Fitch: Morgan Stanley's Operating Results Show Further Progress

NEW YORK--()--Fourth-quarter 2012 (4Q'12) operating income of Morgan Stanley showed further improvement, but remains below the profitability of higher-rated peers, according to Fitch Ratings. Morgan Stanley continues to manage liquidity and funding conservatively and posted further growth in estimated Basel III capital. The latest results have no rating implications.

Operating profits benefited from higher results in institutional securities and global wealth management (GWM). Pre-tax operating profits as calculated by Fitch increased to $1.4 billion in 4Q'12 from $1 billion in 3Q'12. Operating profitability, as measured by the pre-tax operating return on assets (ROA), was 0.7%. This performance was below the profitability of higher rated U.S. banks, but the performance gap narrowed. These figures exclude DVA adjustments and various other one-time gains/charges.

Within institutional securities, results benefited from higher revenues in investment banking (particularly fixed income underwriting and rebounding advisory), steady equity sales and trading revenues combined with operating efficiency measures. Strong fixed income underwriting activities reflected credit spread compression in the quarter and low absolute interest rates. Trading results in fixed income and commodities were hampered primarily by weak commodities trading results. Morgan Stanley plans to continue to seek operating efficiencies in the institutional business and drive down risk-weighted assets and capital needs, particularly in fixed income.

Morgan Stanley recorded continued margin expansion in GWM. The pre-tax operating margin showed notable improvement in 4Q'12, reaching 17% versus 13% in 3Q'12. This improvement reflected higher GWM revenues combined with operating efficiencies and the benefit of completing systems integration earlier in the year. When Morgan Stanley purchases Citi's remaining 35% stake in MSSB (likely in 2013), the contribution from GWM will likely increase considerably, providing greater stability to the earnings mix and enhancing overall returns.

Morgan Stanley continues to manage liquidity conservatively and further strengthen an already solid capital position. Morgan Stanley's global liquidity reserve stood at $182 billion (23% of total assets) at year-end 2012, moderately above the 3Q'12 level. This level of liquidity provides ample coverage of 2013 long-term debt maturities. Reliance on short-term unsecured funding is minimal and Morgan Stanley has lengthened out the weighted average maturity (WAM) of its secured funding.

VaR increased moderately from a subdued level in 3Q'12, but remains well contained. Management continues to focus on more liquid and less volatile trading products as well as taking a cautious approach towards risk generally. Generally low market volatility in the last two quarters has helped restrain the VaR level as well.

The Tier I common ratio (under Basel I) improved further to 14.7%, compared with 12.6% at year-end 2011. This ratio continues to compare favorably to the average of the large U.S. trading/diversified banks. Under Basel III, Morgan Stanley's Tier I common ratio is estimated by management to be approximately 9.5%, moderately above average among major U.S. competitors.

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