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 is Stable. A complete list of rating actions follows at the end of this press release.
Today's rating action on Morgan Stanley was taken in conjunction with Fitch's Global Trading and Universal Bank (GTUB) periodic review. Fitch's outlook for the industry is stable on balance. The positive rating drivers include improved liquidity, funding, capitalization and more streamlined businesses, all partly driven by regulation. Offsetting these positive drivers are substantial earnings pressure, regulatory uncertainty and heightened legal and operational risk.
RATING ACTION RATIONALE Morgan Stanley's 'a-' VR continues to be supported by a solid liquidity position, improved risk management, and higher-than-average capital position. The VR remains constrained by challenging industry prospects given the uncertain global economic environment, the impact of increased regulation on the capital markets business, and wholesale funding risks. Morgan Stanley's IDRs continue to incorporate the prospect of government support in the event of need.
The VR reflects an expectation that the earnings contribution from the global wealth management (GWM) business will continue to increase, based on higher ownership of Morgan Stanley Smith Barney (now 65%) and an improving operating margin. GWM is a more stable business versus the institutional securities segment.
Morgan Stanley has maintained core profitability in recent quarters, but profitability remains generally below that of peers with higher VRs. To improve consolidated performance, Morgan Stanley will likely increase the operating margin in GWM (a gradual process) and achieve additional operational efficiencies in both GWM and the institutional securities business.
Morgan Stanley has a comparatively higher reliance on capital market operations than many GTUBs reflecting its focus on the institutional securities business. However, if Morgan Stanley achieves margin expansion goals in GWM and attains full ownership of MSSB, earnings will become more balanced. Still, Morgan Stanley'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 market compared with most U.S. banks.
Morgan Stanley's capital position continues to improve and remains a relative strength. At mid-year 2012, FCC/RWA of 16.6% well exceeded the average of the top six U.S. banks of 12.1%. This higher capital is considered necessary given a potentially more volatile and concentrated business mix versus many more diversified banks.
Liquidity remains at conservative levels. Cash and unencumbered highly liquid securities totaled $173 billion (23% of total assets) at mid-year 2012. The Basel III liquidity coverage ratio is estimated by Morgan Stanley to be well in excess of 100%. This prudent level of liquidity is instrumental in reducing Fitch's concerns regarding wholesale funding risks.
Morgan Stanley is primarily wholesale funded, which Fitch believes makes it more vulnerable to funding and rollover risks than a number of GTUB peers. To reduce wholesale funding risk, Morgan Stanley has reduced reliance on unsecured short-term to minimal levels with no reliance on 2a-7 funds or commercial paper. The firm has improved its governance of secured funding, including maturity targets and limits set for each tier of collateral. Deposit funding is increasing at the subsidiary bank, but deposits remain a relatively small portion of the overall funding mix.
Regulatory and legal issues appear manageable but costly. Morgan Stanley and peers face new capital markets regulations such as the Volcker Rule and implementation of Basel III capital and liquidity standards. Morgan Stanley is projected to meet new requirements well within allowable time frames.
RATING DRIVERS & SENSITIVITIES: - VR, IDRs & SENIOR DEBT The VR factors in Fitch core capital in line with current levels and the management of capital comfortably above Basel III capital minimums. Over time, the VR could be positively affected if Morgan Stanley improves operating performance and diversifies the earnings mix, while maintaining prudent levels of liquidity. Reductions in current economic, financial and regulatory uncertainties would be contributing factors towards any upward momentum.
Downward pressure on the VR would result from a material loss, reduction in capital ratios and/or significant deterioration in liquidity levels. Likewise, any unforeseen outsized fines, settlements or other charges could also have adverse rating implications.
IDRs and Senior Debt ratings are at the support floor. In the event of the elimination of support, the long-term IDR and senior debt ratings would be adjusted to the level of the VR.
RATING DRIVERS & SENSITIVITIES: SUPPORT RATING & SUPPORT RATING FLOOR Morgan Stanley's current long-term 'A' IDR is above its 'a-' VR, reflecting the fact 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. At Morgan Stanley's current VR, the firm's long-term IDR would be affected by a change in the support rating floor.
Fitch's rating action continues to embody a view of support in the IDRs of Morgan Stanley and other U.S. Global Systemically Important Financial Institutions (G-SIFIs) over the near-to-intermediate term. This viewpoint was broadly discussed in Fitch's special report titled 'U.S. Banks - Sovereign Support: When Does it End' dated Dec. 15, 2011. Fitch could reassess its support ratings for U.S. G-SIFIs if global market conditions normalize and resolution regimes become more harmonized across international jurisdictions. While Fitch believes the policy goal is to no longer provide full support to systemically important banks, this is progressing at an uneven pace globally.
SUBORDINATED DEBT & OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Morgan Stanley and by various issuing vehicles are all notched down from Morgan Stanley's VR in accordance with Fitch's assessment of each instrument's respective nonperformance and relative Loss Severity risk profiles. Their ratings are primarily sensitive to any change in the VRs of Morgan Stanley.
HOLDING COMPANY RATING DRIVERS & SENSITIVITIES Morgan Stanley's IDRs are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries, as well as the use of the holding company to fund subsidiary operations.
SUBSIDIARY & AFFILIATED COMPANY RATING DRIVERS The IDRs of Morgan Stanley's major rated operating subsidiaries are equalized with Morgan Stanley's IDR reflecting Fitch's view that these entities are core to 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. In September 2008, Morgan Stanley converted to a bank holding company (BHC) regulated by the Federal Reserve. Morgan Stanley is currently the sixth largest bank by assets in the U.S. and one of the 29 banking institutions worldwide designated 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 above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated 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 Criteria Rating Bank Regulatory Capital and Similar Securities Treatment of Hybrids in Bank Capital Analysis Rating FI Subsidiaries and Holding Companies (New York Ratings Team)