01—Abstract
Summary
Summary of the 10-K filed February 26, 2019. Cited figures are marked; the original filing is the authoritative source.
Morgan Stanley reported a strong 2018, with net revenues of $40.1 billiona (up 6% from $37.9 billion) and net income applicable to Morgan Stanley of $8.7 billion, or $4.73 per diluted share, versus $6.1 billion ($3.07) in 2017.
Excluding intermittent net discrete tax items, adjusted diluted EPS was $4.61b, up from $3.60, and the adjusted ROE was 11.5%, within the firm's 10% to 13% target range. Growth was led by Institutional Securities, where net revenues rose 9% to $20.6 billion on higher sales and trading and investment banking results, while Wealth Management revenues grew 2% to $17.2 billion, driven by asset management fees, and Investment Management revenues rose 6% to $2.7 billion. Expenses grew 5% to $28.9 billion, with a 72.0% expense efficiency ratio, modestly better than 72.6% in 2017.
The balance sheet remained large and well capitalized. Total assets were $853.5 billionc, essentially flat year over year, and the Common Equity Tier 1 ratio rose to 16.9% under the fully phased-in Standardized Approach. Liquidity was strong, with a Global Liquidity Reserve of $249.7 billion (up from $192.7 billion) and an LCR of 145%.
The firm repurchased $4.9 billiond of common stock in 2018 and raised its quarterly dividend to $0.30 per share, with a 2018 Capital Plan allowing up to $4.7 billion of repurchases through June 2019. Key risks flagged in the filing include Brexit uncertainty affecting EU passporting, the transition away from LIBOR, the Firm's TLAC and SPOE resolution framework, cybersecurity exposure, and several legacy residential mortgage and credit crisis lawsuits. The most significant disclosed potential loss is a CDIB claim of up to approximately $240 million, and an Italian Treasury claim seeking about $3.2 billion was dismissed by the lower court but is under appeal.
02—Key points
Key Highlights
- Net revenues rose 6% to $40.1 billion, and net income applicable to Morgan Stanley increased 43% to $8.7 billion, with diluted EPS of $4.73 versus $3.07 in 2017.
- Excluding intermittent discrete tax items, adjusted diluted EPS was $4.61, up 28% from $3.60, and adjusted ROE reached 11.5% versus 9.4% in 2017.
- Institutional Securities net revenues grew 9% to $20.6 billion, led by higher equity and fixed income sales and trading and a 10% rise in investment banking revenues to $6.1 billion.
- Wealth Management net revenues increased 2% to $17.2 billion, supported by asset management revenues of $10.2 billion (up 9%), though transactional revenues fell 18%.
- Common Equity Tier 1 capital ratio improved to 16.9% from 16.5%, and the Global Liquidity Reserve expanded to $249.7 billion, supporting a 145% LCR.
- The Firm returned capital through $4.9 billion of share repurchases and a quarterly dividend increase to $0.30 per share effective July 2018.
- Total assets were stable at $853.5 billion, and the Firm's 2018 Capital Plan permits up to $4.7 billion of buybacks through June 2019.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 26, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Interest Expense | $10.09B$5.70B | +77.0% |
| Net Income | $8.75B$6.11B | +43.2% |
| EPS (Basic) | $4.81$3.14 | +53.2% |
| EPS (Diluted) | $4.73$3.07 | +54.1% |
| Shares Outstanding (Basic) | 1.71B1.78B | −4.0% |
| Shares Outstanding (Diluted) | 1.74B1.82B | −4.6% |
05—Questions
Frequently Asked Questions
How did Morgan Stanley's profitability change in 2018?
Net income applicable to Morgan Stanley rose to $8.7 billion from $6.1 billion, and diluted EPS increased to $4.73 from $3.07. Part of the gain reflects lower tax expense from the Tax Cuts and Jobs Act and intermittent discrete tax benefits of $203 million. Excluding those items, adjusted diluted EPS was $4.61 versus $3.60 in 2017.
Which business segment drove the most growth?
Institutional Securities was the main driver, with net revenues up 9% to $20.6 billion and pre-tax income up 11% to $6.3 billion. Growth came mainly from equity and fixed income sales and trading, along with higher investment banking revenues. Wealth Management revenues also rose 2%, driven by asset management fees.
Is Morgan Stanley well capitalized and liquid?
Yes. The CET1 ratio was 16.9% and the total capital ratio was 21.8% under the Standardized Approach, both above regulatory requirements including buffers. The Global Liquidity Reserve reached $249.7 billion, and the LCR was 145%, comfortably above the 100% minimum.
What are the main risks and legal exposures investors should watch?
The filing highlights Brexit-related disruption to EU operations, the transition away from LIBOR, and the firm's SPOE resolution framework, which could impose losses on long-term debt holders. Legal exposures include residential mortgage-related litigation, with a potential loss of up to about $240 million in the CDIB matter, and an Italian Treasury claim that was dismissed but is under appeal.
How is Morgan Stanley returning capital to shareholders?
In 2018 the firm repurchased $4.9 billion of common stock and paid common dividends of $1.10 per share in total. The quarterly dividend was raised to $0.30 per share, and the 2018 Capital Plan allows up to $4.7 billion of repurchases from July 2018 through June 2019, subject to regulatory approval.
06—Continue