01—Abstract
Summary
Summary of the 10-K filed February 27, 2018. Cited figures are marked; the original filing is the authoritative source.
Morgan Stanley's 2017 Form 10-K shows a firm that grew net revenues 10% to $37.9 billiona and net income applicable to Morgan Stanley to $6.1 billion ($3.07 diluted EPS), but the headline GAAP figures were depressed by a roughly $1.2 billion net discrete tax charge tied to the Tax Cuts and Jobs Act.
Excluding intermittent tax items, adjusted net income was $7.1 billionb and adjusted diluted EPS was $3.60, against $2.88 in 2016. Growth was led by Wealth Management (net revenues up 10% to $16.8 billion, with fee-based client assets rising to $1.045 trillion) and Institutional Securities (up 8% to $18.8 billion, driven by a 24% jump in investment banking). Investment Management revenue rose 22% to $2.6 billion on stronger investment gains.
Capital and shareholder returns remained strong. The Common Equity Tier 1 ratio was 16.5% on a transitional standardized basis, the Tier 1 leverage ratio was 8.3%, and the firm repurchased $3.75 billionc of common stock while raising the quarterly dividend to $0.25 per share. Management set a new medium-term ROE target of 10% to 13%, and reported ROE of 8.0% on an unadjusted basis (9.4% adjusted).
The 2018 effective tax rate is guided to 22%d to 25%, down sharply from 40.1% in 2017, which should flatter future earnings. Key risks flagged in the filing include legacy residential mortgage litigation (several multi-hundred-million-dollar claims), exposure to a €2.76 billion Italian government derivatives claim, dependence on credit ratings for funding and collateral calls, the uncertain interpretation of the Tax Act, and Brexit-related restructuring of European operations. Overall, the filing presents an improving earnings base with solid capital, while the medium-term ROE target and the tax normalization are the key items for investors to track.
02—Key points
Key Highlights
- Net revenues rose 10% to $37.9 billion, and net income applicable to Morgan Stanley reached $6.1 billion ($3.07 diluted EPS) on a GAAP basis.
- Excluding a $968 million intermittent net discrete tax provision (mainly the Tax Act), adjusted diluted EPS was $3.60, up from $2.88 in 2016.
- Wealth Management net revenues grew 10% to $16.8 billion; fee-based client assets reached $1.045 trillion, up from $877 billion.
- Institutional Securities net revenues rose 8% to $18.8 billion, led by a 24% increase in investment banking revenues to $5.5 billion.
- Capital remained strong: CET1 ratio of 16.5% (transitional standardized), Tier 1 leverage ratio of 8.3%, and $3.75 billion of share repurchases in 2017.
- The quarterly dividend was raised to $0.25 per share, and a new 10%–13% medium-term ROE target was set; 2017 ROE was 8.0% unadjusted and 9.4% adjusted.
- Key risks include legacy RMBS litigation, a €2.76 billion Italian government derivatives claim, credit-rating-triggered collateral calls, and Brexit-related changes to European operations.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 27, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Interest Expense | $5.70B$3.32B | +71.7% |
| Net Income | $6.11B$5.98B | +2.2% |
| EPS (Basic) | $3.14$2.98 | +5.4% |
| EPS (Diluted) | $3.07$2.92 | +5.1% |
| Shares Outstanding (Basic) | 1.78B1.85B | −3.7% |
| Shares Outstanding (Diluted) | 1.82B1.89B | −3.5% |
05—Questions
Frequently Asked Questions
How did Morgan Stanley's earnings change in 2017, and why do the GAAP and adjusted figures differ?
GAAP diluted EPS was $3.07, up from $2.92 in 2016. The GAAP figure includes a net discrete tax provision of $968 million, primarily from remeasuring deferred tax assets under the Tax Cuts and Jobs Act (about $1.2 billion), partly offset by $233 million of tax benefits from resolved IRS examinations. Excluding these intermittent items, adjusted diluted EPS was $3.60, which better reflects the underlying operating performance.
Which business segments drove growth?
Wealth Management net revenues rose 10% to $16.8 billion, driven by asset management fees and higher net interest income, and its pre-tax margin improved to 26%. Institutional Securities revenues increased 8% to $18.8 billion, mainly from investment banking, which rose 24% on stronger equity and fixed income underwriting. Investment Management revenues increased 22% to $2.6 billion, reflecting higher investment gains and asset management fees.
How strong is the firm's capital and liquidity position?
At December 31, 2017, the transitional Common Equity Tier 1 ratio was 16.5%, the Tier 1 capital ratio was 18.9%, and the total capital ratio was 21.7%, all above the required minimums. The Tier 1 leverage ratio was 8.3%. The Global Liquidity Reserve totaled $192.7 billion, and the liquidity coverage ratio was 128%, comfortably above the 100% requirement.
What are the main legal and regulatory risks investors should monitor?
The firm faces multiple legacy residential mortgage-backed securities suits, including claims relating to trusts with original principal balances in the hundreds of millions to over $1 billion. It also faces an Italian claim seeking €2.76 billion (about $3.3 billion) related to derivatives with the Republic of Italy, and a Dutch tax dispute over approximately €124 million of withholding tax credits. Management believes the outcome of these matters will not have a material adverse effect on the firm's financial condition, though results could be material in a given period.
What should investors expect for 2018 and beyond?
The firm guides to an effective tax rate of about 22% to 25% for 2018, compared with 40.1% in 2017, which should meaningfully boost net income if pre-tax earnings hold. It set a medium-term ROE target of 10% to 13%, and the 2017 capital plan allows up to $5.0 billion of buybacks through June 2018. Ongoing items to monitor include Basel III revisions effective January 2022, the Tax Act's interpretation, TLAC compliance by January 2019, and Brexit-related changes to European operations.
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