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 June 30, 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 July 31, 2018, there were 1,744,789,709 shares of the Registrants Common Stock, par value $0.01 per share, outstanding.
QUARTERLY REPORT ON FORM 10-Q
For the quarter ended June 30, 2018
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Financial Data Supplement (Unaudited) | 88 | |||||||||||
Glossary of Common Acronyms | 91 | |||||||||||
Other Information | II | 93 | ||||||||||
Legal Proceedings | II | 1 | 93 | |||||||||
Unregistered Sales of Equity Securities and Use of Proceeds | II | 2 | 94 | |||||||||
Controls and Procedures | I | 4 | 95 | |||||||||
Exhibits | II | 6 | 95 | |||||||||
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 and financing extended to equities and commodities customers and 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, BusinessSupervision and Regulation and Risk Factors in the 2017 Form 10-K, and Liquidity and Capital Resources herein.
1 | June 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 $10,610 million in the quarter ended June 30, 2018 (current quarter, or 2Q 2018), compared with $9,503 million in the quarter ended June 30, 2017 (prior year quarter, or 2Q 2017). For the current quarter, net income applicable to Morgan Stanley was $2,437 million, or $1.30 per diluted common share, compared with $1,757 million, or $0.87 per diluted common share, in the prior year quarter. |
| We reported net revenues of $21,687 million in the six months ended June 30, 2018 (current year period, or YTD 2018), compared with $19,248 million in the six months ended June 30, 2017 (prior year period, or YTD 2017). For the current year period, net income applicable to Morgan Stanley was $5,105 million, or $2.75 per diluted common share, compared with $3,687 million, or $1.87 per diluted common share, in the prior year period. |
June 2018 Form 10-Q | 2 |
Managements Discussion and Analysis |
Non-interest Expenses1
($ in millions)
1. | The percentages on the bars in the charts represent the contribution of compensation expense and non-compensation expense to the total. |
| Compensation and benefits expenses of $4,621 million in the current quarter and $9,535 million in the current year period each increased 9% from $4,252 million in the prior year quarter and $8,718 million in the prior year period. These results primarily reflected increases in discretionary incentive compensation mainly driven by higher revenues, as well as salaries, across all business segments, the formulaic payout to Wealth Management representatives, and amortization of deferred cash and equity awards. These increases were partially offset by a decrease in the fair value of investments to which certain deferred compensation plans are referenced. |
| Non-compensation expenses were $2,880 million in the current quarter and $5,623 million in the current year period compared with $2,609 million in the prior year quarter and $5,080 million in the prior year period, representing a 10% and an 11% increase, respectively. These increases were 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 19 to the financial statements for further information). |
Income Taxes
The current quarter and current year period included intermittent net discrete tax benefits of $88 million primarily associated with new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters. The prior year quarter and prior year period included intermittent tax provisions of $4 million and $18 million, respectively. For further information, see Supplemental Financial Information and DisclosuresIncome Tax Matters herein.
3 | June 2018 Form 10-Q |
Managements Discussion and Analysis |
Selected Financial Information and Other Statistical Data
Three Months June 30, |
Six Months Ended June 30, |
|||||||||||||||
$ in millions | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Income from continuing operations applicable to Morgan Stanley |
$ | 2,439 | $ | 1,762 | $ | 5,109 | $ | 3,714 | ||||||||
Income (loss) from discontinued operations applicable to Morgan Stanley |
(2 | ) | (5 | ) | (4 | ) | (27 | ) | ||||||||
Net income applicable to Morgan Stanley |
2,437 | 1,757 | 5,105 | 3,687 | ||||||||||||
Preferred stock dividends and other |
170 | 170 | 263 | 260 | ||||||||||||
Earnings applicable to Morgan Stanley common shareholders |
$ | 2,267 | $ | 1,587 | $ | 4,842 | $ | 3,427 | ||||||||
Expense efficiency ratio1 |
70.7% | 72.2% | 69.9% | 71.7% | ||||||||||||
ROE2 |
13.0% | 9.1% | 13.9% | 9.9% | ||||||||||||
ROTCE2 |
14.9% | 10.4% | 16.0% | 11.4% |
in millions, except per share and employee data |
At June 30, 2018 |
At December 31, 2017 |
||||||
GLR3 |
$ | 226,322 | $ | 192,660 | ||||
Loans4 |
$ | 112,113 | $ | 104,126 | ||||
Total assets |
$ | 875,875 | $ | 851,733 | ||||
Deposits |
$ | 172,802 | $ | 159,436 | ||||
Borrowings |
$ | 192,244 | $ | 192,582 | ||||
Common shareholders equity |
$ | 70,589 | $ | 68,871 | ||||
Common shares outstanding |
1,750 | 1,788 | ||||||
Book value per common share5 |
$ | 40.34 | $ | 38.52 | ||||
Worldwide employees |
58,010 | 57,633 |
At June 30, 2018 |
At December 31, 2017 |
|||||||
Capital ratios6 |
||||||||
Common Equity Tier 1 capital ratio |
15.8% | 16.5% | ||||||
Tier 1 capital ratio |
18.1% | 18.9% | ||||||
Total capital ratio |
20.6% | 21.7% | ||||||
Tier 1 leverage ratio |
8.2% | 8.3% | ||||||
SLR7 |
6.4% | 6.5% |
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. |
3. | For a discussion of the GLR, see Liquidity and Capital ResourcesLiquidity Risk Management FrameworkGlobal Liquidity Reserve herein. |
4. | 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). |
5. | Book value per common share equals common shareholders equity divided by common shares outstanding. |
6. | Beginning in 2018, our risk based capital ratios are based on the Standardized Approach fully phased-in rules. At December 31, 2017, our risk based 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. |
7. | The SLR became effective as a capital standard on January 1, 2018. For a discussion of the SLR, see Liquidity and Capital ResourcesRegulatory Requirements herein. |
Business Segment Results
Net Revenues by Segment1, 2
($ in millions)
June 2018 Form 10-Q | 4 |
Managements Discussion and Analysis |
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 $(120) million and $(75) million in the current quarter and prior year quarter, respectively, and $(235) million and $(149) million in the current year period and prior year period, 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 period. |
| Institutional Securities net revenues of $5,714 million in the current quarter and $11,814 million in the current year period increased 20% from the prior year quarter and 19% from the prior year period primarily reflecting higher sales and trading and Investment banking revenues. |
| Wealth Management net revenues of $4,325 million in the current quarter and $8,699 million in the current year period increased 4% from the prior year quarter and 6% from the prior year period primarily reflecting growth in Asset management revenues. |
| Investment Management net revenues of $691 million in the current quarter and $1,409 million in the current year period increased 4% from the prior year quarter and 11% from the prior year period primarily reflecting higher revenues from Asset management. |
Net Revenues by Region1, 2
($ in millions)
1. | For a discussion of how the geographic breakdown for net revenues is determined, see Note 19 to the financial statements. |
2. | The percentages on the bars in the charts represent the contribution of each region to the total. |
5 | June 2018 Form 10-Q |
Managements Discussion and Analysis |
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.
Reconciliations from U.S. GAAP to Non-GAAP Consolidated Financial Measures
$ in millions, except | Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||||
per share data | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income applicable to Morgan Stanley |
$ | 2,437 | $ | 1,757 | $ | 5,105 | $ | 3,687 | ||||||||
Impact of adjustments |
(88 | ) | 4 | (88 | ) | 18 | ||||||||||
Adjusted net income applicable to Morgan Stanleynon-GAAP1 |
$ | 2,349 | 1,761 | $ | 5,017 | 3,705 | ||||||||||
Earnings per diluted common share |
$ | 1.30 | $ | 0.87 | $ | 2.75 | $ | 1.87 | ||||||||
Impact of adjustments |
(0.05 | ) | | (0.05 | ) | 0.01 | ||||||||||
Adjusted earnings per diluted common share non-GAAP1 |
$ | 1.25 | $ | 0.87 | $ | 2.70 | $ | 1.88 | ||||||||
Effective income tax rate |
20.6% | 32.0% | 20.7% | 30.5% | ||||||||||||
Impact of adjustments |
2.8% | (0.1)% | 1.4% | (0.4)% | ||||||||||||
Adjusted effective income tax ratenon-GAAP1 |
23.4% | 31.9% | 22.1% | 30.1% |
Average Monthly Balance | ||||||||||||||||||||||||
At 2018 |
At 2017 |
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||||
$ in millions | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||
Tangible Equity |
||||||||||||||||||||||||
U.S. GAAP |
||||||||||||||||||||||||
Morgan Stanley shareholders equity |
$ | 79,109 | $ | 77,391 | $ | 78,432 | $ | 78,436 | $ | 77,960 | $ | 77,836 | ||||||||||||
Less: Goodwill and net intangible assets |
(9,022 | ) | (9,042 | ) | (9,076 | ) | (9,194 | ) | (9,049 | ) | (9,227 | ) | ||||||||||||
Morgan Stanley tangible shareholders equitynon-GAAP |
$ | 70,087 | $ | 68,349 | $ | 69,356 | $ | 69,242 | $ | 68,911 | $ | 68,609 | ||||||||||||
U.S. GAAP |
||||||||||||||||||||||||
Common equity |
$ | 70,589 | $ | 68,871 | $ | 69,912 | $ | 69,916 | $ | 69,440 | $ | 69,459 | ||||||||||||
Less: Goodwill and net intangible assets |
(9,022 | ) | (9,042 | ) | (9,076 | ) | (9,194 | ) | (9,049 | ) | (9,227 | ) | ||||||||||||
Tangible common equitynon-GAAP |
$ | 61,567 | $ | 59,829 | $ | 60,836 | $ | 60,722 | $ | 60,391 | $ | 60,232 |
Consolidated Non-GAAP Financial Measures
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
$ in billions | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Average common equity |
|
|||||||||||||||
Unadjusted |
$ | 69.9 | $ | 69.9 | $ | 69.4 | $ | 69.5 | ||||||||
Adjusted1 |
69.9 | 69.9 | 69.4 | 69.5 | ||||||||||||
ROE2 |
|
|||||||||||||||
Unadjusted |
13.0% | 9.1% | 13.9% | 9.9% | ||||||||||||
Adjusted1, 3 |
12.5% | 9.1% | 13.7% | 9.9% | ||||||||||||
Average tangible common equity |
|
|||||||||||||||
Unadjusted |
$ | 60.8 | $ | 60.7 | $ | 60.4 | $ | 60.2 | ||||||||
Adjusted1 |
60.8 | 60.7 | 60.4 | 60.2 | ||||||||||||
ROTCE2 |
|
|||||||||||||||
Unadjusted |
14.9% | 10.4% | 16.0% | 11.4% | ||||||||||||
Adjusted1, 3 |
14.3% | 10.5% | 15.7% | 11.4% |
At June 30, 2018 |
At December 31, 2017 |
|||||||
Tangible book value per common share4 |
$ | 35.19 | $ | 33.46 |
June 2018 Form 10-Q | 6 |
Managements Discussion and Analysis |
Non-GAAP Financial Measures by Business Segment
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
$ in billions | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Pre-tax profit margin5 |
||||||||||||||||
Institutional Securities |
32% | 30% | 33% | 32% | ||||||||||||
Wealth Management |
27% | 25% | 27% | 25% | ||||||||||||
Investment Management |
20% | 21% | 20% | 19% | ||||||||||||
Consolidated |
29% | 28% | 30% | 28% | ||||||||||||
Average common equity6 |
|
|||||||||||||||
Institutional Securities |
$ | 40.8 | $ | 40.2 | $ | 40.8 | $ | 40.2 | ||||||||
Wealth Management |
16.8 | 17.2 | 16.8 | 17.2 | ||||||||||||
Investment Management |
2.6 | 2.4 | 2.6 | 2.4 | ||||||||||||
Parent Company |
9.7 | 10.1 | 9.2 | 9.7 | ||||||||||||
Consolidated average common equity |
$ | 69.9 | $ | 69.9 | $ | 69.4 | $ | 69.5 | ||||||||
Average tangible common equity6 |
|
|||||||||||||||
Institutional Securities |
$ | 40.1 | $ | 39.6 | $ | 40.1 | $ | 39.6 | ||||||||
Wealth Management |
9.2 | 9.3 | 9.2 | 9.3 | ||||||||||||
Investment Management |
1.7 | 1.6 | 1.7 | 1.6 | ||||||||||||
Parent Company |
9.8 | 10.2 | 9.4 | 9.7 | ||||||||||||
Consolidated average tangible common equity |
$ | 60.8 | $ | 60.7 | $ | 60.4 | $ | 60.2 | ||||||||
ROE2, 7 |
|
|||||||||||||||
Institutional Securities |
13.0% | 8.5% | 14.1% | 9.9% | ||||||||||||
Wealth Management |
20.0% | 14.6% | 20.7% | 14.6% | ||||||||||||
Investment Management |
15.7% | 16.3% | 17.5% | 13.7% | ||||||||||||
Consolidated |
13.0% | 9.1% | 13.9% | 9.9% | ||||||||||||
ROTCE2, 7 |
|
|||||||||||||||
Institutional Securities |
13.2% | 8.7% | 14.3% | 10.1% | ||||||||||||
Wealth Management |
36.6% | 27.0% | 37.8% | 27.0% | ||||||||||||
Investment Management |
24.5% | 24.1% | 27.4% | 20.2% | ||||||||||||
Consolidated |
14.9% | 10.4% | 16.0% | 11.4% |
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 annualized 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 the ROE and ROTCE by segment uses the annualized 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, respectively, allocated to each segment. |
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; and capital levels. 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.
7 | June 2018 Form 10-Q |
Managements Discussion and Analysis |
Institutional Securities
Income Statement Information
Three Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues |
||||||||||||
Investment banking |
$ | 1,699 | $ | 1,413 | 20% | |||||||
Trading |
3,128 | 2,725 | 15% | |||||||||
Investments |
89 | 37 | 141% | |||||||||
Commissions and fees |
674 | 630 | 7% | |||||||||
Asset management |
102 | 89 | 15% | |||||||||
Other |
168 | 126 | 33% | |||||||||
Total non-interest revenues |
5,860 | 5,020 | 17% | |||||||||
Interest income |
2,195 | 1,243 | 77% | |||||||||
Interest expense |
2,341 | 1,501 | 56% | |||||||||
Net interest |
(146 | ) | (258 | ) | 43% | |||||||
Net revenues |
5,714 | 4,762 | 20% | |||||||||
Compensation and benefits |
1,993 | 1,667 | 20% | |||||||||
Non-compensation expenses |
1,909 | 1,652 | 16% | |||||||||
Total non-interest expenses |
3,902 | 3,319 | 18% | |||||||||
Income from continuing operations before income taxes |
1,812 | 1,443 | 26% | |||||||||
Provision for income taxes |
323 | 413 | (22)% | |||||||||
Income from continuing operations |
1,489 | 1,030 | 45% | |||||||||
Income (loss) from discontinued operations, net of income taxes |
(2 | ) | (5 | ) | 60% | |||||||
Net income |
1,487 | 1,025 | 45% | |||||||||
Net income applicable to noncontrolling interests |
30 | 33 | (9)% | |||||||||
Net income applicable to Morgan Stanley |
$ | 1,457 | $ | 992 | 47% |
Six Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues |
||||||||||||
Investment banking |
$ | 3,212 | $ | 2,830 | 13% | |||||||
Trading |
6,771 | 5,737 | 18% | |||||||||
Investments |
138 | 103 | 34% | |||||||||
Commissions and fees |
1,418 | 1,250 | 13% | |||||||||
Asset management |
212 | 180 | 18% | |||||||||
Other |
304 | 299 | 2% | |||||||||
Total non-interest revenues |
12,055 | 10,399 | 16% | |||||||||
Interest income |
3,999 | 2,367 | 69% | |||||||||
Interest expense |
4,240 | 2,852 | 49% | |||||||||
Net interest |
(241 | ) | (485 | ) | 50% | |||||||
Net revenues |
11,814 | 9,914 | 19% | |||||||||
Compensation and benefits |
4,153 | 3,537 | 17% | |||||||||
Non-compensation expenses |
3,737 | 3,204 | 17% | |||||||||
Total non-interest expenses |
7,890 | 6,741 | 17% | |||||||||
Income from continuing operations before income taxes |
3,924 | 3,173 | 24% | |||||||||
Provision for income taxes |
772 | 872 | (11)% | |||||||||
Income from continuing operations |
3,152 | 2,301 | 37% | |||||||||
Income (loss) from discontinued operations, net of income taxes |
(4 | ) | (27 | ) | 85% | |||||||
Net income |
3,148 | 2,274 | 38% | |||||||||
Net income applicable to noncontrolling interests |
64 | 68 | (6)% | |||||||||
Net income applicable to Morgan Stanley |
$ | 3,084 | $ | 2,206 | 40% |
June 2018 Form 10-Q | 8 |
Managements Discussion and Analysis |
Investment Banking
Investment Banking Revenues
Three Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Advisory |
$ | 618 | $ | 504 | 23% | |||||||
Underwriting: |
||||||||||||
Equity |
541 | 405 | 34% | |||||||||
Fixed income |
540 | 504 | 7% | |||||||||
Total underwriting |
1,081 | 909 | 19% | |||||||||
Total investment banking |
$ | 1,699 | $ | 1,413 | 20% |
Six Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Advisory |
$ | 1,192 | $ | 1,000 | 19% | |||||||
Underwriting: |
||||||||||||
Equity |
962 | 795 | 21% | |||||||||
Fixed income |
1,058 | 1,035 | 2% | |||||||||
Total underwriting |
2,020 | 1,830 | 10% | |||||||||
Total investment banking |
$ | 3,212 | $ | 2,830 | 13% |
Investment Banking Volumes
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
$ in billions | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Completed mergers and acquisitions1 |
$ | 325 | $ | 212 | $ | 488 | $ | 375 | ||||||||
Equity and equity-related offerings2, 3 |
16 | 20 | 37 | 30 | ||||||||||||
Fixed income offerings2, 4 |
61 | 70 | 116 | 145 |
Source: Thomson Reuters, data as of July 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 $1,699 million in the current quarter and $3,212 million in the current year period increased 20% and 13% from the comparable prior year periods. The adoption of the accounting update Revenue from Contracts with Customers had the effect of increasing the revenues reported in investment banking by approximately $101 million in the current quarter and $161 million in the current year period compared with the prior year periods (see Notes 2 and 19 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 and current year period primarily reflecting higher volumes of completed M&A activity (see Investment Banking Volumes table), partially offset by lower fee realizations. |
| Equity underwriting revenues increased in the current quarter primarily as a result of higher fee realizations in initial public offerings and convertibles. In the current year period, equity underwriting revenues increased due to higher equity market volumes (see Investment Banking Volumes table). |
| Fixed income underwriting revenues increased in the current quarter primarily due to higher non-investment grade loan fees. Fixed income underwriting revenues in the current year period were relatively unchanged from the prior year period. |
Sales and Trading Net Revenues
By Income Statement Line Item
Three Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Trading |
$ | 3,128 | $ | 2,725 | 15% | |||||||
Commissions and fees |
674 | 630 | 7% | |||||||||
Asset management |
102 | 89 | 15% | |||||||||
Net interest |
(146 | ) | (258 | ) | 43% | |||||||
Total |
$ | 3,758 | $ | 3,186 | 18% |
Six Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Trading |
$ | 6,771 | $ | 5,737 | 18% | |||||||
Commissions and fees |
1,418 | 1,250 | 13% | |||||||||
Asset management |
212 | 180 | 18% | |||||||||
Net interest |
(241 | ) | (485 | ) | 50% | |||||||
Total |
$ | 8,160 | $ | 6,682 | 22% |
9 | June 2018 Form 10-Q |
Managements Discussion and Analysis |
By Business
Three Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Equity |
$ | 2,470 | $ | 2,155 | 15% | |||||||
Fixed income |
1,389 | 1,239 | 12% | |||||||||
Other |
(101 | ) | (208 | ) | 51% | |||||||
Total |
$ | 3,758 | $ | 3,186 | 18% |
Six Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Equity |
$ | 5,028 | $ | 4,171 | 21% | |||||||
Fixed income |
3,262 | 2,953 | 10% | |||||||||
Other |
(130 | ) | (442 | ) | 71% | |||||||
Total |
$ | 8,160 | $ | 6,682 | 22% |
Sales and Trading RevenuesEquity and Fixed Income
Three Months Ended June 30, 2018 |
||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 |
Total | ||||||||||||
Financing |
$ | 1,373 | $ | 89 | $ | (192 | ) | $ | 1,270 | |||||||
Execution services |
661 | 605 | (66 | ) | 1,200 | |||||||||||
Total Equity |
$ | 2,034 | $ | 694 | $ | (258 | ) | $ | 2,470 | |||||||
Total Fixed Income |
$ | 1,299 | $ | 83 | $ | 7 | $ | 1,389 |
Three Months Ended June 30, 2017 |
||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 |
Total | ||||||||||||
Financing |
$ | 1,166 | $ | 88 | $ | (227 | ) | $ | 1,027 | |||||||
Execution services |
601 | 580 | (53 | ) | 1,128 | |||||||||||
Total Equity |
$ | 1,767 | $ | 668 | $ | (280 | ) | $ | 2,155 | |||||||
Total Fixed income |
$ | 1,114 | $ | 48 | $ | 77 | $ | 1,239 |
Six Months Ended June 30, 2018 |
||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 |
Total | ||||||||||||
Financing |
$ | 2,607 | $ | 196 | $ | (338 | ) | $ | 2,465 | |||||||
Execution services |
1,452 | 1,269 | (158 | ) | 2,563 | |||||||||||
Total Equity |
$ | 4,059 | $ | 1,465 | $ | (496 | ) | $ | 5,028 | |||||||
Total Fixed Income |
$ | 3,014 | $ | 166 | $ | 82 | $ | 3,262 |
Six Months Ended June 30, 2017 |
||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 |
Total | ||||||||||||
Financing |
$ | 2,097 | $ | 177 | $ | (415 | ) | $ | 1,859 | |||||||
Execution services |
1,265 | 1,148 | (101 | ) | 2,312 | |||||||||||
Total Equity |
$ | 3,362 | $ | 1,325 | $ | (516 | ) | $ | 4,171 | |||||||
Total Fixed income |
$ | 2,712 | $ | 102 | $ | 139 | $ | 2,953 |
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.
Sales and Trading Net Revenues during the Current Quarter
Equity
Equity sales and trading net revenues of $2,470 million in the current quarter increased 15% 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 due to higher average client balances and changes in funding mix which resulted in increased Trading and Net interest revenues. |
| Execution services increased from the prior year quarter, primarily reflecting higher Trading revenues driven by effective inventory management in derivative products. In addition, Commissions and fees increased from higher client activity in cash equities products. |
Fixed Income
Fixed income net revenues of $1,389 million in the current quarter were 12% higher than the prior year quarter, driven by higher results in commodities products and other and credit products, partially offset by lower results in global macro products.
| Global macro products revenues decreased as higher client activity was more than offset by unfavorable inventory management results in foreign exchange and emerging markets products. |
| Credit products Trading and Net interest revenues increased primarily as a result of increased client activity in lending products, partially offset by the impact of credit spread widening on inventory. |
| Commodities products and Other increased primarily due to increased client trading activity across commodities products and higher Trading revenues principally from a reduction in counterparty credit risk. |
June 2018 Form 10-Q | 10 |
Managements Discussion and Analysis |
Other
Other sales and trading net losses of $101 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 corporate loan activity.
Sales and Trading Net Revenues during the Current Year Period
Equity
Equity sales and trading net revenues of $5,028 million in the current year period increased 21% from the prior year period, reflecting higher results in both our financing businesses and execution services.
| Financing revenues increased from the prior year period, primarily due to higher average client balances and changes in funding mix which resulted in increased Trading and Net interest revenues. |
| Execution services increased from the prior year period, primarily reflecting higher Trading revenues driven by effective inventory management and higher client activity in derivative products. In addition, Commissions and fees increased from higher client activity in cash equities products. |
Fixed Income
Fixed income net revenues of $3,262 million in the current year period were 10% higher than the prior year period, primarily driven by higher results in commodities products and other.
| Global macro and Credit products revenues remained relatively unchanged from the prior year period. |
| Commodities products and Other increased primarily due to increased Commodities structured transactions and client flow and higher Trading revenues principally from a reduction in counterparty credit risk. |
Other
Other sales and trading net losses of $130 million in the current year period decreased from the prior year period, primarily reflecting higher revenues on economic hedges related to our long-term debt and lower losses associated with corporate loan hedging activity.
Investments, Other Revenues, Non-interest Expenses and Income Tax Items
Investments
| Net investment gains of $89 million in the current quarter and $138 million in the current year period increased from the prior year periods, primarily as a result of higher gains on business-related investments, partially offset by lower results from real estate limited partnership investments. |
Other Revenues
| Other revenues of $168 million in the current quarter and $304 million in the current year period increased from the prior year periods, reflecting the recovery of a previously charged off energy industry related loan and improved results from other equity method investments. These results were partially offset by losses associated with held-for-sale corporate loans compared with gains in the respective prior year periods. |
Non-interest Expenses
Non-interest expenses of $3,902 million in the current quarter increased from the prior year quarter, reflecting a 20% increase in Compensation and benefits expenses and a 16% increase in Non-compensation expenses. Non-interest expenses of $7,890 million in the current year period increased from the prior year period reflecting a 17% increase in both Compensation and benefits expenses and Non-compensation expenses.
| Compensation and benefits expenses increased in the current quarter and current year period, primarily due to increases in discretionary incentive compensation driven by higher revenues, as well as amortization of deferred cash and equity awards and salaries, partially offset by a decrease in the fair value of investments to which certain deferred compensation plans are referenced. |
| Non-compensation expenses increased in the current quarter and current year period, primarily due to 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 19 to the financial statements for further information). In addition, in the current year period, the results were partially offset by the reversal of a portion of previously recorded provisions related to U.K. VAT matters. |
11 | June 2018 Form 10-Q |
Managements Discussion and Analysis |
Income Tax Items
The effective tax rate in the current quarter and current year period is lower compared with the prior year periods primarily as a result of the enactment of the U.S. Tax Cuts and Jobs Act (Tax Act). For a discussion of the Tax Act, see Supplemental Financial Information and DisclosuresIncome Tax Matters herein.
In both the current quarter and current year period, we recognized in Provision for income taxes an intermittent net discrete tax benefit of $97 million, primarily associated with new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters.
June 2018 Form 10-Q | 12 |
Managements Discussion and Analysis |
Wealth Management
Income Statement Information
Three Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues |
||||||||||||
Investment banking |
$ | 114 | $ | 135 | (16)% | |||||||
Trading |
135 | 207 | (35)% | |||||||||
Investments |
3 | 1 | 200% | |||||||||
Commissions and fees |
442 | 424 | 4% | |||||||||
Asset management |
2,514 | 2,302 | 9% | |||||||||
Other |
74 | 73 | 1% | |||||||||
Total non-interest revenues |
3,282 | 3,142 | 4% | |||||||||
Interest income |
1,320 | 1,114 | 18% | |||||||||
Interest expense |
277 | 105 | 164% | |||||||||
Net interest |
1,043 | 1,009 | 3% | |||||||||
Net revenues |
4,325 | 4,151 | 4% | |||||||||
Compensation and benefits |
2,356 | 2,297 | 3% | |||||||||
Non-compensation expenses |
812 | 797 | 2% | |||||||||
Total non-interest expenses |
3,168 | 3,094 | 2% | |||||||||
Income from continuing operations before income taxes |
1,157 | 1,057 | 9% | |||||||||
Provision for income taxes |
281 | 392 | (28)% | |||||||||
Net income applicable to Morgan Stanley |
$ | 876 | $ | 665 | 32% |
Six Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues |
||||||||||||
Investment banking |
$ | 254 | $ | 280 | (9)% | |||||||
Trading |
244 | 445 | (45)% | |||||||||
Investments |
3 | 2 | 50% | |||||||||
Commissions and fees |
940 | 864 | 9% | |||||||||
Asset management |
5,009 | 4,486 | 12% | |||||||||
Other |
137 | 129 | 6% | |||||||||
Total non-interest revenues |
6,587 | 6,206 | 6% | |||||||||
Interest income |
2,600 | 2,193 | 19% | |||||||||
Interest expense |
488 | 190 | 157% | |||||||||
Net interest |
2,112 | 2,003 | 5% | |||||||||
Net revenues |
8,699 | 8,209 | 6% | |||||||||
Compensation and benefits |
4,806 | 4,614 | 4% | |||||||||
Non-compensation expenses |
1,576 | 1,565 | 1% | |||||||||
Total non-interest expenses |
6,382 | 6,179 | 3% | |||||||||
Income from continuing operations before income taxes |
2,317 | 2,030 | 14% | |||||||||
Provision for income taxes |
527 | 718 | (27)% | |||||||||
Net income applicable to Morgan Stanley |
$ | 1,790 | $ | 1,312 | 36% |
Financial Information and Statistical Data
$ in billions | At June 30, |
At December 31, 2017 |
||||||
Client assets |
$ | 2,411 | $ | 2,373 | ||||
Fee-based client assets1 |
$ | 1,084 | $ | 1,045 | ||||
Fee-based client assets as a percentage of total client assets |
45% | 44% | ||||||
Client liabilities2 |
$ | 82 | $ | 80 | ||||
Investment securities portfolio |
$ | 59.7 | $ | 59.2 | ||||
Loans and lending commitments |
$ | 80.7 | $ | 77.3 | ||||
Wealth Management representatives |
15,632 | 15,712 |
Three Months Ended June 30, |
||||||||
2018 | 2017 | |||||||
Per representative: |
||||||||
Annualized revenues ($ in thousands)3 |
$ | 1,105 | $ | 1,052 | ||||
Client assets ($ in millions)4 |
$ | 154 | $ | 142 | ||||
Fee-based asset flows ($ in billions)5 |
$ | 15.3 | $ | 19.9 | ||||
Six Months Ended June 30, |
||||||||
2018 | 2017 | |||||||
Per representative: |
||||||||
Annualized revenues ($ in thousands)3 |
$ | 1,110 | $ | 1,041 | ||||
Client assets ($ in millions)4 |
$ | 154 | $ | 142 | ||||
Fee-based asset flows ($ in billions)5 |
$ | 33.5 | $ | 38.7 |
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. |
13 | June 2018 Form 10-Q |
Managements Discussion and Analysis |
Transactional Revenues
Three Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Investment banking |
$ | 114 | $ | 135 | (16)% | |||||||
Trading |
135 | 207 | (35)% | |||||||||
Commissions and fees |
442 | 424 | 4% | |||||||||
Total |
$ | 691 | $ | 766 | (10)% | |||||||
Transactional revenues as a % of Net revenues |
16% | 18% |
Six Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Investment banking |
$ | 254 | $ | 280 | (9)% | |||||||
Trading |
244 | 445 | (45)% | |||||||||
Commissions and fees |
940 | 864 | 9% | |||||||||
Total |
$ | 1,438 | $ | 1,589 | (10)% | |||||||
Transactional revenues as a % of Net revenues |
17% | 19% |
Net Revenues
Transactional Revenues
Transactional revenues of $691 million in the current quarter and $1,438 million in the current year period decreased 10% from the respective prior year periods primarily as a result of lower Trading and Investment banking revenues, partially offset by higher Commissions and fees.
| Investment banking revenues decreased in the current quarter and current year period primarily due to lower revenues from equity and structured products issuances. |
| Trading revenues decreased in the current quarter and current year period primarily as a result of lower gains related to investments associated with certain employee deferred compensation plans and lower fixed income revenue driven by product mix. |
| Commissions and fees increased in the current quarter and current year period primarily as a result of increased client transactions in alternative products, and options and futures. |
Asset Management
Asset management revenues of $2,514 million in the current quarter and $5,009 million in the current year period increased 9% and 12%, respectively, primarily due to the effect of market appreciation and net positive flows on the respective beginning of period fee-based client assets balances on which billings are generally based.
See Fee-Based Client Assets Rollforwards herein.
Net Interest
Net interest of $1,043 million in the current quarter and $2,112 million in the current year period increased 3% and 5%, respectively, primarily as a result of higher Loan balances. In the current quarter and current year period, the effect of higher interest rates on Loans and Investment securities was essentially offset by higher average interest rates on Deposits, due to changes in our deposit mix.
Non-interest Expenses
Non-interest expenses of $3,168 million in the current quarter and $6,382 million in the current year period increased 2% and 3%, respectively, primarily as a result of higher Compensation and benefits expenses.
| Compensation and benefits expenses increased in the current quarter and current year period 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 both the current quarter and current year period. |
Income Tax Items
The effective tax rate in the current quarter and current year period is lower compared with the prior year periods primarily as a result of the enactment of the Tax Act. For a discussion of the Tax Act, see Supplemental Financial Information and DisclosuresIncome Tax Matters herein.
June 2018 Form 10-Q | 14 |
Managements Discussion and Analysis |
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 March 31, |
Inflows | Outflows | Market Impact |
At June 30, 2018 |
|||||||||||||||
Separately managed1 |
$ | 260 | $ | 9 | $ | (5) | $ | 3 | $ | 267 | ||||||||||
Unified managed |
254 | 12 | (8) | 1 | 259 | |||||||||||||||
Mutual fund advisory |
20 | | (1) | 1 | 20 | |||||||||||||||
Advisor |
147 | 8 | (8) | 2 | 149 | |||||||||||||||
Portfolio manager |
356 | 20 | (12) | 3 | 367 | |||||||||||||||
Subtotal |
$ | 1,037 | $ | 49 | $ | (34) | $ | 10 | $ | 1,062 | ||||||||||
Cash management |
21 | 6 | (5) | | 22 | |||||||||||||||
Total fee-based client assets |
$ | 1,058 | $ | 55 | $ | (39) | $ | 10 | $ | 1,084 |
$ in billions | At March 31, |
Inflows | Outflows | Market Impact |
At June 30, 2017 |
|||||||||||||||
Separately managed1 |
$ | 230 | $ | 8 | $ | (7) | $ | 6 | $ | 237 | ||||||||||
Unified managed |
217 | 13 | (7) | 5 | 228 | |||||||||||||||
Mutual fund advisory |
21 | | (1) | 1 | 21 | |||||||||||||||
Advisor |
133 | 10 | (8) | 3 | 138 | |||||||||||||||
Portfolio manager |
305 | 23 | (11) | 4 | 321 | |||||||||||||||
Subtotal |
$ | 906 | $ | 54 | $ | (34) | $ | 19 | $ | 945 | ||||||||||
Cash management |
21 | 2 | (6) | | 17 | |||||||||||||||
Total fee-based client assets |
$ | 927 | $ | 56 | $ | (40) | $ | 19 | $ | 962 |
$ in billions | At December 31, |
Inflows | Outflows | Market Impact |
At June 30, 2018 |
|||||||||||||||
Separately managed1 |
$ | 252 | $ | 18 | $ | (10) | $ | 7 | $ | 267 | ||||||||||
Unified managed |
250 | 25 | (16) | | 259 | |||||||||||||||
Mutual fund advisory |
21 | 1 | (2) | | 20 | |||||||||||||||
Advisor |
149 | 16 | (16) | | 149 | |||||||||||||||
Portfolio manager |
353 | 39 | (22) | (3) | 367 | |||||||||||||||
Subtotal |
$ | 1,025 | $ | 99 | $ | (66) | $ | 4 | $ | 1,062 | ||||||||||
Cash management |
20 | 11 | (9) | | 22 | |||||||||||||||
Total fee-based client assets |
$ | 1,045 | $ | 110 | $ | (75) | $ | 4 | $ | 1,084 |
$ in billions | At December 31, |
Inflows | Outflows | Market Impact |
At June 30, 2017 |
|||||||||||||||
Separately managed1 |
$ | 222 | $ | 16 | $ | (11) | $ | 10 | $ | 237 | ||||||||||
Unified managed |
204 | 25 | (15) | 14 | 228 | |||||||||||||||
Mutual fund advisory |
21 | 1 | (3) | 2 | 21 | |||||||||||||||
Advisor |
125 | 19 | (14) | 8 | 138 | |||||||||||||||
Portfolio manager |
285 | 42 | (21) | 15 | 321 | |||||||||||||||
Subtotal |
$ | 857 | $ | 103 | $ | (64) | $ | 49 | $ | 945 | ||||||||||
Cash management |
20 | 5 | (8) | | 17 | |||||||||||||||
Total fee-based client assets |
$ | 877 | $ | 108 | $ | (72) | $ | 49 | $ | 962 |
Average Fee Rates
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Fee rate in bps | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Separately managed |
16 | 17 | 16 | 16 | ||||||||||||
Unified managed |
97 | 98 | 98 | 98 | ||||||||||||
Mutual fund advisory |
120 | 118 | 120 | 118 | ||||||||||||
Advisor |
84 | 84 | 85 | 85 | ||||||||||||
Portfolio manager |
96 | 96 | 96 | 97 | ||||||||||||
Subtotal |
77 | 77 | 76 | 76 | ||||||||||||
Cash management |
6 | 6 | 6 | 6 | ||||||||||||
Total fee-based client assets |
75 | 75 | 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. |
15 | June 2018 Form 10-Q |
Managements Discussion and Analysis |
Investment Management
Income Statement Information
Three Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues |
||||||||||||
Trading |
$ | 16 | $ | (3 | ) | N/M | ||||||
Investments |
55 | 125 | (56)% | |||||||||
Asset management |
610 | 539 | 13% | |||||||||
Other |
3 | 4 | (25)% | |||||||||
Total non-interest revenues |
684 | 665 | 3% | |||||||||
Interest income |
17 | 1 | N/M | |||||||||
Interest expense |
10 | 1 | N/M | |||||||||
Net interest |
7 | | N/M | |||||||||
Net revenues |
691 | 665 | 4% | |||||||||
Compensation and benefits |
272 | 288 | (6)% | |||||||||
Non-compensation expenses |
279 | 235 | 19% | |||||||||
Total non-interest expenses |
551 | 523 | 5% | |||||||||
Income from continuing operations before income taxes |
140 | 142 | (1)% | |||||||||
Provision for income taxes |
36 | 41 | (12)% | |||||||||
Net income |
104 | 101 | 3% | |||||||||
Net income (loss) applicable to noncontrolling interests |
| 1 | N/M | |||||||||
Net income applicable to Morgan Stanley |
$ | 104 | $ | 100 | 4% |
Six Months Ended June 30, |
||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues |
||||||||||||
Trading |
$ | 21 | $ | (14 | ) | N/M | ||||||
Investments |
132 | 223 | (41)% | |||||||||
Asset management |
1,236 | 1,056 | 17% | |||||||||
Other |
13 | 8 | 63% | |||||||||
Total non-interest revenues |
1,402 | 1,273 | 10% | |||||||||
Interest income |
18 | 2 | N/M | |||||||||
Interest expense |
11 | 1 | N/M | |||||||||
Net interest |
7 | 1 | N/M | |||||||||
Net revenues |
1,409 | 1,274 | 11% | |||||||||
Compensation and benefits |
576 | 567 | 2% | |||||||||
Non-compensation expenses |
545 | 462 | 18% | |||||||||
Total non-interest expenses |
1,121 | 1,029 | 9% | |||||||||
Income from continuing operations before income taxes |
288 | 245 | 18% | |||||||||
Provision for income taxes |
55 | 71 | (23)% | |||||||||
Net income |
233 | 174 | 34% | |||||||||
Net income (loss) applicable to noncontrolling interests |
2 | 7 | (71)% | |||||||||
Net income applicable to Morgan Stanley |
$ | 231 | $ | 167 | 38% |
Net Revenues
Investments
Investments gains of $55 million in the current quarter and $132 million in the current year period compared with $125 million in the prior year quarter and $223 million in the prior year period, respectively. These decreases reflect the absence of realized investment gains in an infrastructure fund, as well as the reversal of previously accrued carried interest in certain Asia private equity funds, primarily due to losses associated with weakening Asia-Pacific currencies.
Asset Management
Asset management revenues of $610 million in the current quarter and $1,236 million in the current year period increased 13% and 17%, respectively, primarily as a result of higher average AUM across all asset classes. See AUM Rollforwards herein.
The adoption of the accounting update Revenue from Contracts with Customers had the effect of increasing Asset management revenues due to the gross presentation of distribution fees. This increase (approximately $44 million in the current year period) was partially offset by the delayed recognition of certain performance fees not in the form of carried interest until they are no longer probable of reversing. For 2018, the recognition of a greater portion of these revenues is expected to occur in the fourth quarter based on current fee arrangements. See Notes 2 and 19 to the financial statements for further details.
Non-interest Expenses
Non-interest expenses of $551 million in the current quarter and $1,121 million in the current year period increased 5% and 9%, respectively, primarily due to higher Non-compensation expenses.
| Compensation and benefits expenses decreased in the current quarter due to decreases in deferred compensation associated with carried interest and the fair value of investments to which certain deferred compensation plans are referenced. Compensation and benefits expenses were relatively unchanged in the current year period. |
| Non-compensation expenses increased in the current quarter and current year period primarily as a result of the gross presentation of distribution fees due to the adoption of the accounting update Revenue from Contracts with Customers along with higher fee sharing on increased AUM balances. See Asset Management above. |
June 2018 Form 10-Q | 16 |
Managements Discussion and Analysis |
Income Tax Items
The effective tax rate in the current quarter and current year period is lower compared with the prior year periods primarily as a result of the enactment of the Tax Act. For a discussion of the Tax Act, see Supplemental Financial Information and DisclosuresIncome Tax Matters herein.
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 March 31, |
Inflows | Outflows | Market Impact |
Other1 | At June 30, 2018 |
||||||||||||||||||
Equity |
$ | 109 | $ | 10 | $ | (7 | ) | $ | 3 | $ | (1 | ) | $ | 114 | ||||||||||
Fixed income |
72 | 7 | (7 | ) | (1 | ) | (2 | ) | 69 | |||||||||||||||
Alternative/Other |
131 | 6 | (4 | ) | 1 | (2 | ) | 132 | ||||||||||||||||
Long-term AUM subtotal |
312 | 23 | (18 | ) | 3 | (5 | ) | 315 | ||||||||||||||||
Liquidity |
157 | 375 | (373 | ) | 1 | (1 | ) | 159 | ||||||||||||||||
Total AUM |
$ | 469 | $ | 398 | $ | (391 | ) | $ | 4 | $ | (6 | ) | $ | 474 | ||||||||||
Shares of minority stake assets |
7 | 7 | ||||||||||||||||||||||
$ in billions | At March 31, 2017 |
Inflows | Outflows | Market Impact |
Other1 | At June 30, 2017 |
||||||||||||||||||
Equity |
$ | 87 | $ | 6 | $ | (5 | ) | $ | 5 | $ | 1 | $ | 94 | |||||||||||
Fixed income |
62 | 8 | (6 | ) | 1 | 1 | 66 | |||||||||||||||||
Alternative/Other |
119 | 6 | (6 | ) | 3 | (1 | ) | 121 | ||||||||||||||||
Long-term AUM subtotal |
268 | 20 | (17 | ) | 9 | 1 | 281 | |||||||||||||||||
Liquidity |
153 | 308 | (308 | ) | | 1 | 154 | |||||||||||||||||
Total AUM |
$ | 421 | $ | 328 | $ | (325 | ) | $ | 9 | $ | 2 | $ | 435 | |||||||||||
Shares of minority stake assets |
7 | 8 |
$ in billions | At December 31, |
Inflows | Outflows | Market Impact |
Other1 | At June 30, 2018 |
||||||||||||||||||
Equity |
$ | 105 | $ | 20 | $ | (14 | ) | $ | 3 | $ | | $ | 114 | |||||||||||
Fixed income |
73 | 14 | (16 | ) | (1 | ) | (1 | ) | 69 | |||||||||||||||
Alternative/Other |
128 | 11 | (9 | ) | 1 | 1 | 132 | |||||||||||||||||
Long-term AUM subtotal |
306 | 45 | (39 | ) | 3 | | 315 | |||||||||||||||||
Liquidity |
176 | 700 | (717 | ) | 1 | (1 | ) | 159 | ||||||||||||||||
Total AUM |
$ | 482 | $ | 745 | $ | (756 | ) | $ | 4 | $ | (1 | ) | $ | 474 | ||||||||||
Shares of minority stake assets |
7 | 7 | ||||||||||||||||||||||
$ in billions | At December 31, |
Inflows | Outflows | Market Impact |
Other1 | At June 30, 2017 |
||||||||||||||||||
Equity |
$ | 79 | $ | 11 | $ | (10 | ) | $ | 13 | $ | 1 | $ | 94 | |||||||||||
Fixed income |
60 | 13 | (11 | ) | 2 | 2 | 66 | |||||||||||||||||
Alternative/Other |
115 | 13 | (10 | ) | 4 | (1 | ) | 121 | ||||||||||||||||
Long-term AUM subtotal |
254 | 37 | (31 | ) | 19 | 2 | 281 | |||||||||||||||||
Liquidity |
163 | 636 | (646 | ) | | 1 | 154 | |||||||||||||||||
Total AUM |
$ | 417 | $ | 673 | $ | (677 | ) | $ | 19 | $ | 3 | $ | 435 | |||||||||||
Shares of minority stake assets |
8 | 8 |
1. | Includes distributions and foreign currency impact for all periods and the impact of the Mesa West Capital, LLC acquisition in the current year period. |
Average AUM
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
$ in billions | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Equity |
$ | 111 | $ | 91 | $ | 110 | $ | 87 | ||||||||
Fixed income |
71 | 64 | 72 | 63 | ||||||||||||
Alternative/Other |
131 | 120 | 130 | 119 | ||||||||||||
Long-term AUM subtotal |
313 | 275 | 312 | 269 | ||||||||||||
Liquidity |
161 | 153 | 163 | 155 | ||||||||||||
Total AUM |
$ | 474 | $ | 428 | $ | 475 | $ | 424 | ||||||||
Shares of minority stake assets |
7 | 8 | 7 | 8 |
Average Fee Rate
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Fee rate in bps | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Equity |
77 | 73 | 76 | 74 | ||||||||||||
Fixed income |
33 | 33 | 34 | 33 | ||||||||||||
Alternative/Other |
67 | 70 | 67 | 70 | ||||||||||||
Long-term AUM |
63 | 62 | 63 | 63 | ||||||||||||
Liquidity |
18 | 17 | 18 | 18 | ||||||||||||
Total AUM |
47 | 46 | 47 | 46 |
17 | June 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 June 30, |
Six Months Ended June 30, |
|||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
U.S. GAAP |
20.6% | 32.0% | 20.7% | 30.5% | ||||||||||||
Adjusted effective income tax ratenon-GAAP1 |
23.4% | 31.9% | 22.1% | 30.1% |
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 non-GAAP measures, see Selected Non-GAAP Financial Information herein. |
Adjusted amounts exclude an intermittent net discrete tax benefit of $88 million in the current quarter and current year period, primarily associated with new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters. Intermittent net discrete tax provisions were $4 million and $18 million in the prior year quarter and prior year period, respectively.
The effective tax rates include recurring-type discrete tax benefits associated with employee share-based payments of $17 million and $16 million in the current quarter and prior year quarter, respectively. The effective tax rates include recurring-type discrete tax benefits associated with employee share-based payments of $164 million and $128 million in the current year period and prior year period, respectively.
The effective tax rate reflects our current assumptions, estimates and interpretations related to the 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 income tax 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
Our U.S. bank subsidiaries, Morgan Stanley Bank N.A. (MSBNA) and Morgan Stanley Private Bank, National Association (MSPBNA) (collectively, U.S. Bank Subsidiaries) accept deposit accounts, provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, and invest in securities. 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 |
$ | 200.5 | $ | 185.3 | ||||
Investment securities portfolio: |
||||||||
Investment securitiesAFS |
41.3 | 42.0 | ||||||
Investment securitiesHTM |
18.8 | 17.5 | ||||||
Total investment securities |
$ | 60.1 | $ | 59.5 | ||||
Deposits2 |
$ | 172.6 | $ | 159.1 | ||||
Wealth Management |
| |||||||
Securities-based lending and other loans3 |
$ | 43.6 | $ | 41.2 | ||||
Residential real estate loans |
26.4 | 26.7 | ||||||
Total |
$ | 70.0 | $ | 67.9 | ||||
Institutional Securities |
| |||||||
Corporate loans |
$ | 26.7 | $ | 24.2 | ||||
Wholesale real estate loans |
14.5 | 12.2 | ||||||
Total |
$ | 41.2 | $ | 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. |
June 2018 Form 10-Q | 18 |
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. Currently, we plan to adopt this accounting update as of the effective date, January 1, 2019. Based upon our current population of leases, we expect the right of use asset and corresponding lease liability to be less than 1% of our total assets. |
| 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.
19 | June 2018 Form 10-Q |
Managements Discussion and Analysis |
Total Assets by Business Segment
At June 30, 2018 | ||||||||||||||||
$ in millions | IS | WM | IM | Total | ||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents1 |
$ | 66,624 | $ | 14,891 | $ | 74 | $ | 81,589 | ||||||||
Trading assets at fair value |
262,743 | 78 | 3,617 | 266,438 | ||||||||||||
Investment securities |
22,204 | 59,744 | | 81,948 | ||||||||||||
Securities purchased under agreements to resell |
79,509 | 14,419 | | 93,928 | ||||||||||||
Securities borrowed |
153,062 | 186 | | 153,248 | ||||||||||||
Customer and other receivables |
43,664 | 17,467 | 583 | 61,714 | ||||||||||||
Loans, net of allowance2 |
42,071 | 70,037 | 5 | 112,113 | ||||||||||||
Other assets3 |
14,011 | 9,227 | 1,659 | 24,897 | ||||||||||||
Total assets |
$ | 683,888 | $ | 186,049 | $ | 5,938 | $ | 875,875 | ||||||||
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 $875.9 billion at June 30, 2018 from $851.7 billion at December 31, 2017, primarily driven by increases to support client activity in Securities borrowed in the Institutional Securities business segment and Loans across all segments. Trading assets within the Institutional Securities business segment declined due to reductions in Equities inventory to support increased demand and changes in client positioning. The decrease in Trading assets resulted in greater liquidity, as reflected by increases in GLR-eligible Securities purchased under agreements to resell, Investment securities and Cash and cash equivalents. For further information regarding our GLR, see Global Liquidity Reserve herein.
Collateralized Financing Transactions
$ in millions | At June 30, 2018 |
At December 31, 2017 |
||||||
Securities purchased under agreements to resell and Securities borrowed |
$ | 247,176 | $ | 208,268 | ||||
Securities sold under agreements to repurchase and Securities loaned |
$ | 63,370 | $ | 70,016 | ||||
Securities received as collateral1 |
$ | 8,209 | $ | 13,749 | ||||
Average Daily Balance Three Months Ended |
||||||||
$ in millions | June 30, 2018 |
December 31, 2017 |
||||||
Securities purchased under agreements to resell and Securities borrowed |
$ | 227,527 | $ | 214,343 | ||||
Securities sold under agreements to repurchase and Securities loaned |
$ | 64,404 | $ | 66,879 |
1. | Included in Trading assets in the balance sheets. |
See Note 2 to the financial statements in the 2017 Form 10-K and Note 6 to the financial statements for more details on collateralized financing transactions.
In addition to the collateralized financing transactions shown in the previous table, we also engage in financing transactions collateralized by customer-owned securities, which are segregated in accordance with regulatory requirements. Receivables under these financing transactions, primarily margin loans, are included in Customer and other receivables in the balance sheets, and payables under these financing transactions, primarily to prime brokerage customers, are included in Customer and other payables in the balance sheets. 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 Condition and Results of OperationsLiquidity and Capital ResourcesLiquidity Risk Management Framework in the 2017 Form 10-K.
June 2018 Form 10-Q | 20 |
Managements Discussion and Analysis |
At June 30, 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 June 30, 2018 |
At December 31, 2017 |
||||||
Cash deposits with banks1 |
$ | 10,345 | $ | 7,167 | ||||
Cash deposits with central banks1 |
33,948 | 33,791 | ||||||
Unencumbered highly liquid securities: |
||||||||
U.S. government obligations |
88,979 | 73,422 | ||||||
U.S. agency and agency mortgage-backed securities |
59,143 | 55,750 | ||||||
Non-U.S. sovereign obligations2 |
31,157 | 19,424 | ||||||
Other investment grade securities |
2,750 | 3,106 | ||||||
Total |
$ | 226,322 | $ | 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 Japanese, U.K., German, Brazilian and French government obligations. |
GLR Managed by Bank and Non-Bank Legal Entities
At 2018 |
At 2017 |
Average Daily Balance Three Months Ended |
||||||||||
$ in millions | June 30, 2018 | |||||||||||
Bank legal entities |
||||||||||||
Domestic |
$ | 76,667 | $ | 70,364 | $ | 70,962 | ||||||
Foreign |
4,365 | 4,756 | 4,144 | |||||||||
Total Bank legal entities |
81,032 | 75,120 | 75,106 | |||||||||
Non-Bank legal entities |
|
|||||||||||
Domestic: |
||||||||||||
Parent Company |
63,401 | 41,642 | 55,887 | |||||||||
Non-Parent Company |
31,652 | 35,264 | 32,307 | |||||||||
Total Domestic |
95,053 | 76,906 | 88,194 | |||||||||
Foreign |
50,237 | 40,634 | 50,650 | |||||||||
Total Non-Bank legal entities |
145,290 | 117,540 | 138,844 | |||||||||
Total |
$ | 226,322 | $ | 192,660 | $ | 213,950 |
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. Based on our daily calculations, we and our U.S. Bank Subsidiaries are compliant with the minimum required LCR of 100%.
The Firms calculations are based on our current understanding of the LCR and other factors, which may be subject to change as we receive additional clarification and implementation guidance from regulators relating to the LCR, and as the interpretation of the LCR evolves over time.
HQLA by Type of Asset and LCR
Average Daily Balance Three Months Ended |
||||||||
$ in millions | June 30, 2018 | March 31, 2018 | ||||||
HQLA |
||||||||
Cash deposits with central banks |
$ | 38,456 | $ | 33,350 | ||||
Securities1 |
128,268 | 125,015 | ||||||
Total |
$ | 166,724 | $ | 158,365 | ||||
LCR |
128% | 121% |
1. | Primarily includes U.S. Treasuries; U.S. agency mortgage-backed securities; sovereign bonds; investment grade corporate bonds; and publicly traded common equities. |
The increase in the LCR in the current quarter is due to increased HQLA resulting from changes in the composition of assets 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.
21 | June 2018 Form 10-Q |
Managements Discussion and Analysis |
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 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 June 30, 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.
Deposits
$ in millions | At June 30, |
At December 31, 2017 |
||||||
Savings and demand deposits: |
||||||||
Brokerage sweep deposits1 |
$ | 130,698 | $ | 135,946 | ||||
Savings and other |
9,038 | 8,541 | ||||||
Total Savings and demand deposits |
139,736 | 144,487 | ||||||
Time deposits2 |
33,066 | 14,949 | ||||||
Total |
$ | 172,802 | $ | 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 June 30, 2018 increased compared with December 31, 2017, primarily driven by increases in Time deposits and Savings and other deposits, partially offset by a reduction in Brokerage sweep deposits due to client deployment of cash into investments and typical seasonal client tax payments. In the current quarter we initiated a redesign of our Brokerage sweep deposit program, resulting in approximately $10 billion in incremental deposits in higher balance accounts, which partially offset the reductions noted since December 31, 2017. As we make additional adjustments in the third quarter of 2018, we anticipate a similar amount of incremental deposits.
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.
June 2018 Form 10-Q | 22 |
Managements Discussion and Analysis |
Borrowings by Remaining Maturity at June 30, 20181
$ in millions | Parent Company |
Subsidiaries | Total | |||||||||
Original maturities of one year or less |
$ | | $ | 2,329 | $ | 2,329 | ||||||
Original maturities greater than one year |
|
|||||||||||
2018 |
$ | 3,652 | $ | 2,436 | $ | 6,088 | ||||||
2019 |
21,497 | 4,095 | 25,592 | |||||||||
2020 |
18,781 | 2,400 | 21,181 | |||||||||
2021 |
21,294 | 2,984 | 24,278 | |||||||||
2022 |
14,969 | 1,874 | 16,843 | |||||||||
Thereafter |
80,964 | 14,969 | 95,933 | |||||||||
Total |
$ | 161,157 | $ | 28,758 | $ | 189,915 | ||||||
Total Borrowings |
$ | 161,157 | $ | 31,087 | $ | 192,244 | ||||||
Maturities over next 12 months2 |
|
$ | 17,330 |
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 of $192,244 million as of June 30, 2018 remained relatively unchanged compared with $192,582 million at December 31, 2017.
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 July 31, 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 June 30, |
At December 31, 2017 |
||||||
One-notch downgrade |
$ | 828 | $ | 822 | ||||
Two-notch downgrade |
596 | 596 |
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
23 | June 2018 Form 10-Q |
Managements Discussion and Analysis |
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 June 30, |
Six Months Ended June 30, |
|||||||||||||||
$ in millions |
2018 | 2017 | 2018 | 2017 | ||||||||||||
Repurchases of common stock under our share repurchase program |
$ | 1,250 | $ | 500 | $ | 2,500 | $ | 1,250 |
From time to time we repurchase our outstanding common stock, including as part of our share repurchase program. On April 18, 2018, we entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (MUFG) whereby MUFG sells shares of the Firms common stock to us, as part of our share repurchase program. The sales plan, which began to be executed in the current quarter, is only intended to maintain MUFGs ownership percentage below 24.9% in order to comply with MUFGs passivity commitments to the Board of Governors of the Federal Reserve System (Federal Reserve) and will have no impact on the strategic alliance between MUFG and us, including the joint ventures 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 |
July 18, 2018 | |
Amount per share |
$0.30 | |
Date to be paid |
August 15, 2018 | |
Shareholders of record as of |
July 31, 2018 |
Preferred Stock
Preferred Stock Dividend Announcement
Announcement date |
June 15, 2018 | |
Date paid |
July 16, 2018 | |
Shareholders of record as of |
June 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 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. For us to remain an FHC, we must remain well-capitalized in accordance with standards established by the Federal Reserve and our U.S. Bank Subsidiaries must remain well-capitalized in accordance with standards established by the OCC. For additional information on regulatory capital requirements for our U.S. Bank Subsidiaries, see Note 13 to the financial statements.
Regulatory capital requirements established by the Federal Reserve 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-based 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 Capital Requirements in the 2017 Form 10-K.
Risk-based 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.
June 2018 Form 10-Q | 24 |
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 June 30, 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.
Leverage-based Regulatory Capital. Minimum leverage-based capital requirements include a Tier 1 leverage ratio and an SLR. The SLR became effective as a capital standard on January 1, 2018. We are required to maintain a Tier 1 SLR 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 potential limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers.
Regulatory Capital Ratios
At June 30, 2018 | ||||||||||||
Fully Phased-In | ||||||||||||
$ in millions | Required Ratio |
Standardized | Advanced | |||||||||
Risk-based capital |
||||||||||||
Common Equity Tier 1 capital |
$ | 61,352 | $ | 61,352 | ||||||||
Tier 1 capital |
70,017 | 70,017 | ||||||||||
Total capital |
79,681 | 79,425 | ||||||||||
Total RWA |
387,414 | 369,383 | ||||||||||
Common Equity Tier 1 capital ratio |
8.6% | 15.8% | 16.6% | |||||||||
Tier 1 capital ratio |
10.1% | 18.1% | 19.0% | |||||||||
Total capital ratio |
12.1% | 20.6% | 21.5% | |||||||||
Leverage-based capital |
||||||||||||
Adjusted average assets1 |
$ | 852,726 | N/A | |||||||||
Tier 1 leverage ratio |
4.0% | 8.2% | N/A | |||||||||
Supplementary leverage exposure2 |
N/A | 1,096,953 | ||||||||||
SLR |
5.0% | N/A | 6.4% |
At December 31, 2017 | ||||||||||||||||||||
Transitional3 | Pro Forma 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 | |||||||||||||||
Supplementary leverage exposure2 |
N/A | 1,082,683 | N/A | 1,082,170 | ||||||||||||||||
Pro forma SLR |
5.0% | N/A | 6.5% | N/A | 6.4% |
1. | Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is 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 capital deductions. |
2. | Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily (i) potential future exposure for derivative exposures, gross-up for cash collateral netting where qualifying criteria are not met, and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount for off-balance sheet exposures. |
3. | 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 and the pro forma estimated SLR utilized 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
25 | June 2018 Form 10-Q |
Managements Discussion and Analysis |
non-GAAP financial measures as 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.
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 June 30, 2018.
Fully Phased-In Regulatory Capital
$ in millions | At June 30, 2018 |
At December 31, 20171 |
||||||
Common Equity Tier 1 capital |
||||||||
Common stock and surplus |
$ | 11,824 | $ | 14,354 |