Company Quick10K Filing
Quick10K
Morgan Stanley
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$46.45 1,682 $78,140
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-23 Shareholder Vote
8-K 2019-04-17 Earnings, Exhibits
8-K 2019-01-18 Other Events
8-K 2019-01-17 Earnings, Regulation FD, Exhibits
8-K 2018-10-31 Other Events, Exhibits
8-K 2018-10-16 Earnings, Exhibits
8-K 2018-07-18 Earnings
8-K 2018-06-28 Other Events, Exhibits
8-K 2018-06-21 Exhibits
8-K 2018-05-24 Shareholder Vote
8-K 2018-04-18 Earnings, Other Events, Exhibits
8-K 2018-01-31 Officers
8-K 2018-01-18 Earnings, Regulation FD, Exhibits
8-K 2018-01-05 Other Events
DBX Dropbox 9,900
ESNT Essent Group 4,600
BXMT Blackstone Mortgage Trust 4,430
SHO Sunstone Hotel Investors 3,240
DHT DHT Holdings 836
KODK Eastman Kodak 106
VOXX VOXX 100
BNSO Bonso Electronics 12
ODYY Odyssey Group 0
ALPP Alpine 4 Technologies 0
MS 2019-03-31
EX-15 d673523dex15.htm
EX-23 d673523dex23.htm
EX-31.1 d673523dex311.htm
EX-31.2 d673523dex312.htm
EX-32.1 d673523dex321.htm
EX-32.2 d673523dex322.htm

Morgan Stanley Earnings 2019-03-31

MS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d673523d10q.htm FORM 10-Q Form 10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

Commission File Number 1-11758

 

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(Exact Name of Registrant as specified in its charter)

 

       

Delaware

(State or other jurisdiction of

incorporation or organization)

 

1585 Broadway

New York, NY 10036

(Address of principal executive offices, including zip code)

 

 

36-3145972

(I.R.S. Employer Identification No.)

 

(212) 761-4000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Name of exchange on
which registered
 

Trading

Symbol(s)

Common Stock, $0.01 par value

  New York Stock Exchange   MS

Depositary Shares, each representing 1/1,000th interest in a share of Floating Rate
Non-Cumulative Preferred Stock, Series A, $0.01 par value

  New York Stock Exchange   MS/PA

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series E, $0.01 par value

  New York Stock Exchange   MS/PE

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series F, $0.01 par value

  New York Stock Exchange   MS/PF

Depositary Shares, each representing 1/1,000th interest in a share of 6.625%
Non-Cumulative Preferred Stock, Series G, $0.01 par value

  New York Stock Exchange   MS/PG

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series I, $0.01 par value

  New York Stock Exchange   MS/PI

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series K, $0.01 par value

  New York Stock Exchange   MS/PK

Global Medium-Term Notes, Series A, Fixed Rate Step-Up Senior Notes Due 2026 of
Morgan Stanley Finance LLC (and Registrant’s guarantee with respect thereto)

  New York Stock Exchange   MS/26C

Market Vectors ETNs due March 31, 2020 (two issuances)

  NYSE Arca, Inc.   URR/DDR

Market Vectors ETNs due April 30, 2020 (two issuances)

  NYSE Arca, Inc.   CNY/INR

Morgan Stanley Cushing® MLP High Income Index ETNs due March 21, 2031

  NYSE Arca, Inc.   MLPY

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer    ☒      

Accelerated Filer    ☐    

 

Non-Accelerated Filer    ☐    

 

Smaller reporting company    ☐   

  Emerging growth company   ☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of April 30, 2019, there were 1,682,234,555 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


Table of Contents

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QUARTERLY REPORT ON FORM 10-Q

For the quarter ended March 31, 2019

 

Table of Contents   Part      Item      Page  

Financial Information

    I                 1  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    I        2        1  

Introduction

                      1  

Executive Summary

                      2  

Business Segments

                      6  

Supplemental Financial Information and Disclosures

                      13  

Accounting Development Updates

                      13  

Critical Accounting Policies

                      14  

Liquidity and Capital Resources

                      14  

Balance Sheet

                      14  

Regulatory Requirements

                      19  

Quantitative and Qualitative Disclosures about Risk

    I        3        24  

Market Risk

                      24  

Credit Risk

                      26  

Country and Other Risks

                      30  

Report of Independent Registered Public Accounting Firm

                      33  

Consolidated Financial Statements and Notes

    I        1        34  

Consolidated Income Statements (Unaudited)

                      34  

Consolidated Comprehensive Income Statements (Unaudited)

                      35  

Consolidated Balance Sheets (Unaudited at March 31, 2019)

                      36  

Consolidated Statements of Changes in Total Equity (Unaudited)

                      37  

Consolidated Cash Flow Statements (Unaudited)

                      38  

Notes to Consolidated Financial Statements (Unaudited)

                      39  

  1.

 

Introduction and Basis of Presentation

                      39  

  2.

 

Significant Accounting Policies

                      40  

  3.

 

Fair Values

                      40  

  4.

 

Derivative Instruments and Hedging Activities

                      48  

  5.

 

Investment Securities

                      51  

  6.

 

Collateralized Transactions

                      54  

  7.

 

Loans, Lending Commitments and Allowance for Credit Losses

                      55  

  8.

 

Equity Method Investments

                      57  

  9.

 

Deposits

                      58  

10.

 

Borrowings and Other Secured Financings

                      58  

11.

 

Commitments, Leases, Guarantees and Contingencies

                      58  

12.

 

Variable Interest Entities and Securitization Activities

                      63  

13.

 

Regulatory Requirements

                      65  

14.

 

Total Equity

                      67  

15.

 

Earnings per Common Share

                      69  

16.

 

Interest Income and Interest Expense

                      69  

17.

 

Income Taxes

                      69  

18.

 

Segment, Geographic and Revenue Information

                      70  

19.

 

Subsequent Events

                      71  

Financial Data Supplement (Unaudited)

                      72  

Glossary of Common Acronyms

                      73  

Other Information

    II                 75  

Legal Proceedings

    II        1        75  

Unregistered Sales of Equity Securities and Use of Proceeds

    II        2        76  

Controls and Procedures

    I        4        77  

Exhibits

    II        6        77  

Exhibit Index

                      E-1  

Signatures

                      S-1  

 

i


Table of Contents

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Available Information

We file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains an internet site, www.sec.gov, that contains annual, quarterly and current reports, proxy and information statements and other information that issuers file electronically with the SEC. Our electronic SEC filings are available to the public at the SEC’s internet site.

Our internet site is www.morganstanley.com. You can access our Investor Relations webpage at www.morganstanley.com/about-us-ir. We make available free of charge, on or through our Investor Relations webpage, our Proxy Statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We also make available, through our Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

You can access information about our corporate governance at www.morganstanley.com/about-us-governance. Our Corporate Gover-nance webpage includes:

 

   

Amended and Restated Certificate of Incorporation;

   

Amended and Restated Bylaws;

   

Charters for our Audit Committee, Compensation, Management Development and Succession Committee, Nominating and Governance Committee, Operations and Technology Committee, and Risk Committee;

   

Corporate Governance Policies;

   

Policy Regarding Corporate Political Activities;

   

Policy Regarding Shareholder Rights Plan;

   

Equity Ownership Commitment;

   

Code of Ethics and Business Conduct;

   

Code of Conduct;

   

Integrity Hotline Information; and

   

Environmental and Social Policies.

Our Code of Ethics and Business Conduct applies to all directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer and Deputy Chief Financial Officer. We will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC (“NYSE”) on our internet site. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036 (212-761-4000). The information on our internet site is not incorporated by reference into this report.

 

ii


Table of Contents

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Management’s

Discussion and Analysis of Financial Condition and Results of Operations

Introduction

 

Morgan Stanley is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms “Morgan Stanley,” “Firm,” “us,” “we” or “our” mean Morgan Stanley (the “Parent Company”) together with its consolidated subsidiaries. We define the following as part of our consolidated financial statements (“financial statements”): consolidated income statements (“income statements”), consolidated balance sheets (“balance sheets”) and consolidated cash flow statements (“cash flow statements”). See the “Glossary of Common Acronyms” for the definition of certain acronyms used throughout this Form 10-Q.

A description of the clients and principal products and services of each of our business segments is as follows:

Institutional Securities provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions, and high to ultra-high net worth clients. Investment banking services consist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing, prime brokerage and market-making activities in equity and fixed income products, including foreign exchange and commodities. Lending activities include originating corporate loans, commercial mortgage lending, providing secured lending facilities and extending financing to sales and trading customers. Other activities include investments and research.

Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses and institutions covering brokerage and investment advisory services; financial and wealth planning services; annuity and insurance products; securities-based lending, residential real estate loans and other lending products; banking and retirement plan services.

Investment Management provides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are served through intermediaries, including affiliated and non-affiliated distributors.

The results of operations in the past have been, and in the future may continue to be, materially affected by competition; risk factors; and legislative, legal and regulatory developments; as well as other factors. These factors also may have an adverse impact on our ability to achieve our strategic objectives. Additionally, the discussion of our results of operations herein may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, see “Forward-Looking Statements,” “Business—Competition,” “Business—Supervision and Regulation,” and “Risk Factors” in the 2018 Form 10-K, and “Liquidity and Capital Resources—Regulatory Requirements” herein.

 

 

  1   March 2019 Form 10-Q


Table of Contents

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Management’s Discussion and Analysis

 

Executive Summary

Overview of Financial Results

Consolidated Results

Net Revenues

($ in millions)

 

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Net Income Applicable to Morgan Stanley

($ in millions)

 

LOGO

Earnings per Common Share1

 

LOGO

 

1.

For the calculation of basic and diluted EPS, see Note 15 to the financial statements.

 

We reported net revenues of $10,286 million in the quarter ended March 31, 2019 (“current quarter,” or “1Q 2019”), compared with $11,077 million in the quarter ended March 31, 2018 (“prior year quarter,” or “1Q 2018”). For the current quarter, net income applicable to Morgan Stanley was $2,429 million, or $1.39 per diluted common share, compared with $2,668 million or $1.45 per diluted common share, in the prior year quarter.

Non-interest Expenses1

($ in millions)

 

LOGO

 

1.

The percentages on the bars in the chart represent the contribution of compensation and benefits expenses and non-compensation expenses to total non-interest expenses.

 

 

Compensation and benefits expenses of $4,651 million in current quarter decreased 5% from $4,914 million in the prior year quarter, primarily due to decreases in discretionary incentive compensation and the formulaic payout to Wealth Management representatives, both driven by lower revenues. These decreases were partially offset by increases in the fair value of investments to which certain deferred compensation plans are referenced and higher salaries.

 

 

Non-compensation expenses were $2,680 million in the current quarter compared with $2,743 million in the prior year quarter, representing a 2% decrease. This decrease was primarily due to lower litigation and volume-related expenses, partially offset by increased investment in technology.

Income Taxes

The current quarter includes intermittent net discrete tax benefits of $101 million, primarily associated with the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations. For further information, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

 

 

March 2019 Form 10-Q   2  


Table of Contents

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Management’s Discussion and Analysis

 

Selected Financial Information and Other Statistical Data

 

     Three Months Ended
March 31,
 
$ in millions    2019      2018  

Income from continuing operations applicable to Morgan Stanley

   $         2,429      $         2,670  

Income (loss) from discontinued operations applicable to Morgan Stanley

            (2

Net income applicable to Morgan Stanley

     2,429        2,668  

Preferred stock dividends and other

     93        93  

Earnings applicable to Morgan Stanley common shareholders

   $ 2,336      $ 2,575  

Expense efficiency ratio1

     71.3%        69.1%  

ROE2

     13.1%        14.9%  

ROTCE2

     14.9%        17.2%  

 

in millions, except per share and employee data

   

At

March 31,

2019

 

 

 

   

At

December 31,

2018

 

 

 

GLR3

  $              233,148     $ 249,735  

Loans4

  $ 116,197     $ 115,579  

Total assets

  $ 875,964     $ 853,531  

Deposits

  $ 179,731     $ 187,820  

Borrowings

  $ 190,691     $ 189,662  

Common shares outstanding

    1,686       1,700  

Common shareholders’ equity

  $ 72,204     $ 71,726  

Tangible common shareholders’ equity2

  $ 63,434     $ 62,879  

Book value per common share5

  $ 42.83     $ 42.20  

Tangible book value per common share2, 5

  $ 37.62     $ 36.99  

Worldwide employees

    60,469       60,348  

 

     

At

March 31,

2019

   

At

December 31,

2018

 

Capital ratios6

    

Common Equity Tier 1 capital

     16.7%       16.9%  

Tier 1 capital

     19.0%       19.2%  

Total capital

     21.6%       21.8%  

Tier 1 leverage

     8.4%       8.4%  

SLR

     6.5%       6.5%  

 

1.

The expense efficiency ratio represents total non-interest expense as a percentage of net revenues.

2.

Represents a non-GAAP measure. See “Selected Non-GAAP Financial Information” herein.

3.

For a discussion of the GLR, see “Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” herein.

4.

Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 7 to the financial statements).

5.

Book value per common share and tangible book value per common share equal common shareholders’ equity and tangible common shareholders’ equity, respectively, divided by common shares outstanding.

6.

At March 31, 2019 and December 31 2018, our risk-based capital ratios are based on the Standardized Approach rules. For a discussion of our capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.

Business Segment Results

Net Revenues by Segment1, 2 

($ in millions)

 

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Net Income Applicable to Morgan Stanley by Segment1, 3

($ in millions)

 

LOGO

 

1.

The percentages on the bars in the charts represent the contribution of each business segment to the total of the applicable financial category and may not total to 100% due to intersegment eliminations.

2.

The total amount of Net Revenues by Segment includes intersegment eliminations of $(103) million and $(115) million in the current quarter and prior year quarter, respectively.

3.

The total amount of Net Income Applicable to Morgan Stanley by Segment includes intersegment eliminations of $(2) million in the current quarter.

 

 

Institutional Securities net revenues of $5,196 million in the current quarter decreased 15% from the prior year quarter, primarily reflecting lower revenues from both sales and trading and Investment banking.

 

 

Wealth Management net revenues were relatively unchanged from the prior year quarter.

 

 

Investment Management net revenues of $804 million in the current quarter increased 12% from the prior year quarter, primarily reflecting higher revenues from Investments.

 

 

  3   March 2019 Form 10-Q


Table of Contents

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Management’s Discussion and Analysis

 

Net Revenues by Region1, 2

($ in millions)

 

     LOGO

 

1.

For a discussion of how the geographic breakdown of net revenues is determined, see Note 18 to the financial statements.

2.

The percentages on the bars in the charts represent the contribution of each region to the total.

Selected Non-GAAP Financial Information

We prepare our financial statements using U.S. GAAP. From time to time, we may disclose certain “non-GAAP financial measures” in this document or in the course of our earnings releases, earnings and other conference calls, financial presentations, Definitive Proxy Statement and otherwise. A “non-GAAP financial measure” excludes, or includes, amounts from the most directly comparable measure calculated and presented in accordance with U.S. GAAP. We consider the non-GAAP financial measures we disclose to be useful to us, analysts, investors and other stakeholders by providing further transparency about, or an alternate means of assessing, our financial condition, operating results, prospective regulatory capital requirements or capital adequacy.

These measures are not in accordance with, or a substitute for, U.S. 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 define it or present the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, along with a reconciliation of the differences between the U.S. GAAP financial measure and the non-GAAP financial measure.

The principal non-GAAP financial measures presented in this document are set forth in the following tables.

Reconciliations from U.S. GAAP to Non-GAAP Consolidated
Financial Measures

 

 
     Three Months Ended
March 31,
 
$ in millions, except per share data    2019     2018  

Net income applicable to
Morgan Stanley

   $             2,429     $             2,668  

Impact of adjustments

     (101      

Adjusted net income applicable to Morgan Stanley—non-GAAP1

   $ 2,328     $ 2,668  

Earnings per diluted common share

   $ 1.39     $ 1.45  

Impact of adjustments

     (0.06      

Adjusted earnings per diluted common share—non-GAAP1

   $ 1.33     $ 1.45  

Effective income tax rate

     16.5%       20.9%  

Impact of adjustments

     3.4%       —%  

Adjusted effective income tax rate—non-GAAP1

     19.9%       20.9%  

 

$ in millions   

At

March 31,

2019

    At
December 31,
2018
 

Tangible equity

    

U.S. GAAP

    

Morgan Stanley shareholders’ equity

   $             80,724     $             80,246  

Less: Goodwill and net intangible assets

     (8,770     (8,847

Tangible Morgan Stanley shareholders’ equity—non-GAAP

   $ 71,954     $ 71,399  

U.S. GAAP

    

Common shareholders’ equity

   $ 72,204     $ 71,726  

Less: Goodwill and net intangible assets

     (8,770     (8,847

Tangible common shareholders’

equity—non-GAAP

   $ 63,434     $ 62,879  
 

 

March 2019 Form 10-Q   4  


Table of Contents

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Management’s Discussion and Analysis

 

 

Consolidated Non-GAAP Financial Measures

 

    Average Monthly Balance
Three Months Ended
March 31,
 
$ in millions   2019     2018  

Tangible equity

   

Morgan Stanley shareholders’ equity

  $         80,115     $         77,507  

Less: Goodwill and net intangible assets

    (8,806     (9,043

Tangible Morgan Stanley shareholders’ equity

  $ 71,309     $ 68,464  

Common shareholders’ equity

  $ 71,595     $ 68,987  

Less: Goodwill and net intangible assets

    (8,806     (9,043

Tangible common shareholders’ equity

  $ 62,789     $ 59,944  

 

    Three Months Ended
March 31,
 
$ in billions   2019     2018  

Average common equity

 

 

Unadjusted

  $ 71.6     $ 69.0  

Adjusted1

    71.5       69.0  

ROE2

 

Unadjusted

    13.1%       14.9%  

Adjusted1, 3

    12.5%       14.9%  

Average tangible common equity

 

Unadjusted

  $ 62.8     $ 59.9  

Adjusted1

    62.7       59.9  

ROTCE2

 

Unadjusted

    14.9%       17.2%  

Adjusted1, 3

    14.2%       17.2%  

Non-GAAP Financial Measures by Business Segment

 

   

Three Months Ended

March 31,

 
$ in billions   2019     2018  

Pre-tax margin4

   

Institutional Securities

    31%       35%  

Wealth Management

    27%       27%  

Investment Management

    22%       21%  

Consolidated

    29%       31%  

Average common equity5

 

 

Institutional Securities

  $             40.4     $             40.8  

Wealth Management

    18.2       16.8  

Investment Management

    2.5       2.6  

Parent

    10.5       8.8  

Consolidated average common equity

  $ 71.6     $ 69.0  

Average tangible common equity5

 

 

Institutional Securities

  $ 39.9     $ 40.1  

Wealth Management

    10.2       9.2  

Investment Management

    1.5       1.7  

Parent

    11.2       8.9  

Consolidated average tangible common equity

  $ 62.8     $ 59.9  

ROE2, 6

 

 

Institutional Securities

    12.9%       15.2%  

Wealth Management

    19.8%       21.3%  

Investment Management

    21.9%       19.3%  

Consolidated

    13.1%       14.9%  

ROTCE2, 6

 

 

Institutional Securities

    13.0%       15.5%  

Wealth Management

    35.6%       38.9%  

Investment Management

    35.3%       30.3%  

Consolidated

    14.9%       17.2%  

 

1.

Adjusted amounts exclude intermittent net discrete tax provisions (benefits). We consider certain income tax consequences associated with employee share-based awards recognized in Provision for income taxes in the income statements to be recurring-type (“Recurring”) discrete tax items, as we anticipate some level of conversion activity each quarter. Accordingly, these Recurring discrete tax provisions (benefits) are not part of the adjustment for intermittent net discrete tax provisions (benefits). For further information on the net discrete tax provisions (benefits), see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

2.

ROE and ROTCE represent annualized net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity and average tangible common equity, respectively. When excluding intermittent net discrete tax provisions (benefits), both the numerator and average denominator are adjusted.

3.

The calculations used in determining our “ROE and ROTCE Targets” referred to in the following section are the Adjusted ROE and Adjusted ROTCE amounts shown in this table.

4.

Pre-tax margin represents income from continuing operations before income taxes as a percentage of net revenues.

5.

Average common equity and average tangible common equity for each business segment are determined using our Required Capital framework (see “Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity According to the Required Capital Framework” herein).

6.

The calculation of ROE and ROTCE by segment uses net income applicable to Morgan Stanley by segment less preferred dividends allocated to each segment as a percentage of average common equity and average tangible common equity, respectively, allocated to each segment.

 

 

  5   March 2019 Form 10-Q


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Management’s Discussion and Analysis

 

Return on Equity and Tangible Common Equity Targets

We have established an ROE Target of 10% to 13% and an ROTCE Target of 11.5% to 14.5%.

Our ROE and ROTCE Targets are forward-looking statements that may be materially affected by many factors, including, among other things: macroeconomic and market conditions; legislative and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; outsized legal expenses or penalties and the ability to maintain a reduced level of expenses; and capital levels. For further information on our ROE and ROTCE Targets and related assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Return on Equity and Tangible Common Equity Targets” in the 2018 Form 10-K.

Business Segments

Substantially all of our operating revenues and operating expenses are directly attributable to our business segments. Certain revenues and expenses have been allocated to each business segment, generally in proportion to its respective net revenues, non-interest expenses or other relevant measures.

For an overview of the components of our business segments, net revenues, compensation expense and income taxes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments” in the 2018 Form 10-K.

With respect to Institutional Securities sales and trading activities, Commodities products and Other also includes Trading revenues from managing derivative counterparty credit risk on behalf of clients, in addition to results from the centralized management of our fixed income derivative counterparty exposures.

 

 

March 2019 Form 10-Q   6  


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Management’s Discussion and Analysis

 

Institutional Securities

Income Statement Information

 

    Three Months Ended
March 31,
       
$ in millions   2019     2018     % Change  

Revenues

     

Investment banking

  $ 1,151     $ 1,513       (24)%  

Trading

    3,130       3,643       (14)%  

Investments

    81       49       65%  

Commissions and fees

    621       744       (17)%  

Asset management

    107       110       (3)%  

Other

    222       136       63%  

Total non-interest revenues

    5,312       6,195       (14)%  

Interest income

    3,056       1,804       69%  

Interest expense

    3,172       1,899       67%  

Net interest

    (116     (95     (22)%  

Net revenues

    5,196       6,100       (15)%  

Compensation and benefits

    1,819       2,160       (16)%  

Non-compensation expenses

    1,782       1,828       (3)%  

Total non-interest expenses

    3,601       3,988       (10)%  

Income from continuing operations before income taxes

    1,595       2,112       (24)%  

Provision for income taxes

    190       449       (58)%  

Income from continuing operations

    1,405       1,663       (16)%  

Income (loss) from discontinued operations, net of income taxes

          (2     100%  

Net income

    1,405       1,661       (15)%  

Net income applicable to noncontrolling interests

    34       34       —%  

Net income applicable to Morgan Stanley

  $ 1,371     $ 1,627       (16)%  

Investment Banking

Investment Banking Revenues

 

    Three Months Ended
March 31,
       
$ in millions       2019             2018         % Change  

Advisory

  $ 406     $ 574       (29)%  

Underwriting:

     

Equity

    339       421       (19)%  

Fixed income

    406       518       (22)%  

Total Underwriting

    745       939       (21)%  

Total Investment banking

  $ 1,151     $ 1,513       (24)%  

Investment Banking Volumes

 

     Three Months Ended
March 31,
 
$ in billions          2019                  2018        

Completed mergers and acquisitions1

   $ 187      $ 170  

Equity and equity-related offerings2, 3

     14        22  

Fixed income offerings2, 4

             54                58  

Source: Refinitiv (formerly Thomson Reuters Financial & Risk), data as of April 1, 2019. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal, change in value, or change in timing of certain transactions.

 

1.

Includes transactions of $100 million or more. Based on full credit to each of the advisors in a transaction.

2.

Based on full credit for single book managers and equal credit for joint book managers.

3.

Includes Rule 144A issuances and registered public offerings of common stock and convertible securities and rights offerings.

4.

Includes Rule 144A and publicly registered issuances, non-convertible preferred stock, mortgage-backed and asset-backed securities, and taxable municipal debt. Excludes leveraged loans and self-led issuances.

Investment banking revenues of $1,151 million in the current quarter decreased 24%, reflecting lower results in both our advisory and underwriting businesses.

 

 

Advisory revenues decreased in the current quarter primarily due to the effect of lower fee realizations.

 

 

Equity underwriting revenues decreased in the current quarter primarily as a result of lower volumes. Revenues decreased primarily in initial public offerings, follow-ons and convertible issuances, partially offset by an increase in secondary block share trades.

 

 

Fixed income underwriting revenues decreased in the current quarter due to the effect of lower fee realizations and lower volumes. Revenues decreased primarily in non-investment grade loan fees.

See “Investment Banking Volumes” herein.

 

 

  7   March 2019 Form 10-Q


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Management’s Discussion and Analysis

 

Sales and Trading Net Revenues

By Income Statement Line Item

 

     Three Months Ended        
     March 31,        
$ in millions          2019                 2018           % Change  

Trading

   $ 3,130     $ 3,643       (14 )% 

Commissions and fees

     621       744       (17 )% 

Asset management

     107       110       (3 )% 

Net interest

     (116     (95     (22 )% 

Total

   $ 3,742     $ 4,402       (15 )% 

By Business

 

    

Three Months Ended

March 31,

       
       
$ in millions          2019              2018       % Change  

Equity

   $ 2,015      $ 2,558       (21)%  

Fixed income

     1,710        1,873       (9)%  

Other

     17        (29     159%  

Total

   $ 3,742      $ 4,402       (15)%  

Sales and Trading Revenues—Equity and Fixed Income

 

     Three Months Ended  
     March 31, 2019  
                   Net        
$ in millions    Trading      Fees1      Interest2     Total  

Financing

   $       1,115      $ 98      $ (258   $ 955  

Execution services

     551        553        (44     1,060  

Total Equity

   $ 1,666      $       651      $       (302   $       2,015  

Total Fixed income

   $ 1,727      $ 78      $ (95   $ 1,710  

 

     Three Months Ended  
     March 31, 2018  
                   Net        
$ in millions    Trading      Fees1      Interest2     Total  

Financing

   $ 1,234      $ 107      $ (146   $ 1,195  

Execution services

     791        664        (92     1,363  

Total Equity

   $       2,025      $       771      $       (238   $ 2,558  

Total Fixed income

   $ 1,715      $ 83      $ 75     $       1,873  

 

1.

Includes Commissions and fees and Asset management revenues.

2.

Includes funding costs, which are allocated to the businesses based on funding usage.

As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in the 2018 Form 10-K, we manage each of the sales and trading businesses based on its aggregate net revenues. We provide qualitative commentary in the discussion of results that follow on the key drivers of period over period variances, as the quantitative impact of the various market dynamics typically cannot be disaggregated.

For additional information on total Trading revenues, see the table “Trading Revenues by Product Type” in Note 18 to the financial statements.

Equity

Equity sales and trading net revenues of $2,015 million in the current quarter decreased 21% from the prior year quarter, reflecting lower results in both our financing and execution services businesses.

 

 

Financing decreased from the prior year quarter, primarily due to lower average client balances, which resulted in lower Trading and Net interest revenues. Additionally, Net interest revenues decreased due to higher funding costs attributable to higher rates and changes in funding mix.

 

 

Execution services decreased from the prior year quarter, reflecting lower Trading revenues as a result of less favorable inventory management and lower client activity in derivatives products. In addition, Commissions and fees decreased due to lower client activity in cash equities products.

Fixed Income

Fixed income net revenues of $1,710 million in the current quarter were 9% lower than the prior year quarter, primarily driven by lower revenues in global macro products and lower Net interest revenues due to higher funding costs, partially offset by higher revenues in credit products and commodities products and other.

 

 

Global macro products revenues decreased reflecting unfavorable inventory management while the level of client activity remained consistent.

 

 

Credit products Trading revenues increased primarily in corporate credit products driven by higher client activity, partially offset by lower client activity in securitized products.

 

 

Commodities products and Other Trading revenues increased primarily as a result of gains from client structuring activity within derivatives counterparty credit risk management and effective inventory management in commodities, partially offset by decreased client activity in structured transactions within commodities.

Other

 

 

Other sales and trading net gains of $17 million in the current quarter increased from the prior year quarter, primarily due to an increase in the fair value of investments to which certain deferred compensation plans are referenced, partially offset by higher losses on hedges associated with corporate loans.

 

 

March 2019 Form 10-Q   8  


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Management’s Discussion and Analysis

 

Investments, Other Revenues, Non-interest Expenses, and Income Tax Items

Investments

 

 

Net investment gains of $81 million in the current quarter increased from the prior year quarter as a result of higher revenues driven by a fund distribution and gains on real estate limited partnership investments.

Other Revenues

 

 

Other revenues of $222 million in the current quarter increased from the prior year quarter, primarily reflecting higher mark-to-market gains on held for sale loans, partially offset by lower results from certain equity method investments.

Non-interest Expenses

Non-interest expenses of $3,601 million in the current quarter decreased from the prior year quarter, reflecting a 16% decrease in Compensation and benefits expenses and a 3% decrease in Non-compensation expenses.

 

 

Compensation and benefits expenses decreased in the current quarter, primarily due to decreases in discretionary incentive compensation driven by lower revenues, partially offset by increases in the fair value of investments to which certain deferred compensation plans are referenced and higher salaries.

 

 

Non-compensation expenses decreased in the current quarter, primarily due to lower litigation and volume-related expenses, partially offset by increased investment in technology and higher professional service expenses.

Income Tax Items

The current quarter includes intermittent net discrete tax benefits of $101 million. For further information, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

 

 

  9   March 2019 Form 10-Q


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Management’s Discussion and Analysis

 

Wealth Management

 

Income Statement Information

 

     Three Months Ended
March 31,
       
$ in millions    2019      2018     % Change  

Revenues

       

Investment banking

   $ 109      $ 140       (22)%  

Trading

     302        109       177%  

Investments

     1              N/M  

Commissions and fees

     406        498       (18)%  

Asset management

     2,361        2,495       (5)%  

Other

     80        63       27%  

Total non-interest revenues

     3,259        3,305       (1)%  

Interest income

     1,413        1,280       10%  

Interest expense

     283        211       34%  

Net interest

     1,130        1,069       6%  

Net revenues

     4,389        4,374       —%  

Compensation and benefits

     2,462        2,450       —%  

Non-compensation expenses

     739        764       (3)%  

Total non-interest expenses

     3,201        3,214       —%  

Income from continuing operations before income taxes

     1,188        1,160       2%  

Provision for income taxes

     264        246       7%  

Net income applicable to Morgan Stanley

   $ 924      $ 914       1%  

Financial Information and Statistical Data

 

    

At

March 31,

     At
December 31,
 
$ in billions, except employee data    2019      2018  

Client assets

   $ 2,476      $ 2,303  

Fee-based client assets1

   $ 1,116      $ 1,046  

Fee-based client assets as a percentage of total client assets

     45%        45%  

Client liabilities2

   $ 82      $ 83  

Investment securities portfolio

   $ 71.3      $ 68.6  

Loans and lending commitments

   $ 83.6      $ 82.9  

Wealth Management representatives

     15,708        15,694  

 

     Three Months Ended
March 31,
 
      2019      2018  

Per representative:

     

Annualized revenues ($ in thousands)3

   $ 1,118      $ 1,115  

Client assets ($ in millions)4

   $ 158      $ 151  

Fee-based asset flows ($ in billions)5

   $ 14.8      $ 18.2  

 

1.

Fee-based client assets represent the amount of assets in client accounts where the fee for services is calculated based on those assets.

2.

Client liabilities include securities-based and tailored lending, residential real estate loans and margin lending.

3.

Revenues per representative equal Wealth Management’s annualized net revenues divided by the average number of representatives.

4.

Client assets per representative equal total period-end client assets divided by period-end number of representatives.

5.

For a description of the Inflows and Outflows included within Fee-based asset flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in the 2018 Form 10-K. Excludes institutional cash management-related activity.

Transactional Revenues

 

    Three Months Ended
March 31,
       
$ in millions   2019     2018     % Change  

Investment banking

  $ 109     $ 140       (22)%  

Trading

    302       109       177%  

Commissions and fees

    406       498       (18)%  

Total

  $ 817     $ 747       9%  

Transactional revenues as a % of Net revenues

    19%       17%    

Net Revenues

Transactional Revenues

Transactional revenues of $817 million in the current quarter increased 9% from the prior year quarter as a result of higher Trading revenues, partially offset by lower Commissions and fees and Investment banking revenues.

 

 

Investment banking revenues decreased in the current quarter primarily due to lower revenues from structured products issuances.

 

 

Trading revenues increased in the current quarter primarily due to gains related to investments associated with certain employee deferred compensation plans compared with losses in the prior year quarter.

 

 

Commissions and fees decreased in the current quarter primarily due to decreased client activity in equities.

Asset Management

Asset management revenues of $2,361 million in the current quarter decreased 5% from the prior year quarter primarily reflecting lower fee-based client assets levels at the beginning of the current quarter due to fourth quarter market depreciation, partially offset by positive net flows.

See “Fee-Based Client Assets—Rollforwards” herein.

 

 

March 2019 Form 10-Q   10  


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Management’s Discussion and Analysis

 

Net Interest

Net interest of $1,130 million in the current quarter increased 6% from the prior year quarter primarily as a result of higher interest rates on loans and cash management activities and higher investment securities balances, partially offset by the effect of higher interest rates on Deposits due to changes in funding mix.

In addition, we centralized certain internal treasury activities as of January 1, 2019, which partially offset the increases in Interest income and Interest expense compared with the prior year quarter. This impact is expected to continue in future periods. The effect on Net interest income was not significant in the current quarter, nor is it expected to be for the full year 2019.

Non-interest Expenses

Non-interest expenses of $3,201 million were relatively unchanged from the prior year quarter.

 

 

Compensation and benefits expenses increased modestly from the prior year quarter, reflecting increases in the fair value of investments to which certain deferred compensation plans are referenced and salaries, offset by decreases in the formulaic payout to Wealth Management representatives linked to lower revenues and the roll-off of certain merger-related employee retention loans.

 

 

Non-compensation expenses decreased due to lower consulting fees and deposit insurance expenses.

Fee-Based Client Assets

Rollforwards

 

$ in billions  

At

December 31,
2018

    Inflows     Outflows     Market
Impact
   

At

March 31,

2019

 

Separately managed1

  $ 279     $ 14     $ (5   $ (12   $ 276  

Unified managed2

    257       13       (11     24       283  

Advisor

    137       8       (9     11       147  

Portfolio manager

    353       19       (14     33       391  

Subtotal

  $ 1,026     $ 54     $ (39   $ 56     $ 1,097  

Cash management

    20       4       (5           19  

Total fee-based
client assets

  $ 1,046     $ 58     $ (44   $ 56     $ 1,116  

 

$ in billions  

At

December 31,
2017

    Inflows     Outflows     Market
Impact
   

At

March 31,

2018

 

Separately managed1

  $ 252     $ 10     $ (6   $ 4     $ 260  

Unified managed2

    271       14       (9     (2     274  

Advisor

    149       9       (9     (2     147  

Portfolio manager

    353       21       (12     (6     356  

Subtotal

  $ 1,025     $ 54     $ (36   $ (6   $ 1,037  

Cash management

    20       4       (3           21  

Total fee-based
client assets

  $ 1,045     $ 58     $ (39   $ (6   $ 1,058  

Average Fee Rates3

 

     Three Months Ended
March 31,
 
Fee rate in bps    2019      2018  

Separately managed

     14        16  

Unified managed2

     101        99  

Advisor

     88        85  

Portfolio manager

     96        96  

Subtotal

     74        76  

Cash management

     6        6  

Total fee-based client assets

     73        75  

 

1.

Includes non-custody account values reflecting prior quarter-end balances due to a lag in the reporting of asset values by third-party custodians.

2.

Includes Mutual fund advisory accounts. Prior periods have been recast to conform to the current presentation.

3.

The calculation of average fee rates was changed in the current quarter to more closely align with the recognition of the related fee revenue. Prior period rates were not changed due to immateriality.

For a description of fee-based client assets and rollforward items in the previous tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in the 2018 Form 10-K.

 

 

  11   March 2019 Form 10-Q


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Management’s Discussion and Analysis

 

Investment Management

Income Statement Information

 

    Three Months Ended
March 31,
       
$ in millions   2019     2018     % Change  

Revenues

     

Trading

  $ (3   $ 5       (160)%  

Investments

    191       77       148%  

Asset management

    617       626       (1)%  

Other

    3       10       (70)%  

Total non-interest revenues

    808       718       13%  

Interest income

    4       1       N/M  

Interest expense

    8       1       N/M  

Net interest

    (4           N/M  

Net revenues

    804       718       12%  

Compensation and benefits

    370       304       22%  

Non-compensation expenses

    260       266       (2)%  

Total non-interest expenses

    630       570       11%  

Income from continuing operations before income taxes

    174       148       18%  

Provision for income taxes

    33       19       74%  

Net income

    141       129       9%  

Net income applicable to noncontrolling interests

    5       2       150%  

Net income applicable to Morgan Stanley

  $ 136     $ 127       7%  

Net Revenues

Investments

Investments gains of $191 million in the current quarter increased 148% from the prior year quarter primarily as a result of higher carried interest in certain Asia private equity and infrastructure funds.

Asset Management

Asset management revenues of $617 million in the current quarter were relatively unchanged from the prior year quarter, as average AUM and average fee rates remained stable.

See “Assets Under Management or Supervision” herein.

Non-interest Expenses

Non-interest expenses of $630 million in the current quarter increased 11% from the prior year quarter primarily as a result of higher compensation and benefits expenses.

 

 

Compensation and benefits expenses increased in the current quarter primarily due to deferred compensation associated with carried interest.

 

 

Non-compensation expenses were relatively unchanged from the prior year quarter.

Assets Under Management or Supervision

Rollforwards

 

$ in billions

 

At

December 31,

2018

    Inflows     Outflows     Market
Impact
    Other    

At

March 31,

2019

 

Equity

  $ 103     $ 9     $ (8   $ 16     $     $ 120  

Fixed income

    68       6       (7     1             68  

Alternative/Other

    128       5       (4     5       (1     133  

Long-term AUM subtotal

    299       20       (19     22       (1     321  

Liquidity

    164       343       (348     1       (1     159  

Total AUM

  $ 463     $ 363     $ (367   $ 23     $ (2   $ 480  

Shares of minority
stake assets

    7                                       6  

 

$ in billions  

At

December 31,
2017

    Inflows     Outflows     Market
Impact
    Other1    

At

March 31,

2018

 

Equity

  $ 105     $ 9     $ (7   $ 1     $ 1     $ 109  

Fixed income

    73       7       (8     (1     1       72  

Alternative/Other

    128       4       (4           3       131  

Long-term AUM subtotal

    306       20       (19           5       312  

Liquidity

    176       325       (344                 157  

Total AUM

  $ 482     $ 345     $ (363   $     $ 5     $ 469  

Shares of minority
stake assets

    7                                       7  

 

1.

Includes the impact of the Mesa West Capital, LLC acquisition.

Average AUM

 

     Three Months Ended
March 31,
 
$ in billions    2019      2018  

Equity

   $ 113      $ 109  

Fixed income

     68        73  

Alternative/Other

     131        129  

Long-term AUM subtotal

     312        311  

Liquidity

     163        163  

Total AUM

   $ 475      $ 474  

Shares of minority stake assets

     6        7  

Average Fee Rates

 

    

Three Months Ended

March 31,

 
Fee rate in bps    2019      2018  

Equity

     76        76  

Fixed income

     32        35  

Alternative/Other

     68        68  

Long-term AUM

     63        63  

Liquidity

     17        18  

Total AUM

     47        47  

For a description of the asset classes and rollforward items in the previous tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Investment Management—Assets Under Management or Supervision” in the 2018 Form 10-K.

 

 

March 2019 Form 10-Q   12  


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Management’s Discussion and Analysis

 

Supplemental Financial Information and

Disclosures

Income Tax Matters

Effective Tax Rate from Continuing Operations

 

     Three Months Ended
March 31,
 
$ in millions    2019     2018  

U.S. GAAP

     16.5     20.9

Adjusted effective income tax rate—non-GAAP1

     19.9     20.9

Net discrete tax provisions/(benefits)

    

Recurring2

   $ (107   $ (147

Intermittent3

   $ (101   $  

 

1.

Adjusted effective income tax rate is a non-GAAP measure that excludes intermittent net discrete tax provisions (benefits). For further information on non-GAAP measures, see “Selected Non-GAAP Financial Information” herein.

2.

We consider certain income tax consequences associated with employee share-based awards recognized in Provision for income taxes in the income statements to be Recurring discrete tax items as we anticipate some level of conversion activity each quarter. Accordingly, these Recurring discrete tax provisions (benefits) are not part of the adjustment for intermittent net discrete tax provisions (benefits).

3.

Includes all tax provisions (benefits) that have been determined to be discrete, other than Recurring items as defined above.

The current quarter includes intermittent net discrete tax benefits primarily associated with the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations.

U.S. Bank Subsidiaries

Our U.S. bank subsidiaries, Morgan Stanley Bank N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”) accept deposit accounts, provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, and invest in securities. The lending activities in the Institutional Securities business segment primarily include loans and lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily include securities-based lending, which allows clients to borrow money against the value of qualifying securities, and residential real estate loans.

We expect our lending activities to continue to grow through further market penetration of our client base. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk.” For a further discussion about loans and lending commitments, see Notes 7 and 11 to the financial statements.

U.S. Bank Subsidiaries’ Supplemental Financial Information1

 

$ in billions    At
March 31,
2019
     At
December 31,
2018
 

Assets

   $ 210.3      $ 216.9  

Investment securities portfolio:

     

Investment securities—AFS

     44.5        45.5  

Investment securities—HTM

     27.8        23.7  

 

Total investment securities

   $ 72.3      $ 69.2  

 

Deposits2

   $ 179.1      $ 187.1  

Wealth Management Loans

 

Securities-based lending and other3

   $ 43.5      $ 44.7  

Residential real estate

     28.0        27.5  

 

Total

   $ 71.5      $ 72.2  

Institutional Securities Loans4

 

Corporate5:

     

Corporate relationship and
event-driven lending

   $ 7.4      $ 7.4  

Secured lending facilities

     19.3        17.5  

Securities-based lending and other

     5.6        6.0  

Commercial and residential real estate

     11.8        10.5  

 

Total

   $ 44.1      $ 41.4  

 

1.

Amounts exclude transactions between the bank subsidiaries, as well as deposits from the Parent Company and affiliates.

2.

For further information on deposits, see “Liquidity and Capital Resources—Funding Management—Unsecured Financing” herein.

3.

Other loans primarily include tailored lending.

4.

Prior periods have been conformed to the current presentation.

5.

For a further discussion of Corporate loans in the Institutional Securities business segment, see “Credit Risk—Institutional Securities Corporate Loans” herein.

Accounting Development Updates

The Financial Accounting Standards Board has issued certain accounting updates that apply to us. Accounting updates not listed below were assessed and determined to be either not applicable or are not expected to have a significant impact on our financial statements.

The following accounting update is currently being evaluated to determine the potential impact of adoption:

 

 

Financial Instruments–Credit Losses. This accounting update impacts the impairment model for certain financial assets measured at amortized cost by requiring a CECL methodology to estimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase. CECL will replace the loss model currently applicable to loans held for investment, HTM securities and other receivables carried at amortized cost, such as employee loans.

 

 

  13   March 2019 Form 10-Q


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Management’s Discussion and Analysis

 

The update also eliminates the concept of other-than-temporary impairment for AFS securities. Impairments on AFS securities will be required to be recognized in earnings through an allowance when the fair value is less than amortized cost and a credit loss exists or the securities are expected to be sold before recovery of amortized cost.

For certain portfolios, we have determined that there are no expected credit losses, for example based on collateral arrangements for lending and financing transactions such as for Securities borrowed, Securities purchased under agreements to resell and certain other portfolios. Also, we have a zero loss expectation for certain financial assets based on the credit quality of the borrower or issuer such as U.S. government and agency securities.

We expect the following portfolios to be primarily impacted: employee loans, commercial real estate, corporate and residential real estate. The models we expect to use for these portfolios in the future are in the process of being tested. Based on preliminary analyses and estimates, we do not expect the increase in the allowance for credit losses resulting from the adoption of this standard will be significant to our financial statements. The ultimate impact will depend upon macroeconomic conditions, forecasts and our portfolios at the adoption date. This update is effective as of January 1, 2020.

Critical Accounting Policies

Our financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions (see Note 1 to the financial statements). We believe that of our significant accounting policies (see Note 2 to the financial statements in the 2018 Form 10-K and Note 2 to the financial statements), the fair value, goodwill and intangible assets, legal and regulatory contingencies and income taxes policies involve a higher degree of judgment and complexity. For a further discussion about our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the 2018 Form 10-K.

Liquidity and Capital Resources

Senior management, with oversight by the Asset/Liability Management Committee and the Board of Directors (“Board”), establishes and maintains our liquidity and capital policies. Through various risk and control committees, senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity, interest rate and currency sensitivity of our asset and liability position. Our Treasury department, Firm Risk Committee, Asset/Liability Management Committee, and other committees and control groups assist in evaluating, monitoring and controlling the impact that our business activities have on our balance sheet, liquidity and capital structure. Liquidity and capital matters are reported regularly to the Board and the Risk Committee of the Board.

Balance Sheet

We monitor and evaluate the composition and size of our balance sheet on a regular basis. Our balance sheet management process includes quarterly planning, business-specific thresholds, monitoring of business-specific usage versus key performance metrics and new business impact assessments.

We establish balance sheet thresholds at the consolidated and business segment levels. We monitor balance sheet utilization and review variances resulting from business activity and market fluctuations. On a regular basis, we review current performance versus established thresholds and assess the need to re-allocate our balance sheet based on business unit needs. We also monitor key metrics, including asset and liability size and capital usage.

Total Assets by Business Segment

 

     At March 31, 2019  

$ in millions

     IS        WM        IM        Total  

Assets

           

Cash and cash equivalents1

   $ 66,685      $ 13,952      $ 45      $ 80,682  

Trading assets at fair value

     262,249        52        2,517        264,818  

Investment securities

     26,619        71,325               97,944  

Securities purchased under agreements to resell

     87,061        9,509               96,570  

Securities borrowed

     138,710        181               138,891  

Customer and other receivables

     36,314        15,732        621        52,667  

Loans, net of allowance2

     44,742        71,450        5        116,197  

Other assets3

     13,390        12,696        2,109        28,195  

Total assets

   $   675,770      $   194,897      $   5,297      $   875,964  
 

 

March 2019 Form 10-Q   14  


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     At December 31, 2018  

$ in millions

     IS        WM        IM        Total  

Assets

           

Cash and cash equivalents1

   $ 69,526      $ 17,621      $ 49      $ 87,196  

Trading assets at fair value

     263,870        60        2,369        266,299  

Investment securities

     23,273        68,559               91,832  

Securities purchased under agreements to resell

     80,660        17,862               98,522  

Securities borrowed

     116,207        106               116,313  

Customer and other receivables

     35,777        16,865        656        53,298  

Loans, net of allowance2

     43,380        72,194        5        115,579  

Other assets3

     13,734        9,125        1,633        24,492  

Total assets

   $   646,427      $   202,392      $   4,712      $   853,531  

IS—Institutional Securities

WM—Wealth Management

IM—Investment Management

1.

Cash and cash equivalents includes Cash and due from banks, Interest bearing deposits with banks and Restricted cash.

2.

Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 7 to the financial statements).

3.

Other assets primarily includes Goodwill, Intangible assets, premises, equipment, software, other investments, ROU assets related to leases and deferred tax assets.

A substantial portion of total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. Total assets increased to $876 billion at March 31, 2019 from $854 billion at December 31, 2018, primarily due to higher Securities borrowed and Securities purchased under agreements to resell in the Institutional Securities business segment as a result of higher period-end client balances and Trading liabilities. These increases were partially offset by lower Securities purchased under agreements to resell within the Wealth Management business segment as a result of lower Deposits.

Liquidity Risk Management Framework

The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the GLR, which support our target liquidity profile. For a further discussion about the Firm’s Required Liquidity Framework and Liquidity Stress Tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework” in the 2018 Form 10-K.

At March 31, 2019 and December 31, 2018, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.

Global Liquidity Reserve

We maintain sufficient liquidity reserves to cover daily funding needs and to meet strategic liquidity targets sized by

the Required Liquidity Framework and Liquidity Stress Tests. For a further discussion of our GLR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in the 2018 Form 10-K.

GLR by Type of Investment

 

$ in millions    At
March 31,
2019
     At
December 31,
2018
 

Cash deposits with banks1

   $ 11,457      $ 10,441  

Cash deposits with central banks1

     34,170        36,109  

Unencumbered highly liquid securities:

     

U.S. government obligations

     105,425        119,138  

U.S. agency and agency mortgage-backed securities

     42,228        41,473  

Non-U.S. sovereign obligations2

     36,341        39,869  

Other investment grade securities

     3,527        2,705  

Total

   $ 233,148      $ 249,735  

 

1.

Included in Cash and due from banks and Interest bearing deposits with banks in the balance sheets.

2.

Primarily composed of unencumbered Japanese, U.K., Brazilian and French government obligations.

GLR Managed by Bank and Non-Bank Legal Entities

 

$ in millions  

At

March 31,
2019

   

At
December 31,
2018

    Average Daily Balance
Three Months Ended
March 31, 2019
 

Bank legal entities

     

Domestic

  $ 80,296     $ 88,809     $ 80,670  

Foreign

    5,492       4,896       4,672  

Total Bank legal entities

    85,788       93,705       85,342  

Non-Bank legal entities

     

Domestic:

                       

Parent Company

    52,086       64,262       62,283  

Non-Parent Company

    40,807       40,936       39,980  

Total Domestic

    92,893       105,198       102,263  

Foreign

    54,467       50,832       54,820  

Total Non-Bank legal entities

    147,360       156,030       157,083  

Total

  $ 233,148     $ 249,735     $ 242,425  

Regulatory Liquidity Framework

Liquidity Coverage Ratio

We and our U.S. Bank Subsidiaries are subject to LCR requirements, including a requirement to calculate each entity’s LCR on each business day. The requirements are designed to ensure that banking organizations have sufficient HQLA to cover net cash outflows arising from significant stress over 30 calendar days, thus promoting the short-term resilience of the liquidity risk profile of banking organizations.

 

 

  15   March 2019 Form 10-Q


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The regulatory definition of HQLA is substantially the same as our GLR. GLR includes cash placed at institutions other than central banks that is considered an inflow for LCR purposes. HQLA includes a portion of cash placed at central banks, certain unencumbered investment grade corporate bonds and publicly traded common equities, which do not meet the definition of our GLR.

Based on our daily calculations, we and our U.S. Bank Subsidiaries are compliant with the minimum required LCR of 100%.

HQLA by Type of Asset and LCR

 

    

Average Daily Balance

Three Months Ended

 
$ in millions   

March 31,

2019

     December 31,
2018
 

HQLA

     

Cash deposits with central banks

   $ 37,070      $ 44,225  

Securities1

     155,713        150,792  

Total

   $ 192,783      $ 195,017  

LCR

     150%        145%  

 

1.

Primarily includes U.S. Treasuries, U.S. agency mortgage-backed securities, sovereign bonds and investment grade corporate bonds.

The increase in the LCR in the current quarter is due to a reduction in net outflows (i.e., the denominator of the ratio) primarily driven by higher cash inflows from Securities borrowed and Securities purchased under agreements to resell, and due to certain securities-for-securities transactions.

Net Stable Funding Ratio

The Basel Committee on Banking Supervision (“Basel Commit-tee”) has previously finalized the NSFR framework. In May 2016, the U.S. banking agencies issued a proposal to implement the NSFR in the U.S. however, a final rule has not yet been issued in the U.S. For an additional discussion of the NSFR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Liquidity Framework—Net Stable Funding Ratio” in the 2018 Form 10-K.

Funding Management

We manage our funding in a manner that reduces the risk of disruption to our operations. We pursue a strategy of diversification of secured and unsecured funding sources (by product, investor and region) and attempt to ensure that the tenor of our liabilities equals or exceeds the expected holding period of the assets being financed.

We fund our balance sheet on a global basis through diverse sources. These sources include our equity capital, borrowings, securities sold under agreements to repurchase, securities lending, deposits, letters of credit and lines of credit. We have active financing programs for both standard and structured products targeting global investors and currencies.

Secured Financing

For a discussion of our secured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Re-sources—Funding Management—Secured Financing” in the 2018 Form 10-K.

Collateralized Financing Transactions

 

$ in millions    At
March 31,
2019
     At
December 31,
2018
 

Securities purchased under agreements to resell and Securities borrowed

   $   235,461      $         214,835  

Securities sold under agreements to repurchase and Securities loaned

   $ 60,456      $ 61,667  

Securities received as collateral1

   $ 5,426      $ 7,668  

 

     Average Daily Balance
Three Months Ended
 
$ in millions   

March 31,

2019

     December 31,
2018
 

Securities purchased under agreements to resell and Securities borrowed

     $          219,062        $          213,974  

Securities sold under agreements to repurchase and Securities loaned

     $            58,965        $            57,677  

 

1.

Securities received as collateral are included in Trading assets in the balance sheets.

See Note 2 to the financial statements in the 2018 Form 10-K and Note 6 to the financial statements for more details on collateralized financing transactions.

In addition to the collateralized financing transactions shown in the previous table, we engage in financing transactions collateralized by customer-owned securities, which are segregated in accordance with regulatory requirements. Receivables under these financing transactions, primarily margin loans, are included in Customer and other receivables in the balance sheets, and payables under these financing transactions, primarily to prime brokerage customers, are included in Customer and other payables in the balance sheets. Our risk exposure on these transactions is mitigated by collateral maintenance policies that limit our credit exposure to customers and liquidity reserves held against this risk exposure.

Unsecured Financing

For a discussion of our unsecured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Unsecured Financing” in the 2018 Form 10-K.

 

 

March 2019 Form 10-Q   16  


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Deposits

 

$ in millions   

At

March 31,

2019

     At
December 31,
2018
 

Savings and demand deposits:

     

Brokerage sweep deposits1

     $            127,678        $            141,255  

Savings and other

     15,523        13,642  

Total Savings and demand

deposits

     143,201        154,897  

Time deposits

     36,530        32,923  

Total

     $            179,731        $            187,820  

 

1.

Amounts represent balances swept from client brokerage accounts.

Deposits are primarily sourced from our Wealth Management clients and are considered to have stable, low-cost funding characteristics. Total deposits at March 31, 2019 decreased compared with December 31, 2018, due to a decrease in Brokerage sweep deposits driven by redeployment of client cash partially offset by increases in Time deposits and Savings and other deposits driven by promotional offerings.

Borrowings by Remaining Maturity at March 31, 20191

 

$ in millions

   Parent
Company
     Subsidiaries      Total  

Original maturities of one year or less

   $      $ 1,498      $ 1,498  

Original maturities greater than one year

 

     

2019

   $ 14,187      $ 3,937      $ 18,124  

2020

     15,690        4,082        19,772  

2021

     21,256        3,936        25,192  

2022

     14,952        2,322        17,274  

2023

     11,624        2,642        14,266  

Thereafter

     75,346        19,219        94,565  

Total

   $     153,055      $ 36,138      $ 189,193  

Total Borrowings

   $ 153,055      $ 37,636      $     190,691  

Maturities over next 12 months2

 

              26,068  

 

1.

Original maturity in the table is generally based on contractual final maturity. For borrowings with put options, remaining maturity represents the earliest put date.

2.

Includes only borrowings with original maturities greater than one year.

Borrowings of $190,691 million as of March 31, 2019 were relatively unchanged compared with $189,662 million at December 31, 2018.

We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of borrowings with original maturities greater than one year allows us to reduce reliance on short-term credit sensitive instruments. Borrowings with original maturities greater than one year are generally managed to achieve staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients across regions, currencies and product types.

The availability and cost of financing to us can vary depending on market conditions, the volume of certain trading and lending activities, our credit ratings and the overall availability of credit. We also engage in, and may continue to engage in, repurchases of our borrowings in the ordinary course of business.

For further information on Borrowings, see Note 10 to the financial statements.

Credit Ratings

We rely on external sources to finance a significant portion of our daily operations. The cost and availability of financing generally are impacted by our credit ratings, among other things. In addition, our credit ratings can have an impact on certain trading revenues, particularly in those businesses where longer-term counterparty performance is a key consideration, such as OTC derivative transactions, including credit derivatives and interest rate swaps. When determining credit ratings, rating agencies consider company-specific factors, other industry factors such as regulatory or legislative changes and the macroeconomic environment, among other things.

Our credit ratings do not include any uplift from perceived government support from any rating agency given the significant progress of U.S. financial reform legislation and regulations. Some rating agencies have stated that they currently incorporate various degrees of credit rating uplift from non-governmental third-party sources of potential support.

Parent Company and U.S. Bank Subsidiaries’ Senior Unsecured Ratings at April 30, 2019

 

    Parent Company
     Short-Term
Debt
   Long-Term
Debt
   Rating
Outlook

DBRS, Inc.

  R-1 (middle)    A (high)    Stable

Fitch Ratings, Inc.

  F1    A    Stable

Moody’s Investors Service, Inc.

  P-2    A3    Stable

Rating and Investment Information, Inc.

  a-1    A-    Positive

S&P Global Ratings

  A-2    BBB+    Stable
 

 

  17   March 2019 Form 10-Q


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     MSBNA
      Short-Term
Debt
   Long-Term
Debt
   Rating
Outlook

Fitch Ratings, Inc.

   F1    A+    Stable

Moody’s Investors Service, Inc.

   P-1    A1    Stable

S&P Global Ratings

   A-1    A+    Stable

 

     MSPBNA
      Short-Term
Debt
   Long-Term
Debt
   Rating
Outlook

Moody’s Investors Service, Inc.

   P-1    A1    Stable

S&P Global Ratings

   A-1    A+    Stable

Incremental Collateral or Terminating Payments

In connection with certain OTC derivatives and certain other agreements where we are a liquidity provider to certain financing vehicles associated with the Institutional Securities business segment, we may be required to provide additional collateral, immediately settle any outstanding liability balances with certain counterparties or pledge additional collateral to certain clearing organizations in the event of a future credit rating downgrade irrespective of whether we are in a net asset or net liability position. See Note 4 to the financial statements for additional information on OTC derivatives that contain such contingent features.

While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact it would have on our business and results of operations in future periods is inherently uncertain and would depend on a number of interrelated factors, including, among other things, the magnitude of the downgrade, the rating relative to peers, the rating assigned by the relevant agency pre-downgrade, individual client behavior and future mitigating actions we might take. The liquidity impact of additional collateral requirements is included in our Liquidity Stress Tests.

Capital Management

We view capital as an important source of financial strength and actively manage our consolidated capital position based upon, among other things, business opportunities, risks, capital availability and rates of return together with internal capital policies, regulatory requirements and rating agency guidelines. In the future, we may expand or contract our capital base to address the changing needs of our businesses.

Common Stock Repurchases

 

     Three Months Ended March 31,  
in millions, except for per share data    2019      2018  

Repurchases

   $ 1,180      $ 1,250  

Number of shares

     28        22  

Average price per share

   $                 42.19      $                 55.98  

From time to time we repurchase our outstanding common stock as part of our Share Repurchase Program. A portion of common stock repurchases in the current quarter was conducted under a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”), whereby MUFG sold shares of the Firm’s common stock to us, as part of our Share Repurchase Program. The sales plan is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Board of Governors of the Federal Reserve System (“Federal Reserve”) and has no impact on the strategic alliance between MUFG and us, including our joint ventures in Japan. For a description of our Share Repurchase Program, see “Unregistered Sales of Equity Securities and Use of Proceeds.”

For a description of our capital plan, see “Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests.”

Common Stock Dividend Announcement

 

Announcement date

     April 17, 2019  

Amount per share

     $0.30  

Date to be paid

     May 15, 2019  

Shareholders of record as of

     April 30, 2019  

Preferred Stock Dividend Announcement

          

Announcement date

     March 15, 2019  

Date paid

     April 15, 2019  

Shareholders of record as of

     March 29, 2019  

For additional information on common and preferred stock, see Note 14 to the financial statements.

Off-Balance Sheet Arrangements and Contractual Obligations

Off-Balance Sheet Arrangements

We enter into various off-balance sheet arrangements, including through unconsolidated SPEs and lending-related financial instruments (e.g., guarantees and commitments), primarily in connection with the Institutional Securities and Investment Management business segments.

We utilize SPEs primarily in connection with securitization activities. For information on our securitization activities, see Note 12 to the financial statements.

For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 11 to the financial statements. For further information on our lending commitments, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Loans and Lending Commitments.”

 

 

March 2019 Form 10-Q   18  


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Contractual Obligations

For a discussion about our contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations” in the 2018 Form 10-K.

Regulatory Requirements

Regulatory Capital Framework

We are an FHC under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and are subject to the regulation and oversight of the Federal Reserve. The Federal Reserve establishes capital requirements for us, including “well-capitalized” standards, and evaluates our compliance with such capital requirements. The OCC establishes similar capital requirements and standards for our U.S. Bank Subsidiaries. For us to remain an FHC, we must remain well-capitalized in accordance with standards established by the Federal Reserve and our U.S. Bank Subsidiaries must remain well-capitalized in accordance with standards established by the OCC. For additional information on regulatory capital requirements for our U.S. Bank Subsidiaries, see Note 13 to the financial statements.

Regulatory capital requirements established by the Federal Reserve are largely based on the Basel III capital standards established by the Basel Committee and also implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).

Regulatory Capital Requirements

We are required to maintain minimum risk-based capital, leverage-based capital and total loss-absorbing capacity (“TLAC”) ratios. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Capital Requirements” in the 2018 Form 10-K. For additional information on TLAC, see Total Loss-Absorbing Capacity herein.

Risk-Based Regulatory Capital. Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 capital). Certain adjustments to and deductions from capital are required for purposes of determining these ratios, such as goodwill, intangible assets, certain deferred tax assets, other amounts in AOCI and investments in the capital instruments of unconsolidated financial institutions.

In addition to the minimum risk-based capital ratio requirements, we are subject to the following buffers in 2019:

 

 

A greater than 2.5% Common Equity Tier 1 capital conservation buffer;

 

 

The Common Equity Tier 1 G-SIB capital surcharge, currently at 3%; and

 

 

Up to a 2.5% Common Equity Tier 1 CCyB, currently set by U.S. banking agencies at zero.

In 2018, each of these buffers was 75% of the fully phased-in 2019 requirement noted above. Failure to maintain the buffers would result in restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. For a further discussion of the G-SIB capital surcharge, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—G-SIB Capital Surcharge” in the 2018 Form 10-K.

Our risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWA (“Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWA (“Advanced Approach”). The credit risk RWA calculations between the two approaches differ in that the Standardized Approach requires calculation of RWA using prescribed risk weights, whereas the Advanced Approach utilizes models to calculate exposure amounts and risk weights. At March 31, 2019 and December 31, 2018, our ratios for determining regulatory compliance are based on the Standardized Approach rules.

Leverage-Based Regulatory Capital. Minimum leverage-based capital requirements include a Tier 1 leverage ratio and an SLR. We are required to maintain a Tier 1 SLR of 5%, inclusive of an enhanced SLR capital buffer of at least 2% in order to avoid potential limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers.

 

 

  19   March 2019 Form 10-Q


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Management’s Discussion and Analysis

 

Regulatory Capital Ratios

 

     At March 31, 2019  
$ in millions    Required
Ratio1
     Standardized      Advanced  

Risk-based capital

        

Common Equity Tier 1 capital

            $ 63,344      $ 63,344  

Tier 1 capital

              71,910        71,910  

Total capital

              81,570        81,284  

Total RWA

              378,420        366,353  

Common Equity Tier 1 capital ratio

     10.0%        16.7%        17.3%  

Tier 1 capital ratio

     11.5%        19.0%        19.6%  

Total capital ratio

     13.5%        21.6%        22.2%  

Leverage-based capital

        

Adjusted average assets2

            $ 855,192        N/A  

Tier 1 leverage ratio

     4.0%        8.4%        N/A  

Supplementary leverage exposure3

              N/A      $ 1,104,264  

SLR

     5.0%        N/A        6.5%  

 

     At December 31, 2018  
$ in millions    Required
Ratio1
     Standardized      Advanced  

Risk-based capital

        

Common Equity Tier 1 capital

            $ 62,086      $ 62,086  

Tier 1 capital

              70,619        70,619  

Total capital

              80,052        79,814  

Total RWA

              367,309        363,054  

Common Equity Tier 1 capital ratio

     8.6%        16.9%        17.1%  

Tier 1 capital ratio

     10.1%        19.2%        19.5%  

Total capital ratio

     12.1%        21.8%        22.0%  

Leverage-based capital

        

Adjusted average assets2

            $ 843,074        N/A  

Tier 1 leverage ratio

     4.0%        8.4%        N/A  

Supplementary leverage exposure3

              N/A      $ 1,092,672  

SLR

     5.0%        N/A        6.5%  

 

1.

Required ratios are inclusive of any buffers applicable as of the date presented. For 2018, the minimum required regulatory capital ratios for risk-based capital are under the transitional rules.

2.

Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the quarters ended March 31, 2019 and December 31, 2018, adjusted for disallowed goodwill, intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other capital deductions.

3.

Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily (i) potential future exposure for derivative exposures, gross-up for cash collateral netting where qualifying criteria are not met, and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount for off-balance sheet exposures.

Regulatory Capital

 

$ in millions   At
March 31,
2019
    At
December 31,
2018
    Change  

Common Equity Tier 1 capital

     

Common stock and surplus

  $ 8,616     $ 9,843     $ (1,227

Retained earnings

    66,061       64,175       1,886  

AOCI

    (2,473     (2,292     (181

Regulatory adjustments and deductions:

     

Net goodwill

    (6,655     (6,661     6  

Net intangible assets (other than goodwill and mortgage servicing assets)

    (2,084     (2,158     74  

Other adjustments and deductions1

    (121     (821     700  

Total Common Equity Tier 1 capital

  $ 63,344     $ 62,086     $ 1,258  

Additional Tier 1 capital

     

Preferred stock

  $ 8,520     $ 8,520     $  

Noncontrolling interests

    475       454       21  

Additional Tier 1 capital

  $ 8,995     $ 8,974     $ 21  

Deduction for investments in covered funds

    (429     (441     12  

Total Tier 1 capital

  $ 71,910     $ 70,619     $ 1,291  

Standardized Tier 2 capital

     

Subordinated debt

  $ 9,087     $ 8,923     $ 164  

Noncontrolling interests

    112       107       5  

Eligible allowance for credit losses

    470       440       30  

Other adjustments and deductions

    (9     (37     28  

Total Standardized Tier 2 capital

  $ 9,660     $ 9,433     $ 227  

Total Standardized capital

  $ 81,570     $ 80,052     $ 1,518  

Advanced Tier 2 capital

     

Subordinated debt

  $ 9,087     $ 8,923     $ 164  

Noncontrolling interests

    112       107       5  

Eligible credit reserves

    184       202       (18

Other adjustments and deductions

    (9     (37     28  

Total Advanced Tier 2 capital

  $ 9,374     $ 9,195     $ 179  

Total Advanced capital

  $ 81,284     $ 79,814     $ 1,470  

 

1.

Other adjustments and deductions used in the calculation of Common Equity Tier 1 capital include credit spread premium over risk-free rate for derivative liabilities, net deferred tax assets, net after-tax DVA and other net after-tax adjustments related to AOCI.

 

 

March 2019 Form 10-Q   20  


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Management’s Discussion and Analysis

 

RWA Rollforward

 

 

     At March 31, 20191  
$ in millions    Standardized     Advanced  

Credit risk RWA

    

Balance at December 31, 2018

   $ 305,531     $ 190,595  

Change related to the following items:

    

Derivatives

     2,095       7,246  

Securities financing transactions

     8,269       2,353  

Securitizations

     358       402  

Investment securities

     1,503       2,616  

Commitments, guarantees and loans

     2,067       1,648  

Cash

     (610     (361

Equity investments

     369       390  

Other credit risk2

     4,105       4,263  

Total change in credit risk RWA

   $ 18,156     $ 18,557  

Balance at March 31, 2019

   $ 323,687     $ 209,152  

Market risk RWA

    

Balance at December 31, 2018

   $ 61,778     $ 61,857  

Change related to the following items:

    

Regulatory VaR

     (610     (610

Regulatory stressed VaR

     (2,934     (2,934

Incremental risk charge

     (4,980     (4,980

Comprehensive risk measure

     96       55  

Specific risk:

    

Non-securitizations

     1,141       1,141  

Securitizations

     242       242  

Total change in market risk RWA

   $ (7,045   $ (7,086

Balance at March 31, 2019

   $                 54,733     $ 54,771  

Operational risk RWA

    

Balance at December 31, 2018

     N/A     $ 110,602  

Change in operational risk RWA

     N/A       (8,172

Balance at March 31, 2019

     N/A     $ 102,430  

Total RWA

   $ 378,420     $           366,353  

 

Regulatory

VaR—VaR for regulatory capital requirements

1.

The RWA for each category reflects both on- and off-balance sheet exposures, where appropriate.

2.

Amount reflects assets not in a defined category, non-material portfolios of exposures and unsettled transactions, as applicable.

Credit risk RWA increased in the current quarter under the Standardized and Advanced Approaches primarily due to increased exposures in Securities financing transactions and Derivatives, and an increase in Other credit risk mainly driven by the Firm’s adoption of the Leases accounting update on January 1, 2019. Under the Advanced Approach, the increased derivatives exposure also led to increased RWA related to CVA.

Market risk RWA decreased in the current quarter under the Standardized and Advanced Approaches primarily due to a decrease in the Incremental risk charge driven by reduced exposures and improved hedging in credit products.

The decrease in operational risk RWA under the Advanced Approach in the current quarter reflects a continued reduction in the magnitude of internal losses utilized in the operational risk capital model related to litigation.

Total Loss-Absorbing Capacity. The Federal Reserve has established external TLAC, long-term debt (“LTD”) and clean holding company requirements for top-tier BHCs of U.S. G-SIBs (“covered BHCs”), including the Parent Company. These requirements include various definitions and restrictions, such as requiring eligible LTD to be issued by the covered BHC and be unsecured, have a maturity of one year or more from the date of issuance and not have certain derivative-linked features typically associated with certain types of structured notes. A covered BHC is required to maintain minimum levels of external TLAC and eligible LTD, as well as certain TLAC buffer requirements. Failure to maintain the TLAC buffers would result in restrictions on capital distributions and discretionary bonus payments to executive officers.

Required and Actual TLAC and Eligible LTD Ratios

 

     At March 31, 2019  

$ in millions

   Required Ratio1     Actual
Amount/Ratio
 

Total Loss-Absorbing Capacity

    

External TLAC2

             $                198,965  

External TLAC as a % of RWA

     21.5     52.6%  

External TLAC as a % of
leverage exposure

     9.5     18.0%  

Eligible LTD3

             $                120,983  

Eligible LTD as a % of RWA

     9.0     32.0%  

Eligible LTD as a % of
leverage exposure

     4.5     11.0%  

 

1.

Required ratios are inclusive of any buffers applicable as of the date presented.

2.

External TLAC consists of Common Equity Tier 1 capital and Additional Tier 1 capital (each excluding any noncontrolling minority interests), as well as eligible LTD.

3.

Consists of TLAC-eligible LTD reduced by 50% for amounts of unpaid principal due to be paid in more than one year but less than two years from March 31, 2019.

For a further discussion of TLAC and related requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Requirements” in the 2018 Form 10-K.

Capital Plans and Stress Tests

Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large BHCs, including us, which form part of the Federal Reserve’s annual CCAR framework.

We submitted our 2019 Capital Plan (“Capital Plan”) and company-run stress test results to the Federal Reserve on April 5, 2019. We expect that the Federal Reserve will provide its response to our 2019 Capital Plan by June 30, 2019. There could be a range of potential outcomes to our Capital Plan whereby the Federal Reserve could object to, or otherwise require us to modify, such plan. See “Risk Factors”

 

 

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Management’s Discussion and Analysis

 

in the 2018 Form 10-K. The Federal Reserve is expected to publish summary results of the CCAR and Dodd-Frank Act supervisory stress tests of each large BHC, including us, by June 30, 2019. We are required to disclose a summary of the results of our company-run stress tests within 15 days of the date the Federal Reserve discloses the results of the supervisory stress tests. In addition, we must submit the results of our mid-cycle company-run stress test to the Federal Reserve by October 5, 2019 and disclose a summary of the results within 30 days of the submission date.

For a further discussion of our capital plans and stress tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests” in the 2018 Form 10-K.

Attribution of Average Common Equity According to the Required Capital Framework

Our required capital (“Required Capital”) estimation is based on the Required Capital framework, an internal capital adequacy measure. Common equity attribution to the business segments is based on capital usage calculated under the Required Capital framework, as well as each business segment’s relative contribution to our total Required Capital.

The Required Capital framework is a risk-based and leverage use-of-capital measure, which is compared with our regulatory capital to ensure that we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. The amount of capital allocated to the business segments is generally set at the beginning of each year and remains fixed throughout the year until the next annual reset unless a significant business change occurs (e.g., acquisition or disposition). We define the difference between our total average common equity and the sum of the average common equity amounts allocated to our business segments as Parent common equity. We generally hold Parent common equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.

The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory environment, for example, to incorporate changes in stress testing or enhancements to modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.

Average Common Equity Attribution1

 

     Three Months Ended
March 31,
 
$ in billions    2019      2018  

Institutional Securities

   $ 40.4      $ 40.8  

Wealth Management

     18.2        16.8  

Investment Management

     2.5        2.6  

Parent

     10.5        8.8  

Total

   $                 71.6      $                 69.0  

 

1.

Average common equity is a non-GAAP financial measure. See “Selected Non-GAAP Financial Information” herein.

Resolution and Recovery Planning

Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure.

Our preferred resolution strategy is an SPOE strategy. Currently, upon the occurrence of a resolution scenario, the Parent Company would be obligated, under a support agreement with its material entities, to contribute or loan on a subordinated basis all of its contributable material assets, other than shares in subsidiaries of the Parent Company and certain intercompany receivables, to provide capital and liquidity, as applicable, to our material entities.

The obligations of the Parent Company under the existing support agreement are in most cases secured on a senior basis by the assets of the Parent Company (other than shares in subsidiaries of the Parent Company). As a result, claims of our material entities against the assets of the Parent Company (other than shares in subsidiaries of the Parent Company) are effectively senior to unsecured obligations of the Parent Company.

In further development of our SPOE strategy, we have created a wholly owned, direct subsidiary of the Parent Company, MS Holdings LLC (the “Funding IHC”), to serve as a resolution funding vehicle. We expect that, prior to the submission of our 2019 resolution plan by July 1, 2019, the Parent Company will contribute certain of its assets to the Funding IHC and enter into an updated support agreement with the Funding IHC as well as certain other subsidiaries to facilitate the execution of our SPOE strategy. The updated agreement will

 

 

March 2019 Form 10-Q   22  


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Management’s Discussion and Analysis

 

obligate the Parent Company to transfer capital and liquidity to the Funding IHC, and that the Parent Company and/or the Funding IHC will recapitalize and provide liquidity to material entities in the event of our material financial distress or failure.

For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” and “Risk Factors—Legal, Regulatory and Compliance Risk” in the 2018 Form 10-K.

Regulatory Developments

Proposed Revisions to the Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments Issued by G-SIBs

The Federal Reserve, the OCC and the FDIC have issued a proposed rule that would, among other things, modify the regulatory capital framework for Advanced Approach banking organizations, including us. Such firms would be required to make certain deductions from regulatory capital for their investments in certain unsecured debt instruments (including eligible LTD in the TLAC framework) issued by the Parent Company and other G-SIBs.

Proposed Revisions to Resolution Planning Requirements

The Federal Reserve and the FDIC have issued a proposed rule that would change our resolution planning obligations under the Dodd-Frank Act. The proposed rule would require us to file resolution plans once every two years and would allow us to alternate between submitting a full, detailed resolution plan and a streamlined, targeted resolution plan. The proposed rule also makes certain changes to the information required to be included in our resolution plan.

For a discussion of other regulatory developments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” in the 2018 Form 10-K.

Other Matters

U.K. Withdrawal from the E.U.

Following the U.K. electorate vote to leave the E.U., the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017, which triggered a two-year period during which the U.K. government negotiated a form of withdrawal agreement with the E.U. The U.K. government and the E.U. have agreed to delay the U.K.’s scheduled withdrawal from the E.U. until

October 31, 2019. However, if the U.K. does not hold elections to the European Parliament in accordance with applicable E.U. law and ratify the withdrawal agreement by the applicable deadlines, the U.K.’s withdrawal date would become June 1, 2019. Absent any further changes to this time schedule, the U.K. is expected to leave the E.U. by October 31, 2019 at the latest. Discussions are ongoing within the U.K. Parliament on the negotiated withdrawal agreement and the alternatives to it, and between the U.K. government and the E.U.

For more information on the U.K.’s withdrawal from the E.U., our related preparations and the potential impact on our operations, see “Quantitative and Qualitative Disclosures about Risk—Country Risk” herein, and see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Other Matters” and “Risk Factors—International Risk” in the 2018 Form 10-K.

Expected Replacement of London Interbank Offered Rate and Replacement or Reform of Other Interest Rates

Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR and replacements or reforms of other interest rate benchmarks, such as EURIBOR and EONIA (collectively, the “IBORs”).

For a further discussion of the expected replacement of the IBORs and/or reform of interest rate benchmarks, and the related risks and our transition plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” and “Risk Factors—Legal, Regulatory and Compliance Risk,” respectively, in the 2018 Form 10-K.

 

 

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Quantitative and Qualitative Disclosures about Risk

 

Management believes effective risk management is vital to the success of our business activities. For a discussion of our risk management functions, see “Quantitative and Qualitative Disclosures about Risk—Risk Management” in the 2018 Form 10-K.

Market Risk

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of our VaR for market risk exposures is generated. In addition, we incur market risk within the Wealth Management and Investment Management business segments. The Wealth Management business segment primarily incurs non-trading market risk from lending and deposit-taking activities. The Investment Management business segment primarily incurs non-trading market risk from capital investments in alternative and other funds. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Risk—Market Risk” in the 2018 Form 10-K.

Trading Risks

Value-at-Risk. The statistical technique known as VaR is one of the tools we use to measure, monitor and review the market risk exposures of our trading portfolios. The Market Risk Department calculates and distributes daily VaR-based risk measures to various levels of management.

For information regarding our VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Risk—Market Risk—Trading Risks—Value-at-Risk” in the 2018 Form 10-K.

We utilize the same VaR model for risk management purposes and for regulatory capital calculations. Our regulators have approved our VaR model for use in regulatory calculations.

The portfolio of positions used for our VaR for risk management purposes (“Management VaR”) differs from that used for regulatory capital requirements (“Regulatory VaR”). Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include CVA and related hedges, as well as loans that are carried at fair value and associated hedges.

The following table presents the Management VaR for the Trading portfolio. To further enhance the transparency of traded market risk, the Credit Portfolio VaR has been disclosed as a separate category from the Primary Risk Categories. The Credit Portfolio includes counterparty CVA

and related hedges, as well as loans that are carried at fair value and associated hedges.

95%/One-Day Management VaR

 

     Three Months Ended
March 31, 2019
 

$ in millions

  

Period

End

    Average     High2      Low2  

Interest rate and credit spread

   $ 32     $     32     $ 39      $ 26  

Equity price

     15       16       19        12  

Foreign exchange rate

     15       14       16        11  

Commodity price

     9       10       12        9  

Less: Diversification benefit1

     (32     (32     N/A        N/A  

Primary Risk Categories

   $ 39     $ 40     $ 48      $ 36  

Credit Portfolio

     17       16       18        14  

Less: Diversification benefit1

     (12     (10     N/A        N/A  

Total Management VaR

   $     44     $ 46     $     55      $     42  

 

     Three Months Ended
December 31, 2018
 

$ in millions

  

Period

End

    Average     High2      Low2  

Interest rate and credit spread

   $ 38     $ 36     $ 51      $ 25  

Equity price

     14       13       18        12  

Foreign exchange rate

     13       13       16        11  

Commodity price

     13       12       18        7  

Less: Diversification benefit1

     (27     (30     N/A        N/A  

Primary Risk Categories

   $ 51     $ 44     $ 62      $ 34  

Credit Portfolio

     15       13       16        11  

Less: Diversification benefit1

     (9     (8     N/A        N/A  

Total Management VaR

   $     57     $ 49     $     67      $     39  

 

1.

Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulated one-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component.

2.

The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the quarter, and therefore, the diversification benefit is not an applicable measure.

Average total Management VaR and average Management VaR for the Primary Risk Categories decreased from the three-months ended December 31, 2018, primarily as a result of reduced interest rate and credit spread exposure in the Fixed Income Division of the Institutional Securities business segment.

Distribution of VaR Statistics and Net Revenues

One method of evaluating the reasonableness of our VaR model as a measure of our potential volatility of net revenues is to compare VaR with corresponding actual trading revenues. Assuming no intraday trading, for a 95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the VaR model would be questioned.

 

 

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Risk Disclosures

 

We evaluate the reasonableness of our VaR model by comparing the potential declines in portfolio values generated by the model with corresponding actual trading results for the Firm, as well as individual business units. For days where losses exceed the VaR statistic, we examine the drivers of trading losses to evaluate the VaR model’s accuracy relative to realized trading results. There were no days with trading losses in the current quarter.

Daily 95%/One-Day Total Management VaR for the Current Quarter1

($ in millions)

LOGO

 

1.

The average 95%/one-day total Management VaR for the current quarter was $46 million.

Daily Net Trading Revenues for the Current Quarter

($ in millions)

LOGO

The previous histogram shows the distribution for the current quarter of daily net trading revenues. Daily net trading revenues include profits and losses from Interest rate and credit spread, Equity price, Foreign exchange rate, Commodity price, and Credit Portfolio positions and intraday trading activities for our trading businesses. Certain items such as fees, commissions and net

interest income are excluded from daily net trading revenues and the VaR model. Revenues required for Regulatory VaR backtesting further exclude intraday trading.

Non-Trading Risks

We believe that sensitivity analysis is an appropriate representation of our non-trading risks. The following sensitivity analyses cover substantially all of the non-trading risk in our portfolio.

Credit Spread Risk Sensitivity1

 

$ in millions

  At
March 31,
2019
    At
December 31,
2018
 

Derivatives

  $ 6     $ 6  

Funding liabilities2

    37       34  

 

1.

Amounts represent the potential gain for each 1 bps widening of our credit spread.

2.

Relates to structured note liabilities carried at fair value.

U.S. Bank Subsidiaries’ Net Interest Income Sensitivity Analysis

 

$ in millions   At
March 31,
2019
    At
December 31,
2018
 

Basis point change

   

+200

  $ 484     $ 340  

+100

    274       182  

- 100

    (619     (428

The previous table presents an analysis of selected instantaneous upward and downward parallel interest rate shocks on net interest income over the next 12 months for our U.S. Bank Subsidiaries. These shocks are applied to our 12-month forecast for our U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and our forecasted business activity.

We do not manage to any single rate scenario but rather manage net interest income in our U.S. Bank Subsidiaries to optimize across a range of possible outcomes, including non-parallel rate change scenarios. The sensitivity analysis assumes that we take no action in response to these scenarios, assumes there are no changes in other macroeconomic variables normally correlated with changes in interest rates, and includes subjective assumptions regarding customer and market re-pricing behavior and other factors. The change in sensitivity to interest rates between March 31, 2019 and December 31, 2018 is primarily driven by a flatter yield curve, expectations of deposit pricing and changes in our asset-liability profile.

 

 

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Risk Disclosures

 

Investments Sensitivity, Including Related Carried Interest

 

    Loss from 10% Decline  

$ in millions

  At
March 31,
2019
    At
December 31,
2018
 

Investments related to Investment Management activities

  $ 334     $ 298  

Other investments:

   

MUMSS

    164       165  

Other Firm investments

    187       179  

MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

We have exposure to public and private companies through direct investments, as well as through funds that invest in these assets. These investments are predominantly equity positions with long investment horizons, a portion of which is for business facilitation purposes. The market risk related to these investments is measured by estimating the potential reduction in net income associated with a 10% decline in investment values and related impact on carried interest. The change in investments sensitivity related to Investment Management activities between December 31, 2018 and March 31, 2019 is primarily the result of higher carried interest.

Equity Market Sensitivity

In the Wealth Management and Investment Management business segments, certain fee-based revenue streams are driven by the value of clients’ equity holdings. The overall level of revenues for these streams also depends on multiple additional factors that include, but are not limited to, the level and duration of the equity market increase or decline, price volatility, the geographic and industry mix of client assets, the rate and magnitude of client investments and redemptions, and the impact of such market increase or decline and price volatility on client behavior. Therefore, overall revenues do not correlate completely with changes in the equity markets.

Credit Risk

Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to us. We primarily incur credit risk exposure to institutions and individuals through our Institutional Securities and Wealth Management business segments. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk” in the 2018 Form 10-K.

 

Loans and Lending Commitments

 

       
    At March 31, 2019  
$ in millions   IS     WM     IM1     Total  

Corporate

  $ 22,283     $ 16,136     $ 5     $ 38,424  

Consumer

          27,300             27,300  

Residential real estate

          28,037             28,037  

Commercial real estate

    7,764                   7,764  

Loans held for investment, gross of allowance

    30,047       71,473       5       101,525  

Allowance for loan losses

    (215     (44           (259

Loans held for investment, net of allowance

    29,832       71,429       5       101,266  

Corporate

    12,469                   12,469  

Residential real estate

    1       21             22  

Commercial real estate

    2,440                   2,440  

Loans held for sale

    14,910       21             14,931  

Corporate

    8,286             21       8,307  

Residential real estate

    1,282                   1,282  

Commercial real estate

    1,766                   1,766  

Loans held at fair value

    11,334             21       11,355  

Total loans

    56,076       71,450       26       127,552  

Lending commitments2

    102,174       12,147             114,321  

Total loans and lending commitments2

  $     158,250     $     83,597     $             26     $     241,873  

 

    At December 31, 2018  
$ in millions   IS     WM     IM1     Total  

Corporate

  $ 20,020     $ 16,884     $ 5     $ 36,909  

Consumer

          27,868             27,868  

Residential real estate

          27,466             27,466  

Commercial real estate3

    7,810                   7,810  

Loans held for investment, gross of allowance

    27,830       72,218       5       100,053  

Allowance for loan losses

    (193     (45           (238

Loans held for investment, net of allowance

    27,637       72,173       5       99,815  

Corporate

    13,886                   13,886  

Residential real estate

    1       21             22  

Commercial real estate3

    1,856                   1,856  

Loans held for sale

    15,743       21             15,764  

Corporate

    9,150             21       9,171  

Residential real estate

    1,153                   1,153  

Commercial real estate3

    601                   601  

Loans held at fair value

    10,904             21       10,925  

Total loans

    54,284