|Morgan Stanley Reports Second Quarter 2012:|
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NEW YORK, July 19, 2012 – Morgan Stanley (NYSE: MS) today reported net revenues of $7.0 billion for the second quarter ended June 30, 2012 compared with $9.2 billion a year ago. For the current quarter, income from continuing operations applicable to Morgan Stanley was $563 million, or $0.28 per diluted share,4 compared with income of $1.2 billion, or a loss of $0.36 per diluted share,4 for the same period a year ago. The earnings per share calculation for the prior year second quarter included a negative adjustment of approximately $1.7 billion, or $1.02 per diluted share, related to the conversion of the Firm's Series B Preferred Stock held by Mitsubishi UFJ Financial Group, Inc. (MUFG) into common stock.
James P. Gorman, Chairman and Chief Executive Officer, said, "Although global economic uncertainty remains a headwind, we are proactively positioning the Firm for success. Our businesses showed resilience in key areas during the quarter, and we made progress against strategic goals. Despite muted volumes, Investment Banking maintained its industry-leading rankings. In Global Wealth Management, we increased our pre-tax margin to 12 percent in an environment marked by investor caution, and we integrated substantially all of our technology systems, which should bring additional value to our clients. We continue to be focused on taking the necessary steps to deliver strong returns for our shareholders."
(1) Net revenues and pre-tax income for 2Q 2012, 1Q 2012 and 2Q 2011 exclude positive
Institutional Securities reported pre-tax income from continuing operations of $508 million compared with pre-tax income of $1.5 billion in the second quarter of last year. Net revenues for the current quarter were $3.2 billion compared with $5.2 billion a year ago. DVA resulted in positive revenue of $350 million in the current quarter compared with $244 million a year ago. The following discussion for sales and trading excludes DVA.
GLOBAL WEALTH MANAGEMENT GROUP
Global Wealth Management Group reported pre-tax income from continuing operations of $393 million compared with $317 million in the second quarter of last year. Net revenues for the current quarter were $3.3 billion compared to $3.4 billion a year ago. The quarter's pre-tax margin was 12%.11 Aggregate pre-tax income, which included pre-tax income from continuing operations and the pre-tax gain in discontinued operations related to the sale of Quilter, was $420 million after the noncontrolling interest allocation to Citigroup Inc.12, 13
Asset Management reported pre-tax income from continuing operations of $43 million compared with $168 million in last year's second quarter.15 Income after the noncontrolling interest allocation and before taxes was $20 million.
Morgan Stanley's Tier 1 capital ratio under Basel I was approximately 17.1% and Tier 1 common ratio was approximately 13.5% at June 30, 2012.17
As a result of a rating agency downgrade of the Firm's long-term credit rating in June, the amount of additional collateral requirements or other payments that could be called by counterparties, exchanges or clearing organizations under the terms of certain OTC trading agreements and certain other agreements was approximately $6.3 billion, of which $2.9 billion was called and posted at June 30, 2012.
The information above contains forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and which reflect management's current estimates, projections, expectations or beliefs and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of additional risks and uncertainties that may affect the future results of the Company, please see "Forward-Looking Statements" immediately preceding Part I, Item 1, "Competition" and "Supervision and Regulation" in Part I, Item 1, "Risk Factors" in Part I, Item 1A, "Legal Proceedings" in Part I, Item 3, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 and "Quantitative and Qualitative Disclosures about Market Risk" in Part II, Item 7A, each of the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and other items throughout the Form 10-K, the Company's Quarterly Reports on Form 10-Q, including "Risk Factors" in Part II, Item 1A therein, and the Company's Current Reports on Form 8-K, including any amendments thereto.
1 Represents the change in the fair value of certain of Morgan Stanley's long-term and short-term borrowings resulting from fluctuations in its credit spreads and other credit factors (commonly referred to as "DVA").
2 Income (loss) per diluted share amounts, excluding DVA, are non-GAAP financial measures that the Firm considers useful for investors to allow better comparability of period to period operating performance. Such exclusions are provided to differentiate revenues associated with Morgan Stanley borrowings, regardless of whether the impact is either positive, or negative, that result solely from fluctuations in credit spreads and other credit factors. The reconciliation of income (loss) per diluted share from continuing operations applicable to Morgan Stanley common shareholders and average diluted shares from a non-GAAP to GAAP basis is as follows (shares and DVA are presented in millions):
3 From time to time, Morgan Stanley may disclose certain "non-GAAP financial measures" in the course of its earnings releases, earnings conference calls, financial presentations and otherwise. For these purposes, "GAAP" refers to generally accepted accounting principles in the United States. The Securities and Exchange Commission (SEC) defines a "non-GAAP financial measure" as a numerical measure of historical or future financial performance, financial positions, or cash flows that is subject to adjustments that effectively exclude, or include amounts from the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures disclosed by Morgan Stanley are provided as additional information to investors in order to provide them with greater transparency about, or an alternative method for assessing our financial condition and operating results. These measures are not in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with non-GAAP financial measures used by other companies. Whenever we refer to a non-GAAP financial measure, we will also generally present the most directly comparable financial measure calculated and presented in accordance with GAAP, along with a reconciliation of the differences between the non-GAAP financial measure we reference with such comparable GAAP financial measure.
4 Includes preferred dividends and other adjustments related to the calculation of earnings per share of approximately $27 million for the quarter ended June 30, 2012 and $1.8 billion for the quarter ended June 30, 2011. Refer to page 3 of Morgan Stanley's Financial Supplement accompanying this release for the calculation of earnings per share.
5 Income (loss) applicable to Morgan Stanley, excluding DVA, is a non-GAAP financial measure that the Firm considers useful for investors to allow for better comparability of period to period operating performance. The reconciliation of income (loss) from continuing operations applicable to Morgan Stanley from a non-GAAP to GAAP basis is as follows (amounts are presented in millions):
6 Discontinued operations for the current quarter reflected a pre-tax gain of $108 million ($73 million after tax) and other operating income related to Quilter (reported in the Global Wealth Management business segment) and operating results related to Saxon (reported in the Institutional Securities business segment).
7 Source: Thomson Reuters – for the period of January 1, 2012 to June 30, 2012 as of July 3, 2012.
8 Sales & Trading net revenues, including Fixed Income and Commodities (FIC) and Equity Sales & Trading net revenues excluding DVA, are non-GAAP financial measures that the Firm considers useful for investors to allow better comparability of period to period operating performance. The reconciliation of Sales & Trading, including FIC and Equity Sales & Trading net revenues from a non-GAAP to GAAP basis is as follows (amounts are presented in millions):
9 The Firm recognized an out of period pre-tax gain of approximately $300 million in Institutional Securities' Other Sales and Trading net revenues for the quarter ended June 30, 2012, related to the reversal of amounts recorded in cumulative other comprehensive income due to the incorrect application of hedge accounting on certain derivative contracts previously designated as net investment hedges of certain foreign, non-U.S. dollar denominated subsidiaries. This amount included a pre-tax gain of approximately $191 million related to the quarter ended March 31, 2012, with the remainder impacting prior periods. The Firm has evaluated the effects of the incorrect application of hedge accounting, both qualitatively and quantitatively, and concluded that it did not have a material impact on any prior annual or quarterly consolidated results. In addition, the Firm has recognized a partially offsetting pre-tax loss of approximately $224 million for the quarter ended June 30, 2012, resulting from fair value changes within the quarter of the related derivative positions not qualifying for net investment hedge accounting.
10 The compensation to net revenue ratio is calculated as compensation expense of $1,425 million divided by net revenues of $3,234 million. Excluding DVA, the denominator is decreased by $350 million. The compensation to net revenue ratio excluding DVA is a non-GAAP financial measure that the Firm considers to be a useful measure that the Firm and investors use to assess operating performance.
11 Pre-tax margin is a non-GAAP financial measure that the Firm considers to be a useful measure that the Firm and investors use to assess operating performance. Pre-tax margin represents income (loss) from continuing operations before taxes, divided by net revenues.
12 Morgan Stanley owns 51% of MSSB, which is consolidated. The results related to the 49% interest retained by Citigroup Inc. are reported in net income (loss) applicable to noncontrolling interests on page 9 of Morgan Stanley's Financial Supplement accompanying this release.
13 The aggregate pre-tax income from continuing operations, including the pre-tax gain from the sale of Quilter in discontinued operations, after the noncontrolling interest allocation to Citigroup Inc., is a non-GAAP measure that the Firm considers useful for investors to better understand the components of net income applicable to Morgan Stanley.
14 Transactional revenues include investment banking, principal transactions - trading and commissions and fee revenues.
15 Results for the second quarter of 2012 and 2011 included pre-tax income of $22 million and $91 million, respectively, related to principal investments held by certain consolidated real estate funds. The limited partnership interests in these funds are reported in net income (loss) applicable to noncontrolling interests on page 11 of Morgan Stanley's Financial Supplement accompanying this release.
16 Results for the current quarter included gains of $24 million compared with gains of $95 million in the prior year second quarter related to principal investments held by certain consolidated real estate funds.
17 The Firm calculates its Tier 1 capital ratio and risk-weighted assets in accordance with the capital adequacy standards for financial holding companies adopted by the Federal Reserve Board. These standards are based upon a framework described in the International Convergence of Capital Measurement and Capital Standards, July 1988, as amended, also referred to as Basel I. In accordance with the Federal Reserve Board's definition, Tier 1 common capital is defined as Tier 1 capital less non-common elements in Tier 1 capital, including perpetual preferred stock and related surplus, minority interest in subsidiaries, trust preferred securities and mandatory convertible preferred securities. These computations are preliminary estimates as of July 19, 2012 (the date of this release) and could be subject to revision in Morgan Stanley's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.
18 Tangible common equity and tangible book value per common share are non-GAAP financial measures that the Firm considers to be useful measures of capital adequacy. Tangible common equity equals common equity less goodwill and intangible assets net of allowable mortgage servicing rights deduction and includes only the Firm's share of MSSB's goodwill and intangible assets. Tangible book value per common share equals tangible common equity divided by period end common shares outstanding.