itch: Challenging Markets Impact Morgan Stanley's 3Q15 Earnings

CHICAGO--(BUSINESS WIRE)-- Morgan Stanley's (MS) third quarter 2015 (3Q15) earnings were down, largely due to challenging market conditions in the company's Institutional Securities Group (ISG), according to Fitch Ratings. The reversal of accrued carried interest in the investment management business and reduced transactional revenue in wealth management also contributed to the drop in earnings.

MS' 3Q15 earnings were $939 million, down 44% from the sequential quarter and down 42% from the year-ago quarter. This equated to a 3.9% return on common equity excluding DVA, well below Fitch estimate of the company's long-term cost of equity.

Fitch calculated pre-tax profits which exclude CVA/DVA and various other gains/losses amounted to $1.04 billion, or a 0.50% pre-tax return on ending assets (ROA). The Fitch calculated results were also down from both sequential and year-ago quarters, as well as compared to some larger peers who have a more significant contribution from net interest income to the earnings profiles.

The main weak spot in earnings, which has been largely consistent across the industry, was in the company's Sales & Trading businesses. Net revenues in the Fixed Income & Commodities area were down 33% from the sequential quarter and 19% from the year-ago quarter due to challenging conditions in both the company's credit and securitized products businesses.

Equity Sales & Trading net revenues were down 20% from the sequential quarter and flat relative to the year-ago quarter. Within this segment prime brokerage and derivatives results were good, offset by lower net revenues in cash equities.

Another significant component impacting this quarter's earnings was the reversal of previously accrued carried interest associated with the company's Asia private equity business which reflected weaknesses across that geographic region. This swung Investment Management pre-tax income to a $38 million loss for the quarter, down from $220 million of pre-tax income in the prior quarter.

MS' investment banking net revenues were more mixed with strong performance in advisory more than offset by both lower equity and fixed income underwriting activities.

Results in MS' wealth management business were also down but much more modestly. Wealth management net revenues were down 6% from the sequential quarter, with flat asset management fees offset by weaknesses in transactional revenues. Nevertheless the segment's pre-tax margin remained good, in Fitch's opinion, at 23%.

As the company continues to grow wealth management and its lending businesses as well as continue to optimize its other businesses, Fitch would expect wealth management earnings to add more stability to the firm's overall earnings profile over time. This viewpoint is already incorporated in Fitch's ratings and Rating Outlook for the company.

Given the challenging revenue environment compensation expenses declined, with compensation and benefits as a percentage of net revenues of 44% in 3Q15, down from 45% in the sequential quarter and 47% in the year-ago quarter.

Non-compensation expenses were up, primarily due to a $250 million litigation accrual related to the settlement of a credit default swap antitrust litigation matter.

MS' capital and liquidity position continues to be good and is supportive to the company's rating. Total deposits grew to $147.23 billion, up 6% from the sequential quarter and 18% from the year-ago quarter. The company's global liquidity reserve was similarly good $190.87 billion.

MS' fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the advanced approach was 12.4%, down just slightly from prior periods as there was some growth in risk-weighted assets (RWA) during the quarter. The company's fully phased-in enhanced supplementary leverage ratio at the holding company was 5.5%.

Additional information is available at www.fitchratings.com

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View source version on businesswire.com: http://www.businesswire.com/news/home/20151019006473/en/

Fitch Ratings
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Nathan Flanders
Managing Director
+1-212-908-1872
or
Media Relations:
Hannah James, New York, + 1 212 908 0500
Email: [email protected]

Source: Fitch Ratings

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