately settle any outstanding liability balances with certain counterparties or pledge additional collateral to certain clearing organizations in the event of a future credit rating downgrade irrespective of whether we are in a net asset or net liability position.
The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moodys Investors Service, Inc. (Moodys) and S&P Global Ratings. The following table shows the future potential collateral amounts and termination payments that could be called or required by counterparties and clearing organizations in the event of one-notch or two-notch downgrade scenarios, from the lowest of Moodys ratings or S&P Global Ratings, based on the relevant contractual downgrade triggers.
Incremental Collateral or Terminating Payments upon
Potential Future Rating Downgrade
$ in millions | At 2018 |
At 2017 |
||||||
One-notch downgrade |
$ | 806 | $ | 822 | ||||
Two-notch downgrade |
611 | 596 |
19 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact it would have on our business and results of operations in future periods is inherently uncertain and would depend on a number of interrelated factors, including, among others, the magnitude of the downgrade, the rating relative to peers, the rating assigned by the relevant agency pre-downgrade, individual client behavior and future mitigating actions we might take. The liquidity impact of additional collateral requirements is included in our Liquidity Stress Tests.
Capital Management
We view capital as an important source of financial strength and actively manage our consolidated capital position based upon, among other things, business opportunities, risks, capital availability and rates of return together with internal capital policies, regulatory requirements and rating agency guidelines and, therefore, in the future may expand or contract our capital base to address the changing needs of our businesses. We attempt to maintain total capital, on a consolidated basis, at least equal to the sum of our operating subsidiaries required equity.
Common Stock
Three Months Ended March 31, |
||||||||
$ in millions |
2018 | 2017 | ||||||
Repurchases of common stock under our share repurchase program |
$ | 1,250 | $ | 750 |
From time to time we repurchase our outstanding common stock, including as part of our share repurchase program. As previously announced, on April 18, 2018, we entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (MUFG) whereby MUFG will sell shares of the Firms common stock to us, as part of our share repurchase program. The sales plan is only intended to maintain MUFGs ownership percentage below 24.9% in order to comply with MUFGs passivity commitments to the Federal Reserve and will have no impact on the strategic alliance between MUFG and us, including the joint venture in Japan. For a description of our share repurchase program, see Unregistered Sales of Equity Securities and Use of Proceeds.
For a description of our capital plan, see Liquidity and Capital ResourcesRegulatory RequirementsCapital Plans and Stress Tests.
Common Stock Dividend Announcement
Announcement date |
April 18, 2018 | |
Amount per share |
$0.25 | |
Date to be paid |
May 15, 2018 | |
Shareholders of record as of |
April 30, 2018 |
Preferred Stock
Preferred Stock Dividend Announcement
Announcement date |
March 15, 2018 | |
Date paid |
April 16, 2018 | |
Shareholders of record as of |
March 29, 2018 |
For additional information on common and preferred stock, see Note 14 to the financial statements.
Regulatory Requirements
Regulatory Capital Framework
We are a financial holding company (FHC) under the Bank Holding Company Act of 1956, as amended (BHC Act), and are subject to the regulation and oversight of the Board of Governors of the Federal Reserve System (Federal Reserve). The Federal Reserve establishes capital requirements for us, including well-capitalized standards, and evaluates our compliance with such capital requirements. The OCC establishes similar capital requirements and standards for our U.S. Bank Subsidiaries. The regulatory capital requirements are largely based on the Basel III capital standards established by the Basel Committee and also implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
Regulatory Capital Requirements
We are required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. For more information on our regulatory capital requirements, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesRegulatory RequirementsRegulatory Capital Requirements in the 2017 Form 10-K.
Regulatory Capital. Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 capital). Certain adjustments to and deductions from capital are required for purposes of determining these ratios, such as goodwill, intangible assets, certain deferred tax assets, other amounts in AOCI and investments in the capital instruments of unconsolidated financial institutions.
March 2018 Form 10-Q | 20 |
Managements Discussion and Analysis |
In addition to the minimum risk-based capital ratio requirements, by 2019 we will be subject to the following buffers:
| A greater than 2.5% Common Equity Tier 1 capital conservation buffer; |
| The Common Equity Tier 1 G-SIB capital surcharge, currently at 3%; and |
| Up to a 2.5% Common Equity Tier 1 CCyB, currently set by U.S. banking agencies at zero. |
In 2017 and 2018, each of the buffers is 50% and 75%, respectively, of the 2019 requirement noted above. Failure to maintain the buffers would result in restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. For a further discussion of the G-SIB capital surcharge, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesRegulatory RequirementsG-SIB Capital Surcharge in the 2017 Form 10-K.
Our risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWA (Standardized Approach) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWA (Advanced Approach). At March 31, 2018 and December 31, 2017, our ratios are based on the Standardized Approach rules.
Effective January 1, 2019, Common Equity Tier 1 capital, Tier 1 capital and Total capital requirements, inclusive of buffers, will increase to 10.0%, 11.5%, and 13.5%, respectively.
See Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements herein for additional capital requirements effective January 1, 2019.
Regulatory Capital Ratios
At March 31, 2018 | ||||||||||||
Fully Phased-In | ||||||||||||
$ in millions | Required Ratio |
Standardized | Advanced | |||||||||
Risk-based capital |
||||||||||||
Common Equity Tier 1 capital |
$ | 60,568 | $ | 60,568 | ||||||||
Tier 1 capital |
69,213 | 69,213 | ||||||||||
Total capital |
79,363 | 79,138 | ||||||||||
Total RWA |
390,390 | 378,442 | ||||||||||
Common Equity Tier 1 capital ratio |
8.6% | 15.5% | 16.0% | |||||||||
Tier 1 capital ratio |
10.1% | 17.7% | 18.3% | |||||||||
Total capital ratio |
12.1% | 20.3% | 20.9% | |||||||||
Leverage-based capital |
||||||||||||
Adjusted average assets1 |
$ | 846,868 | N/A | |||||||||
Tier 1 leverage ratio |
4.0% | 8.2% | N/A |
At December 31, 2017 | ||||||||||||||||||||
Transitional2 | Fully Phased-In | |||||||||||||||||||
$ in millions | Required Ratio |
Standardized | Advanced | Standardized | Advanced | |||||||||||||||
Risk-based capital |
||||||||||||||||||||
Common Equity |
||||||||||||||||||||
Tier 1 capital |
$ | 61,134 | $ | 61,134 | $ | 60,564 | $ | 60,564 | ||||||||||||
Tier 1 capital |
69,938 | 69,938 | 69,120 | 69,120 | ||||||||||||||||
Total capital |
80,275 | 80,046 | 79,470 | 79,240 | ||||||||||||||||
Total RWA |
369,578 | 350,212 | 377,241 | 358,324 | ||||||||||||||||
Common Equity Tier 1 capital ratio |
7.3% | 16.5% | 17.5% | 16.1% | 16.9% | |||||||||||||||
Tier 1 capital ratio |
8.8% | 18.9% | 20.0% | 18.3% | 19.3% | |||||||||||||||
Total capital ratio |
10.8% | 21.7% | 22.9% | 21.1% | 22.1% | |||||||||||||||
Leverage-based capital |
||||||||||||||||||||
Adjusted average assets1 |
$ | 842,270 | N/A | $ | 841,756 | N/A | ||||||||||||||
Tier 1 leverage ratio |
4.0% | 8.3% | N/A | 8.2% | N/A |
1. | Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the current quarter and the quarter ended December 31, 2017 adjusted for disallowed goodwill, intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments. |
2. | Regulatory compliance was determined based on capital ratios calculated under transitional rules until December 31, 2017. |
At December 31, 2017, the pro forma fully phased-in estimated amounts utilize fully phased-in Tier 1 capital, including the fully phased-in Tier 1 capital deductions that applied beginning January 1, 2018. These pro forma fully phased-in estimates were non-GAAP financial measures because the related capital rules were not yet effective at December 31, 2017. These estimates were based on our understanding of the capital rules and other factors at the time.
21 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
Well-Capitalized Regulatory Capital Ratio Requirements for U.S. Bank Subsidiaries
At March 31, 2018 | ||||
Common Equity Tier 1 risk-based capital ratio |
6.5% | |||
Tier 1 risk-based capital ratio |
8.0% | |||
Total risk-based capital ratio |
10.0% | |||
Tier 1 leverage ratio |
5.0% | |||
SLR |
6.0% |
For us to remain an FHC, our U.S. Bank Subsidiaries must qualify as well-capitalized by maintaining the ratio requirements set forth in the previous table. The Federal Reserve has not yet revised the well-capitalized standard for FHCs to reflect the higher capital standards required of us under the capital rules. Assuming that the Federal Reserve would apply the same or very similar well-capitalized standards to FHCs, each of our risk-based capital ratios, Tier 1 leverage ratio and SLR at March 31, 2018 would have exceeded the revised well-capitalized standard. The Federal Reserve may require an FHC to maintain risk- and leverage-based capital ratios substantially in excess of mandated well-capitalized levels, depending upon general economic conditions and the FHCs particular condition, risk profile and growth plans.
Regulatory compliance was determined based on capital ratios including regulatory capital and RWA calculated under the transitional rules until December 31, 2017. The regulatory capital analyses in the following tables are presented using pro forma fully phased-in estimates as of December 31, 2017, which are equivalent to amounts calculated as of March 31, 2018.
Fully Phased-In Regulatory Capital
$ in millions | At March 31, 2018 |
At December 31, 20171 |
||||||
Common Equity Tier 1 capital |
||||||||
Common stock and surplus |
$ | 12,911 | $ | 14,354 | ||||
Retained earnings |
60,009 | 57,577 | ||||||
AOCI |
(3,406 | ) | (3,060 | ) | ||||
Regulatory adjustments and deductions: |
||||||||
Net goodwill |
(6,716 | ) | (6,599 | ) | ||||
Net intangible assets (other than goodwill and mortgage servicing assets) |
(2,424 | ) | (2,446 | ) | ||||
Other adjustments and deductions2 |
194 | 738 | ||||||
Total Common Equity Tier 1 capital |
$ | 60,568 | $ | 60,564 | ||||
Additional Tier 1 capital |
||||||||
Preferred stock |
$ | 8,520 | $ | 8,520 | ||||
Noncontrolling interests |
482 | 415 | ||||||
Other adjustments and deductions |
(23 | ) | (23 | ) | ||||
Additional Tier 1 capital |
$ | 8,979 | $ | 8,912 | ||||
Deduction for investments in covered funds |
(334 | ) | (356 | ) | ||||
Total Tier 1 capital |
$ | 69,213 | $ | 69,120 | ||||
Standardized Tier 2 capital |
||||||||
Subordinated debt |
$ | 9,612 | $ | 9,839 | ||||
Noncontrolling interests |
113 | 98 | ||||||
Eligible allowance for credit losses |
448 | 423 | ||||||
Other adjustments and deductions |
(23 | ) | (10 | ) | ||||
Total Standardized Tier 2 capital |
$ | 10,150 | $ | 10,350 | ||||
Total Standardized capital |
$ | 79,363 | $ | 79,470 | ||||
Advanced Tier 2 capital |
||||||||
Subordinated debt |
$ | 9,612 | $ | 9,839 | ||||
Noncontrolling interests |
113 | 98 | ||||||
Eligible credit reserves |
223 | 193 | ||||||
Other adjustments and deductions |
(23 | ) | (10 | ) | ||||
Total Advanced Tier 2 capital |
$ | 9,925 | $ | 10,120 | ||||
Total Advanced capital |
$ | 79,138 | $ | 79,240 |
March 2018 Form 10-Q | 22 |
Managements Discussion and Analysis |
Fully Phased-In Regulatory Capital Rollforward
$ in millions | Three Months Ended March 31, 2018 |
|||
Common Equity Tier 1 capital |
||||
Common Equity Tier 1 capital at December 31, 20171 |
$ | 60,564 | ||
Change related to the following items: |
||||
Value of shareholders common equity |
643 | |||
Net goodwill |
(117 | ) | ||
Net intangible assets (other than goodwill and mortgage servicing assets) |
22 | |||
Other adjustments and deductions2 |
(544 | ) | ||
Common Equity Tier 1 capital at March 31, 2018 |
$ | 60,568 | ||
Additional Tier 1 capital |
||||
Additional Tier 1 capital at December 31, 20171 |
$ | 8,912 | ||
Change related to the following items: |
||||
Noncontrolling interests |
67 | |||
Other adjustments and deductions |
| |||
Additional Tier 1 capital at March 31, 2018 |
8,979 | |||
Deduction for investments in covered funds at December 31, 2017 |
(356 | ) | ||
Change in deduction for investments in covered funds |
22 | |||
Deduction for investments in covered funds at March 31, 2018 |
(334 | ) | ||
Tier 1 capital at March 31, 2018 |
$ | 69,213 | ||
Standardized Tier 2 capital |
||||
Tier 2 capital at December 31, 20171 |
$ | 10,350 | ||
Change related to the following items: |
||||
Eligible allowance for credit losses |
25 | |||
Other changes, adjustments and deductions3 |
(225 | ) | ||
Standardized Tier 2 capital at March 31, 2018 |
$ | 10,150 | ||
Total Standardized capital at March 31, 2018 |
$ | 79,363 | ||
Advanced Tier 2 capital |
||||
Tier 2 capital at December 31, 20171 |
$ | 10,120 | ||
Change related to the following items: |
||||
Eligible credit reserves |
30 | |||
Other changes, adjustments and deductions3 |
(225 | ) | ||
Advanced Tier 2 capital at March 31, 2018 |
$ | 9,925 | ||
Total Advanced capital at March 31, 2018 |
$ | 79,138 |
1. | The pro forma fully phased-in estimates as of December 31, 2017 are non-GAAP financial measures. See Selected Non-GAAP Financial Information herein. |
2. | Other adjustments and deductions used in the calculation of Common Equity Tier 1 capital include credit spread premium over risk-free rate for derivative liabilities, net deferred tax assets, net after-tax DVA and adjustments related to AOCI. |
3. | Other changes, adjustments and deductions used in the calculations of Standardized and Advanced Tier 2 capital include changes in subordinated debt and noncontrolling interests. |
Fully Phased-In RWA Rollforward
Three Months Ended March 31, 20181 |
||||||||
$ in millions | Standardized | Advanced | ||||||
Credit risk RWA |
||||||||
Balance at December 31, 20172 |
$ | 301,946 | $ | 170,754 | ||||
Change related to the following items: |
||||||||
Derivatives |
(229 | ) | 3,568 | |||||
Securities financing transactions |
177 | 2,242 | ||||||
Securitizations |
(357 | ) | (1,277 | ) | ||||
Investment securities |
(270 | ) | 320 | |||||
Commitments, guarantees and loans |
12,934 | 15,090 | ||||||
Cash |
784 | 294 | ||||||
Equity investments |
2,726 | 2,887 | ||||||
Other credit risk3 |
634 | 236 | ||||||
Total change in credit risk RWA |
$ | 16,399 | $ | 23,360 | ||||
Balance at March 31, 2018 |
$ | 318,345 | $ | 194,114 | ||||
Market risk RWA |
||||||||
Balance at December 31, 20172 |
$ | 75,295 | $ | 74,907 | ||||
Change related to the following items: |
||||||||
Regulatory VaR |
1,187 | 1,187 | ||||||
Regulatory stressed VaR |
235 | 235 | ||||||
Incremental risk charge |
2,968 | 2,968 | ||||||
Comprehensive risk measure |
(2,135 | ) | (1,947 | ) | ||||
Specific risk: |
||||||||
Non-securitizations |
(2,590 | ) | (2,590 | ) | ||||
Securitizations |
(2,915 | ) | (2,917 | ) | ||||
Total change in market risk RWA |
$ | (3,250 | ) | $ | (3,064 | ) | ||
Balance at March 31, 2018 |
$ | 72,045 | $ | 71,843 | ||||
Operational risk RWA |
||||||||
Balance at December 31, 20172 |
$ | N/A | $ | 112,663 | ||||
Change in operational risk RWA |
N/A | (178 | ) | |||||
Balance at March 31, 2018 |
$ | N/A | $ | 112,485 | ||||
Total RWA |
$ | 390,390 | $ | 378,442 |
Regulatory VaRVaR for regulatory capital requirements
1. | The RWA for each category in the table reflects both on- and off-balance sheet exposures, where appropriate. |
2. | The pro forma fully phased-in estimates as of December 31, 2017 are non-GAAP financial measures. See Selected Non-GAAP Financial Information herein. |
3. | Amount reflects assets not in a defined category, non-material portfolios of exposures and unsettled transactions, as applicable. |
Credit risk RWA increased in the current quarter under the Standardized and Advanced Approaches primarily due to increased exposures in corporate lending within the Institutional Securities business segment. Credit risk RWA also increased under the Advanced Approach due to increased exposures in derivatives.
Market risk RWA decreased in the current quarter under the Standardized and Advanced Approaches primarily due to a decrease in standardized specific risk charges.
23 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
The decrease in operational risk RWA under the Advanced Approach reflects a reduction in the internal loss frequency related to litigation utilized in the operational risk capital model.
Supplementary Leverage Ratio
Supplementary Leverage Exposure and Ratio
At March 31, 2018 |
At December 31, 2017 | |||||||||||
$ in millions |
Fully Phased-in | Transitional Basis1 |
Fully Phased-in2 |
|||||||||
Average total assets3 |
$ | 856,738 | $ | 851,510 | $ | 851,510 | ||||||
Adjustments4, 5 |
234,780 | 231,173 | 230,660 | |||||||||
Supplementary leverage exposure |
$ | 1,091,518 | $ | 1,082,683 | $ | 1,082,170 | ||||||
SLR |
6.3% | 6.5% | 6.4% |
1. | Transitional provisions applied until December 31, 2017. |
2. | Estimated amounts utilize fully phased-in Tier 1 capital, including the fully phased-in Tier 1 capital deductions that apply beginning January 1, 2018. |
3. | Computed as the average daily balance of consolidated total assets under U.S. GAAP during the current quarter and the quarter ended December 31, 2017. |
4. | Computed as the average of the month-end balances over the current quarter and the quarter ended December 31, 2017. |
5. | Adjustments are to: (i) incorporate derivative exposures, including adding the related potential future exposure (including for derivatives cleared for clients), grossing up cash collateral netting where qualifying criteria are not met and adding the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) reflect the counterparty credit risk for repo-style transactions; (iii) add the credit equivalent amount for off-balance sheet exposures; and (iv) apply other adjustments to Tier 1 capital, including disallowed goodwill, intangible assets, certain deferred tax assets and certain investments in the capital instruments of unconsolidated financial institutions. |
The SLR became effective as a capital standard on January 1, 2018. We are required to maintain a Tier 1 supplementary leverage ratio of 3% as well as an enhanced SLR capital buffer of at least 2% (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. In addition, our U.S. Bank Subsidiaries must maintain an SLR of 6% to be considered well-capitalized.
U.S. Bank Subsidiaries Fully Phased-In Supplementary Leverage Ratios
At March 31, 2018 | At December 31, 20171 | |||||||
MSBNA |
9.0% | 9.1% | ||||||
MSPBNA |
9.3% | 9.3% |
1. | Estimated amounts utilize fully phased-in Tier 1 capital, including the fully phased-in Tier 1 capital deductions that apply beginning January 1, 2018. |
The pro forma transitional and fully phased-in supplementary leverage exposures and ratios are non-GAAP financial measures because they were not yet effective at December 31, 2017.
Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements
On December 15, 2016, the Federal Reserve adopted a final rule for top-tier BHCs of U.S. G-SIB (covered BHC), including the Parent Company, that establishes external TLAC, long-term debt (LTD) and clean holding company requirements. The final rule contains various definitions and restrictions, such as requiring eligible LTD to be issued by the covered BHC and be unsecured, have a maturity of one year or more from the date of issuance and not have certain derivative-linked features typically associated with certain types of structured notes. We expect to be in compliance with all requirements of the rule by January 1, 2019, the date that compliance is required.
The Federal Reserves proposed modifications to the enhanced SLR would also make corresponding changes to the calibration of the TLAC leverage-based requirements, as well as certain other technical changes to the TLAC rule. For a further discussion of the enhanced SLR, see Regulatory DevelopmentsProposed Modifications to the Enhanced SLR and to the SLR Applicable to Our U.S. Bank Subsidiaries herein.
For a further discussion of TLAC and LTD requirements, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesRegulatory RequirementsTotal Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements in the 2017 Form 10-K. For discussions about the interaction between the SPOE resolution strategy and the TLAC and LTD requirements, see BusinessSupervision and RegulationFinancial Holding CompanyResolution and Recovery Planning and Risk FactorsLegal, Regulatory and Compliance Risk in the 2017 Form 10-K.
Capital Plans and Stress Tests
Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large BHCs, including us, which form part of the Federal Reserves annual CCAR framework.
We submitted our 2018 Capital Plan (Capital Plan) and company-run stress test results to the Federal Reserve on April 5, 2018. We expect that the Federal Reserve will provide its response to our 2018 Capital Plan by June 30, 2018. There could be a range of potential outcomes to our Capital Plan whereby the Federal Reserve could object to, or otherwise require us to modify, such plan. See Risk Factors in the 2017 Form 10-K. The Federal Reserve is expected to publish summary results of the CCAR and Dodd-Frank Act supervisory stress tests of each large BHC, including us, by
March 2018 Form 10-Q | 24 |
Managements Discussion and Analysis |
June 30, 2018. We are required to disclose a summary of the results of our company-run stress tests within 15 days of the date the Federal Reserve discloses the results of the supervisory stress tests. In addition, we must submit the results of our mid-cycle company-run stress test to the Federal Reserve by October 5, 2018 and disclose a summary of the results between October 5, 2018 and November 4, 2018.
The Dodd-Frank Act also requires each of our U.S. Bank Subsidiaries to conduct an annual stress test. MSBNA and MSPBNA submitted their 2018 annual company-run stress tests to the OCC on April 5, 2018 and must publish a summary of their stress test results between June 15, 2018 and July 15, 2018.
For a further discussion of our capital plans and stress tests, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesRegulatory RequirementsCapital Plans and Stress Tests in the 2017 Form 10-K.
Attribution of Average Common Equity According to the Required Capital Framework
Our required capital (Required Capital) estimation is based on the Required Capital framework, an internal capital adequacy measure. Common equity attribution to the business segments is based on capital usage calculated under the Required Capital framework, as well as each business segments relative contribution to our total Required Capital.
The Required Capital framework is a risk-based and leverage use-of-capital measure, which is compared with our regulatory capital to ensure that we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. We define the difference between our total average common equity and the sum of the average common equity amounts allocated to our business segments as Parent Company equity. We generally hold Parent Company equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.
Common equity estimation and attribution to the business segments are based on our fully phased-in regulatory capital rules. The amount of capital allocated to the business segments is generally set at the beginning of each year and remains fixed throughout the year until the next annual reset unless a significant business change occurs (e.g., acquisition or disposition). Differences between available and Required Capital are attributed to Parent Company equity during the year.
The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory environment, for example, to incorporate changes in stress
testing or enhancements to modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.
Average Common Equity Attribution1
Three Months Ended March 31, |
||||||||
$ in billions |
2018 | 2017 | ||||||
Institutional Securities |
$ | 40.8 | $ | 40.2 | ||||
Wealth Management |
16.8 | 17.2 | ||||||
Investment Management |
2.6 | 2.4 | ||||||
Parent Company |
8.8 | 9.2 | ||||||
Total |
$ | 69.0 | $ | 69.0 |
1. | Average common equity is a non-GAAP financial measure. See Selected Non-GAAP Financial Information herein. |
Regulatory Developments
Resolution and Recovery Planning
Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure.
Our preferred resolution strategy, which is set out in our 2017 resolution plan, is an SPOE strategy. The Parent Company has amended and restated its support agreement with its material entities, as defined in our 2017 resolution plan. Under the secured amended and restated support agreement, upon the occurrence of a resolution scenario, the Parent Company would be obligated to contribute or loan on a subordinated basis all of its contributable material assets, other than shares in subsidiaries of the Parent Company and certain intercompany receivables, to provide capital and liquidity, as applicable, to our material entities.
The obligations of the Parent Company under the secured amended and restated support agreement are in most cases secured on a senior basis by the assets of the Parent Company (other than shares in subsidiaries of the Parent Company). As a result, claims of our material entities against the assets of the Parent Company (other than shares in subsidiaries of the Parent Company) are effectively senior to unsecured obligations of the Parent Company.
For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see BusinessSupervision and RegulationFinancial Holding CompanyResolution and Recovery Planning and Risk FactorsLegal, Regulatory and Compliance Risk in the 2017 Form 10-K.
25 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
Volcker Rule
The Volcker Rule prohibits banking entities, including us and our affiliates, from engaging in certain proprietary trading activities, as defined in the Volcker Rule, subject to exemptions for underwriting, market-making-related activities, risk-mitigating hedging and certain other activities. The Volcker Rule also prohibits certain investments and relationships by banking entities with covered funds, with a number of exemptions and exclusions. For more information about the Volcker Rule, see BusinessSupervision and RegulationActivities Restrictions under the Volcker Rule in the 2017 Form 10-K.
U.S. Department of Labor Conflict of Interest Rule and SEC Standards of Conduct for Investment Professionals
The U.S. DOLs final Conflict of Interest Rule under ERISA went into effect on June 9, 2017, with certain aspects subject to phased-in compliance. Full compliance with the rules related exemptions was scheduled to be required by July 1, 2019. However, on March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit vacated the Conflict of Interest Rule and accompanying exemptions in their entirety. While the U.S. DOL could appeal to the U.S. Supreme Court, the order to vacate the rule could take effect as soon as May 7, 2018. For a discussion of the U.S. DOL Conflict of Interest Rule, see BusinessSupervision and RegulationInstitutional Securities and Wealth Management in the 2017 Form 10-K.
On April 18, 2018, the SEC released for public comment a package of proposed rulemaking on the standards of conduct and required disclosures for broker-dealers and investment advisers. One of the proposals, entitled Regulation Best Interest, would require broker-dealers to act in the best interest of retail customers at the time a recommendation is made without placing the financial or other interests of the broker-dealer ahead of the interest of the retail customer. Additionally, the SEC proposed a new requirement for both broker-dealers and investment advisers to provide a brief relationship summary to retail investors with information intended to clarify the relationship between the parties. Finally, the SEC issued a proposed interpretation regarding the fiduciary duty that investment advisers owe their clients. We are reviewing the SECs package of proposed rules.
Proposed Stress Buffer Requirements
On April 10, 2018, the Federal Reserve issued a proposal to integrate its annual capital planning and stress testing requirements with certain ongoing regulatory capital requirements. The proposal, which would apply to certain BHCs, including us, would introduce a stress capital buffer and a stress leverage buffer (collectively, Stress Buffer
Requirements) and related changes to the capital planning and stress testing processes. Under the proposal, Stress Buffer Requirements would apply only with respect to the Standardized Approach and Tier 1 leverage regulatory capital requirements and would generally be effective on October 1, 2019.
In the Standardized Approach, the stress capital buffer would replace the existing Common Equity Tier 1 capital conservation buffer, which will be 2.5% as of January 1, 2019. The Standardized Approach stress capital buffer would equal the greater of (i) the maximum decline in our Common Equity Tier 1 capital ratio under the severely adverse scenario over the supervisory stress test measurement period, plus the sum of the ratios of the dollar amount of our planned common stock dividends to our projected RWA for each of the fourth through seventh quarters of the supervisory stress test projection period, and (ii) 2.5%. Regulatory capital requirements under the Standardized Approach would include the stress capital buffer, as summarized above, as well as our Common Equity Tier 1 G-SIB capital surcharge and any applicable Common Equity Tier 1 CCyB.
Like the stress capital buffer, the stress leverage buffer would be calculated based on the results of our annual supervisory stress tests. The stress leverage buffer would equal the maximum decline in our Tier 1 leverage ratio under the severely adverse scenario, plus the sum of the ratios of the dollar amount of our planned common stock dividends to our projected leverage ratio denominator for each of the fourth through seventh quarters of the supervisory stress test projection period. No floor would be established for the stress leverage buffer, which would apply in addition to the current minimum Tier 1 leverage ratio of 4%.
The proposal would make related changes to capital planning and stress testing processes for BHCs subject to the Stress Buffer Requirements. In particular, the proposal would limit projected capital actions to planned common stock dividends in the fourth through seventh quarters of the supervisory stress test projection period and would assume that BHCs maintain a constant level of assets and RWA throughout the supervisory stress test projection period.
The proposal does not change regulatory capital requirements under the Advanced Approach or the SLR, although the Federal Reserve and the OCC have separately proposed to modify the enhanced SLR requirements, as summarized below. If the proposal is adopted in its current form, limitations on capital distributions and discretionary bonus payments to executive officers would be determined by the most stringent limitation, if any, as determined under the Standardized Approach or the Tier 1 leverage ratio, inclusive of Stress Buffer Requirements, or the Advanced Approach or SLR or TLAC requirements, inclusive of applicable buffers.
March 2018 Form 10-Q | 26 |
Managements Discussion and Analysis |
Proposed Modifications to the Enhanced SLR and to the SLR Applicable to Our U.S. Bank Subsidiaries
On April 11, 2018, the Federal Reserve proposed modifications to the enhanced SLR that would replace the current 2% enhanced SLR buffer applicable to U.S. G-SIBs, including us, with a leverage buffer equal to 50% of our Common Equity Tier 1 G-SIB capital surcharge, which is currently 3%. Under the proposal, our enhanced SLR buffer would become 1.5%, for a total enhanced SLR requirement of 4.5%, assuming that our G-SIB capital surcharge remains the same when the proposal becomes effective, which may be as early as 2018 under the proposal.
As part of the same proposal, the Federal Reserve and the OCC also proposed to align the well-capitalized SLR standard applicable to our U.S. Bank Subsidiaries with the proposed enhanced SLR buffer applicable to the Firm. Under the proposal, the well-capitalized SLR requirement for our U.S. Bank Subsidiaries would change from the current 6% to 3% plus 50% of our current Common Equity Tier 1 G-SIB capital surcharge, for a total well-capitalized SLR requirement of 4.5%, assuming that our G-SIB capital surcharge remains the same when the proposal becomes effective.
Proposed Regulatory Capital Adjustments Related to Implementation of the Current Expected Credit Losses Methodology
On April 17, 2018, the U.S. banking agencies issued a proposal to revise the regulatory capital framework applicable to banking organizations, including us and our U.S. Bank Subsidiaries, to address the new accounting standard for credit losses, known as a CECL methodology. For a further discussion of CECL, see Accounting Development Updates Financial InstrumentsCredit Losses herein.
The proposal modifies the regulatory capital rules to identify which credit loss allowances under the new accounting standard are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in, over a three-year period, the adverse effects on regulatory capital that may result from the adoption of the new accounting standard. The proposal requires a banking organization that has adopted a CECL methodology to include the provision for credit losses beginning in the 2020 stress test cycle.
U.K. Withdrawal from the E.U.
Following the U.K. electorate vote to leave the E.U., the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017, which triggered a two-year period, subject to extension
(which would need the unanimous approval of the E.U. Member States), during which the U.K. government has been negotiating its withdrawal agreement with the E.U. For further discussion of the potential impact of the U.K.s withdrawal from the E.U. on our operations, see Risk FactorsInternational Risk in the 2017 Form 10-K. For further information regarding our exposure to the U.K., see also Quantitative and Qualitative Disclosures about Market RiskRisk ManagementCredit RiskCountry Risk Exposure.
Expected Replacement of London Interbank Offered Rate
Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR based on observable market transactions. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next few years. The U.K. Financial Conduct Authority (FCA), which regulates LIBOR, has announced that it has commitments from panel banks to continue to contribute to LIBOR through the end of 2021, but that it will not use its powers to compel contributions beyond such date. Accordingly, there is considerable uncertainty regarding the publication of such rates beyond 2021.
On April 3, 2018, the Federal Reserve Bank of New York commenced publication of three reference rates based on overnight U.S. Treasury repurchase agreement transactions, including the Secured Overnight Financing Rate (SOFR), which has been recommended as an alternative to U.S. dollar LIBOR by the Alternative Reference Rates Committee. Further, the Bank of England has commenced publication of a reformed Sterling Overnight Index Average (reformed SONIA), comprised of a broader set of overnight Sterling money market transactions, as of April 23, 2018. Reformed SONIA has been recommended as the alternative to Sterling LIBOR by the Working Group on Sterling Risk-Free Reference Rates.
Although the full impact of such reforms and actions, together with any transition away from LIBOR, including the potential or actual discontinuance of LIBOR publication, remains unclear, these changes may have an adverse impact on the value of, return on and trading markets for a broad array of financial products, including any LIBOR-based securities, loans and derivatives that are included in our financial assets and liabilities. Such reforms and actions may also require extensive changes to the contracts that govern these LIBOR-based products, as well as our systems and processes.
27 | March 2018 Form 10-Q |
Managements Discussion and Analysis |
Effects of Inflation and Changes in Interest and Foreign Exchange Rates
For a discussion of the effects of inflation and changes in interest and foreign exchange rates on our business and financial results and strategies to mitigate potential exposures, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesEffects of Inflation and Changes in Interest and Foreign Exchange Rates in the 2017 Form 10-K.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements
We enter into various off-balance sheet arrangements, including through unconsolidated SPEs and lending-related financial instruments (e.g., guarantees and commitments), primarily in connection with the Institutional Securities and Investment Management business segments.
We utilize SPEs primarily in connection with securitization activities. For information on our securitization activities, see Note 12 to the financial statements.
For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 11 to the financial statements. For further information on our lending commitments, see Quantitative and Qualitative Disclosures about Market RiskRisk ManagementCredit RiskLending Activities Included in Loans and Trading Assets.
Contractual Obligations
For a discussion about our contractual obligations, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesContractual Obligations in the 2017 Form 10-K.
March 2018 Form 10-Q | 28 |
Quantitative and Qualitative Disclosures about Market Risk
Management believes effective risk management is vital to the success of our business activities. For a discussion of our risk management functions, see Quantitative and Qualitative Disclosures about Market RiskRisk Management in the 2017 Form 10-K.
Market Risk
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of our VaR for market risk exposures is generated. In addition, we incur market risk within the Wealth Management and Investment Management business segments. The Wealth Management business segment primarily incurs non-trading market risk from lending and deposit-taking activities. The Investment Management business segment primarily incurs non-trading market risk from capital investments in alternative and other funds. For a further discussion of market risk, see Quantitative and Qualitative Disclosures about Market RiskRisk ManagementMarket Risk in the 2017 Form 10-K.
Value-at-Risk
The statistical technique known as VaR is one of the tools we use to measure, monitor and review the market risk exposures of our trading portfolios. The Market Risk Department calculates and distributes daily VaR-based risk measures to various levels of management.
VaR Methodology, Assumptions and Limitations. For information regarding our VaR methodology, assumptions and limitations, see Quantitative and Qualitative Disclosures about Market RiskRisk ManagementMarket RiskSales and Trading and Related ActivitiesVaR Methodology, Assumptions and Limitations in the 2017 Form 10-K.
We utilize the same VaR model for risk management purposes and for regulatory capital calculations. Our regulators have approved our VaR model for use in regulatory calculations.
The portfolio of positions used for our VaR for risk management purposes (Management VaR) differs from that used for regulatory capital requirements (Regulatory VaR). Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include CVA and related hedges, as well as loans that are carried at fair value and associated hedges.
The following table presents the Management VaR for the Trading portfolio, on a period-end, quarterly average and quarterly high and low basis. To further enhance the transparency of the traded market risk, the Credit Portfolio VaR has been disclosed as a separate category from the Primary Risk Categories. The Credit Portfolio includes counterparty CVA and related hedges, as well as loans that are carried at fair value and associated hedges.
Trading Risks
95%/One-Day Management VaR
95%/One-Day VaR for the Three Months Ended March 31, 2018 |
||||||||||||||||
$ in millions |
Period End |
Average | High | Low | ||||||||||||
Interest rate and credit spread |
$ | 41 | $ | 35 | $ | 46 | $ | 30 | ||||||||
Equity price |
16 | 14 | 17 | 11 | ||||||||||||
Foreign exchange rate |
10 | 9 | 13 | 7 | ||||||||||||
Commodity price |
10 | 9 | 11 | 7 | ||||||||||||
Less: Diversification benefit1, 2 |
(27 | ) | (25 | ) | N/A | N/A | ||||||||||
Primary Risk Categories |
$ | 50 | $ | 42 | $ | 51 | $ | 36 | ||||||||
Credit Portfolio |
11 | 10 | 11 | 9 | ||||||||||||
Less: Diversification benefit1, 2 |
(7 | ) | (6 | ) | N/A | N/A | ||||||||||
Total Management VaR |
$ | 54 | $ | 46 | $ | 55 | $ | 40 | ||||||||
95%/One-Day VaR for the Three Months Ended December 31, 2017 |
||||||||||||||||
$ in millions |
Period End |
Average | High | Low | ||||||||||||
Interest rate and credit spread |
$ | 32 | $ | 29 | $ | 36 | $ | 24 | ||||||||
Equity price |
11 | 13 | 15 | 10 | ||||||||||||
Foreign exchange rate |
9 | 8 | 11 | 6 | ||||||||||||
Commodity price |
7 | 8 | 11 | 6 | ||||||||||||
Less: Diversification benefit1, 2 |
(20 | ) | (23 | ) | N/A | N/A | ||||||||||
Primary Risk Categories |
$ | 39 | $ | 35 | $ | 41 | $ | 30 | ||||||||
Credit Portfolio |
9 | 9 | 10 | 8 | ||||||||||||
Less: Diversification benefit1, 2 |
(5 | ) | (6 | ) | N/A | N/A | ||||||||||
Total Management VaR |
$ | 43 | $ | 38 | $ | 44 | $ | 34 |
1. | Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulated one-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component. |
2. | The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the quarter, and therefore, the diversification benefit is not an applicable measure. |
Average total Management VaR and average Management VaR for the Primary Risk Categories of $46 million and $42 million, respectively, increased from the three-months ended December 31, 2017, primarily as a result of increases in trading inventory across the Fixed Income Macro and Credit trading businesses in the Institutional Securities business segment and increased market volatility, particularly in Equities.
29 | March 2018 Form 10-Q |
Risk Disclosures |
Distribution of VaR Statistics and Net Revenues for the current quarter. One method of evaluating the reasonableness of our VaR model as a measure of our potential volatility of net revenues is to compare VaR with corresponding actual trading revenues. Assuming no intraday trading, for a 95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the VaR model would be questioned.
We evaluate the reasonableness of our VaR model by comparing the potential declines in portfolio values generated by the model with corresponding actual trading results for the Firm, as well as individual business units. For days where losses exceed the VaR statistic, we examine the drivers of trading losses to evaluate the VaR models accuracy relative to realized trading results. During the current quarter, we experienced net trading losses on one day, which was not in excess of the 95%/one-day Total Management VaR.
The distribution of VaR statistics and net revenues is presented in the following histograms for the Total Trading populations.
Total Trading. As shown in the 95%/One-Day Management VaR table, the average 95%/one-day total Management VaR for the current quarter was $46 million. The following histogram presents the distribution of the daily 95%/one-day total Management VaR for the current quarter.
Daily 95%/One-Day Total Management VaR for the Current Quarter
($ in millions)
The following histogram shows the distribution for the current quarter of daily net trading revenues, including profits and losses from Interest rate and credit spread, Equity price, Foreign exchange rate, Commodity price, and Credit Portfolio positions and intraday trading activities, for our
Trading businesses. Daily net trading revenues also include intraday trading activities but exclude certain items not captured in the VaR model, such as fees, commissions and net interest income. Daily net trading revenues differ from the definition of revenues required for Regulatory VaR backtesting, which further excludes intraday trading.
Daily Net Trading Revenues for the Current Quarter
($ in millions)
Non-Trading Risks
We believe that sensitivity analysis is an appropriate representation of our non-trading risks. The following sensitivity analyses cover substantially all of the non-trading risk in our portfolio.
Exposure Related to Our Own Credit Spread.
Credit Spread Risk Sensitivity1
$ in millions | At March 31, 2018 |
At December 31, 2017 |
||||||
Derivatives |
$ | 6 | $ | 6 | ||||
Funding liabilities2 |
31 | 29 |
1. | Amounts represent the increase in value for each 1 bps widening of our credit spread. |
2. | Relates to structured note liabilities carried at fair value. |
Interest Rate Risk Sensitivity. The following table presents an analysis of selected instantaneous upward and downward parallel interest rate shocks on net interest income over the next 12 months for our U.S. Bank Subsidiaries. These shocks are applied to our 12-month forecast for our U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and our forecasted business activity, including our deposit deployment strategy and asset-liability management hedges.
March 2018 Form 10-Q | 30 |
Risk Disclosures |
U.S. Bank Subsidiaries Net Interest Income Sensitivity Analysis
$ in millions | At March 31, 2018 |
At December 31, 2017 |
||||||
Basis point change |
||||||||
+200 |
$ | 438 | $ | 489 | ||||
+100 |
226 | 367 | ||||||
-100 |
(464 | ) | (500 | ) |
We do not manage to any single rate scenario but rather manage net interest income in our U.S. Bank Subsidiaries to optimize across a range of possible outcomes, including non-parallel rate change scenarios. The sensitivity analysis assumes that we take no action in response to these scenarios, assumes there are no changes in other macroeconomic variables normally correlated with changes in interest rates, and includes subjective assumptions regarding customer and market re-pricing behavior and other factors. The change in sensitivity to interest rates between March 31, 2018 and December 31, 2017 is related to overall changes in our asset-liability profile and higher market rates.
Investments. We have exposure to public and private companies through direct investments, as well as through funds that invest in these assets. These investments are predominantly equity positions with long investment horizons, a portion of which are for business facilitation purposes. The market risk related to these investments is measured by estimating the potential reduction in net income associated with a 10% decline in investment values and related impact on performance fees.
Investments Sensitivity, Including Related Performance Fees
Loss from 10% Decline | ||||||||
$ in millions | At March 31, 2018 |
At December 31, 2017 |
||||||
Investments related to Investment |
||||||||
Management activities |
$ | 321 | $ | 316 | ||||
Other investments: |
||||||||
MUMSS |
172 | 168 | ||||||
Other Firm investments |
187 | 178 |
MUMSSMitsubishi UFJ Morgan Stanley Securities Co., LTD.
Equity Market Sensitivity. In the Wealth Management and Investment Management business segments, certain fee-based revenue streams are driven by the value of clients equity holdings. The overall level of revenues for these streams also depends on multiple additional factors that include, but are not limited to, the level and duration of the equity market increase or decline, price volatility, the geographic and industry mix of client assets, the rate and magnitude of client investments and redemptions, and the impact of such market
increase or decline and price volatility on client behavior. Therefore, overall revenues do not correlate completely with changes in the equity markets.
Credit Risk
Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to us. We primarily incur credit risk exposure to institutions and individuals through our Institutional Securities and Wealth Management business segments. For a further discussion of our credit risks, see Quantitative and Qualitative Disclosures about Market RiskRisk ManagementCredit Risk in the 2017 Form 10-K. Also, see Notes 7 and 11 to the financial statements for additional information about our loans and lending commitments, respectively.
Lending Activities Included in Loans and Trading Assets
We provide loans and lending commitments to a variety of customers, from large corporate and institutional clients to high net worth individuals. In addition, we purchase loans in the secondary market. In the balance sheets, these loans and lending commitments are carried as held for investment, which are recorded at amortized cost; as held for sale, which are recorded at the lower of cost or fair value; or at fair value with changes in fair value recorded in earnings. Loans held for investment and loans held for sale are classified in Loans, and loans held at fair value are classified in Trading assets in the balance sheets. See Notes 3, 7 and 11 to the financial statements for further information.
31 | March 2018 Form 10-Q |
Risk Disclosures |
Loans and Lending Commitments
At March 31, 2018 | ||||||||||||||||
$ in millions | IS | WM | IM1 | Total | ||||||||||||
Corporate loans |
$ | 17,005 | $ | 14,893 | $ | 5 | $ | 31,903 | ||||||||
Consumer loans |
| 26,877 | | 26,877 | ||||||||||||
Residential real estate loans |
| 26,566 | | 26,566 | ||||||||||||
Wholesale real estate loans |
10,021 | | | 10,021 | ||||||||||||
Loans held for investment, gross of allowance |
27,026 | 68,336 | 5 | 95,367 | ||||||||||||
Allowance for loan losses |
(201 | ) | (42 | ) | | (243 | ) | |||||||||
Loans held for investment, net of allowance |
26,825 | 68,294 | 5 | 95,124 | ||||||||||||
Corporate loans |
12,000 | | | 12,000 | ||||||||||||
Residential real estate loans |
1 | 32 | | 33 | ||||||||||||
Wholesale real estate loans |
1,978 | | | 1,978 | ||||||||||||
Loans held for sale |
13,979 | 32 | | 14,011 | ||||||||||||
Corporate loans |
9,323 | | 23 | 9,346 | ||||||||||||
Residential real estate loans |
706 | | | 706 | ||||||||||||
Wholesale real estate loans |
1,770 | | 1,171 | 2,941 | ||||||||||||
Loans held at fair value |
11,799 | | 1,194 | 12,993 | ||||||||||||
Total loans |
52,603 | 68,326 | 1,199 | 122,128 | ||||||||||||
Lending commitments2, 3 |
109,025 | 10,404 | 187 | 119,616 | ||||||||||||
Total loans and lending commitments2, 3 |
$ | 161,628 | $ | 78,730 | $ | 1,386 | $ | 241,744 |
At December 31, 2017 | ||||||||||||||||
$ in millions | IS | WM | IM | Total | ||||||||||||
Corporate loans |
$ | 15,332 | $ | 14,417 | $ | 5 | $ | 29,754 | ||||||||
Consumer loans |
| 26,808 | | 26,808 | ||||||||||||
Residential real estate loans |
| 26,635 | | 26,635 | ||||||||||||
Wholesale real estate loans |
9,980 | | | 9,980 | ||||||||||||
Loans held for investment, gross of allowance |
25,312 | 67,860 | 5 | 93,177 | ||||||||||||
Allowance for loan losses |
(182 | ) | (42 | ) | | (224 | ) | |||||||||
Loans held for investment, net of allowance |
25,130 | 67,818 | 5 | 92,953 | ||||||||||||
Corporate loans |
9,456 | | | 9,456 | ||||||||||||
Residential real estate loans |
1 | 34 | | 35 | ||||||||||||
Wholesale real estate loans |
1,682 | | | 1,682 | ||||||||||||
Loans held for sale |
11,139 | 34 | | 11,173 | ||||||||||||
Corporate loans |
8,336 | | 22 | 8,358 | ||||||||||||
Residential real estate loans |
799 | | | 799 | ||||||||||||
Wholesale real estate loans |
1,579 | | | 1,579 | ||||||||||||
Loans held at fair value |
10,714 | | 22 | 10,736 | ||||||||||||
Total loans |
46,983 | 67,852 | 27 | 114,862 | ||||||||||||
Lending commitments2, 3 |
92,588 | 9,481 | | 102,069 | ||||||||||||
Total loans and lending commitments2, 3 |
$ | 139,571 | $ | 77,333 | $ | 27 | $ | 216,931 |
1. | Investment Management business segment loans are entered into in conjunction with certain investment advisory activities. The increase in fair value loans in the current quarter is a result of the consolidation of a fund managed by Mesa West Capital, LLC that primarily invests in commercial real estate loans with remaining maturities of less than 5 years. |
2. | Lending commitments represent the notional amount of legally binding obligations to provide funding to clients for lending transactions. Since commitments associated with these business activities may expire unused or may not be utilized to full capacity, they do not necessarily reflect the actual future cash funding requirements. |
3. | For syndications led by us, any lending commitments accepted by the borrower but not yet closed are net of amounts syndicated. For syndications that we participate in and do not lead, any lending commitments accepted by the borrower but not yet closed include only the amount that we expect will be allocated from the lead syndicate bank. Due to the nature of our obligations under the commitments, these amounts include certain commitments participated to third parties. |
Total loans and lending commitments increased by approximately $25 billion in the current quarter, primarily due to increases in Corporate lending commitments within the Institutional Securities business segment.
Our credit exposure from our loans and lending commitments is measured in accordance with our internal risk management standards. Risk factors considered in determining the aggregate allowance for loan and commitment losses include the borrowers financial strength, seniority of the loan, collateral type, volatility of collateral value, debt cushion, loan-to-value ratio, debt service ratio, covenants and counterparty type. Qualitative and environmental factors such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered.
Allowance for Loans and Lending Commitments Held for Investment
$ in millions | At March 31, 2018 |
At December 31, 2017 |
||||||
Loans |
$ | 243 | $ | 224 | ||||
Lending commitments |
205 | 198 |
The aggregate allowance for loans and lending commitment losses increased during the current quarter primarily due to overall portfolio changes and qualitative and environmental factors impacting the inherent allowance within the Institutional Securities business segment. See Note 7 to the financial statements for further information.
Status of Loans Held for Investment
At March 31, 2018 | At December 31, 2017 | |||||||||||||||
IS | WM | IS | WM | |||||||||||||
Current |
99.7% | 99.9% | 99.5% | 99.9% | ||||||||||||
Non-accrual1 |
0.3% | 0.1% | 0.5% | 0.1% |
1. | These loans are on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt. |
March 2018 Form 10-Q | 32 |
Risk Disclosures |
Institutional Securities
In connection with certain Institutional Securities business segment activities, we provide loans and lending commitments to a diverse group of corporate and other institutional clients. These activities include originating and purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending, financing extended to equities and commodities customers and loans to municipalities. These loans and lending commitments may have varying terms; may be senior or subordinated; may be secured or unsecured; are generally contingent upon representations, warranties and contractual conditions applicable to the borrower; and may be syndicated, traded or hedged by us.
We also participate in securitization activities, whereby we extend short-term or long-term funding to clients through loans and lending commitments that are secured by the assets of the borrower and generally provide for over-collateralization, including commercial real estate loans, loans secured by loan pools, corporate loans and secured lines of revolving credit. Credit risk with respect to these loans and lending commitments arises from the failure of a borrower to perform according to the terms of the loan agreement or a decline in the underlying collateral value. See Note 12 to the financial statements for information about our securitization activities. In addition, a collateral management group monitors collateral levels against requirements and oversees the administration of the collateral function. See Note 6 to the financial statements for additional information about our collateralized transactions.
Institutional Securities Loans and Lending Commitments1
At March 31, 2018 | ||||||||||||||||||||
Years to Maturity | &n |