Morgan Stanley
Summary
Brief Company Overview
Morgan Stanley (NYSE:MS) is a global financial services firm established in 1935 in the US by J.P. Morgan & Co. partners as a response to the Glass-Steagall Act, which required the splitting of American commercial and investment banking businesses. The firm advises, originates, trades, manages and distributes capital for governments, institutions and individuals. The company was originally incorporated as a Delaware corporation in 1981 and the predecessors of the company can be traced back to 1924.1 During the first year of its operation, Morgan Stanley grabs 24% of market share in underwriting business by handling $1.1 billion in public offerings and private placements.
Morgan Stanley currently employs more than 75,000 employees around the globe in offices in 41 countries as of December 31, 2021. The company has its presence in the Americas, Asia-Pacific, Europe, Middle East & Africa, and Japan. The company has three reportable business segments - Institutional Securities, Wealth Management, and Investment Management.
Recently, Morgan Stanley has completed acquiring E*Trade in October 2020 for $13.00 billion. On March 1, 2021, the company has completed acquisition of Eaton Vance Corp.2 The company also acquired Smith Barney, Mesa West, and Solium. Morgan Stanley took exit from Saxon, Heidmar, TransMontaigne, Discover, and MSCI.
James Patrick Gorman is the Chairman & CEO of Morgan Stanley. The company has released its 2022 financial results reporting $53.7 billion in revenue, earnings per share (EPS) $6.15 and return on total capital employed 15.3%. Dividend yield of the company during 2022 has been equivalent to 3% and share buybacks executed by the company during the year is equivalent to $10 billion.
Financial Highlights
Q4'22 Highlights
Morgan Stanley has reported net revenues of $12.7 billion for the fourth quarter ended December 31, 2022 compared with $14.5 billion a year ago. Net income applicable to Morgan Stanley was $2.2 billion, or $1.26 per diluted share, compared with $3.7 billion, or $2.01 per diluted share, for the same period a year ago. The fourth quarter of 2022 was impacted by severance costs of $133 million associated with a December employee action, partially offset by a net discrete tax benefit of $89 million.
In the institutional Securities segment, the company has reported net revenue of $4.8 billion in the fourth quarter of 2022, down from $6.7 billion a year earlier. Pre-tax income was $748 million compared with $3.0 billion a year ago. Investment banking revenues, under this segment, has went down by 49% Quarter-to-Quarter in the past year; equity net revenues down by 24%; and fixed income net revenues up by 15%.
In the Wealth Management segment, the company reported net revenues for the current quarter of $6.6 billion compared with $6.3 billion a year ago. Pre-tax income of $1.8 billion. The revenue in this segment is up by 6%.
In the Investment Management segment, the company reported net revenues of $1.5 billion compared with $1.8 billion a year ago, down by 17% quarter-to-quarter. Pre-tax income was $214 million compared with $508 million a year ago.
Annual Performance Highlights
For the year ended December 31, 2022, Morgan Stanley has reported full year net revenues of $53.7 billion and net income of $11.0 billion compared to $51.71 billion in net revenue and $15.12 billion in net income a year earlier.
The Institutional Securities segment reported full year net revenues of $24.4 billion reflecting lower activity in Investment Banking driven by the uncertain macroeconomic environment, partially offset by strong performance in Fixed Income. Net revenues from this segment a year earlier was $29.8 billion. Reported Pre-tax income is $6.7 billion this year compared with $11.8 billion in the prior year. Investment banking revenues are down by 49% during the year; equity net revenues are down by 6%; fixed income net revenues are up by 20% compared to the previous year. Other revenues in the current year were driven by mark-to-market losses on corporate loans held for sale and loan hedges of $876 million. These losses were substantially offset by net interest income and fees of $701 million.
The Wealth Management segment reported net revenues of $24.4 billion compared with $24.2 billion in the prior year. Reported pre-tax income is $6.6 billion compared to $6.1 billion a year earlier. The business added net new assets of $311 billion, representing a full year 6% annualized growth rate from beginning period assets.
Investment Management reported net revenues of $5.4 billion compared with $6.2 billion in the prior year, a decrease of 14% over the year. Pre-tax income was $807 million compared with $1.7 billion in the prior year.
The company has reported $6.23 in earnings per share (EPS) during the year ended December 31, 2022, which was $8.16 a year earlier. Return on average common equity is 11.2% this year, compared to 15.0% a year earlier.
The current TTM dividend payout for Morgan Stanley (MS) as of February 10, 2023 is $3.10.3
Business Overview
Morgan Stanley is an investment management and financial services firm with its presence all over the world. The company was established in 1935 as an effort to separate investment banking business from normal commercial banking business after the Glass-Steagall Act was enacted in 1933 followed by the great depression. The formation of the company was executed by the partners of then J.P. Morgan & Co. With the reputation and business dynamics of J.P. Morgan, Morgan Stanley was able to grab a 24% market share in the first year of its operation.
The company has three reportable segments - Institutional Securities, Wealth Management, and Investment Management. Substantially all of the operating revenues and operating expenses of the company are directly attributable to those business segments.
Institutional Securities
Institutional Securities segment includes the services such as equity financing, equity execution services and fixed incomes from investments and other sources. Under this segment, the company reports Investment Banking revenues. The company works as advisor, underwriter, and distributor of capital for the clients. The revenue from this segment is generated from fees earned from underwriting equity and fixed income securities, syndicating loans and advisory services in relation to mergers and acquisitions, divestitures and corporate restructurings. Morgan Stanley works as a market maker for their clients in trading cash instruments and derivatives. The company buys, sells, or otherwise transacts with customers under a variety of market conditions. Morgan Stanley engages in multiple activities as a part of its market-making function including taking positions and holding that position for a period of time, building, maintaining and rebalancing inventory, managing and assuming basis risk (risk associated with imperfect hedging) between risks incurred from the facilitation of client transactions and the standardized products available in the market to hedge those risks, engaging in activities to provide efficiency and liquidity for markets. The company also carries loans at fair value, and hold equity securities for which it receives fees or dividends. Gains and losses from business-related investments also fall under this segment. Certain investments from them are subject to sale restrictions. Typically, there are no fee revenues from these investments. Securities held by the Firm generally earn interest, as do securities borrowed and securities purchased under agreements to resell, while securities loaned and securities sold under agreements to repurchase generally incur interest expense. Equity methods investments, lending activities, economic derivative hedges, lending commitments held for sale fall under this segment.
Equity - Financing
Morgan Stanley provides financing, prime brokerage and fund administration services to their clients active in the equity markets through a variety of products, including margin lending, securities lending and swaps. Results from this business are largely driven by the difference between financing income earned and financing costs incurred, which are reflected in Net interest for securities lending products, and in Trading revenues for derivative products. Fees for providing fund administration services are reflected in Asset management revenues.
Wealth Management
Wealth Management segment includes revenues from the distribution of newly issued securities. Morgan Stanley works as principal to the customers' purchases and sales of fixed income instruments. The company also manages the employees' deferred compensation plan from which it records gains and losses. Morgan Stanley earns commissions and fees from client transactions primarily in equity securities, insurance products, mutual funds, futures and options. The firm also earns revenues from order flow payments for directing customer orders to broker-dealers, exchanges and market centers for execution. This segment also include services associated with fee-based assets, account service and administration, as well as distribution of products. The company receives revenue for advisory services to these areas. The revenues generated from these services are generally based on the net asset value of the account in which a client is invested. Within the Wealth Management business segment, Interest income is driven by Investment securities, Loans and margin loans. Interest expense is driven by Deposits and other funding. Upon acquisition, E*TRADE’s Investment securities were recorded at fair value, and the resulting premium is being amortized over the life of the portfolio against interest income.
Investment Management
Under the Investment Management segment the company invests funds of employee deferred compensation and co-investment plans. The profit or loss from this segment depends on the fair value estimation of these invested funds. The company uses judgmental approach in estimating the revenues from investments which may be subject to market, financial, and overall business conditions existing in the market. Investments revenues are primarily from performance-based fees in the form of carried interest, a portion of which is subject to reversal, and gains and losses from investments. The business is entitled to receive carried interest when the return in certain funds exceeds specified performance targets. Additionally, there are certain sponsored Investment Management funds consolidated by Morgan Stanley where revenues are primarily attributable to holders of noncontrolling interests. This segment generates revenues from performance-based fees for asset management.
