|Morgan Stanley Reports Third Quarter 2011:|
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NEW YORK, October 19, 2011 – Morgan Stanley (NYSE: MS) today reported income of $2.2 billion, or $1.14 per diluted share,1 from continuing operations applicable to Morgan Stanley for the third quarter ended September 30, 2011 compared with income of $314 million, or $0.05 per diluted share, for the same period a year ago. Net revenues were $9.9 billion for the current quarter compared with $6.8 billion a year ago. Results for the current quarter included positive revenue of $3.4 billion, or $1.12 per diluted share, compared with negative revenue of $731 million a year ago related to changes in Morgan Stanley's debt-related credit spreads and other credit factors (Debt Valuation Adjustment, DVA).2, 3
The Firm's compensation expense for the current quarter was $3.7 billion with a compensation to net revenue ratio of 37%. This ratio was affected by DVA which increased net revenues in the current period. Non-compensation expenses of $2.5 billion reflected higher levels of business activity and costs associated with the U.K. bank levy.
For the current quarter, net income applicable to Morgan Stanley, including discontinued operations, was $1.15 per diluted share, compared with a net loss of $0.07 per diluted share in the third quarter of 2010.4
James P. Gorman, President and Chief Executive Officer, said, "Morgan Stanley effectively navigated turbulent markets while consolidating our market share gains with Institutional clients and demonstrating resilience across the Global Wealth Management business as evidenced by record net new assets flows since the formation of MSSB. The Firm delivered progress across many of our key initiatives, increasing client penetration in equity derivatives and interest rate products as well as achieving a significant milestone in the integration of MSSB with the initial rollout of our new technology platform. With our robust liquidity, diverse funding, strong capital and unique strategic partnership with MUFG, Morgan Stanley is well positioned to deliver for clients in the long term."
(1) Net revenues for 3Q 2011, 2Q 2011 and 3Q 2010 include positive (negative) revenue from
Institutional Securities reported pre-tax income from continuing operations of $3.4 billion compared with $241 million in the third quarter of last year. Net revenues for the current quarter were $6.4 billion compared with $2.9 billion a year ago. DVA resulted in positive revenue of $3.4 billion in the current quarter compared with negative revenue of $731 million a year ago.3 The quarter's pre-tax margin was 53%.6 Due to the impact of DVA in the comparative periods, the following discussion for sales and trading focuses on current period results.
Global Wealth Management Group reported pre-tax income from continuing operations of $362 million compared with $281 million in the third quarter of last year. The quarter's pre-tax margin was 11%.6 Income after the non-controlling interest allocation to Citigroup Inc. and before taxes was $310 million.7
Asset Management reported a pre-tax loss from continuing operations of $117 million compared with pre-tax income from continuing operations of $279 million in last year's third quarter.8
Morgan Stanley's Tier 1 capital ratio, under Basel I, was approximately 15.1% and Tier 1 common ratio was approximately 13.1% at September 30, 2011.6, 10 The annualized return on average common equity from continuing operations was 14.5% in the current quarter.
At September 30, 2011, it is expected that Risk Weighted Assets (RWAs) that are utilized in the Company's calculations of its regulatory capital ratios under Basel I (i.e., Total capital, Tier 1 capital and Tier 1 common) will increase by an approximate net $44 billion from the $305 billion reported at June 30, 2011. Previously, Morgan Stanley applied a capital treatment for OTC derivatives collateral that reduced the Company's overall RWAs based on regulatory reporting guidance received from the Federal Reserve. In October 2011, the Company was advised by the Federal Reserve that, based on their further review concerning the application of pre-existing regulatory policy, the Company should adjust its capital treatment for OTC derivatives collateral. In all circumstances, the Company's calculations have been done consistent with Federal Reserve guidance. Neither the original capital treatment, nor the revision, carry through to Basel III, and as such, the Company's previously provided estimates of its Tier 1 common ratio under Basel III, currently and by the end of 2012, are not impacted.
At September 30, 2011, book value and tangible book value per common share were $31.29 and $27.79,11 respectively, based on approximately 1.9 billion shares outstanding.
The effective tax rate from continuing operations for the current quarter was 38.3% compared with 19.1% in the prior year third quarter.12 The increase in the tax rate from the prior year primarily reflected the change in the geographic mix of earnings.
Morgan Stanley's Board of Directors declared a $0.05 quarterly dividend per common share. The dividend is payable on November 15, 2011 to common shareholders of record on October 31, 2011.
Morgan Stanley is a leading global financial services firm providing a wide range of investment banking, securities, investment management and wealth management services. The Firm's employees serve clients worldwide including corporations, governments, institutions and individuals from more than 1,300 offices in 42 countries. For further information about Morgan Stanley, please visit www.morganstanley.com.
A financial summary follows. Financial, statistical and business-related information, as well as information regarding business and segment trends, is included in the Financial Supplement. Both the earnings release and the Financial Supplement are available online in the Investor Relations section at www.morganstanley.com.
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 of the Company's Annual Report on Form 10-K for the year ended December 31, 2010 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 Includes preferred dividends and other adjustments related to the calculation of earnings per share of approximately $46 million for the quarter ended September 30, 2011 and $222 million for the quarter ended September 30, 2010. Refer to page 3 of Morgan Stanley's Financial Supplement accompanying this release for the calculation of earnings per share.
2 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").
3 Due to DVA, sales and trading net revenue for the quarter ended September 30, 2011 included positive revenue of $3.4 billion (fixed income: $2.8 billion; equity: $0.6 billion) and sales and trading net revenue for the quarter ended September 30, 2010 included negative revenue of $731 million (fixed income: $464 million; equity: $196 million; other: $71 million).
4 Discontinued operations for the current quarter primarily reflected additional tax benefits associated with the sale of the retail asset management business to Invesco Ltd.
5 Source: Thomson Reuters – for the period of January 1, 2011 to September 30, 2011 as of October 3, 2011.
6 Pre-tax margin and Tier 1 common ratios are non-GAAP financial measures that the Firm considers to be useful measures that the Firm and investors use to assess operating performance and capital adequacy. Pre-tax margin represents income (loss) from continuing operations before taxes, divided by net revenues. The Tier 1 common ratio equals Tier 1 capital (see note 10) less qualifying perpetual preferred stock and qualifying restricted core capital elements, such as qualifying trust preferred securities and qualifying non-controlling interests, adjusted for the portion of goodwill and non-servicing intangible assets associated with MSSB non-controlling interests divided by risk-weighted assets.
7 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 non-controlling interests on page 9 of Morgan Stanley's Financial Supplement accompanying this release.
8 Results for the third quarter of 2011 and 2010 included a pre-tax loss of $17 million and pre-tax income of $195 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 non-controlling interests on page 11 of Morgan Stanley's Financial Supplement accompanying this release.
9 Results for the current quarter included losses of $13 million compared with gains of $203 million in the prior year quarter related to principal investments held by certain consolidated real estate funds.
10 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. The definition of Tier 1 common equity may evolve in the future as regulatory rules may be implemented based on a final proposal regarding non-controlling interest as initially presented by the Basel Committee. These computations are preliminary estimates as of October 19, 2011 (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 September 30, 2011.
11 Tangible common equity and Tangible book value per common share are non-GAAP financial measures that the Company 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 including only the Company'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.
12 The quarter ended September 30, 2010 included a tax gain of $176 million associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated. Excluding the discrete tax gain, the effective tax rate for the quarter would have been 19.1%.