Oct 10 - Fitch Ratings has affirmed Morgan Stanley's
including its Issuer Default Ratings (IDRs) at 'A/F1', support rating at '1',support floor at 'A' and viability rating (VR) at 'a-'. The Rating Outlook isStable. A complete list of rating actions follows at the end of this pressrelease.
Today's rating action on Morgan Stanley was taken in conjunction with Fitch'sGlobal Trading and Universal Bank (GTUB) periodic review. Fitch's outlook forthe industry is stable on balance. The positive rating drivers include improvedliquidity, funding, capitalization and more streamlined businesses, all partlydriven by regulation. Offsetting these positive drivers are substantial earningspressure, regulatory uncertainty and heightened legal and operational risk.
RATING ACTION RATIONALEMorgan Stanley's 'a-' VR continues to be supported by a solid liquidityposition, improved risk management, and higher-than-average capital position.The VR remains constrained by challenging industry prospects given the uncertainglobal economic environment, the impact of increased regulation on the capitalmarkets business, and wholesale funding risks. Morgan Stanley's IDRs continue toincorporate the prospect of government support in the event of need.
The VR reflects an expectation that the earnings contribution from the globalwealth management (GWM) business will continue to increase, based on higherownership of Morgan Stanley Smith Barney (now 65%) and an improving operatingmargin. GWM is a more stable business versus the institutional securitiessegment.
Morgan Stanley has maintained core profitability in recent quarters, butprofitability remains generally below that of peers with higher VRs. To improveconsolidated performance, Morgan Stanley will likely increase the operatingmargin in GWM (a gradual process) and achieve additional operationalefficiencies in both GWM and the institutional securities business.
Morgan Stanley has a comparatively higher reliance on capital market operationsthan many GTUBs reflecting its focus on the institutional securities business.However, if Morgan Stanley achieves margin expansion goals in GWM and attainsfull ownership of MSSB, earnings will become more balanced. Still, MorganStanley's future earnings will not be as diverse as large universal banks.Positively, Morgan Stanley has far less exposure to the U.S. real estate marketcompared with most U.S. banks.
Morgan Stanley's capital position continues to improve and remains a relativestrength. At mid-year 2012, FCC/RWA of 16.6% well exceeded the average of thetop six U.S. banks of 12.1%. This higher capital is considered necessary given apotentially more volatile and concentrated business mix versus many morediversified banks.
Liquidity remains at conservative levels. Cash and unencumbered highly liquidsecurities totaled $173 billion (23% of total assets) at mid-year 2012. TheBasel III liquidity coverage ratio is estimated by Morgan Stanley to be well inexcess of 100%. This prudent level of liquidity is instrumental in reducingFitch's concerns regarding wholesale funding risks.
Morgan Stanley is primarily wholesale funded, which Fitch believes makes it morevulnerable to funding and rollover risks than a number of GTUB peers. To reducewholesale funding risk, Morgan Stanley has reduced reliance on unsecuredshort-term to minimal levels with no reliance on 2a-7 funds or commercial paper.The firm has improved its governance of secured funding, including maturitytargets and limits set for each tier of collateral. Deposit funding isincreasing at the subsidiary bank, but deposits remain a relatively smallportion of the overall funding mix.
Regulatory and legal issues appear manageable but costly. Morgan Stanley andpeers face new capital markets regulations such as the Volcker Rule andimplementation of Basel III capital and liquidity standards. Morgan Stanley isprojected to meet new requirements well within allowable time frames.
RATING DRIVERS & SENSITIVITIES: - VR, IDRs & SENIOR DEBTThe VR factors in Fitch core capital in line with current levels and themanagement of capital comfortably above Basel III capital minimums. Over time,the VR could be positively affected if Morgan Stanley improves operatingperformance and diversifies the earnings mix, while maintaining prudent levelsof liquidity. Reductions in current economic, financial and regulatoryuncertainties would be contributing factors towards any upward momentum.
Downward pressure on the VR would result from a material loss, reduction incapital ratios and/or significant deterioration in liquidity levels. Likewise,any unforeseen outsized fines, settlements or other charges could also haveadverse rating implications.
IDRs and Senior Debt ratings are at the support floor. In the event of theelimination of support, the long-term IDR and senior debt ratings would beadjusted to the level of the VR.
RATING DRIVERS & SENSITIVITIES: SUPPORT RATING & SUPPORT RATING FLOORMorgan Stanley's current long-term 'A' IDR is above its 'a-' VR, reflecting thefact that its IDR benefits from support. Morgan Stanley's '1' support rating and'A' support rating floor factor in government support in the event of need. AtMorgan Stanley's current VR, the firm's long-term IDR would be affected by achange in the support rating floor.
Fitch's rating action continues to embody a view of support in the IDRs ofMorgan Stanley and other U.S. Global Systemically Important FinancialInstitutions (G-SIFIs) over the near-to-intermediate term. This viewpoint wasbroadly discussed in Fitch's special report titled 'U.S. Banks - SovereignSupport: When Does it End' dated Dec. 15, 2011. Fitch could reassess its supportratings for U.S. G-SIFIs if global market conditions normalize and resolutionregimes become more harmonized across international jurisdictions. While Fitchbelieves the policy goal is to no longer provide full support to systemicallyimportant banks, this is progressing at an uneven pace globally.
SUBORDINATED DEBT & OTHER HYBRID SECURITIESSubordinated debt and other hybrid capital issued by Morgan Stanley and byvarious issuing vehicles are all notched down from Morgan Stanley's VR inaccordance with Fitch's assessment of each instrument's respectivenonperformance and relative Loss Severity risk profiles. Their ratings areprimarily sensitive to any change in the VRs of Morgan Stanley.
HOLDING COMPANY RATING DRIVERS & SENSITIVITIESMorgan Stanley's IDRs are equalized with those of its operating companies andbanks, reflecting its role as the bank holding company, which is mandated in theU.S. to act as a source of strength for its bank subsidiaries, as well as theuse of the holding company to fund subsidiary operations.
SUBSIDIARY & AFFILIATED COMPANY RATING DRIVERSThe IDRs of Morgan Stanley's major rated operating subsidiaries are equalizedwith Morgan Stanley's IDR reflecting Fitch's view that these entities are coreto Morgan Stanley's business strategy and financial profile.
Morgan Stanley is a leading global bank with three business segments:institutional securities, global wealth management, and asset management. InSeptember 2008, Morgan Stanley converted to a bank holding company (BHC)regulated by the Federal Reserve. Morgan Stanley is currently the sixth largestbank by assets in the U.S. and one of the 29 banking institutions worldwidedesignated as a G-SIFI by the Financial Stability Board.
Fitch has affirmed the following ratings with a Stable Outlook:
Morgan Stanley--Long-term IDR at 'A';--Long-term Senior Debt at 'A';--Short-term IDR at 'F1';--Short-term Debt at 'F1';--Commercial paper at 'F1';--Market linked securities at 'Aemr';--VR at 'a-';--Subordinated Debt at 'BBB+';--Preferred Stock 'BB';--Support at '1';--Support Floor at 'A'.Morgan Stanley Bank N.A.--Long-term IDR at 'A';--Long-term Deposits at 'A+';--Short-term IDR at 'F1';--Market linked securities at 'Aemr';--Support at '1'.Morgan Stanley Australia Finance Ltd--Long-term IDR at 'A';--Long-term Senior Debt at 'A';--Short-term IDR at 'F1';--Short-term Debt at 'F1'.Morgan Stanley Canada Ltd--Short-term IDR at 'F1';--Short-term Debt at 'F1'.--Commercial paper at 'F1'.Morgan Stanley International Finance SA--Short-term Debt at 'F1'.Bank Morgan Stanley AG--Long-term IDR at 'A';--Short-term IDR at 'F1';--Support at '1'.Morgan Stanley Secured Financing--Long-term Senior Debt at 'A';--Short-term Debt at 'F1'.Morgan Stanley Capital Trust III-VIII--Preferred Stock 'BB+'.
Additional information is available at '
'. The ratings abovewere solicited by, or on behalf of, the issuer, and therefore, Fitch has beencompensated for the provision of the ratings.
Applicable Criteria and Related Research:--'Global Financial Institutions Rating Criteria' dated Aug. 15, 2012;--'Rating Bank Regulatory Capital and Similar Securities' dated Dec. 15, 2011;--'Treatment of Hybrids in Bank Capital Analysis' July 9, 2012;--'Rating FI Subsidiaries and Holding Companies' dated Aug. 10, 2012.
Applicable Criteria and Related Research:Global Financial Institutions Rating CriteriaRating Bank Regulatory Capital and Similar SecuritiesTreatment of Hybrids in Bank Capital AnalysisRating FI Subsidiaries and Holding Companies(New York Ratings Team)