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.
KEY RATING CONSIDERATIONS
The ratings confirmation reflects the strength of Morgan Stanley’s franchise, including its well-diversified global mix of businesses that have substantial scale and strong market positions and contribute to resilient earnings generation. Additionally, MS’s effective risk management capabilities, along with its strong credit fundamentals, support the current rating level.
The ratings also consider MS’s exposure to a wide range of capital markets activities that are integral to the value of its franchise, but also contribute a notable level of market risk that characterizes the Company’s risk profile. Furthermore, the unprecedented economic disruption caused by the Coronavirus Disease (COVID-19) pandemic and related extraordinary support measures implemented to mitigate the fallout have been factored into our ratings assessment. We will continue to monitor this developing situation and its impact on Morgan Stanley’s overall credit profile.
Given the current economic environment, an upgrade is unlikely. Over the long term, continued revenue growth and sustained top-tier profitability metrics, without altering its risk profile, would result in an upgrade. Conversely, a prolonged adverse economic downturn resulting in a sustained deterioration of earnings or balance sheet fundamentals would result in a downgrade. Any indications of significant weakening in MS’s franchise due to risk management deficiencies would also result in a downgrade.
Morgan Stanley’s very strong franchise is supported by top-tier positioning within its global capital markets businesses and its market-leading Wealth Management (WM) platform. With $2.4 trillion in client assets, the Company’s Wealth Management business is the third largest globally. Overall, MS’s Wealth and Investment Management businesses generate roughly half of the Company’s total net revenues, providing stability and predictability to results, which we view favorably from a ratings perspective. This was particularly evident in MS’s 1Q20 results, in which the Company delivered an 8.5% return on equity that was significantly higher than the rest of the peer group. While lower global asset prices had a pronounced negative impact within WM in 1Q20, the segment still generated a 26% pre-tax profit margin. Results were also driven by a 30% year-on-year increase in sales and trading net revenues, which benefited from exceptionally high trading volumes.
We view the acquisition of ETFC as 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 present substantial long-term growth opportunities. In addition, the acquisition is expected to improve MS’s pre-tax margin to 30%, add $56 billion of low-cost, “sticky” deposits and increase its CET1 ratio by about 30 basis points post close.
We view MS’s risk management capabilities and cohesive culture as contributing to the strength of the franchise. Morgan Stanley’s business activities inherently require it to take significant risk, making skillful risk management a critical component of its success. Considering its long and successful track record, we see MS as having the appropriate processes and governance in place for managing risk across its businesses.
MS’s funding and liquidity remains very strong. While the Company has a higher reliance on wholesale funding than its universal bank peers, we view MS’s wholesale funding as well managed. In addition, deposits have become an increasingly meaningful portion of the funding stack. In 1Q20, deposits increased $45 billion from YE19 to $235 billion, representing more than one-third of core funding sources. Liquidity resources totaled $255 billion at quarter end, representing 27% of total assets. Consistent with industry trends, balance sheet and risk-weighted asset growth to accommodate clients drove declines in capital metrics. Nonetheless, MS reported a very strong 15.2% CET1 ratio at the end of 1Q20.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
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 the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations,
DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020): https://www.dbrsmorningstar.com/research/355780/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 (DBRS Morningstar) 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 February 20, 2020, when all ratings were confirmed.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
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: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 10 April 1992
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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