DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Morgan Stanley (MS or the Company), including the Company’s Long-Term Issuer Rating of A (high) and Short-Term Issuer Rating of R-1 (middle). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Company is AA (low), while its Support Assessment remains SA3. The Company’s Long-Term Issuer Rating is positioned one notch below the IA. The ratings action follows the announcement of the Company’s definitive agreement to acquire E-Trade Financial Corporation (ETFC) in an all-stock transaction valued at approximately $13 billion. The transaction is expected to close in 4Q20, subject to regulatory approvals and contingent on shareholder approval by ETFC shareholders.
KEY RATING CONSIDERATIONS
The confirmation of Morgan Stanley’s ratings reflects DBRS Morningstar’s view that the ETFC acquisition is a compelling strategic fit, with attractive prospects. Specifically, the combination improves Morgan Stanley’s already formidable wealth management franchise, allowing it to offer a full set of wealth products and services across channels, while providing access to the next generation of wealth accumulators, all of which presents substantial long-term growth opportunities. Additionally, the acquisition is expected to provide $400 million of cost synergies (phased-in over three years) and bring on approximately $56 billion of low-cost deposits, which the Company expects will generate roughly $150 million of funding synergies. Further, the transaction will be accretive to capital, as the Company’s CET1 ratio is expected to increase by about 30 basis points upon closing.
While DBRS Morningstar recognizes the considerable integration risk associated with the acquisition, these concerns are mitigated when considering Morgan Stanley’s proven track record of strengthening its franchise through selective acquisitions and successfully integrating them. Providing further support, Mike Pizzi, CEO of ETFC, will continue to run the business within the MS franchise and lead the integration process.
DBRS Morningstar sees MS’s ratings as well placed at the current level. Over the intermediate term, successful integration of ETFC and delivering on the transaction assumptions could result in positive ratings pressure. Conversely, failure to sustain the Company’s strong financial profile, or a poorly executed integration could have negative ratings implications.
Morgan Stanley’s Wealth and Investment Management businesses currently generate roughly half of the Company’s total net revenues, providing stability and predictability to results, which DBRS Morningstar views favorably from a ratings perspective. This contribution is expected to be further enhanced with the acquisition of ETFC. ETFC’s online brokerage business is a broadly recognized, leading competitor in meeting the needs of retail investors, with approximately $360 billion of retail client assets across 5.2 million client accounts. Complementing the retail brokerage business is ETFC’s stock plan administration business, which has approximately $300 billion of corporate services assets across 1.9 million accounts.
Overall, the combination will allow MS to offer an even more comprehensive set of wealth products and services across channels, including financial advisors, workplace and self-directed accounts. Additionally, MS will be able to leverage ETFC’s state-of-the-art technology and strong brand, providing it access to the next generation of wealth accumulators, which DBRS Morningstar expects will provide a significant competitive advantage for the Company over the long term.
MS’s strong financial profile underpins its ratings and is further bolstered with the acquisition. On a combined basis, MS would have $3.1 trillion of client assets and would have generated $21 billion of revenue, with a pre-tax margin of 30% in 2019 (up from 27%). In addition, the acquisition will add $56 billion of low-cost, “sticky” deposits ($247 billion of pro-forma deposits), further reducing the Company’s wholesale funding reliance. MS had a global liquidity reserve of $217 billion, representing 24% of total assets and a peer-leading CET1 ratio of 16.4% at YE19.
The Grid Summary Grades for Morgan Stanley are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Very Strong/Strong; Risk Profile – Strong; Funding & Liquidity – Strong; Capitalisation – Strong.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2019) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 2020) , which can be found on our website under Methodologies & Criteria.
The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:
Each of the principal methodologies/principal asset class methodologies and criteria employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision, Specifically, the “Global Methodology for Rating Banks and Banking Organisations” was utilized to evaluate the Issuer, while the “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” was used to rate the subsidiary guaranteed by the Issuer.
The last rating action on this issuer took place on December 11, 2019.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Lead Analyst: Michael McTamney, CFA, Vice President – Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer – Global FIG and Sovereign Ratings
Initial Rating Date: 10 April 1992
For more information on this credit or on this industry, visit www.dbrs.com.
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