UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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) |
Securities registered pursuant to Section 12(b) of the Act: | ||||||
Title of each class | Name of exchange on which registered |
Trading Symbol(s) | ||||
Common Stock, $0.01 par value |
New York Stock Exchange | MS | ||||
Depositary Shares, each representing 1/1,000th
interest in a share of Floating Rate |
New York Stock Exchange | MS/PA | ||||
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series E, $0.01 par value |
New York Stock Exchange | MS/PE | ||||
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series F, $0.01 par value |
New York Stock Exchange | MS/PF | ||||
Depositary Shares, each representing 1/1,000th
interest in a share of 6.625% |
New York Stock Exchange | MS/PG | ||||
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series I, $0.01 par value |
New York Stock Exchange | MS/PI | ||||
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series K, $0.01 par value |
New York Stock Exchange | MS/PK | ||||
Global Medium-Term Notes, Series A, Fixed Rate Step-Up Senior Notes Due 2026 of |
New York Stock Exchange | MS/26C | ||||
Market Vectors ETNs due March 31, 2020 (two issuances) |
NYSE Arca, Inc. | URR/DDR | ||||
Market Vectors ETNs due April 30, 2020 (two issuances) |
NYSE Arca, Inc. | CNY/INR | ||||
Morgan Stanley Cushing® MLP High Income Index ETNs due March 21, 2031 |
NYSE Arca, Inc. | MLPY |
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 every Interactive Data File required to be submitted 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 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 ☐ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2019, there were 1,682,234,555 shares of the Registrants Common Stock, par value $0.01 per share, outstanding.
For the quarter ended March 31, 2019
Table of Contents | Part | Item | Page | |||||||||||
I | 1 | |||||||||||||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
I | 2 | 1 | |||||||||||
1 | ||||||||||||||
2 | ||||||||||||||
6 | ||||||||||||||
13 | ||||||||||||||
13 | ||||||||||||||
14 | ||||||||||||||
14 | ||||||||||||||
14 | ||||||||||||||
19 | ||||||||||||||
I | 3 | 24 | ||||||||||||
24 | ||||||||||||||
26 | ||||||||||||||
30 | ||||||||||||||
33 | ||||||||||||||
I | 1 | 34 | ||||||||||||
34 | ||||||||||||||
35 | ||||||||||||||
36 | ||||||||||||||
Consolidated Statements of Changes in Total Equity (Unaudited) |
37 | |||||||||||||
38 | ||||||||||||||
39 | ||||||||||||||
39 | ||||||||||||||
40 | ||||||||||||||
40 | ||||||||||||||
48 | ||||||||||||||
51 | ||||||||||||||
54 | ||||||||||||||
55 | ||||||||||||||
57 | ||||||||||||||
58 | ||||||||||||||
58 | ||||||||||||||
58 | ||||||||||||||
63 | ||||||||||||||
65 | ||||||||||||||
67 | ||||||||||||||
69 | ||||||||||||||
69 | ||||||||||||||
69 | ||||||||||||||
70 | ||||||||||||||
71 | ||||||||||||||
72 | ||||||||||||||
73 | ||||||||||||||
II | 75 | |||||||||||||
II | 1 | 75 | ||||||||||||
II | 2 | 76 | ||||||||||||
I | 4 | 77 | ||||||||||||
II | 6 | 77 | ||||||||||||
E-1 | ||||||||||||||
S-1 |
i
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. 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 Gover-nance 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 the definition 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 activities include originating corporate loans, commercial mortgage lending, providing secured lending facilities and extending financing to sales and trading customers. 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; securities-based lending, residential real estate loans 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 served 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 2018 Form 10-K, and Liquidity and Capital ResourcesRegulatory Requirements herein.
1 | March 2019 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 $10,286 million in the quarter ended March 31, 2019 (current quarter, or 1Q 2019), compared with $11,077 million in the quarter ended March 31, 2018 (prior year quarter, or 1Q 2018). For the current quarter, net income applicable to Morgan Stanley was $2,429 million, or $1.39 per diluted common share, compared with $2,668 million or $1.45 per diluted common share, in the prior year quarter. |
Non-interest Expenses1
($ in millions)
1. | The percentages on the bars in the chart represent the contribution of compensation and benefits expenses and non-compensation expenses to total non-interest expenses. |
| Compensation and benefits expenses of $4,651 million in current quarter decreased 5% from $4,914 million in the prior year quarter, primarily due to decreases in discretionary incentive compensation and the formulaic payout to Wealth Management representatives, both driven by lower revenues. These decreases were partially offset by increases in the fair value of investments to which certain deferred compensation plans are referenced and higher salaries. |
| Non-compensation expenses were $2,680 million in the current quarter compared with $2,743 million in the prior year quarter, representing a 2% decrease. This decrease was primarily due to lower litigation and volume-related expenses, partially offset by increased investment in technology. |
Income Taxes
The current quarter includes intermittent net discrete tax benefits of $101 million, primarily associated with the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations. For further information, see Supplemental Financial Information and DisclosuresIncome Tax Matters herein.
March 2019 Form 10-Q | 2 |
Managements Discussion and Analysis
Selected Financial Information and Other Statistical Data
Three Months Ended March 31, |
||||||||
$ in millions | 2019 | 2018 | ||||||
Income from continuing operations applicable to Morgan Stanley |
$ | 2,429 | $ | 2,670 | ||||
Income (loss) from discontinued operations applicable to Morgan Stanley |
| (2 | ) | |||||
Net income applicable to Morgan Stanley |
2,429 | 2,668 | ||||||
Preferred stock dividends and other |
93 | 93 | ||||||
Earnings applicable to Morgan Stanley common shareholders |
$ | 2,336 | $ | 2,575 | ||||
Expense efficiency ratio1 |
71.3% | 69.1% | ||||||
ROE2 |
13.1% | 14.9% | ||||||
ROTCE2 |
14.9% | 17.2% |
in millions, except per share and employee data |
|
At March 31, 2019 |
|
|
At December 31, 2018 |
| ||
GLR3 |
$ | 233,148 | $ | 249,735 | ||||
Loans4 |
$ | 116,197 | $ | 115,579 | ||||
Total assets |
$ | 875,964 | $ | 853,531 | ||||
Deposits |
$ | 179,731 | $ | 187,820 | ||||
Borrowings |
$ | 190,691 | $ | 189,662 | ||||
Common shares outstanding |
1,686 | 1,700 | ||||||
Common shareholders equity |
$ | 72,204 | $ | 71,726 | ||||
Tangible common shareholders equity2 |
$ | 63,434 | $ | 62,879 | ||||
Book value per common share5 |
$ | 42.83 | $ | 42.20 | ||||
Tangible book value per common share2, 5 |
$ | 37.62 | $ | 36.99 | ||||
Worldwide employees |
60,469 | 60,348 |
At March 31, 2019 |
At December 31, 2018 |
|||||||
Capital ratios6 |
||||||||
Common Equity Tier 1 capital |
16.7% | 16.9% | ||||||
Tier 1 capital |
19.0% | 19.2% | ||||||
Total capital |
21.6% | 21.8% | ||||||
Tier 1 leverage |
8.4% | 8.4% | ||||||
SLR |
6.5% | 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 and tangible book value per common share equal common shareholders equity and tangible common shareholders equity, respectively, divided by common shares outstanding. |
6. | At March 31, 2019 and December 31 2018, our risk-based capital ratios are based on the Standardized Approach rules. For a discussion of our capital ratios, see Liquidity and Capital ResourcesRegulatory Requirements herein. |
Business Segment Results
Net Revenues by Segment1, 2
($ in millions)
Net Income Applicable to Morgan Stanley by Segment1, 3
($ in millions)
1. | The percentages on the bars in the charts represent the contribution of each business segment to the total of the applicable financial category and may not total to 100% due to intersegment eliminations. |
2. | The total amount of Net Revenues by Segment includes intersegment eliminations of $(103) million and $(115) million in the current quarter and prior year quarter, respectively. |
3. | The total amount of Net Income Applicable to Morgan Stanley by Segment includes intersegment eliminations of $(2) million in the current quarter. |
| Institutional Securities net revenues of $5,196 million in the current quarter decreased 15% from the prior year quarter, primarily reflecting lower revenues from both sales and trading and Investment banking. |
| Wealth Management net revenues were relatively unchanged from the prior year quarter. |
| Investment Management net revenues of $804 million in the current quarter increased 12% from the prior year quarter, primarily reflecting higher revenues from Investments. |
3 | March 2019 Form 10-Q |
Managements Discussion and Analysis
Net Revenues by Region1, 2
($ in millions)
1. | For a discussion of how the geographic breakdown of net revenues is determined, see Note 18 to the financial statements. |
2. | The percentages on the bars in the charts represent the contribution of each region to the total. |
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, analysts, investors and other stakeholders 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 in the following tables.
Reconciliations from U.S. GAAP to Non-GAAP Consolidated
|
||||||||
Three Months Ended March 31, |
||||||||
$ in millions, except per share data | 2019 | 2018 | ||||||
Net income applicable to |
$ | 2,429 | $ | 2,668 | ||||
Impact of adjustments |
(101 | ) | | |||||
Adjusted net income applicable to Morgan Stanleynon-GAAP1 |
$ | 2,328 | $ | 2,668 | ||||
Earnings per diluted common share |
$ | 1.39 | $ | 1.45 | ||||
Impact of adjustments |
(0.06 | ) | | |||||
Adjusted earnings per diluted common sharenon-GAAP1 |
$ | 1.33 | $ | 1.45 | ||||
Effective income tax rate |
16.5% | 20.9% | ||||||
Impact of adjustments |
3.4% | % | ||||||
Adjusted effective income tax ratenon-GAAP1 |
19.9% | 20.9% |
$ in millions | At March 31, 2019 |
At December 31, 2018 |
||||||
Tangible equity |
||||||||
U.S. GAAP |
||||||||
Morgan Stanley shareholders equity |
$ | 80,724 | $ | 80,246 | ||||
Less: Goodwill and net intangible assets |
(8,770 | ) | (8,847 | ) | ||||
Tangible Morgan Stanley shareholders equitynon-GAAP |
$ | 71,954 | $ | 71,399 | ||||
U.S. GAAP |
||||||||
Common shareholders equity |
$ | 72,204 | $ | 71,726 | ||||
Less: Goodwill and net intangible assets |
(8,770 | ) | (8,847 | ) | ||||
Tangible common shareholders equitynon-GAAP |
$ | 63,434 | $ | 62,879 |
March 2019 Form 10-Q | 4 |
Managements Discussion and Analysis
Consolidated Non-GAAP Financial Measures
Average Monthly Balance Three Months Ended March 31, |
||||||||
$ in millions | 2019 | 2018 | ||||||
Tangible equity |
||||||||
Morgan Stanley shareholders equity |
$ | 80,115 | $ | 77,507 | ||||
Less: Goodwill and net intangible assets |
(8,806 | ) | (9,043 | ) | ||||
Tangible Morgan Stanley shareholders equity |
$ | 71,309 | $ | 68,464 | ||||
Common shareholders equity |
$ | 71,595 | $ | 68,987 | ||||
Less: Goodwill and net intangible assets |
(8,806 | ) | (9,043 | ) | ||||
Tangible common shareholders equity |
$ | 62,789 | $ | 59,944 |
Three Months Ended March 31, |
||||||||
$ in billions | 2019 | 2018 | ||||||
Average common equity |
|
|||||||
Unadjusted |
$ | 71.6 | $ | 69.0 | ||||
Adjusted1 |
71.5 | 69.0 | ||||||
ROE2 |
| |||||||
Unadjusted |
13.1% | 14.9% | ||||||
Adjusted1, 3 |
12.5% | 14.9% | ||||||
Average tangible common equity |
| |||||||
Unadjusted |
$ | 62.8 | $ | 59.9 | ||||
Adjusted1 |
62.7 | 59.9 | ||||||
ROTCE2 |
| |||||||
Unadjusted |
14.9% | 17.2% | ||||||
Adjusted1, 3 |
14.2% | 17.2% |
Non-GAAP Financial Measures by Business Segment
Three Months Ended March 31, |
||||||||
$ in billions | 2019 | 2018 | ||||||
Pre-tax margin4 |
||||||||
Institutional Securities |
31% | 35% | ||||||
Wealth Management |
27% | 27% | ||||||
Investment Management |
22% | 21% | ||||||
Consolidated |
29% | 31% | ||||||
Average common equity5 |
|
|||||||
Institutional Securities |
$ | 40.4 | $ | 40.8 | ||||
Wealth Management |
18.2 | 16.8 | ||||||
Investment Management |
2.5 | 2.6 | ||||||
Parent |
10.5 | 8.8 | ||||||
Consolidated average common equity |
$ | 71.6 | $ | 69.0 | ||||
Average tangible common equity5 |
|
|||||||
Institutional Securities |
$ | 39.9 | $ | 40.1 | ||||
Wealth Management |
10.2 | 9.2 | ||||||
Investment Management |
1.5 | 1.7 | ||||||
Parent |
11.2 | 8.9 | ||||||
Consolidated average tangible common equity |
$ | 62.8 | $ | 59.9 | ||||
ROE2, 6 |
|
|||||||
Institutional Securities |
12.9% | 15.2% | ||||||
Wealth Management |
19.8% | 21.3% | ||||||
Investment Management |
21.9% | 19.3% | ||||||
Consolidated |
13.1% | 14.9% | ||||||
ROTCE2, 6 |
|
|||||||
Institutional Securities |
13.0% | 15.5% | ||||||
Wealth Management |
35.6% | 38.9% | ||||||
Investment Management |
35.3% | 30.3% | ||||||
Consolidated |
14.9% | 17.2% |
1. | Adjusted amounts exclude intermittent net discrete tax provisions (benefits). We consider certain income tax consequences associated with employee share-based awards recognized in Provision for income taxes in the income statements to be recurring-type (Recurring) discrete tax items, as we anticipate some level of conversion activity each quarter. Accordingly, these Recurring discrete tax provisions (benefits) are not part of the adjustment for intermittent net discrete tax provisions (benefits). For further information on the net discrete tax provisions (benefits), see Supplemental Financial Information and DisclosuresIncome Tax Matters herein. |
2. | ROE and ROTCE represent annualized net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity and average tangible common equity, respectively. When excluding intermittent net discrete tax provisions (benefits), both the numerator and average denominator are adjusted. |
3. | The calculations used in determining our ROE and ROTCE Targets referred to in the following section are the Adjusted ROE and Adjusted ROTCE amounts shown in this table. |
4. | Pre-tax margin represents income from continuing operations before income taxes as a percentage of net revenues. |
5. | 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). |
6. | The calculation of ROE and ROTCE by segment uses net income applicable to Morgan Stanley by segment less preferred dividends allocated to each segment as a percentage of average common equity and average tangible common equity, respectively, allocated to each segment. |
5 | March 2019 Form 10-Q |
Managements Discussion and Analysis
Return on Equity and Tangible Common Equity Targets
We have established an ROE Target of 10% to 13% and 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; outsized 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 2018 Form 10-K.
Substantially all of our operating revenues and operating expenses are directly attributable to our 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.
For an overview of the components of our business segments, net revenues, compensation expense and income taxes, see Managements Discussion and Analysis of Financial Condition and Results of OperationsBusiness Segments in the 2018 Form 10-K.
With respect to Institutional Securities sales and trading activities, Commodities products and Other also includes Trading revenues from managing derivative counterparty credit risk on behalf of clients, in addition to results from the centralized management of our fixed income derivative counterparty exposures.
March 2019 Form 10-Q | 6 |
Managements Discussion and Analysis
Institutional Securities
Income Statement Information
Three Months Ended March 31, |
||||||||||||
$ in millions | 2019 | 2018 | % Change | |||||||||
Revenues |
||||||||||||
Investment banking |
$ | 1,151 | $ | 1,513 | (24)% | |||||||
Trading |
3,130 | 3,643 | (14)% | |||||||||
Investments |
81 | 49 | 65% | |||||||||
Commissions and fees |
621 | 744 | (17)% | |||||||||
Asset management |
107 | 110 | (3)% | |||||||||
Other |
222 | 136 | 63% | |||||||||
Total non-interest revenues |
5,312 | 6,195 | (14)% | |||||||||
Interest income |
3,056 | 1,804 | 69% | |||||||||
Interest expense |
3,172 | 1,899 | 67% | |||||||||
Net interest |
(116 | ) | (95 | ) | (22)% | |||||||
Net revenues |
5,196 | 6,100 | (15)% | |||||||||
Compensation and benefits |
1,819 | 2,160 | (16)% | |||||||||
Non-compensation expenses |
1,782 | 1,828 | (3)% | |||||||||
Total non-interest expenses |
3,601 | 3,988 | (10)% | |||||||||
Income from continuing operations before income taxes |
1,595 | 2,112 | (24)% | |||||||||
Provision for income taxes |
190 | 449 | (58)% | |||||||||
Income from continuing operations |
1,405 | 1,663 | (16)% | |||||||||
Income (loss) from discontinued operations, net of income taxes |
| (2 | ) | 100% | ||||||||
Net income |
1,405 | 1,661 | (15)% | |||||||||
Net income applicable to noncontrolling interests |
34 | 34 | % | |||||||||
Net income applicable to Morgan Stanley |
$ | 1,371 | $ | 1,627 | (16)% |
Investment Banking
Investment Banking Revenues
Three Months Ended March 31, |
||||||||||||
$ in millions | 2019 | 2018 | % Change | |||||||||
Advisory |
$ | 406 | $ | 574 | (29)% | |||||||
Underwriting: |
||||||||||||
Equity |
339 | 421 | (19)% | |||||||||
Fixed income |
406 | 518 | (22)% | |||||||||
Total Underwriting |
745 | 939 | (21)% | |||||||||
Total Investment banking |
$ | 1,151 | $ | 1,513 | (24)% |
Investment Banking Volumes
Three Months Ended March 31, |
||||||||
$ in billions | 2019 | 2018 | ||||||
Completed mergers and acquisitions1 |
$ | 187 | $ | 170 | ||||
Equity and equity-related offerings2, 3 |
14 | 22 | ||||||
Fixed income offerings2, 4 |
54 | 58 |
Source: Refinitiv (formerly Thomson Reuters Financial & Risk), data as of April 1, 2019. 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, change in value, or change in timing of certain transactions.
1. | Includes transactions of $100 million or more. Based on full credit to each of the advisors in a transaction. |
2. | Based on full credit for single book managers and equal credit for joint book managers. |
3. | Includes Rule 144A issuances and registered public offerings of common stock and convertible securities and rights offerings. |
4. | Includes Rule 144A and publicly registered issuances, non-convertible preferred stock, mortgage-backed and asset-backed securities, and taxable municipal debt. Excludes leveraged loans and self-led issuances. |
Investment banking revenues of $1,151 million in the current quarter decreased 24%, reflecting lower results in both our advisory and underwriting businesses.
| Advisory revenues decreased in the current quarter primarily due to the effect of lower fee realizations. |
| Equity underwriting revenues decreased in the current quarter primarily as a result of lower volumes. Revenues decreased primarily in initial public offerings, follow-ons and convertible issuances, partially offset by an increase in secondary block share trades. |
| Fixed income underwriting revenues decreased in the current quarter due to the effect of lower fee realizations and lower volumes. Revenues decreased primarily in non-investment grade loan fees. |
See Investment Banking Volumes herein.
7 | March 2019 Form 10-Q |
Managements Discussion and Analysis
Sales and Trading Net Revenues
By Income Statement Line Item
Three Months Ended | ||||||||||||
March 31, | ||||||||||||
$ in millions | 2019 | 2018 | % Change | |||||||||
Trading |
$ | 3,130 | $ | 3,643 | (14 | )% | ||||||
Commissions and fees |
621 | 744 | (17 | )% | ||||||||
Asset management |
107 | 110 | (3 | )% | ||||||||
Net interest |
(116 | ) | (95 | ) | (22 | )% | ||||||
Total |
$ | 3,742 | $ | 4,402 | (15 | )% |
By Business
Three Months Ended March 31, |
||||||||||||
$ in millions | 2019 | 2018 | % Change | |||||||||
Equity |
$ | 2,015 | $ | 2,558 | (21)% | |||||||
Fixed income |
1,710 | 1,873 | (9)% | |||||||||
Other |
17 | (29 | ) | 159% | ||||||||
Total |
$ | 3,742 | $ | 4,402 | (15)% |
Sales and Trading RevenuesEquity and Fixed Income
Three Months Ended | ||||||||||||||||
March 31, 2019 | ||||||||||||||||
Net | ||||||||||||||||
$ in millions | Trading | Fees1 | Interest2 | Total | ||||||||||||
Financing |
$ | 1,115 | $ | 98 | $ | (258 | ) | $ | 955 | |||||||
Execution services |
551 | 553 | (44 | ) | 1,060 | |||||||||||
Total Equity |
$ | 1,666 | $ | 651 | $ | (302 | ) | $ | 2,015 | |||||||
Total Fixed income |
$ | 1,727 | $ | 78 | $ | (95 | ) | $ | 1,710 |
Three Months Ended | ||||||||||||||||
March 31, 2018 | ||||||||||||||||
Net | ||||||||||||||||
$ in millions | Trading | Fees1 | Interest2 | Total | ||||||||||||
Financing |
$ | 1,234 | $ | 107 | $ | (146 | ) | $ | 1,195 | |||||||
Execution services |
791 | 664 | (92 | ) | 1,363 | |||||||||||
Total Equity |
$ | 2,025 | $ | 771 | $ | (238 | ) | $ | 2,558 | |||||||
Total Fixed income |
$ | 1,715 | $ | 83 | $ | 75 | $ | 1,873 |
1. | Includes Commissions and fees and Asset management revenues. |
2. | Includes funding costs, which are allocated to the businesses based on funding usage. |
As discussed in Managements Discussion and Analysis of Financial Condition and Results of OperationsBusiness SegmentsNet Revenues by Segment in the 2018 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 18 to the financial statements.
Equity
Equity sales and trading net revenues of $2,015 million in the current quarter decreased 21% from the prior year quarter, reflecting lower results in both our financing and execution services businesses.
| Financing decreased from the prior year quarter, primarily due to lower average client balances, which resulted in lower Trading and Net interest revenues. Additionally, Net interest revenues decreased due to higher funding costs attributable to higher rates and changes in funding mix. |
| Execution services decreased from the prior year quarter, reflecting lower Trading revenues as a result of less favorable inventory management and lower client activity in derivatives products. In addition, Commissions and fees decreased due to lower client activity in cash equities products. |
Fixed Income
Fixed income net revenues of $1,710 million in the current quarter were 9% lower than the prior year quarter, primarily driven by lower revenues in global macro products and lower Net interest revenues due to higher funding costs, partially offset by higher revenues in credit products and commodities products and other.
| Global macro products revenues decreased reflecting unfavorable inventory management while the level of client activity remained consistent. |
| Credit products Trading revenues increased primarily in corporate credit products driven by higher client activity, partially offset by lower client activity in securitized products. |
| Commodities products and Other Trading revenues increased primarily as a result of gains from client structuring activity within derivatives counterparty credit risk management and effective inventory management in commodities, partially offset by decreased client activity in structured transactions within commodities. |
Other
| Other sales and trading net gains of $17 million in the current quarter increased from the prior year quarter, primarily due to an increase in the fair value of investments to which certain deferred compensation plans are referenced, partially offset by higher losses on hedges associated with corporate loans. |
March 2019 Form 10-Q | 8 |
Managements Discussion and Analysis
Investments, Other Revenues, Non-interest Expenses, and Income Tax Items
Investments
| Net investment gains of $81 million in the current quarter increased from the prior year quarter as a result of higher revenues driven by a fund distribution and gains on real estate limited partnership investments. |
Other Revenues
| Other revenues of $222 million in the current quarter increased from the prior year quarter, primarily reflecting higher mark-to-market gains on held for sale loans, partially offset by lower results from certain equity method investments. |
Non-interest Expenses
Non-interest expenses of $3,601 million in the current quarter decreased from the prior year quarter, reflecting a 16% decrease in Compensation and benefits expenses and a 3% decrease in Non-compensation expenses.
| Compensation and benefits expenses decreased in the current quarter, primarily due to decreases in discretionary incentive compensation driven by lower revenues, partially offset by increases in the fair value of investments to which certain deferred compensation plans are referenced and higher salaries. |
| Non-compensation expenses decreased in the current quarter, primarily due to lower litigation and volume-related expenses, partially offset by increased investment in technology and higher professional service expenses. |
Income Tax Items
The current quarter includes intermittent net discrete tax benefits of $101 million. For further information, see Supplemental Financial Information and DisclosuresIncome Tax Matters herein.
9 | March 2019 Form 10-Q |
Managements Discussion and Analysis
Wealth Management
Income Statement Information
Three Months Ended March 31, |
||||||||||||
$ in millions | 2019 | 2018 | % Change | |||||||||
Revenues |
||||||||||||
Investment banking |
$ | 109 | $ | 140 | (22)% | |||||||
Trading |
302 | 109 | 177% | |||||||||
Investments |
1 | | N/M | |||||||||
Commissions and fees |
406 | 498 | (18)% | |||||||||
Asset management |
2,361 | 2,495 | (5)% | |||||||||
Other |
80 | 63 | 27% | |||||||||
Total non-interest revenues |
3,259 | 3,305 | (1)% | |||||||||
Interest income |
1,413 | 1,280 | 10% | |||||||||
Interest expense |
283 | 211 | 34% | |||||||||
Net interest |
1,130 | 1,069 | 6% | |||||||||
Net revenues |
4,389 | 4,374 | % | |||||||||
Compensation and benefits |
2,462 | 2,450 | % | |||||||||
Non-compensation expenses |
739 | 764 | (3)% | |||||||||
Total non-interest expenses |
3,201 | 3,214 | % | |||||||||
Income from continuing operations before income taxes |
1,188 | 1,160 | 2% | |||||||||
Provision for income taxes |
264 | 246 | 7% | |||||||||
Net income applicable to Morgan Stanley |
$ | 924 | $ | 914 | 1% |
Financial Information and Statistical Data
At March 31, |
At December 31, |
|||||||
$ in billions, except employee data | 2019 | 2018 | ||||||
Client assets |
$ | 2,476 | $ | 2,303 | ||||
Fee-based client assets1 |
$ | 1,116 | $ | 1,046 | ||||
Fee-based client assets as a percentage of total client assets |
45% | 45% | ||||||
Client liabilities2 |
$ | 82 | $ | 83 | ||||
Investment securities portfolio |
$ | 71.3 | $ | 68.6 | ||||
Loans and lending commitments |
$ | 83.6 | $ | 82.9 | ||||
Wealth Management representatives |
15,708 | 15,694 |
Three Months Ended March 31, |
||||||||
2019 | 2018 | |||||||
Per representative: |
||||||||
Annualized revenues ($ in thousands)3 |
$ | 1,118 | $ | 1,115 | ||||
Client assets ($ in millions)4 |
$ | 158 | $ | 151 | ||||
Fee-based asset flows ($ in billions)5 |
$ | 14.8 | $ | 18.2 |
1. | Fee-based client assets represent the amount of assets in client accounts where the fee for services is calculated based on those assets. |
2. | Client liabilities include securities-based and tailored lending, residential real estate loans and margin lending. |
3. | Revenues per representative equal Wealth Managements annualized net revenues divided by the average number of representatives. |
4. | Client assets per representative equal total period-end client assets divided by period-end number of representatives. |
5. | For a description of the Inflows and Outflows included within Fee-based asset flows, see Managements Discussion and Analysis of Financial Condition and Results of OperationsBusiness SegmentsWealth ManagementFee-Based Client Assets in the 2018 Form 10-K. Excludes institutional cash management-related activity. |
Transactional Revenues
Three Months Ended March 31, |
||||||||||||
$ in millions | 2019 | 2018 | % Change | |||||||||
Investment banking |
$ | 109 | $ | 140 | (22)% | |||||||
Trading |
302 | 109 | 177% | |||||||||
Commissions and fees |
406 | 498 | (18)% | |||||||||
Total |
$ | 817 | $ | 747 | 9% | |||||||
Transactional revenues as a % of Net revenues |
19% | 17% |
Net Revenues
Transactional Revenues
Transactional revenues of $817 million in the current quarter increased 9% from the prior year quarter as a result of higher Trading revenues, partially offset by lower Commissions and fees and Investment banking revenues.
| Investment banking revenues decreased in the current quarter primarily due to lower revenues from structured products issuances. |
| Trading revenues increased in the current quarter primarily due to gains related to investments associated with certain employee deferred compensation plans compared with losses in the prior year quarter. |
| Commissions and fees decreased in the current quarter primarily due to decreased client activity in equities. |
Asset Management
Asset management revenues of $2,361 million in the current quarter decreased 5% from the prior year quarter primarily reflecting lower fee-based client assets levels at the beginning of the current quarter due to fourth quarter market depreciation, partially offset by positive net flows.
See Fee-Based Client AssetsRollforwards herein.
March 2019 Form 10-Q | 10 |
Managements Discussion and Analysis
Net Interest
Net interest of $1,130 million in the current quarter increased 6% from the prior year quarter primarily as a result of higher interest rates on loans and cash management activities and higher investment securities balances, partially offset by the effect of higher interest rates on Deposits due to changes in funding mix.
In addition, we centralized certain internal treasury activities as of January 1, 2019, which partially offset the increases in Interest income and Interest expense compared with the prior year quarter. This impact is expected to continue in future periods. The effect on Net interest income was not significant in the current quarter, nor is it expected to be for the full year 2019.
Non-interest Expenses
Non-interest expenses of $3,201 million were relatively unchanged from the prior year quarter.
| Compensation and benefits expenses increased modestly from the prior year quarter, reflecting increases in the fair value of investments to which certain deferred compensation plans are referenced and salaries, offset by decreases in the formulaic payout to Wealth Management representatives linked to lower revenues and the roll-off of certain merger-related employee retention loans. |
| Non-compensation expenses decreased due to lower consulting fees and deposit insurance expenses. |
Fee-Based Client Assets
Rollforwards
$ in billions | At December 31, |
Inflows | Outflows | Market Impact |
At March 31, 2019 |
|||||||||||||||
Separately managed1 |
$ | 279 | $ | 14 | $ | (5 | ) | $ | (12 | ) | $ | 276 | ||||||||
Unified managed2 |
257 | 13 | (11 | ) | 24 | 283 | ||||||||||||||
Advisor |
137 | 8 | (9 | ) | 11 | 147 | ||||||||||||||
Portfolio manager |
353 | 19 | (14 | ) | 33 | 391 | ||||||||||||||
Subtotal |
$ | 1,026 | $ | 54 | $ | (39 | ) | $ | 56 | $ | 1,097 | |||||||||
Cash management |
20 | 4 | (5 | ) | | 19 | ||||||||||||||
Total
fee-based |
$ | 1,046 | $ | 58 | $ | (44 | ) | $ | 56 | $ | 1,116 |
$ in billions | At December 31, |
Inflows | Outflows | Market Impact |
At March 31, 2018 |
|||||||||||||||
Separately managed1 |
$ | 252 | $ | 10 | $ | (6 | ) | $ | 4 | $ | 260 | |||||||||
Unified managed2 |
271 | 14 | (9 | ) | (2 | ) | 274 | |||||||||||||
Advisor |
149 | 9 | (9 | ) | (2 | ) | 147 | |||||||||||||
Portfolio manager |
353 | 21 | (12 | ) | (6 | ) | 356 | |||||||||||||
Subtotal |
$ | 1,025 | $ | 54 | $ | (36 | ) | $ | (6 | ) | $ | 1,037 | ||||||||
Cash management |
20 | 4 | (3 | ) | | 21 | ||||||||||||||
Total
fee-based |
$ | 1,045 | $ | 58 | $ | (39 | ) | $ | (6 | ) | $ | 1,058 |
Average Fee Rates3
Three Months Ended March 31, |
||||||||
Fee rate in bps | 2019 | 2018 | ||||||
Separately managed |
14 | 16 | ||||||
Unified managed2 |
101 | 99 | ||||||
Advisor |
88 | 85 | ||||||
Portfolio manager |
96 | 96 | ||||||
Subtotal |
74 | 76 | ||||||
Cash management |
6 | 6 | ||||||
Total fee-based client assets |
73 | 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. |
2. | Includes Mutual fund advisory accounts. Prior periods have been recast to conform to the current presentation. |
3. | The calculation of average fee rates was changed in the current quarter to more closely align with the recognition of the related fee revenue. Prior period rates were not changed due to immateriality. |
For a description of fee-based client assets and rollforward items in the previous tables, see Managements Discussion and Analysis of Financial Condition and Results of OperationsBusiness SegmentsWealth ManagementFee-Based Client Assets in the 2018 Form 10-K.
11 | March 2019 Form 10-Q |
Managements Discussion and Analysis
Investment Management
Income Statement Information
Three Months Ended March 31, |
||||||||||||
$ in millions | 2019 | 2018 | % Change | |||||||||
Revenues |
||||||||||||
Trading |
$ | (3 | ) | $ | 5 | (160)% | ||||||
Investments |
191 | 77 | 148% | |||||||||
Asset management |
617 | 626 | (1)% | |||||||||
Other |
3 | 10 | (70)% | |||||||||
Total non-interest revenues |
808 | 718 | 13% | |||||||||
Interest income |
4 | 1 | N/M | |||||||||
Interest expense |
8 | 1 | N/M | |||||||||
Net interest |
(4 | ) | | N/M | ||||||||
Net revenues |
804 | 718 | 12% | |||||||||
Compensation and benefits |
370 | 304 | 22% | |||||||||
Non-compensation expenses |
260 | 266 | (2)% | |||||||||
Total non-interest expenses |
630 | 570 | 11% | |||||||||
Income from continuing operations before income taxes |
174 | 148 | 18% | |||||||||
Provision for income taxes |
33 | 19 | 74% | |||||||||
Net income |
141 | 129 | 9% | |||||||||
Net income applicable to noncontrolling interests |
5 | 2 | 150% | |||||||||
Net income applicable to Morgan Stanley |
$ | 136 | $ | 127 | 7% |
Net Revenues
Investments
Investments gains of $191 million in the current quarter increased 148% from the prior year quarter primarily as a result of higher carried interest in certain Asia private equity and infrastructure funds.
Asset Management
Asset management revenues of $617 million in the current quarter were relatively unchanged from the prior year quarter, as average AUM and average fee rates remained stable.
See Assets Under Management or Supervision herein.
Non-interest Expenses
Non-interest expenses of $630 million in the current quarter increased 11% from the prior year quarter primarily as a result of higher compensation and benefits expenses.
| Compensation and benefits expenses increased in the current quarter primarily due to deferred compensation associated with carried interest. |
| Non-compensation expenses were relatively unchanged from the prior year quarter. |
Assets Under Management or Supervision
Rollforwards
$ in billions |
At December 31, 2018 |
Inflows | Outflows | Market Impact |
Other | At March 31, 2019 |
||||||||||||||||||
Equity |
$ | 103 | $ | 9 | $ | (8 | ) | $ | 16 | $ | | $ | 120 | |||||||||||
Fixed income |
68 | 6 | (7 | ) | 1 | | 68 | |||||||||||||||||
Alternative/Other |
128 | 5 | (4 | ) | 5 | (1 | ) | 133 | ||||||||||||||||
Long-term AUM subtotal |
299 | 20 | (19 | ) | 22 | (1 | ) | 321 | ||||||||||||||||
Liquidity |
164 | 343 | (348 | ) | 1 | (1 | ) | 159 | ||||||||||||||||
Total AUM |
$ | 463 | $ | 363 | $ | (367 | ) | $ | 23 | $ | (2 | ) | $ | 480 | ||||||||||
Shares of minority |
7 | 6 |
$ in billions | At December 31, |
Inflows | Outflows | Market Impact |
Other1 | At March 31, 2018 |
||||||||||||||||||
Equity |
$ | 105 | $ | 9 | $ | (7 | ) | $ | 1 | $ | 1 | $ | 109 | |||||||||||
Fixed income |
73 | 7 | (8 | ) | (1 | ) | 1 | 72 | ||||||||||||||||
Alternative/Other |
128 | 4 | (4 | ) | | 3 | 131 | |||||||||||||||||
Long-term AUM subtotal |
306 | 20 | (19 | ) | | 5 | 312 | |||||||||||||||||
Liquidity |
176 | 325 | (344 | ) | | | 157 | |||||||||||||||||
Total AUM |
$ | 482 | $ | 345 | $ | (363 | ) | $ | | $ | 5 | $ | 469 | |||||||||||
Shares of minority |
7 | 7 |
1. | Includes the impact of the Mesa West Capital, LLC acquisition. |
Average AUM
Three Months Ended March 31, |
||||||||
$ in billions | 2019 | 2018 | ||||||
Equity |
$ | 113 | $ | 109 | ||||
Fixed income |
68 | 73 | ||||||
Alternative/Other |
131 | 129 | ||||||
Long-term AUM subtotal |
312 | 311 | ||||||
Liquidity |
163 | 163 | ||||||
Total AUM |
$ | 475 | $ | 474 | ||||
Shares of minority stake assets |
6 | 7 |
Average Fee Rates
Three Months Ended March 31, |
||||||||
Fee rate in bps | 2019 | 2018 | ||||||
Equity |
76 | 76 | ||||||
Fixed income |
32 | 35 | ||||||
Alternative/Other |
68 | 68 | ||||||
Long-term AUM |
63 | 63 | ||||||
Liquidity |
17 | 18 | ||||||
Total AUM |
47 | 47 |
For a description of the asset classes and rollforward items in the previous tables, see Managements Discussion and Analysis of Financial Condition and Results of OperationsBusiness SegmentsInvestment ManagementAssets Under Management or Supervision in the 2018 Form 10-K.
March 2019 Form 10-Q | 12 |
Managements Discussion and Analysis
Supplemental Financial Information and
Disclosures
Income Tax Matters
Effective Tax Rate from Continuing Operations
Three Months Ended March 31, |
||||||||
$ in millions | 2019 | 2018 | ||||||
U.S. GAAP |
16.5 | % | 20.9 | % | ||||
Adjusted effective income tax ratenon-GAAP1 |
19.9 | % | 20.9 | % | ||||
Net discrete tax provisions/(benefits) |
||||||||
Recurring2 |
$ | (107 | ) | $ | (147 | ) | ||
Intermittent3 |
$ | (101 | ) | $ | |
1. | Adjusted effective income tax rate is a non-GAAP measure that excludes intermittent net discrete tax provisions (benefits). For further information on non-GAAP measures, see Selected Non-GAAP Financial Information herein. |
2. | We consider certain income tax consequences associated with employee share-based awards recognized in Provision for income taxes in the income statements to be Recurring discrete tax items as we anticipate some level of conversion activity each quarter. Accordingly, these Recurring discrete tax provisions (benefits) are not part of the adjustment for intermittent net discrete tax provisions (benefits). |
3. | Includes all tax provisions (benefits) that have been determined to be discrete, other than Recurring items as defined above. |
The current quarter includes intermittent net discrete tax benefits primarily associated with the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations.
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 our client base. For a further discussion of our credit risks, see Quantitative and Qualitative Disclosures about RiskCredit Risk. For a 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 March 31, 2019 |
At December 31, 2018 |
||||||
Assets |
$ | 210.3 | $ | 216.9 | ||||
Investment securities portfolio: |
||||||||
Investment securitiesAFS |
44.5 | 45.5 | ||||||
Investment securitiesHTM |
27.8 | 23.7 | ||||||
Total investment securities |
$ | 72.3 | $ | 69.2 | ||||
Deposits2 |
$ | 179.1 | $ | 187.1 | ||||
Wealth Management Loans |
| |||||||
Securities-based lending and other3 |
$ | 43.5 | $ | 44.7 | ||||
Residential real estate |
28.0 | 27.5 | ||||||
Total |
$ | 71.5 | $ | 72.2 | ||||
Institutional Securities Loans4 |
| |||||||
Corporate5: |
||||||||
Corporate relationship and |
$ | 7.4 | $ | 7.4 | ||||
Secured lending facilities |
19.3 | 17.5 | ||||||
Securities-based lending and other |
5.6 | 6.0 | ||||||
Commercial and residential real estate |
11.8 | 10.5 | ||||||
Total |
$ | 44.1 | $ | 41.4 |
1. | Amounts exclude transactions between the bank subsidiaries, as well as deposits from the Parent Company and affiliates. |
2. | For further information on deposits, see Liquidity and Capital ResourcesFunding ManagementUnsecured Financing herein. |
3. | Other loans primarily include tailored lending. |
4. | Prior periods have been conformed to the current presentation. |
5. | For a further discussion of Corporate loans in the Institutional Securities business segment, see Credit RiskInstitutional Securities Corporate Loans herein. |
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 update is currently being evaluated to determine the potential impact of adoption:
| 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, such as employee loans. |
13 | March 2019 Form 10-Q |
Managements Discussion and Analysis
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.
For certain portfolios, we have determined that there are no expected credit losses, for example based on collateral arrangements for lending and financing transactions such as for Securities borrowed, Securities purchased under agreements to resell and certain other portfolios. Also, we have a zero loss expectation for certain financial assets based on the credit quality of the borrower or issuer such as U.S. government and agency securities.
We expect the following portfolios to be primarily impacted: employee loans, commercial real estate, corporate and residential real estate. The models we expect to use for these portfolios in the future are in the process of being tested. Based on preliminary analyses and estimates, we do not expect the increase in the allowance for credit losses resulting from the adoption of this standard will be significant to our financial statements. The ultimate impact will depend upon macroeconomic conditions, forecasts and our portfolios at the adoption date. This update is effective as of January 1, 2020.
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 2018 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 2018 Form 10-K.
Liquidity and Capital Resources
Senior management, with oversight by the Asset/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. Our Treasury department, Firm Risk Committee, Asset/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.
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 and 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.
Total Assets by Business Segment
At March 31, 2019 | ||||||||||||||||
$ in millions |
IS | WM | IM | Total | ||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents1 |
$ | 66,685 | $ | 13,952 | $ | 45 | $ | 80,682 | ||||||||
Trading assets at fair value |
262,249 | 52 | 2,517 | 264,818 | ||||||||||||
Investment securities |
26,619 | 71,325 | | 97,944 | ||||||||||||
Securities purchased under agreements to resell |
87,061 | 9,509 | | 96,570 | ||||||||||||
Securities borrowed |
138,710 | 181 | | 138,891 | ||||||||||||
Customer and other receivables |
36,314 | 15,732 | 621 | 52,667 | ||||||||||||
Loans, net of allowance2 |
44,742 | 71,450 | 5 | 116,197 | ||||||||||||
Other assets3 |
13,390 | 12,696 | 2,109 | 28,195 | ||||||||||||
Total assets |
$ | 675,770 | $ | 194,897 | $ | 5,297 | $ | 875,964 |
March 2019 Form 10-Q | 14 |
Managements Discussion and Analysis
At December 31, 2018 | ||||||||||||||||
$ in millions |
IS | WM | IM | Total | ||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents1 |
$ | 69,526 | $ | 17,621 | $ | 49 | $ | 87,196 | ||||||||
Trading assets at fair value |
263,870 | 60 | 2,369 | 266,299 | ||||||||||||
Investment securities |
23,273 | 68,559 | | 91,832 | ||||||||||||
Securities purchased under agreements to resell |
80,660 | 17,862 | | 98,522 | ||||||||||||
Securities borrowed |
116,207 | 106 | | 116,313 | ||||||||||||
Customer and other receivables |
35,777 | 16,865 | 656 | 53,298 | ||||||||||||
Loans, net of allowance2 |
43,380 | 72,194 | 5 | 115,579 | ||||||||||||
Other assets3 |
13,734 | 9,125 | 1,633 | 24,492 | ||||||||||||
Total assets |
$ | 646,427 | $ | 202,392 | $ | 4,712 | $ | 853,531 |
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, ROU assets related to leases 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 $876 billion at March 31, 2019 from $854 billion at December 31, 2018, primarily due to higher Securities borrowed and Securities purchased under agreements to resell in the Institutional Securities business segment as a result of higher period-end client balances and Trading liabilities. These increases were partially offset by lower Securities purchased under agreements to resell within the Wealth Management business segment as a result of lower Deposits.
Liquidity Risk Management Framework
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 a 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 2018 Form 10-K.
At March 31, 2019 and December 31, 2018, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.
Global Liquidity Reserve
We maintain sufficient liquidity reserves to cover daily funding needs and to meet strategic liquidity targets sized by
the Required Liquidity Framework and Liquidity Stress Tests. For a 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 2018 Form 10-K.
GLR by Type of Investment
$ in millions | At March 31, 2019 |
At December 31, 2018 |
||||||
Cash deposits with banks1 |
$ | 11,457 | $ | 10,441 | ||||
Cash deposits with central banks1 |
34,170 | 36,109 | ||||||
Unencumbered highly liquid securities: |
||||||||
U.S. government obligations |
105,425 | 119,138 | ||||||
U.S. agency and agency mortgage-backed securities |
42,228 | 41,473 | ||||||
Non-U.S. sovereign obligations2 |
36,341 | 39,869 | ||||||
Other investment grade securities |
3,527 | 2,705 | ||||||
Total |
$ | 233,148 | $ | 249,735 |
1. | Included in Cash and due from banks and Interest bearing deposits with banks in the balance sheets. |
2. | Primarily composed of unencumbered Japanese, U.K., Brazilian and French government obligations. |
GLR Managed by Bank and Non-Bank Legal Entities
$ in millions | At March 31, |
At |
Average Daily Balance Three Months Ended March 31, 2019 |
|||||||||
Bank legal entities |
||||||||||||
Domestic |
$ | 80,296 | $ | 88,809 | $ | 80,670 | ||||||
Foreign |
5,492 | 4,896 | 4,672 | |||||||||
Total Bank legal entities |
85,788 | 93,705 | 85,342 | |||||||||
Non-Bank legal entities |
||||||||||||
Domestic: |
||||||||||||
Parent Company |
52,086 | 64,262 | 62,283 | |||||||||
Non-Parent Company |
40,807 | 40,936 | 39,980 | |||||||||
Total Domestic |
92,893 | 105,198 | 102,263 | |||||||||
Foreign |
54,467 | 50,832 | 54,820 | |||||||||
Total Non-Bank legal entities |
147,360 | 156,030 | 157,083 | |||||||||
Total |
$ | 233,148 | $ | 249,735 | $ | 242,425 |
Regulatory Liquidity Framework
Liquidity Coverage Ratio
We and our U.S. Bank Subsidiaries are subject to 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.
15 | March 2019 Form 10-Q |
Managements Discussion and Analysis
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.
Based on our daily calculations, we and our U.S. Bank Subsidiaries are compliant with the minimum required LCR of 100%.
HQLA by Type of Asset and LCR
Average Daily Balance Three Months Ended |
||||||||
$ in millions | March 31, 2019 |
December 31, 2018 |
||||||
HQLA |
||||||||
Cash deposits with central banks |
$ | 37,070 | $ | 44,225 | ||||
Securities1 |
155,713 | 150,792 | ||||||
Total |
$ | 192,783 | $ | 195,017 | ||||
LCR |
150% | 145% |
1. | Primarily includes U.S. Treasuries, U.S. agency mortgage-backed securities, sovereign bonds and investment grade corporate bonds. |
The increase in the LCR in the current quarter is due to a reduction in net outflows (i.e., the denominator of the ratio) primarily driven by higher cash inflows from Securities borrowed and Securities purchased under agreements to resell, and due to certain securities-for-securities transactions.
Net Stable Funding Ratio
The Basel Committee on Banking Supervision (Basel Commit-tee) 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. however, a final rule has not yet been issued in the U.S. 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 2018 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 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 Re-sourcesFunding ManagementSecured Financing in the 2018 Form 10-K.
Collateralized Financing Transactions
$ in millions | At March 31, 2019 |
At December 31, 2018 |
||||||
Securities purchased under agreements to resell and Securities borrowed |
$ | 235,461 | $ | 214,835 | ||||
Securities sold under agreements to repurchase and Securities loaned |
$ | 60,456 | $ | 61,667 | ||||
Securities received as collateral1 |
$ | 5,426 | $ | 7,668 |
Average Daily Balance Three Months Ended |
||||||||
$ in millions | March 31, 2019 |
December 31, 2018 |
||||||
Securities purchased under agreements to resell and Securities borrowed |
$ 219,062 | $ 213,974 | ||||||
Securities sold under agreements to repurchase and Securities loaned |
$ 58,965 | $ 57,677 |
1. | Securities received as collateral are included in Trading assets in the balance sheets. |
See Note 2 to the financial statements in the 2018 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 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.
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 2018 Form 10-K.
March 2019 Form 10-Q | 16 |
Managements Discussion and Analysis
Deposits
$ in millions | At March 31, 2019 |
At December 31, 2018 |
||||||
Savings and demand deposits: |
||||||||
Brokerage sweep deposits1 |
$ 127,678 | $ 141,255 | ||||||
Savings and other |
15,523 | 13,642 | ||||||
Total Savings and demand deposits |
143,201 | 154,897 | ||||||
Time deposits |
36,530 | 32,923 | ||||||
Total |
$ 179,731 | $ 187,820 |
1. | Amounts represent balances swept from client brokerage accounts. |
Deposits are primarily sourced from our Wealth Management clients and are considered to have stable, low-cost funding characteristics. Total deposits at March 31, 2019 decreased compared with December 31, 2018, due to a decrease in Brokerage sweep deposits driven by redeployment of client cash partially offset by increases in Time deposits and Savings and other deposits driven by promotional offerings.
Borrowings by Remaining Maturity at March 31, 20191
$ in millions |
Parent Company |
Subsidiaries | Total | |||||||||
Original maturities of one year or less |
$ | | $ | 1,498 | $ | 1,498 | ||||||
Original maturities greater than one year |
|
|||||||||||
2019 |
$ | 14,187 | $ | 3,937 | $ | 18,124 | ||||||
2020 |
15,690 | 4,082 | 19,772 | |||||||||
2021 |
21,256 | 3,936 | 25,192 | |||||||||
2022 |
14,952 | 2,322 | 17,274 | |||||||||
2023 |
11,624 | 2,642 | 14,266 | |||||||||
Thereafter |
75,346 | 19,219 | 94,565 | |||||||||
Total |
$ | 153,055 | $ | 36,138 | $ | 189,193 | ||||||
Total Borrowings |
$ | 153,055 | $ | 37,636 | $ | 190,691 | ||||||
Maturities over next 12 months2 |
|
26,068 |
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 $190,691 million as of March 31, 2019 were relatively unchanged compared with $189,662 million at December 31, 2018.
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.
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 U.S. Bank Subsidiaries Senior Unsecured Ratings at April 30, 2019
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- | Positive | |||
S&P Global Ratings |
A-2 | BBB+ | Stable |
17 | March 2019 Form 10-Q |
Managements Discussion and Analysis
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 |
MSPBNA | ||||||
Short-Term Debt |
Long-Term Debt |
Rating Outlook | ||||
Moodys Investors Service, Inc. |
P-1 | A1 | Stable | |||
S&P Global Ratings |
A-1 | A+ | Stable |
Incremental Collateral or Terminating Payments
In connection with certain OTC derivatives 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. See Note 4 to the financial statements for additional information on OTC derivatives that contain such contingent features.
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 other things, the magnitude of the downgrade, the rating relative to peers, the rating assigned by the relevant agency pre-downgrade, individual client behavior and future mitigating actions we might take. The liquidity impact of additional collateral requirements is included in our Liquidity Stress Tests.
Capital Management
We view capital as an important source of financial strength and actively manage our consolidated capital position based upon, among other things, business opportunities, risks, capital availability and rates of return together with internal capital policies, regulatory requirements and rating agency guidelines. In the future, we may expand or contract our capital base to address the changing needs of our businesses.
Common Stock Repurchases
Three Months Ended March 31, | ||||||||
in millions, except for per share data | 2019 | 2018 | ||||||
Repurchases |
$ | 1,180 | $ | 1,250 | ||||
Number of shares |
28 | 22 | ||||||
Average price per share |
$ | 42.19 | $ | 55.98 |
From time to time we repurchase our outstanding common stock as part of our Share Repurchase Program. A portion of common stock repurchases in the current quarter was conducted under a sales plan with Mitsubishi UFJ Financial Group, Inc. (MUFG), whereby MUFG sold shares of the Firms common stock to us, as part of our Share Repurchase Program. The sales plan is only intended to maintain MUFGs ownership percentage below 24.9% in order to comply with MUFGs passivity commitments to the Board of Governors of the Federal Reserve System (Federal Reserve) and has no impact on the strategic alliance between MUFG and us, including our 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 |
April 17, 2019 | |||
Amount per share |
$0.30 | |||
Date to be paid |
May 15, 2019 | |||
Shareholders of record as of |
April 30, 2019 |
Preferred Stock Dividend Announcement
Announcement date |
March 15, 2019 | |||
Date paid |
April 15, 2019 | |||
Shareholders of record as of |
March 29, 2019 |
For additional information on common and preferred stock, see Note 14 to the financial statements.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements
We enter into various off-balance sheet arrangements, including through unconsolidated SPEs and lending-related financial instruments (e.g., guarantees and commitments), primarily in connection with the Institutional Securities and Investment Management business segments.
We utilize SPEs primarily in connection with securitization activities. For information on our securitization activities, see Note 12 to the financial statements.
For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 11 to the financial statements. For further information on our lending commitments, see Quantitative and Qualitative Disclosures about RiskCredit RiskLoans and Lending Commitments.
March 2019 Form 10-Q | 18 |
Managements Discussion and Analysis
Contractual Obligations
For a discussion about our contractual obligations, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesContractual Obligations in the 2018 Form 10-K.
Regulatory Capital Framework
We are an 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 capital, leverage-based capital and total loss-absorbing capacity (TLAC) ratios. For more information, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesRegulatory Capital Requirements in the 2018 Form 10-K. For additional information on TLAC, see Total Loss-Absorbing Capacity herein.
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.
In addition to the minimum risk-based capital ratio requirements, we are subject to the following buffers in 2019:
| 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 2018, each of these buffers was 75% of the fully phased-in 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 2018 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). The credit risk RWA calculations between the two approaches differ in that the Standardized Approach requires calculation of RWA using prescribed risk weights, whereas the Advanced Approach utilizes models to calculate exposure amounts and risk weights. At March 31, 2019 and December 31, 2018, our ratios for determining regulatory compliance are based on the Standardized Approach rules.
Leverage-Based Regulatory Capital. Minimum leverage-based capital requirements include a Tier 1 leverage ratio and an SLR. We are required to maintain a Tier 1 SLR of 5%, inclusive of an enhanced SLR capital buffer of at least 2% in order to avoid potential limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers.
19 | March 2019 Form 10-Q |
Managements Discussion and Analysis
Regulatory Capital Ratios
At March 31, 2019 | ||||||||||||
$ in millions | Required Ratio1 |
Standardized | Advanced | |||||||||
Risk-based capital |
||||||||||||
Common Equity Tier 1 capital |
$ | 63,344 | $ | 63,344 | ||||||||
Tier 1 capital |
71,910 | 71,910 | ||||||||||
Total capital |
81,570 | 81,284 | ||||||||||
Total RWA |
378,420 | 366,353 | ||||||||||
Common Equity Tier 1 capital ratio |
10.0% | 16.7% | 17.3% | |||||||||
Tier 1 capital ratio |
11.5% | 19.0% | 19.6% | |||||||||
Total capital ratio |
13.5% | 21.6% | 22.2% | |||||||||
Leverage-based capital |
||||||||||||
Adjusted average assets2 |
$ | 855,192 | N/A | |||||||||
Tier 1 leverage ratio |
4.0% | 8.4% | N/A | |||||||||
Supplementary leverage exposure3 |
N/A | $ | 1,104,264 | |||||||||
SLR |
5.0% | N/A | 6.5% |
At December 31, 2018 | ||||||||||||
$ in millions | Required Ratio1 |
Standardized | Advanced | |||||||||
Risk-based capital |
||||||||||||
Common Equity Tier 1 capital |
$ | 62,086 | $ | 62,086 | ||||||||
Tier 1 capital |
70,619 | 70,619 | ||||||||||
Total capital |
80,052 | 79,814 | ||||||||||
Total RWA |
367,309 | 363,054 | ||||||||||
Common Equity Tier 1 capital ratio |
8.6% | 16.9% | 17.1% | |||||||||
Tier 1 capital ratio |
10.1% | 19.2% | 19.5% | |||||||||
Total capital ratio |
12.1% | 21.8% | 22.0% | |||||||||
Leverage-based capital |
||||||||||||
Adjusted average assets2 |
$ | 843,074 | N/A | |||||||||
Tier 1 leverage ratio |
4.0% | 8.4% | N/A | |||||||||
Supplementary leverage exposure3 |
N/A | $ | 1,092,672 | |||||||||
SLR |
5.0% | N/A | 6.5% |
1. | Required ratios are inclusive of any buffers applicable as of the date presented. For 2018, the minimum required regulatory capital ratios for risk-based capital are under the transitional rules. |
2. | 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 quarters ended March 31, 2019 and December 31, 2018, adjusted for disallowed goodwill, intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other capital deductions. |
3. | 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. |
Regulatory Capital
$ in millions | At March 31, 2019 |
At December 31, 2018 |
Change | |||||||||
Common Equity Tier 1 capital |
||||||||||||
Common stock and surplus |
$ | 8,616 | $ | 9,843 | $ | (1,227 | ) | |||||
Retained earnings |
66,061 | 64,175 | 1,886 | |||||||||
AOCI |
(2,473 | ) | (2,292 | ) | (181 | ) | ||||||
Regulatory adjustments and deductions: |
||||||||||||
Net goodwill |
(6,655 | ) | (6,661 | ) | 6 | |||||||
Net intangible assets (other than goodwill and mortgage servicing assets) |
(2,084 | ) | (2,158 | ) | 74 | |||||||
Other adjustments and deductions1 |
(121 | ) | (821 | ) | 700 | |||||||
Total Common Equity Tier 1 capital |
$ | 63,344 | $ | 62,086 | $ | 1,258 | ||||||
Additional Tier 1 capital |
||||||||||||
Preferred stock |
$ | 8,520 | $ | 8,520 | $ | | ||||||
Noncontrolling interests |
475 | 454 | 21 | |||||||||
Additional Tier 1 capital |
$ | 8,995 | $ | 8,974 | $ | 21 | ||||||
Deduction for investments in covered funds |
(429 | ) | (441 | ) | 12 | |||||||
Total Tier 1 capital |
$ | 71,910 | $ | 70,619 | $ | 1,291 | ||||||
Standardized Tier 2 capital |
||||||||||||
Subordinated debt |
$ | 9,087 | $ | 8,923 | $ | 164 | ||||||
Noncontrolling interests |
112 | 107 | 5 | |||||||||
Eligible allowance for credit losses |
470 | 440 | 30 | |||||||||
Other adjustments and deductions |
(9 | ) | (37 | ) | 28 | |||||||
Total Standardized Tier 2 capital |
$ | 9,660 | $ | 9,433 | $ | 227 | ||||||
Total Standardized capital |
$ | 81,570 | $ | 80,052 | $ | 1,518 | ||||||
Advanced Tier 2 capital |
||||||||||||
Subordinated debt |
$ | 9,087 | $ | 8,923 | $ | 164 | ||||||
Noncontrolling interests |
112 | 107 | 5 | |||||||||
Eligible credit reserves |
184 | 202 | (18 | ) | ||||||||
Other adjustments and deductions |
(9 | ) | (37 | ) | 28 | |||||||
Total Advanced Tier 2 capital |
$ | 9,374 | $ | 9,195 | $ | 179 | ||||||
Total Advanced capital |
$ | 81,284 | $ | 79,814 | $ | 1,470 |
1. | Other adjustments and deductions used in the calculation of Common Equity Tier 1 capital include credit spread premium over risk-free rate for derivative liabilities, net deferred tax assets, net after-tax DVA and other net after-tax adjustments related to AOCI. |
March 2019 Form 10-Q | 20 |
Managements Discussion and Analysis
RWA Rollforward
At March 31, 20191 | ||||||||
$ in millions | Standardized | Advanced | ||||||
Credit risk RWA |
||||||||
Balance at December 31, 2018 |
$ | 305,531 | $ | 190,595 | ||||
Change related to the following items: |
||||||||
Derivatives |
2,095 | 7,246 | ||||||
Securities financing transactions |
8,269 | 2,353 | ||||||
Securitizations |
358 | 402 | ||||||
Investment securities |
1,503 | 2,616 | ||||||
Commitments, guarantees and loans |
2,067 | 1,648 | ||||||
Cash |
(610 | ) | (361 | ) | ||||
Equity investments |
369 | 390 | ||||||
Other credit risk2 |
4,105 | 4,263 | ||||||
Total change in credit risk RWA |
$ | 18,156 | $ | 18,557 | ||||
Balance at March 31, 2019 |
$ | 323,687 | $ | 209,152 | ||||
Market risk RWA |
||||||||
Balance at December 31, 2018 |
$ | 61,778 | $ | 61,857 | ||||
Change related to the following items: |
||||||||
Regulatory VaR |
(610 | ) | (610 | ) | ||||
Regulatory stressed VaR |
(2,934 | ) | (2,934 | ) | ||||
Incremental risk charge |
(4,980 | ) | (4,980 | ) | ||||
Comprehensive risk measure |
96 | 55 | ||||||
Specific risk: |
||||||||
Non-securitizations |
1,141 | 1,141 | ||||||
Securitizations |
242 | 242 | ||||||
Total change in market risk RWA |
$ | (7,045 | ) | $ | (7,086 | ) | ||
Balance at March 31, 2019 |
$ | 54,733 | $ | 54,771 | ||||
Operational risk RWA |
||||||||
Balance at December 31, 2018 |
N/A | $ | 110,602 | |||||
Change in operational risk RWA |
N/A | (8,172 | ) | |||||
Balance at March 31, 2019 |
N/A | $ | 102,430 | |||||
Total RWA |
$ | 378,420 | $ | 366,353 |
Regulatory | VaRVaR for regulatory capital requirements |
1. | The RWA for each category reflects both on- and off-balance sheet exposures, where appropriate. |
2. | Amount reflects assets not in a defined category, non-material portfolios of exposures and unsettled transactions, as applicable. |
Credit risk RWA increased in the current quarter under the Standardized and Advanced Approaches primarily due to increased exposures in Securities financing transactions and Derivatives, and an increase in Other credit risk mainly driven by the Firms adoption of the Leases accounting update on January 1, 2019. Under the Advanced Approach, the increased derivatives exposure also led to increased RWA related to CVA.
Market risk RWA decreased in the current quarter under the Standardized and Advanced Approaches primarily due to a decrease in the Incremental risk charge driven by reduced exposures and improved hedging in credit products.
The decrease in operational risk RWA under the Advanced Approach in the current quarter reflects a continued reduction in the magnitude of internal losses utilized in the operational risk capital model related to litigation.
Total Loss-Absorbing Capacity. The Federal Reserve has established external TLAC, long-term debt (LTD) and clean holding company requirements for top-tier BHCs of U.S. G-SIBs (covered BHCs), including the Parent Company. These requirements include various definitions and restrictions, such as requiring eligible LTD to be issued by the covered BHC and be unsecured, have a maturity of one year or more from the date of issuance and not have certain derivative-linked features typically associated with certain types of structured notes. A covered BHC is required to maintain minimum levels of external TLAC and eligible LTD, as well as certain TLAC buffer requirements. Failure to maintain the TLAC buffers would result in restrictions on capital distributions and discretionary bonus payments to executive officers.
Required and Actual TLAC and Eligible LTD Ratios
At March 31, 2019 | ||||||||
$ in millions |
Required Ratio1 | Actual Amount/Ratio |
||||||
Total Loss-Absorbing Capacity |
||||||||
External TLAC2 |
$ 198,965 | |||||||
External TLAC as a % of RWA |
21.5 | % | 52.6% | |||||
External TLAC as a % of |
9.5 | % | 18.0% | |||||
Eligible LTD3 |
$ 120,983 | |||||||
Eligible LTD as a % of RWA |
9.0 | % | 32.0% | |||||
Eligible LTD as a % of |
4.5 | % | 11.0% |
1. | Required ratios are inclusive of any buffers applicable as of the date presented. |
2. | External TLAC consists of Common Equity Tier 1 capital and Additional Tier 1 capital (each excluding any noncontrolling minority interests), as well as eligible LTD. |
3. | Consists of TLAC-eligible LTD reduced by 50% for amounts of unpaid principal due to be paid in more than one year but less than two years from March 31, 2019. |
For a further discussion of TLAC and related requirements, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesRegulatory RequirementsRegulatory Capital Requirements in the 2018 Form 10-K.
Capital Plans and Stress Tests
Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large BHCs, including us, which form part of the Federal Reserves annual CCAR framework.
We submitted our 2019 Capital Plan (Capital Plan) and company-run stress test results to the Federal Reserve on April 5, 2019. We expect that the Federal Reserve will provide its response to our 2019 Capital Plan by June 30, 2019. There could be a range of potential outcomes to our Capital Plan whereby the Federal Reserve could object to, or otherwise require us to modify, such plan. See Risk Factors
21 | March 2019 Form 10-Q |
Managements Discussion and Analysis
in the 2018 Form 10-K. The Federal Reserve is expected to publish summary results of the CCAR and Dodd-Frank Act supervisory stress tests of each large BHC, including us, by June 30, 2019. We are required to disclose a summary of the results of our company-run stress tests within 15 days of the date the Federal Reserve discloses the results of the supervisory stress tests. In addition, we must submit the results of our mid-cycle company-run stress test to the Federal Reserve by October 5, 2019 and disclose a summary of the results within 30 days of the submission date.
For a further discussion of our capital plans and stress tests, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesRegulatory RequirementsCapital Plans and Stress Tests in the 2018 Form 10-K.
Attribution of Average Common Equity According to the Required Capital Framework
Our required capital (Required Capital) estimation is based on the Required Capital framework, an internal capital adequacy measure. Common equity attribution to the business segments is based on capital usage calculated under the Required Capital framework, as well as each business segments relative contribution to our total Required Capital.
The Required Capital framework is a risk-based and leverage use-of-capital measure, which is compared with our regulatory capital to ensure that we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. The amount of capital allocated to the business segments is generally set at the beginning of each year and remains fixed throughout the year until the next annual reset unless a significant business change occurs (e.g., acquisition or disposition). We define the difference between our total average common equity and the sum of the average common equity amounts allocated to our business segments as Parent common equity. We generally hold Parent common equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.
The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory environment, for example, to incorporate changes in stress testing or enhancements to modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.
Average Common Equity Attribution1
Three Months Ended March 31, |
||||||||
$ in billions | 2019 | 2018 | ||||||
Institutional Securities |
$ | 40.4 | $ | 40.8 | ||||
Wealth Management |
18.2 | 16.8 | ||||||
Investment Management |
2.5 | 2.6 | ||||||
Parent |
10.5 | 8.8 | ||||||
Total |
$ | 71.6 | $ | 69.0 |
1. | Average common equity is a non-GAAP financial measure. See Selected Non-GAAP Financial Information herein. |
Resolution and Recovery Planning
Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure.
Our preferred resolution strategy is an SPOE strategy. Currently, upon the occurrence of a resolution scenario, the Parent Company would be obligated, under a support agreement with its material entities, to contribute or loan on a subordinated basis all of its contributable material assets, other than shares in subsidiaries of the Parent Company and certain intercompany receivables, to provide capital and liquidity, as applicable, to our material entities.
The obligations of the Parent Company under the existing support agreement are in most cases secured on a senior basis by the assets of the Parent Company (other than shares in subsidiaries of the Parent Company). As a result, claims of our material entities against the assets of the Parent Company (other than shares in subsidiaries of the Parent Company) are effectively senior to unsecured obligations of the Parent Company.
In further development of our SPOE strategy, we have created a wholly owned, direct subsidiary of the Parent Company, MS Holdings LLC (the Funding IHC), to serve as a resolution funding vehicle. We expect that, prior to the submission of our 2019 resolution plan by July 1, 2019, the Parent Company will contribute certain of its assets to the Funding IHC and enter into an updated support agreement with the Funding IHC as well as certain other subsidiaries to facilitate the execution of our SPOE strategy. The updated agreement will
March 2019 Form 10-Q | 22 |
Managements Discussion and Analysis
obligate the Parent Company to transfer capital and liquidity to the Funding IHC, and that the Parent Company and/or the Funding IHC will recapitalize and provide liquidity to material entities in the event of our material financial distress or failure.
For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see BusinessSupervision and RegulationFinancial Holding CompanyResolution and Recovery Planning and Risk FactorsLegal, Regulatory and Compliance Risk in the 2018 Form 10-K.
Regulatory Developments
Proposed Revisions to the Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments Issued by G-SIBs
The Federal Reserve, the OCC and the FDIC have issued a proposed rule that would, among other things, modify the regulatory capital framework for Advanced Approach banking organizations, including us. Such firms would be required to make certain deductions from regulatory capital for their investments in certain unsecured debt instruments (including eligible LTD in the TLAC framework) issued by the Parent Company and other G-SIBs.
Proposed Revisions to Resolution Planning Requirements
The Federal Reserve and the FDIC have issued a proposed rule that would change our resolution planning obligations under the Dodd-Frank Act. The proposed rule would require us to file resolution plans once every two years and would allow us to alternate between submitting a full, detailed resolution plan and a streamlined, targeted resolution plan. The proposed rule also makes certain changes to the information required to be included in our resolution plan.
For a discussion of other regulatory developments, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesRegulatory RequirementsRegulatory Developments in the 2018 Form 10-K.
Other Matters
U.K. Withdrawal from the E.U.
Following the U.K. electorate vote to leave the E.U., the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017, which triggered a two-year period during which the U.K. government negotiated a form of withdrawal agreement with the E.U. The U.K. government and the E.U. have agreed to delay the U.K.s scheduled withdrawal from the E.U. until
October 31, 2019. However, if the U.K. does not hold elections to the European Parliament in accordance with applicable E.U. law and ratify the withdrawal agreement by the applicable deadlines, the U.K.s withdrawal date would become June 1, 2019. Absent any further changes to this time schedule, the U.K. is expected to leave the E.U. by October 31, 2019 at the latest. Discussions are ongoing within the U.K. Parliament on the negotiated withdrawal agreement and the alternatives to it, and between the U.K. government and the E.U.
For more information on the U.K.s withdrawal from the E.U., our related preparations and the potential impact on our operations, see Quantitative and Qualitative Disclosures about RiskCountry Risk herein, and see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesRegulatory RequirementsOther Matters and Risk FactorsInternational Risk in the 2018 Form 10-K.
Expected Replacement of London Interbank Offered Rate and Replacement or Reform of Other Interest Rates
Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR and replacements or reforms of other interest rate benchmarks, such as EURIBOR and EONIA (collectively, the IBORs).
For a further discussion of the expected replacement of the IBORs and/or reform of interest rate benchmarks, and the related risks and our transition plan, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesRegulatory RequirementsRegulatory Developments and Risk FactorsLegal, Regulatory and Compliance Risk, respectively, in the 2018 Form 10-K.
23 | March 2019 Form 10-Q |
Quantitative and Qualitative Disclosures about Risk
Management believes effective risk management is vital to the success of our business activities. For a discussion of our risk management functions, see Quantitative and Qualitative Disclosures about RiskRisk Management in the 2018 Form 10-K.
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of our VaR for market risk exposures is generated. In addition, we incur market risk within the Wealth Management and Investment Management business segments. The Wealth Management business segment primarily incurs non-trading market risk from lending and deposit-taking activities. The Investment Management business segment primarily incurs non-trading market risk from capital investments in alternative and other funds. For a further discussion of market risk, see Quantitative and Qualitative Disclosures about RiskMarket Risk in the 2018 Form 10-K.
Trading Risks
Value-at-Risk. The statistical technique known as VaR is one of the tools we use to measure, monitor and review the market risk exposures of our trading portfolios. The Market Risk Department calculates and distributes daily VaR-based risk measures to various levels of management.
For information regarding our VaR methodology, assumptions and limitations, see Quantitative and Qualitative Disclosures about RiskMarket RiskTrading RisksValue-at-Risk in the 2018 Form 10-K.
We utilize the same VaR model for risk management purposes and for regulatory capital calculations. Our regulators have approved our VaR model for use in regulatory calculations.
The portfolio of positions used for our VaR for risk management purposes (Management VaR) differs from that used for regulatory capital requirements (Regulatory VaR). Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include CVA and related hedges, as well as loans that are carried at fair value and associated hedges.
The following table presents the Management VaR for the Trading portfolio. To further enhance the transparency of traded market risk, the Credit Portfolio VaR has been disclosed as a separate category from the Primary Risk Categories. The Credit Portfolio includes counterparty CVA
and related hedges, as well as loans that are carried at fair value and associated hedges.
95%/One-Day Management VaR
Three Months Ended March 31, 2019 |
||||||||||||||||
$ in millions |
Period End |
Average | High2 | Low2 | ||||||||||||
Interest rate and credit spread |
$ | 32 | $ | 32 | $ | 39 | $ | 26 | ||||||||
Equity price |
15 | 16 | 19 | 12 | ||||||||||||
Foreign exchange rate |
15 | 14 | 16 | 11 | ||||||||||||
Commodity price |
9 | 10 | 12 | 9 | ||||||||||||
Less: Diversification benefit1 |
(32 | ) | (32 | ) | N/A | N/A | ||||||||||
Primary Risk Categories |
$ | 39 | $ | 40 | $ | 48 | $ | 36 | ||||||||
Credit Portfolio |
17 | 16 | 18 | 14 | ||||||||||||
Less: Diversification benefit1 |
(12 | ) | (10 | ) | N/A | N/A | ||||||||||
Total Management VaR |
$ | 44 | $ | 46 | $ | 55 | $ | 42 |
Three Months Ended December 31, 2018 |
||||||||||||||||
$ in millions |
Period End |
Average | High2 | Low2 | ||||||||||||
Interest rate and credit spread |
$ | 38 | $ | 36 | $ | 51 | $ | 25 | ||||||||
Equity price |
14 | 13 | 18 | 12 | ||||||||||||
Foreign exchange rate |
13 | 13 | 16 | 11 | ||||||||||||
Commodity price |
13 | 12 | 18 | 7 | ||||||||||||
Less: Diversification benefit1 |
(27 | ) | (30 | ) | N/A | N/A | ||||||||||
Primary Risk Categories |
$ | 51 | $ | 44 | $ | 62 | $ | 34 | ||||||||
Credit Portfolio |
15 | 13 | 16 | 11 | ||||||||||||
Less: Diversification benefit1 |
(9 | ) | (8 | ) | N/A | N/A | ||||||||||
Total Management VaR |
$ | 57 | $ | 49 | $ | 67 | $ | 39 |
1. | Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulated one-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component. |
2. | The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the quarter, and therefore, the diversification benefit is not an applicable measure. |
Average total Management VaR and average Management VaR for the Primary Risk Categories decreased from the three-months ended December 31, 2018, primarily as a result of reduced interest rate and credit spread exposure in the Fixed Income Division of the Institutional Securities business segment.
Distribution of VaR Statistics and Net Revenues
One method of evaluating the reasonableness of our VaR model as a measure of our potential volatility of net revenues is to compare VaR with corresponding actual trading revenues. Assuming no intraday trading, for a 95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the VaR model would be questioned.
March 2019 Form 10-Q | 24 |
Risk Disclosures
We evaluate the reasonableness of our VaR model by comparing the potential declines in portfolio values generated by the model with corresponding actual trading results for the Firm, as well as individual business units. For days where losses exceed the VaR statistic, we examine the drivers of trading losses to evaluate the VaR models accuracy relative to realized trading results. There were no days with trading losses in the current quarter.
Daily 95%/One-Day Total Management VaR for the Current Quarter1
($ in millions)
1. | The average 95%/one-day total Management VaR for the current quarter was $46 million. |
Daily Net Trading Revenues for the Current Quarter
($ in millions)
The previous histogram shows the distribution for the current quarter of daily net trading revenues. Daily net trading revenues include profits and losses from Interest rate and credit spread, Equity price, Foreign exchange rate, Commodity price, and Credit Portfolio positions and intraday trading activities for our trading businesses. Certain items such as fees, commissions and net
interest income are excluded from daily net trading revenues and the VaR model. Revenues required for Regulatory VaR backtesting further exclude intraday trading.
Non-Trading Risks
We believe that sensitivity analysis is an appropriate representation of our non-trading risks. The following sensitivity analyses cover substantially all of the non-trading risk in our portfolio.
Credit Spread Risk Sensitivity1
$ in millions |
At March 31, 2019 |
At December 31, 2018 |
||||||
Derivatives |
$ | 6 | $ | 6 | ||||
Funding liabilities2 |
37 | 34 |
1. | Amounts represent the potential gain for each 1 bps widening of our credit spread. |
2. | Relates to structured note liabilities carried at fair value. |
U.S. Bank Subsidiaries Net Interest Income Sensitivity Analysis
$ in millions | At March 31, 2019 |
At December 31, 2018 |
||||||
Basis point change |
||||||||
+200 |
$ | 484 | $ | 340 | ||||
+100 |
274 | 182 | ||||||
- 100 |
(619 | ) | (428 | ) |
The previous table presents an analysis of selected instantaneous upward and downward parallel interest rate shocks on net interest income over the next 12 months for our U.S. Bank Subsidiaries. These shocks are applied to our 12-month forecast for our U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and our forecasted business activity.
We do not manage to any single rate scenario but rather manage net interest income in our U.S. Bank Subsidiaries to optimize across a range of possible outcomes, including non-parallel rate change scenarios. The sensitivity analysis assumes that we take no action in response to these scenarios, assumes there are no changes in other macroeconomic variables normally correlated with changes in interest rates, and includes subjective assumptions regarding customer and market re-pricing behavior and other factors. The change in sensitivity to interest rates between March 31, 2019 and December 31, 2018 is primarily driven by a flatter yield curve, expectations of deposit pricing and changes in our asset-liability profile.
25 | March 2019 Form 10-Q |
Risk Disclosures
Investments Sensitivity, Including Related Carried Interest
Loss from 10% Decline | ||||||||
$ in millions |
At March 31, 2019 |
At December 31, 2018 |
||||||
Investments related to Investment Management activities |
$ | 334 | $ | 298 | ||||
Other investments: |
||||||||
MUMSS |
164 | 165 | ||||||
Other Firm investments |
187 | 179 |
MUMSSMitsubishi UFJ Morgan Stanley Securities Co., Ltd.
We have exposure to public and private companies through direct investments, as well as through funds that invest in these assets. These investments are predominantly equity positions with long investment horizons, a portion of which is for business facilitation purposes. The market risk related to these investments is measured by estimating the potential reduction in net income associated with a 10% decline in investment values and related impact on carried interest. The change in investments sensitivity related to Investment Management activities between December 31, 2018 and March 31, 2019 is primarily the result of higher carried interest.
Equity Market Sensitivity
In the Wealth Management and Investment Management business segments, certain fee-based revenue streams are driven by the value of clients equity holdings. The overall level of revenues for these streams also depends on multiple additional factors that include, but are not limited to, the level and duration of the equity market increase or decline, price volatility, the geographic and industry mix of client assets, the rate and magnitude of client investments and redemptions, and the impact of such market increase or decline and price volatility on client behavior. Therefore, overall revenues do not correlate completely with changes in the equity markets.
Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to us. We primarily incur credit risk exposure to institutions and individuals through our Institutional Securities and Wealth Management business segments. For a further discussion of our credit risks, see Quantitative and Qualitative Disclosures about RiskCredit Risk in the 2018 Form 10-K.
Loans and Lending Commitments
|
||||||||||||||||
At March 31, 2019 | ||||||||||||||||
$ in millions | IS | WM | IM1 | Total | ||||||||||||
Corporate |
$ | 22,283 | $ | 16,136 | $ | 5 | $ | 38,424 | ||||||||
Consumer |
| 27,300 | | 27,300 | ||||||||||||
Residential real estate |
| 28,037 | | 28,037 | ||||||||||||
Commercial real estate |
7,764 | | | 7,764 | ||||||||||||
Loans held for investment, gross of allowance |
30,047 | 71,473 | 5 | 101,525 | ||||||||||||
Allowance for loan losses |
(215 | ) | (44 | ) | | (259 | ) | |||||||||
Loans held for investment, net of allowance |
29,832 | 71,429 | 5 | 101,266 | ||||||||||||
Corporate |
12,469 | | | 12,469 | ||||||||||||
Residential real estate |
1 | 21 | | 22 | ||||||||||||
Commercial real estate |
2,440 | | | 2,440 | ||||||||||||
Loans held for sale |
14,910 | 21 | | 14,931 | ||||||||||||
Corporate |
8,286 | | 21 | 8,307 | ||||||||||||
Residential real estate |
1,282 | | | 1,282 | ||||||||||||
Commercial real estate |
1,766 | | | 1,766 | ||||||||||||
Loans held at fair value |
11,334 | | 21 | 11,355 | ||||||||||||
Total loans |
56,076 | 71,450 | 26 | 127,552 | ||||||||||||
Lending commitments2 |
102,174 | 12,147 | | 114,321 | ||||||||||||
Total loans and lending commitments2 |
$ | 158,250 | $ | 83,597 | $ | 26 | $ | 241,873 |
At December 31, 2018 | ||||||||||||||||
$ in millions | IS | WM | IM1 | Total | ||||||||||||
Corporate |
$ | 20,020 | $ | 16,884 | $ | 5 | $ | 36,909 | ||||||||
Consumer |
| 27,868 | | 27,868 | ||||||||||||
Residential real estate |
| 27,466 | | 27,466 | ||||||||||||
Commercial real estate3 |
7,810 | | | 7,810 | ||||||||||||
Loans held for investment, gross of allowance |
27,830 | 72,218 | 5 | 100,053 | ||||||||||||
Allowance for loan losses |
(193 | ) | (45 | ) | | (238 | ) | |||||||||
Loans held for investment, net of allowance |
27,637 | 72,173 | 5 | 99,815 | ||||||||||||
Corporate |
13,886 | | | 13,886 | ||||||||||||
Residential real estate |
1 | 21 | | 22 | ||||||||||||
Commercial real estate3 |
1,856 | | | 1,856 | ||||||||||||
Loans held for sale |
15,743 | 21 | | 15,764 | ||||||||||||
Corporate |
9,150 | | 21 | 9,171 | ||||||||||||
Residential real estate |
1,153 | | | 1,153 | ||||||||||||
Commercial real estate3 |
601 | | | 601 | ||||||||||||
Loans held at fair value |
10,904 | | 21 | 10,925 | ||||||||||||
Total loans |
54,284 | 72,194 | 26 | 126,504 | ||||||||||||
Lending commitments2 |
95,065 | 10,663 | | 105,728 | ||||||||||||
Total loans and lending commitments2 |
$ | 149,349 | $ | 82,857 | $ | 26 | $ | 232,232 |
1. | Investment Management business segment loans are entered into in conjunction with certain investment advisory activities. |
2. | Due to the nature of our obligations under the commitments, these amounts include certain commitments participated to third parties. |
3. | Beginning in 2019, loans previously referred to as Wholesale real estate are referred to as Commercial real estate. |
March 2019 Form 10-Q | 26 |
Risk Disclosures
We provide loans and lending commitments to a variety of customers, from large corporate and institutional clients to high net worth individuals. In addition, we purchase loans in the secondary market. In the balance sheets, these loans and lending commitments are carried as held for investment, which are recorded at amortized cost; as held for sale, which are recorded at the lower of cost or fair value; or at fair value with changes in fair value recorded in earnings. Loans held for investment and loans held for sale are classified in Loans, and loans held at fair value are classified in Trading assets in the balance sheets. Total loans and lending commitments increased by approximately $10 billion primarily due to increases in event-driven lending commitments within the Institutional Securities business segment.
Credit exposure arising from our loans and lending commitments is measured in accordance with our internal risk management standards. Risk factors considered in determining the aggregate allowance for loan and commitment losses include the borrowers financial strength, industry, facility structure, loan-to-value ratio, debt service ratio, collateral and covenants. Qualitative and environmental factors such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered.
See Notes 3, 7 and 11 to the financial statements for further information.
Allowance for Loans and Lending Commitments Held for Investment
At | At | |||||||
March 31, | December 31, | |||||||
$ in millions | 2019 | 2018 | ||||||
Loans |
$ | 259 | $ | 238 | ||||
Lending commitments |
211 | 203 | ||||||
Total allowance for loans and |
$ | 470 | $ | 441 |
The aggregate allowance for loans and lending commitments increased in the current quarter primarily in Institutional Securities as a result of select downgrades within Corporate loans as well as growth in lending commitments. See Notes 7 and 11 to the financial statements for further information.
Status of Loans Held for Investment
At March 31, 2019 | At December 31, 2018 | |||||||||||||||
IS | WM | IS | WM | |||||||||||||
Current |
99.1 | % | 99.9 | % | 99.8 | % | 99.9 | % | ||||||||
Nonaccrual1 |
0.9 | % | 0.1 | % | 0.2 | % | 0.1 | % |
1. | These loans are on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt. |
Institutional Securities Loans and Lending Commitments1
At March 31, 2019 | ||||||||||||||||||||
Years to Maturity | ||||||||||||||||||||
$ in millions |
Less than 1 | 1-3 | 3-5 | Over 5 | Total | |||||||||||||||
Loans |
||||||||||||||||||||
AA |
$ | 369 | $ | 52 | $ | | $ | 19 | $ | 440 | ||||||||||
A |
712 | 1,686 | 999 | 264 | 3,661 | |||||||||||||||
BBB |
3,101 | 5,070 | 4,380 | 401 | 12,952 | |||||||||||||||
NIG |
5,966 | 15,002 | 10,348 | 5,646 | 36,962 | |||||||||||||||
Unrated2 |
87 | 26 | 234 | 1,714 | 2,061 | |||||||||||||||
Total loans |
10,235 | 21,836 | 15,961 | 8,044 | 56,076 | |||||||||||||||
Lending commitments |
|
|||||||||||||||||||
AAA |
90 | 50 | | | 140 | |||||||||||||||
AA |
2,520 | 1,163 | 2,757 | | 6,440 | |||||||||||||||
A |
9,716 | 5,539 | 9,857 | 428 | 25,540 | |||||||||||||||
BBB |
3,259 | 12,132 | 21,084 | 374 | 36,849 | |||||||||||||||
NIG |
1,637 | 10,832 | 15,833 | 4,750 | 33,052 | |||||||||||||||
Unrated2 |
8 | | 134 | 11 | 153 | |||||||||||||||
Total lending commitments |
17,230 | 29,716 | 49,665 | 5,563 | 102,174 | |||||||||||||||
Total exposure |
$ |