DBRS Morningstar Confirms Morgan Stanley at A (high), Stable TrendBanking Organizations, Non-Bank Financial Institutions
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, 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.
Given MS’s current business mix and funding, we see the ratings as appropriately placed. Over the longer term, continued revenue growth and sustained top-tier profitability metrics, without altering its risk profile, could result in positive rating implications. Conversely, 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 reputational issues, risk management deficiencies or operational missteps, 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 $4.2 trillion in client assets, the Company’s Wealth Management business is one of the 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.
Despite the challenging operating environment in 2020, MS generated record net revenues and net income, with strength across businesses. Continuing this momentum, the Company reported record quarterly net revenues of $15.7 billion in 1Q21, which was up 61% year-on-year and 16% sequentially, representing a strong 16.9% return on equity. Results included an unexpected $911 million Archegos-related loss. While concerning from a risk management perspective, especially since it appears that MS was impacted to a greater extent than its US peers, the loss was considerably smaller compared to what has been reported by some peers outside the U.S. Additionally, MS conducted a portfolio-wide review of its family office exposure and found no patterns resembling Archegos-like strategies. Excluding this loss, the Equities business reported record results and provided significant loss absorption capacity.
Overall, 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 balance sheet fundamentals remain robust. 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 continue to contribute a more meaningful portion of the funding stack. In 1Q21, total deposits grew by $12 billion from YE20 to $323 billion, representing more than 40% of core funding sources. Moreover, MS reported a peer-leading Standardized CET1 ratio of 16.8% and liquidity resources of $353 billion, representing 30% of total assets at the end of 1Q21.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
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; Capitalization – Strong.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is 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 (May 31, 2021): https://www.dbrsmorningstar.com/research/379424/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021):
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 for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:
Each of the principal methodologies/principal asset class methodologies 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 (June 8, 2020) was utilized to evaluate the Issuer, the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021) was used to rate the subsidiary guaranteed by the Issuer and the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021) was used to assess ESG factors.
The last rating action on this issuer took place on July 1, 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
Lead Analyst: Michael McTamney, CFA, Senior Vice President – Global FIG
Rating Committee Chair: Lisa Kwasnowski, Senior Vice President – Global FIG
Initial Rating Date: Initial Rating Date: 10 April 1992
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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- Global Methodology for Rating Banks and Banking Organisations (Archived) / June 8, 2020
- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (Archived) / May 31, 2021
- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (Archived) / February 3, 2021