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 September 30, 20202021
Commission File Number 1-11758
(Exact name of Registrant as specified in its charter)
| Delaware | 1585 Broadway | 36-3145972 | (212) | 761-4000 | |||||||||||||||||||
(State or other jurisdiction of incorporation or organization) | New York, | NY | 10036 | (I.R.S. Employer Identification No.) | (Registrant’s telephone number, including area code) | ||||||||||||||||||
| (Address of principal executive offices, including zip code) | |||||||||||||||||||||||
Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||
| Common Stock, $0.01 par value | MS | New York Stock Exchange | ||||||
| Depositary Shares, each representing 1/1,000th interest in a share of Floating Rate | MS/PA | New York Stock Exchange | ||||||
| Non-Cumulative Preferred Stock, Series A, $0.01 par value | ||||||||
| Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate | MS/PE | New York Stock Exchange | ||||||
| Non-Cumulative Preferred Stock, Series E, $0.01 par value | ||||||||
| Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate | MS/PF | New York Stock Exchange | ||||||
| Non-Cumulative Preferred Stock, Series F, $0.01 par value | ||||||||
| Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate | MS/PI | New York Stock Exchange | ||||||
| Non-Cumulative Preferred Stock, Series I, $0.01 par value | ||||||||
| Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate | MS/PK | New York Stock Exchange | ||||||
| Non-Cumulative Preferred Stock, Series K, $0.01 par value | ||||||||
| MS/PL | New York Stock Exchange | |||||||
| Non-Cumulative Preferred Stock, Series L, $0.01 par value | ||||||||
| Depositary Shares, each representing 1/1000th interest in a share of 4.250% | MS/PO | New York Stock Exchange | ||||||
| Non-Cumulative Preferred Stock, Series O, $0.01 par value | ||||||||
| Global Medium-Term Notes, Series A, Fixed Rate Step-Up Senior Notes Due 2026 | MS/26C | New York Stock Exchange | ||||||
| of Morgan Stanley Finance LLC (and Registrant’s guarantee with respect thereto) | ||||||||
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 October 30, 2020,29, 2021, there were 1,809,198,2481,794,411,954 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.
QUARTERLY REPORT ON FORM 10-Q
For the quarter ended September 30, 20202021
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Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains a website, 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 website.
Our website 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 website, 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-governanceand, our sustainability initiatives at www.morganstanley.com/about-us/sustainability-at-morgan-stanley.sustainability-at-morgan-stanley and our commitment to diversity and inclusion at www.morganstanley.com/about-us/diversity. Our webpages include:
•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;
•Environmental and Social Policies;
•Sustainability Report;
•Task Force on Climate-related Financial Disclosures Report; and
•Diversity and Inclusion Report.
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 website. 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 website is not incorporated by reference into this report.
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. Disclosures reflect the effects of the acquisitions of E*TRADE Financial Corporation (“E*TRADE”) and Eaton Vance Corp. (“Eaton Vance”) prospectively from the acquisition dates, October 2, 2020 and March 1, 2021, respectively. See the “Glossary of Common Terms and Acronyms” for the definition of certain terms and 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, salesa variety of products 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. SalesOur Equity and trading servicesFixed Income businesses include sales, financing, prime brokerage, market-making, Asia wealth management services and market-making activities in the equity and fixed income businesses.certain business-related investments. Lending activities include originating corporate loans and commercial real estate loans, providing secured lending facilities, and extending securities-based and other financing to sales and trading customers. Other activities include Asia wealth management services, 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: financial advisor-led brokerage and investment advisory services; self-directed brokerage services; financial and wealth planning services; workplace services including stock plan administration services;administration; 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, which are offered through a variety of investment vehicles, include equity, fixed income, alternatives and solutions, and liquidity and alternative/other products.overlay services. 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 generally served through intermediaries, including affiliated and non-affiliated distributors.
Management’s Discussion and Analysis includes certain metrics whichthat we believe to be useful to us, investors, analysts and other stakeholders by providing further transparency about, or an additional means of assessing, our financial condition and operating results. Such metrics, when used, are defined and may be different from or inconsistent with metrics used by other companies.
The results of operations in the past have been, and in the future may continue to be, materially affected by: competition; risk factors; legislative, legal and regulatory developments; and 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” herein and in the 20192020 Form 10-K, and “Liquidity and Capital Resources—Regulatory Requirements” herein. In addition, see “Executive Summary” herein and “Risk Factors” for information on the current and possible future effects of the COVID-19 pandemic on our results.
| September | ||||||||
| Management’s Discussion and Analysis | | ||||
Executive Summary
Overview of Financial Results
Consolidated Results—Three Months Ended September 30, 20202021
•Firm Netnet revenues were up 16%of $14.8 billion and Netnet income applicable to Morgan Stanley was upof $3.7 billion increased more than 25%, from the prior year quarter, reflecting strengthstrong performance across all business segments and resulting inregions.
•The Firm delivered an annualized ROTCE of 15.0%19.6% or 20.2% excluding the impact of integration-related expenses (see “Non-GAAP“Selected Non-GAAP Financial Measures”Information” herein).
•At September 30, 2020,2021, our standardized Common Equity Tier 1 capital ratio was 17.4%16.0%.
•Wealth Management delivered a pre-tax margin of 25.8% or 27.7% excluding integration-related expenses (see “Selected Non-GAAP Financial Information” herein). Results reflect record asset management revenues, continued growth in bank lending. The business added record net new assets of $135 billion representing a year-to-date 10% annualized growth rate from beginning period assets. •Investment Management results reflect an increase in fee-based asset management revenues on AUM of $1.5 trillion. |
Net Revenues1
($ in millions)
1.Certain prior period amounts have been reclassified to conform to the current presentation. See “Business Segments” herein and Note 1 to the financial statements for more information.
Net Income Applicable to Morgan Stanley
($ in millions)
Earnings per Diluted Common Share1
1.
We reported net revenues of $11,657 million$14.8 billion in the quarter ended September 30, 2021 (“current quarter,” or “3Q 2021”), compared with $11.7 billion in the quarter ended September 30, 2020 (“current quarter,” or “3Q 2020”), compared with $10,032 million in the quarter ended September 30, 2019 (“prior year quarter,” or “3Q 2019”2020”). For the current quarter, net income applicable to Morgan Stanley was $2,717 million,$3.7 billion, or $1.66$1.98 per diluted common share, compared with $2,173 million$2.7 billion or $1.27$1.66 per diluted common share, in the prior year quarter.
We reported net revenues of $34,558 million$45.2 billion in the nine months ended September 30, 20202021 (“current year period,” or “YTD 2020”2021”), compared with $30,562 million$35.2 billion in the period ended September 30, 20192020 (“prior year period,” or “YTD 2019”2020”). For the current year period, net income applicable to Morgan Stanley was $7,611 million,$11.3 billion, or $4.62$6.02 per diluted common share, compared with $6,803 million$7.6 billion or $3.89$4.62 per diluted common share, in the prior year period.
| September | ||||||||
| Management’s Discussion and Analysis | | ||||
Non-interest Expenses1, 2
($ in millions)
1.The percentages on the bars in the chart represent the contribution of compensation and benefits expenses and non-compensation expenses to the total.
2.Certain prior period amounts have been reclassified to conform to the current presentation. See “Business Segments” herein and Note 1 to the financial statements for more information.
•Compensation and benefits expenses of $5,086$5,920 million in the current quarter increased 15%16% from the prior year quarter, primarily as a result of increases in discretionary incentive compensation and the formulaic payout to Wealth Management representatives, incremental compensation as a result of the E*TRADE and Eaton Vance acquisitions, higher discretionary incentive compensation driven by higher revenues, and higher salaries on increased headcount, partially offset by lower expenses related to certain deferred compensation plans linked to investment performance.
Compensation and benefits expenses of $19,141 million in the current year period increased 24% from the prior year period, primarily as a result of an increase in the formulaic payout to Wealth Management representatives, incremental compensation as a result of the E*TRADE and Eaton Vance acquisitions, higher discretionary incentive compensation driven by revenues, higher expenses related to certain deferred compensation plans linked to investment performance.the Firm's share price, and higher salaries on increased headcount.
•Non-compensation expenses of $3,084$3,935 million in the current quarter increased 7%30% from the prior year quarter, primarily due to incremental expenses as a result of the E*TRADE and Eaton Vance acquisitions, in addition to higher volume-related expenses and increased information processing and communication expenses, partially offset by a decreaseinvestments in marketing and business development expenses.
technology.Provision for Credit Losses
The Provision for credit losses on loans and certain deferred compensation plans linkedlending commitments in the current quarter was $24 million, primarily driven by growth in corporate lending commitments. The Provision for credit losses on loans and lending commitments of $111 million in the prior year quarter was primarily driven by the risks related to investment performance.vulnerable sectors and higher downgrade sensitivity, and changes in asset quality trends.
For further information on the Provision for credit losses, see “Credit Risk” herein. |
Income Taxes
The currentFirm’s effective tax rate of 23.6% is higher than the prior year quarter which included intermittenta net discrete tax benefits of $113 million, principally associated withbenefit from the remeasurement of reserves and related interest as a result of new information pertaining to the resolution of tax examinations in certain jurisdictions. The prior year quarter included intermittent net discrete tax benefits of $89 million primarily associated with the filing of the 2018 federal tax return and the remeasurement of reserves and related interest as a result of new information pertaining to the resolution of multi-jurisdiction tax examinations.
| September | ||||||||
| Management’s Discussion and Analysis | | ||||
Business Segment Results
Net Revenues by Segment1, 2
($ in millions)
Net Income Applicable to Morgan Stanley by Segment1
($ in millions)
 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 sum to 100% due to intersegment eliminations. See Note 20 to the financial statements for details of intersegment eliminations. 2.Certain prior period amounts have been reclassified to conform to the current presentation. See “Business Segments” herein and Note 1 to the financial statements for more information. • |
Institutional Securities |
•Wealth Management net revenues of $5,935 million in the current quarter increased 28% from the prior year quarter and net revenues of $17,989 million in the current year period increased 34% from the prior year period, both primarily due to gains from investments associated with certain employee deferred compensation plans. Excluding these investment gains, revenues increased modestly, reflecting higher Asset management revenues on positive net flows, partially offset by lower Net interest.and incremental revenues as a result of the E*TRADE acquisition.
| 4 | September 2021 Form 10-Q | |||||||
| Management’s Discussion and Analysis | | ||||
•Investment Management net revenues of $1,056$1,453 million in the current quarter increased 38% from the prior year quarter, primarily due to higher Investments revenues, driven by accrued carried interest and investment gains in an Asia private equity fund, and higher Asset management and related fees, including incremental revenues as a result of higher average AUM.
 | |
Investment Management net revenues of $2,634$4,469 million in the current year period increased 9%70% from the prior year period, primarily due to higher Asset management and related fees, including incremental revenues as a result of higher average AUM.related to the Eaton Vance acquisition.
Net Revenues by Region1, 2, 3
($ in millions)
 1.The percentages on the bars in the charts represent the contribution of each region to the total. 2.For a discussion of how the geographic breakdown of net revenues is determined, see Note 20 to the financial statements in the 2020 Form 10-K. 3.Certain prior period amounts have been reclassified to conform to the current presentation. See “Business Segments” herein and Note 1 to the financial statements for more information. Americas net |
decreased 3% from the prior year quarter, primarily driven by the Investment Management business segment, partially offset by an increase in the Equity business within the Institutional Securities business segment sales and trading, as well as the Wealth Management business segment. EMEA
Americas net revenues were relatively unchanged in the current quarter.
Selected Financial Information and Other Statistical Data
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| $ in millions | 2021 | 2020 | 2021 | 2020 | ||||||||||
| Consolidated results | ||||||||||||||
Net revenues1 | $ | 14,753 | $ | 11,721 | $ | 45,231 | $ | 35,160 | ||||||
| Earnings applicable to Morgan Stanley common shareholders | $ | 3,584 | $ | 2,597 | $ | 10,974 | $ | 7,234 | ||||||
| Earnings per diluted common share | $ | 1.98 | $ | 1.66 | $ | 6.02 | $ | 4.62 | ||||||
| Consolidated financial measures | ||||||||||||||
Expense efficiency ratio1, 2 | 67 | % | 69 | % | 67 | % | 69 | % | ||||||
Adjusted expense efficiency ratio1, 2 ,4 | 66 | % | 69 | % | 67 | % | 69 | % | ||||||
ROE3 | 14.5 | % | 13.2 | % | 15.1 | % | 12.6 | % | ||||||
Adjusted ROE3, 4 | 15.0 | % | 13.2 | % | 15.4 | % | 12.6 | % | ||||||
ROTCE3, 4 | 19.6 | % | 15.0 | % | 19.7 | % | 14.3 | % | ||||||
Adjusted ROTCE3, 4 | 20.2 | % | 15.0 | % | 20.2 | % | 14.3 | % | ||||||
Pre-tax margin1, 5 | 33 | % | 30 | % | 33 | % | 28 | % | ||||||
| Effective tax rate | 23.6 | % | 21.1 | % | 22.9 | % | 22.2 | % | ||||||
Pre-tax margin by segment5 | ||||||||||||||
Institutional Securities1 | 40 | % | 33 | % | 38 | % | 31 | % | ||||||
Wealth Management1 | 26 | % | 24 | % | 26 | % | 25 | % | ||||||
Wealth Management, adjusted1, 4 | 28 | % | 24 | % | 28 | % | 25 | % | ||||||
| Investment Management | 25 | % | 30 | % | 26 | % | 26 | % | ||||||
Investment Management, adjusted4 | 28 | % | 30 | % | 28 | % | 26 | % | ||||||
| September 2021 Form 10-Q | 5 | |||||||
| Management’s Discussion and Analysis | | ||||
| in millions, except per share and employee data | At September 30, 2021 | At December 31, 2020 | ||||||
Liquidity resources6 | $ | 346,289 | $ | 338,623 | ||||
Loans7 | $ | 188,274 | $ | 161,745 | ||||
| Total assets | $ | 1,190,476 | $ | 1,115,862 | ||||
| Deposits | $ | 329,041 | $ | 310,782 | ||||
| Borrowings | $ | 229,762 | $ | 217,079 | ||||
| Common shareholders' equity | $ | 98,153 | $ | 92,531 | ||||
Tangible common shareholders’ equity4 | $ | 72,808 | $ | 75,916 | ||||
| Common shares outstanding | 1,799 | 1,810 | ||||||
Book value per common share8 | $ | 54.56 | $ | 51.13 | ||||
Tangible book value per common share4, 8 | $ | 40.47 | $ | 41.95 | ||||
Worldwide employees9 (in thousands) | 74 | 68 | ||||||
Capital Ratios10 | ||||||||
| Common Equity Tier 1 capital—Standardized | 16.0 | % | 17.4 | % | ||||
| Tier 1 capital—Standardized | 17.6 | % | 19.4 | % | ||||
| Common Equity Tier 1 capital—Advanced | 17.2 | % | 17.7 | % | ||||
| Tier 1 capital—Advanced | 18.9 | % | 19.8 | % | ||||
| Tier 1 leverage | 7.3 | % | 8.4 | % | ||||
SLR11 | 5.7 | % | 7.4 | % | ||||
1.Certain prior period amounts have been reclassified to conform to the current year period.presentation. See “Business Segments” herein and Note 1 to the financial statements for more information.
2.The expense efficiency ratio represents total non-interest expenses as a percentage of net revenues.
3.ROE and ROTCE represent annualized earnings applicable to Morgan Stanley common shareholders as a percentage of average common equity and average tangible common equity, respectively.
4.Represents a non-GAAP financial measure. See “Selected Non-GAAP Financial Information” herein.
5.Pre-tax margin represents income before income taxes as a percentage of net revenues.
6.For a discussion of Liquidity resources, see “Liquidity and Capital Resources—Liquidity Risk Management Framework—Liquidity Resources” herein.
7.Includes loans at held for investment, net of ACL, loans held for sale, and also includes loans at fair value, which are included in Trading assets in the balance sheets. Prior period amounts have been revised to conform to the current presentation.
8.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.
9.As of September 30, 2021, the number of employees includes Eaton Vance.
10.For a discussion of our capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.
11.At December 31, 2020, our SLR reflects the impact of a Federal Reserve interim final rule that was in effect until March 31, 2021. For further information, see “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments and Other Matters” herein.
Coronavirus Disease (“COVID-19”) Pandemic
Refer to “Risk Factors” and “Forward-Looking Statements” in the Americas working from home as2020 Form 10-K for more information on the potential effects of September 30, 2020.
| |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| $ in millions | 2020 | 2019 | 2020 | 2019 | ||||||||
| Net income applicable to Morgan Stanley | $ | 2,717 | $ | 2,173 | $ | 7,611 | $ | 6,803 | ||||
| Preferred stock dividends | 120 | 113 | 377 | 376 | ||||||||
| Earnings applicable to Morgan Stanley common shareholders | $ | 2,597 | $ | 2,060 | $ | 7,234 | $ | 6,427 | ||||
Expense efficiency ratio1 | 70.1 | % | 73.0 | % | 71.1 | % | 72.0 | % | ||||
ROE2 | 13.2 | % | 11.2 | % | 12.6 | % | 11.8 | % | ||||
Adjusted ROE3 | 12.6 | % | 10.7 | % | 12.5 | % | 11.5 | % | ||||
ROTCE2,3 | 15.0 | % | 12.9 | % | 14.3 | % | 13.5 | % | ||||
Adjusted ROTCE3 | 14.3 | % | 12.3 | % | 14.2 | % | 13.1 | % | ||||
Pre-tax profit margin4 | 29.9 | % | 27.0 | % | 28.9 | % | 28.0 | % | ||||
Pre-tax profit margin by segment4 | ||||||||||||
| Institutional Securities | 34 | % | 26 | % | 32 | % | 28 | % | ||||
| Wealth Management | 24 | % | 28 | % | 25 | % | 28 | % | ||||
| Investment Management | 30 | % | 22 | % | 26 | % | 22 | % | ||||
| in millions, except per share and employee data | At September 30, 2020 | At December 31, 2019 | ||||
Liquidity resources5 | $ | 267,292 | $ | 215,868 | ||
Loans6 | $ | 146,237 | $ | 130,637 | ||
| Total assets | $ | 955,940 | $ | 895,429 | ||
| Deposits | $ | 239,253 | $ | 190,356 | ||
| Borrowings | $ | 203,444 | $ | 192,627 | ||
| Common shares outstanding | 1,576 | 1,594 | ||||
| Common shareholders' equity | $ | 79,874 | $ | 73,029 | ||
Tangible common shareholders’ equity3 | $ | 70,646 | $ | 63,780 | ||
Book value per common share7 | $ | 50.67 | $ | 45.82 | ||
Tangible book value per common share3,7 | $ | 44.81 | $ | 40.01 | ||
| Worldwide employees | 63,051 | 60,431 | ||||
Capital ratios8 | ||||||
| Common Equity Tier 1 capital—Advanced | 16.9 | % | 16.9 | % | ||
| Common Equity Tier 1 capital—Standardized | 17.4 | % | 16.4 | % | ||
| Tier 1 capital—Advanced | 19.0 | % | 19.2 | % | ||
| Tier 1 capital—Standardized | 19.5 | % | 18.6 | % | ||
| Tier 1 leverage | 8.3 | % | 8.3 | % | ||
SLR9 | 7.4 | % | 6.4 | % | ||
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, investors, analysts and other stakeholders by providing further transparency about, or an alternate means of assessing or comparing our financial condition, operating results prospective regulatory capital requirements orand 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 September 30, | Nine Months Ended September 30, | |||||||||||||
| $ in millions, except per share data | 2021 | 2020 | 2021 | 2020 | ||||||||||
| Earnings applicable to Morgan Stanley common shareholders | $ | 3,584 | $ | 2,597 | $ | 10,974 | $ | 7,234 | ||||||
| Impact of adjustments: | ||||||||||||||
| Integration-related expenses | 145 | — | 310 | — | ||||||||||
| Related tax benefit | (34) | — | (72) | — | ||||||||||
Adjusted earnings applicable to Morgan Stanley common shareholders—non-GAAP1 | $ | 3,695 | $ | 2,597 | $ | 11,212 | $ | 7,234 | ||||||
| Earnings per diluted common share | $ | 1.98 | $ | 1.66 | $ | 6.02 | $ | 4.62 | ||||||
| Impact of adjustments | 0.06 | — | 0.13 | — | ||||||||||
Adjusted earnings per diluted common share—non-GAAP1 | $ | 2.04 | $ | 1.66 | $ | 6.15 | $ | 4.62 | ||||||
Expense efficiency ratio2 | 67 | % | 69 | % | 67 | % | 69 | % | ||||||
| Impact of adjustments | (1) | % | — | % | — | % | — | % | ||||||
Adjusted expense efficiency ratio—non-GAAP1, 2 | 66 | % | 69 | % | 67 | % | 69 | % | ||||||
Wealth Management Pre-tax margin2 | 26 | % | 24 | % | 26 | % | 25 | % | ||||||
| Impact of adjustments | 2 | % | — | % | 2 | % | — | % | ||||||
Adjusted Wealth Management pre-tax margin—non-GAAP1, 2 | 28 | % | 24 | % | 28 | % | 25 | % | ||||||
| Investment Management Pre-tax margin | 25 | % | 30 | % | 26 | % | 26 | % | ||||||
| Impact of adjustments | 3 | % | — | % | 2 | % | — | % | ||||||
Adjusted Investment Management pre-tax margin—non-GAAP1 | 28 | % | 30 | % | 28 | % | 26 | % | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| $ in millions, except per share data | 2020 | 2019 | 2020 | 2019 | ||||||||
| Earnings applicable to Morgan Stanley common shareholders | $ | 2,597 | $ | 2,060 | $ | 7,234 | $ | 6,427 | ||||
| Impact of adjustments | (113 | ) | (89 | ) | (10 | ) | (190 | ) | ||||
Adjusted earnings applicable to Morgan Stanley common shareholders—non-GAAP1 | $ | 2,484 | $ | 1,971 | $ | 7,224 | $ | 6,237 | ||||
| Earnings per diluted common share | $ | 1.66 | $ | 1.27 | $ | 4.62 | $ | 3.89 | ||||
| Impact of adjustments | (0.07 | ) | (0.06 | ) | — | (0.12 | ) | |||||
Adjusted earnings per diluted common share—non-GAAP1 | $ | 1.59 | $ | 1.21 | $ | 4.62 | $ | 3.77 | ||||
| Effective income tax rate | 21.1 | % | 18.2 | % | 22.2 | % | 19.1 | % | ||||
| Impact of adjustments | 3.2 | % | 3.2 | % | 0.1 | % | 2.2 | % | ||||
Adjusted effective income tax rate—non-GAAP1 | 24.3 | % | 21.4 | % | 22.3 | % | 21.3 | % | ||||
| 6 | September 2021 Form 10-Q | |||||||
| Average Monthly Balance | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| $ in millions | 2020 | 2019 | 2020 | 2019 | ||||||||
| Tangible equity | ||||||||||||
| Morgan Stanley shareholders' equity | $ | 87,210 | $ | 81,912 | $ | 85,378 | $ | 81,028 | ||||
| Less: Goodwill and net intangible assets | (9,260 | ) | (9,389 | ) | (9,248 | ) | (9,097 | ) | ||||
| Tangible Morgan Stanley shareholders' equity—Non-GAAP | $ | 77,950 | $ | 72,523 | $ | 76,130 | $ | 71,931 | ||||
| Common shareholders' equity | $ | 78,690 | $ | 73,392 | $ | 76,858 | $ | 72,508 | ||||
| Less: Goodwill and net intangible assets | (9,260 | ) | (9,389 | ) | (9,248 | ) | (9,097 | ) | ||||
| Tangible common shareholders' equity—Non-GAAP | $ | 69,430 | $ | 64,003 | $ | 67,610 | $ | 63,411 | ||||
| Management’s Discussion and Analysis | | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| $ in billions | 2020 | 2019 | 2020 | 2019 | ||||||||
| Average common equity | ||||||||||||
| Unadjusted—GAAP | $ | 78.7 | $ | 73.4 | $ | 76.9 | $ | 72.5 | ||||
Adjusted1—Non-GAAP | 78.7 | 73.4 | 76.9 | 72.4 | ||||||||
ROE2 | ||||||||||||
| Unadjusted—GAAP | 13.2 | % | 11.2 | % | 12.6 | % | 11.8 | % | ||||
Adjusted—Non-GAAP1, 3 | 12.6 | % | 10.7 | % | 12.5 | % | 11.5 | % | ||||
| Average tangible common equity—Non-GAAP | ||||||||||||
| Unadjusted | $ | 69.4 | $ | 64.0 | $ | 67.6 | $ | 63.4 | ||||
Adjusted1 | 69.4 | 64.0 | 67.6 | 63.3 | ||||||||
ROTCE2—Non-GAAP | ||||||||||||
| Unadjusted | 15.0 | % | 12.9 | % | 14.3 | % | 13.5 | % | ||||
Adjusted1, 3 | 14.3 | % | 12.3 | % | 14.2 | % | 13.1 | % | ||||
| $ in millions | At September 30, 2021 | At December 31, 2020 | ||||||
| Tangible equity | ||||||||
| Common shareholders' equity | $ | 98,153 | $ | 92,531 | ||||
| Less: Goodwill and net intangible assets | (25,345) | (16,615) | ||||||
| Tangible common shareholders' equity—non-GAAP | $ | 72,808 | $ | 75,916 | ||||
| Average Monthly Balance | ||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| $ in millions | 2021 | 2020 | 2021 | 2020 | ||||||||||
| Tangible equity | ||||||||||||||
| Common shareholders' equity | $ | 98,563 | $ | 78,690 | $ | 96,929 | $ | 76,858 | ||||||
| Less: Goodwill and net intangible assets | (25,433) | (9,260) | (22,836) | (9,248) | ||||||||||
| Tangible common shareholders' equity—non-GAAP | $ | 73,130 | $ | 69,430 | $ | 74,093 | $ | 67,610 | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| $ in billions | 2021 | 2020 | 2021 | 2020 | ||||||||||
| Average common equity | ||||||||||||||
| Unadjusted—GAAP | $ | 98.6 | $ | 78.7 | $ | 96.9 | $ | 76.9 | ||||||
Adjusted1—Non-GAAP | 98.6 | 78.7 | 97.0 | 76.9 | ||||||||||
ROE3 | ||||||||||||||
| Unadjusted—GAAP | 14.5 | % | 13.2 | % | 15.1 | % | 12.6 | % | ||||||
Adjusted1—Non-GAAP | 15.0 | % | 13.2 | % | 15.4 | % | 12.6 | % | ||||||
| Average tangible common equity—Non-GAAP | ||||||||||||||
| Unadjusted | $ | 73.1 | $ | 69.4 | $ | 74.1 | $ | 67.6 | ||||||
Adjusted1 | 73.2 | 69.4 | 74.2 | 67.6 | ||||||||||
ROTCE3—Non-GAAP | ||||||||||||||
| Unadjusted | 19.6 | % | 15.0 | % | 19.7 | % | 14.3 | % | ||||||
Adjusted1 | 20.2 | % | 15.0 | % | 20.2 | % | 14.3 | % | ||||||
Non-GAAP Financial Measures by Business Segment
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| $ in billions | 2021 | 2020 | 2021 | 2020 | ||||||||||
Average common equity4 | ||||||||||||||
| Institutional Securities | $ | 43.5 | $ | 42.8 | $ | 43.5 | $ | 42.8 | ||||||
| Wealth Management | 28.6 | 18.2 | 28.6 | 18.2 | ||||||||||
| Investment Management | 10.7 | 2.6 | 8.2 | 2.6 | ||||||||||
ROE5 | ||||||||||||||
| Institutional Securities | 20 | % | 15 | % | 20 | % | 13 | % | ||||||
| Wealth Management | 16 | % | 18 | % | 17 | % | 18 | % | ||||||
| Investment Management | 12 | % | 34 | % | 15 | % | 23 | % | ||||||
Average tangible common equity4 | ||||||||||||||
| Institutional Securities | $ | 42.9 | $ | 42.3 | $ | 42.9 | $ | 42.3 | ||||||
| Wealth Management | 13.4 | 10.4 | 13.4 | 10.4 | ||||||||||
| Investment Management | 1.0 | 1.7 | 1.0 | 1.7 | ||||||||||
ROTCE5 | ||||||||||||||
| Institutional Securities | 20 | % | 15 | % | 20 | % | 14 | % | ||||||
| Wealth Management | 34 | % | 31 | % | 35 | % | 32 | % | ||||||
| Investment Management | 161 | % | 53 | % | 128 | % | 36 | % | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| $ in billions | 2020 | 2019 | 2020 | 2019 | ||||||||
Average common equity4, 5 | ||||||||||||
| Institutional Securities | $ | 42.8 | $ | 40.4 | $ | 42.8 | $ | 40.4 | ||||
| Wealth Management | 18.2 | 18.2 | 18.2 | 18.2 | ||||||||
| Investment Management | 2.6 | 2.5 | 2.6 | 2.5 | ||||||||
Average tangible common equity4, 5 | ||||||||||||
| Institutional Securities | $ | 42.3 | $ | 39.9 | $ | 42.3 | $ | 39.9 | ||||
| Wealth Management | 10.4 | 10.2 | 10.4 | 10.2 | ||||||||
| Investment Management | 1.7 | 1.5 | 1.7 | 1.5 | ||||||||
ROE6 | ||||||||||||
| Institutional Securities | 14.5 | % | 9.8 | % | 13.4 | % | 10.8 | % | ||||
| Wealth Management | 17.9 | % | 20.6 | % | 18.2 | % | 20.2 | % | ||||
| Investment Management | 34.0 | % | 22.1 | % | 23.0 | % | 21.5 | % | ||||
ROTCE6 | ||||||||||||
| Institutional Securities | 14.7 | % | 9.9 | % | 13.5 | % | 10.9 | % | ||||
| Wealth Management | 31.4 | % | 36.9 | % | 31.7 | % | 36.2 | % | ||||
| Investment Management | 52.6 | % | 35.6 | % | 35.6 | % | 34.7 | % | ||||
| 2. |
3.ROE and ROTCE represent earnings applicable to Morgan Stanley common shareholders as a percentage of average common equity and average tangible common equity, respectively. When excluding integration-related costs, both the numerator and average denominator are adjusted. 4.Average common equity and average tangible common equity for each business segment is 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). The sums of the segments' Average common equity and Average tangible common equity do not equal the Consolidated measures due to Parent equity. 5.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. |
| |
Return on Tangible Common Equity Target
In January 2020,2021, we established ana 2-year ROTCE Target of 13%14% to 15% to be achieved over the next two years.16%, excluding integration-related expenses.
Our ROTCE Target is a forward-looking statement that was based on a normal market environment and may be materially affected by many factors, including, among other things: mergers and acquisitions; macroeconomic and market conditions;conditions, which may be impacted by the future course of COVID-19; legislative, accounting, tax and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; outsized legal expenses or penalties; the ability to maintain a reduced level ofcontrol expenses; capital levels; and capital levels.mergers and acquisitions.
| September 2021 Form 10-Q | 7 | |||||||
| Management’s Discussion and Analysis | | ||||
For further information on non-GAAP measures (ROTCE excluding intermittent net discrete tax items)integration-related expenses), see “Selected Non-GAAP Financial Information” herein. For information on the impact of intermittent net discrete tax items, see “Supplemental Financial Information—Income Tax Matters” herein.
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. See Note 20 to the financial statements for segment net revenues by income statement line item and information on intersegment transactions.
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 20192020 Form 10-K.
Provision for credit losses
The Provision for credit losses for loans and lending commitments is presented as a separate line in the income statements. Previously, the provision for credit losses for loans was included in Other revenues and the provision for credit losses for lending commitments was included in Other expense.
Other revenues
Gains and losses on economic derivative hedges associated with certain held-for-sale and held-for-investment corporate loans, which were previously reported in Trading revenues, are reported within Other revenues in the income statements. This presentation better aligns with the recognition of mark-to-market gains and losses on held-for-sale loans which continue to be reported in Other revenues.
Institutional Securities
Equity—Financing, Equity—Execution services and Fixed income include certain Investments and Other revenues to the extent directly attributable to those businesses. The remaining Investments and Other revenues not included in those businesses’ results are reported in Other. Other also includes revenues previously reported as Other Sales and Trading.
Investment Management
We have renamed the previously disclosed revenue line Asset management to Asset management and related fees and have
combined the remaining revenue lines into a new category named Performance-based income and other.
| September | ||||||||
| Management’s Discussion and Analysis | | ||||
Institutional Securities
Income Statement Information
| Three Months Ended September 30, | |||||||||||
| $ in millions | 2021 | 2020 | % Change | ||||||||
| Revenues | |||||||||||
| Advisory | $ | 1,272 | $ | 357 | N/M | ||||||
| Equity | 1,010 | 874 | 16 | % | |||||||
| Fixed income | 567 | 476 | 19 | % | |||||||
| Total Underwriting | 1,577 | 1,350 | 17 | % | |||||||
| Total Investment banking | 2,849 | 1,707 | 67 | % | |||||||
Equity1 | 2,876 | 2,311 | 24 | % | |||||||
Fixed income1 | 1,640 | 1,954 | (16) | % | |||||||
Other1 | 130 | 157 | (17) | % | |||||||
| Net revenues | $ | 7,495 | $ | 6,129 | 22 | % | |||||
Provision for credit losses1 | 24 | 113 | (79) | % | |||||||
| Compensation and benefits | 2,248 | 2,001 | 12 | % | |||||||
Non-compensation expenses1 | 2,250 | 1,967 | 14 | % | |||||||
Total non-interest expenses1 | 4,498 | 3,968 | 13 | % | |||||||
| Income before provision for income taxes | 2,973 | 2,048 | 45 | % | |||||||
| Provision for income taxes | 713 | 385 | 85 | % | |||||||
| Net income | 2,260 | 1,663 | 36 | % | |||||||
| Net income applicable to noncontrolling interests | 31 | 16 | 94 | % | |||||||
| Net income applicable to Morgan Stanley | $ | 2,229 | $ | 1,647 | 35 | % | |||||
| Nine Months Ended September 30, | |||||||||||
| $ in millions | 2021 | 2020 | % Change | ||||||||
| Revenues | |||||||||||
| Advisory | $ | 2,416 | $ | 1,181 | 105 | % | |||||
| Equity | 3,584 | 2,092 | 71 | % | |||||||
| Fixed income | 1,838 | 1,629 | 13 | % | |||||||
| Total Underwriting | 5,422 | 3,721 | 46 | % | |||||||
| Total Investment banking | 7,838 | 4,902 | 60 | % | |||||||
Equity1 | 8,578 | 7,387 | 16 | % | |||||||
Fixed income1 | 6,288 | 7,057 | (11) | % | |||||||
Other1 | 460 | 160 | 188 | % | |||||||
Net revenues1 | $ | 23,164 | $ | 19,506 | 19 | % | |||||
Provision for credit losses1 | 1 | 718 | (100) | % | |||||||
| Compensation and benefits | 7,795 | 6,767 | 15 | % | |||||||
Non-compensation expenses1 | 6,526 | 6,030 | 8 | % | |||||||
Total non-interest expenses1 | 14,321 | 12,797 | 12 | % | |||||||
| Income before provision for income taxes | 8,842 | 5,991 | 48 | % | |||||||
| Provision for income taxes | 2,023 | 1,326 | 53 | % | |||||||
| Net income | 6,819 | 4,665 | 46 | % | |||||||
| Net income applicable to noncontrolling interests | 85 | 75 | 13 | % | |||||||
| Net income applicable to Morgan Stanley | $ | 6,734 | $ | 4,590 | 47 | % | |||||
1.Certain prior period amounts have been reclassified to conform to the current presentation. See “Business Segments” herein and Note 1 to the financial statements for additional information.
| Three Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Revenues | ||||||||
| Investment banking | $ | 1,707 | $ | 1,535 | 11 | % | ||
| Trading | 2,807 | 2,533 | 11 | % | ||||
| Investments | 87 | (18 | ) | N/M | ||||
| Commissions and fees | 639 | 643 | (1 | )% | ||||
| Asset management | 114 | 100 | 14 | % | ||||
| Other | 114 | 51 | 124 | % | ||||
| Total non-interest revenues | 5,468 | 4,844 | 13 | % | ||||
| Interest income | 1,086 | 3,112 | (65 | )% | ||||
| Interest expense | 492 | 2,933 | (83 | )% | ||||
| Net interest | 594 | 179 | N/M | |||||
| Net revenues | 6,062 | 5,023 | 21 | % | ||||
| Compensation and benefits | 2,001 | 1,768 | 13 | % | ||||
| Non-compensation expenses | 2,013 | 1,948 | 3 | % | ||||
| Total non-interest expenses | 4,014 | 3,716 | 8 | % | ||||
| Income before provision for income taxes | 2,048 | 1,307 | 57 | % | ||||
| Provision for income taxes | 385 | 189 | 104 | % | ||||
| Net income | 1,663 | 1,118 | 49 | % | ||||
| Net income applicable to noncontrolling interests | 16 | 45 | (64 | )% | ||||
| Net income applicable to Morgan Stanley | $ | 1,647 | $ | 1,073 | 53 | % | ||
| Nine Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Revenues | ||||||||
| Investment banking | $ | 4,902 | $ | 4,158 | 18 | % | ||
| Trading | 10,375 | 8,221 | 26 | % | ||||
| Investments | 98 | 257 | (62 | )% | ||||
| Commissions and fees | 2,230 | 1,889 | 18 | % | ||||
| Asset management | 342 | 310 | 10 | % | ||||
| Other | (628 | ) | 416 | N/M | ||||
| Total non-interest revenues | 17,319 | 15,251 | 14 | % | ||||
| Interest income | 4,809 | 9,457 | (49 | )% | ||||
| Interest expense | 3,184 | 9,376 | (66 | )% | ||||
| Net interest | 1,625 | 81 | N/M | |||||
| Net revenues | 18,944 | 15,332 | 24 | % | ||||
| Compensation and benefits | 6,767 | 5,376 | 26 | % | ||||
| Non-compensation expenses | 6,186 | 5,591 | 11 | % | ||||
| Total non-interest expenses | 12,953 | 10,967 | 18 | % | ||||
| Income before provision for income taxes | 5,991 | 4,365 | 37 | % | ||||
| Provision for income taxes | 1,326 | 703 | 89 | % | ||||
| Net income | 4,665 | 3,662 | 27 | % | ||||
| Net income applicable to noncontrolling interests | 75 | 97 | (23 | )% | ||||
| Net income applicable to Morgan Stanley | $ | 4,590 | $ | 3,565 | 29 | % | ||
Investment Banking
Investment Banking RevenuesVolumes
| Three Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Advisory | $ | 357 | $ | 550 | (35 | )% | ||
| Underwriting: | ||||||||
| Equity | 874 | 401 | 118 | % | ||||
| Fixed income | 476 | 584 | (18 | )% | ||||
| Total Underwriting | 1,350 | 985 | 37 | % | ||||
| Total Investment banking | $ | 1,707 | $ | 1,535 | 11 | % | ||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| $ in billions | 2021 | 2020 | 2021 | 2020 | ||||||||||
Completed mergers and acquisitions1 | $ | 352 | $ | 110 | $ | 732 | $ | 662 | ||||||
Equity and equity-related offerings2, 3 | 22 | 26 | 92 | 75 | ||||||||||
Fixed income offerings2, 4 | 73 | 93 | 284 | 308 | ||||||||||
| Nine Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Advisory | $ | 1,181 | $ | 1,462 | (19 | )% | ||
| Underwriting: | ||||||||
| Equity | 2,092 | 1,286 | 63 | % | ||||
| Fixed income | 1,629 | 1,410 | 16 | % | ||||
| Total Underwriting | 3,721 | 2,696 | 38 | % | ||||
| Total Investment banking | $ | 4,902 | $ | 4,158 | 18 | % | ||
| |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| $ in billions | 2020 | 2019 | 2020 | 2019 | ||||||||
Completed mergers and acquisitions1 | $ | 88 | $ | 215 | $ | 633 | $ | 582 | ||||
Equity and equity-related offerings2, 3 | 25 | 17 | 74 | 47 | ||||||||
Fixed income offerings2, 4 | 91 | 90 | 304 | 211 | ||||||||
Source: Refinitiv data as of October 1, 2020.2021. 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, 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 in the Current Quarter
•Advisory revenues decreased in the current quarterincreased primarily as a result of lower volumes ofdriven by higher completed M&A activity.transactions.
•Equity underwriting revenues increased, primarily in initial public offerings, follow-on offerings and secondary block share trades, on overall higher volumes in the current quarter.and private placement offerings, partially offset by lower revenues from other equity offerings.
•Fixed income underwriting revenues decreased in the current quarterincreased primarily indue to higher non-investment grade and investment grade loan issuances reflectingand securitized products revenues, partially offset by lower event-driven activity.investment grade bond issuances.
•Advisory revenues decreased in the current year period as there were fewerincreased primarily due to higher completed transactions.
•Equity underwriting revenues increased on higher volumes, primarily in follow-oninitial public offerings, secondary block share trades, initial publicand private placement offerings, andpartially offset by lower revenues from convertible issuances, on overall higher volumes in the current year period.issuances.
•Fixed income underwriting revenues increased primarily in investment grade anddue to higher non-investment grade bondloan issuances and securitized products revenues, partially offset by a decrease investment grade loan issuances, on overall higher volumes.bond issuances.
See “Investment Banking Volumes” herein.
| Three Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Trading | $ | 2,807 | $ | 2,533 | 11 | % | ||
| Commissions and fees | 639 | 643 | (1 | )% | ||||
| Asset management | 114 | 100 | 14 | % | ||||
| Net interest | 594 | 179 | N/M | |||||
| Total | $ | 4,154 | $ | 3,455 | 20 | % | ||
| Nine Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Trading | $ | 10,375 | $ | 8,221 | 26 | % | ||
| Commissions and fees | 2,230 | 1,889 | 18 | % | ||||
| Asset management | 342 | 310 | 10 | % | ||||
| Net interest | 1,625 | 81 | N/M | |||||
| Total | $ | 14,572 | $ | 10,501 | 39 | % | ||
| Three Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Equity | $ | 2,262 | $ | 1,991 | 14 | % | ||
| Fixed Income | 1,924 | 1,430 | 35 | % | ||||
| Other | (32 | ) | 34 | (194 | )% | |||
| Total | $ | 4,154 | $ | 3,455 | 20 | % | ||
| Nine Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Equity | $ | 7,303 | $ | 6,136 | 19 | % | ||
| Fixed Income | 7,160 | 4,273 | 68 | % | ||||
| Other | 109 | 92 | 18 | % | ||||
| Total | $ | 14,572 | $ | 10,501 | 39 | % | ||
| September | 9 | |||||||||
| Management’s Discussion and Analysis | | ||||
Equity, Fixed Income and Other Net Revenues
| Three Months Ended September 30, 2020 | ||||||||||||
| Net | ||||||||||||
| $ in millions | Trading | Fees1 | Interest2 | Total | ||||||||
| Financing | $ | 929 | $ | 108 | $ | 116 | $ | 1,153 | ||||
| Execution services | 606 | 580 | (77 | ) | 1,109 | |||||||
| Total Equity | $ | 1,535 | $ | 688 | $ | 39 | $ | 2,262 | ||||
| Total Fixed Income | $ | 1,420 | $ | 65 | $ | 439 | $ | 1,924 | ||||
| Three Months Ended September 30, 2019 | ||||||||||||
| Net | ||||||||||||
| $ in millions | Trading | Fees1 | Interest2 | Total | ||||||||
| Financing | $ | 1,049 | $ | 88 | $ | (90 | ) | $ | 1,047 | |||
| Execution services | 446 | 564 | (66 | ) | 944 | |||||||
| Total Equity | $ | 1,495 | $ | 652 | $ | (156 | ) | $ | 1,991 | |||
| Total Fixed Income | $ | 1,329 | $ | 90 | $ | 11 | $ | 1,430 | ||||
| Nine Months Ended September 30, 2020 | ||||||||||||
| Net | ||||||||||||
| $ in millions | Trading | Fees1 | Interest2 | Total | ||||||||
| Financing | $ | 2,847 | $ | 325 | $ | 172 | $ | 3,344 | ||||
| Execution services | 2,134 | 2,014 | (189 | ) | 3,959 | |||||||
| Total Equity | $ | 4,981 | $ | 2,339 | $ | (17 | ) | $ | 7,303 | |||
| Total Fixed Income | $ | 5,661 | $ | 234 | $ | 1,265 | $ | 7,160 | ||||
| Nine Months Ended September 30, 2019 | ||||||||||||
| Net | ||||||||||||
| $ in millions | Trading | Fees1 | Interest2 | Total | ||||||||
| Financing | $ | 3,249 | $ | 280 | $ | (500 | ) | $ | 3,029 | |||
| Execution services | 1,597 | 1,671 | (161 | ) | 3,107 | |||||||
| Total Equity | $ | 4,846 | $ | 1,951 | $ | (661 | ) | $ | 6,136 | |||
| Total Fixed Income | $ | 4,200 | $ | 249 | $ | (176 | ) | $ | 4,273 | |||
| Three Months Ended September 30, 2021 | |||||||||||||||||
Net Interest2 | All Other3 | ||||||||||||||||
| $ in millions | Trading | Fees1 | Total | ||||||||||||||
| Financing | $ | 1,204 | $ | 123 | $ | 130 | $ | 1 | $ | 1,458 | |||||||
| Execution services | 832 | 612 | (62) | 36 | 1,418 | ||||||||||||
| Total Equity | $ | 2,036 | $ | 735 | $ | 68 | $ | 37 | $ | 2,876 | |||||||
| Total Fixed Income | $ | 1,029 | $ | 75 | $ | 479 | $ | 57 | $ | 1,640 | |||||||
Three Months Ended September 30, 20204 | |||||||||||||||||
Net Interest2 | All Other3 | ||||||||||||||||
| $ in millions | Trading | Fees1 | Total | ||||||||||||||
| Financing | $ | 929 | $ | 108 | $ | 116 | $ | — | $ | 1,153 | |||||||
| Execution services | 606 | 580 | (77) | 49 | 1,158 | ||||||||||||
| Total Equity | $ | 1,535 | $ | 688 | $ | 39 | $ | 49 | $ | 2,311 | |||||||
| Total Fixed Income | $ | 1,420 | $ | 65 | $ | 442 | $ | 27 | $ | 1,954 | |||||||
| Nine Months Ended September 30, 2021 | |||||||||||||||||
Net Interest2 | All Other3 | ||||||||||||||||
| $ in millions | Trading | Fees1 | Total | ||||||||||||||
| Financing | $ | 2,987 | $ | 374 | $ | 429 | $ | 7 | $ | 3,797 | |||||||
| Execution services | 2,764 | 2,048 | (169) | 138 | 4,781 | ||||||||||||
| Total Equity | $ | 5,751 | $ | 2,422 | $ | 260 | $ | 145 | $ | 8,578 | |||||||
| Total Fixed Income | $ | 4,490 | $ | 228 | $ | 1,335 | $ | 235 | $ | 6,288 | |||||||
Nine Months Ended September 30, 20204 | |||||||||||||||||
Net Interest2 | All Other3 | ||||||||||||||||
| $ in millions | Trading | Fees1 | Total | ||||||||||||||
| Financing | $ | 2,847 | $ | 325 | $ | 172 | $ | 4 | $ | 3,348 | |||||||
| Execution services | 2,134 | 2,014 | (189) | 80 | 4,039 | ||||||||||||
| Total Equity | $ | 4,981 | $ | 2,339 | $ | (17) | $ | 84 | $ | 7,387 | |||||||
| Total Fixed Income | $ | 5,661 | $ | 234 | $ | 1,274 | $ | (112) | $ | 7,057 | |||||||
1.Includes Commissions and fees and Asset management revenues.
2.Includes funding costs, which are allocated to the businesses based on funding usage.
3.Includes Investments and Other revenues.
4.Certain prior period amounts have been reclassified to conform to the current period presentation. See “Business Segments” herein and Note 1 to the financial statements for additional information.
Equity, Fixed Income and Other Net Revenues—Current Quarter
Equity
•Financing revenues increased from the prior year quarter, primarily driven by client activity. The effect of lower interest rates was an increase in Net interest driven by lower funding costs, partially offset by reduced Trading revenues.
•Execution services revenues increased from the prior year period, reflecting higher client activity and favorable inventory management results in cash equities and derivatives, partially offset by the impact of counterparty exposure losses.
| |
Fixed Income
Net revenues of $1,640 million in the current quarter decreased 16% compared with the prior year quarter, primarily driven by global macro and credit products.
•Global macro products revenues decreased in rates and foreign exchange products, and improvedprimarily due to the impact of market conditions on inventory management results.held to facilitate client activity.
•Credit products revenues decreased primarily due to the impact of market conditions on inventory held to facilitate client activity in securitized products and corporate credit products, reflecting the impact of tightening credit spreads in the prior year quarter and the effect of tighter bid-offer spreads in the current quarter.
•Commodities products and other fixed income revenues increased, primarily driven by higher client activity in Commodities.
Other Net Revenues
Net revenues of $130 million in the current quarter decreased 17% compared with the prior year quarter primarily due to losses from investments associated with certain employee deferred compensation plans compared with gains in the prior year quarter, partially offset by improved performance in economic hedges related to certain of the Firm’s Borrowings.
Net Interest
Net interest revenues of $716 million in the current quarter are included within Equity, Fixed Income, and Other, and increased 21% compared with the prior year quarter primarily driven by lower net costs associated with maintaining liquidity as well as increased revenues from higher balances in secured lending facilities.
Equity, Fixed Income and Other Net Revenues—Current Year Period
Equity
Net revenues of $8,578 million in the current year period increased 16% compared with the prior year period, reflecting an increase in both our execution services and financing businesses, with particular strength in Asia.
•Financing revenues increased, primarily driven by higher average client balances and higher client activity, partially offset by a credit loss related to a single client in the first quarter of 2021.
•Execution services revenues increased, primarily due to higher client activity and the impact of market conditions on inventory held to facilitate client activity in corporatederivatives, partially offset by trading losses related to the aforementioned credit event.
| 10 | September 2021 Form 10-Q | |||||||
| Management’s Discussion and Analysis | | ||||
Fixed Income
Net revenues of $6,288 million in the current year period decreased 11% compared with the prior year period, primarily driven by global macro products, partially offset by credit products.
•Global macro products revenues decreased in rates and securitizedforeign exchange products, from higher volumes and widerprimarily due to the effect of tighter bid-offer spreads and lower market volatility compared with the prior year period, partially offset by the impact of market conditions on inventory held to facilitate client activity.
•Credit products revenues increased, primarily due to the impact of market conditions on inventory held to facilitate client activity across all credit products, partially offset by the effect of widening credittighter bid-offer spreads on inventory. Net interest revenues increased reflecting lower funding costs and higher average balances in secured lending facilities.corporate credit products.
•Commodities products and Otherother fixed income revenues increased, primarily reflecting favorabledriven by higher counterparty credit risk management results, partially offset by the impact of market conditions on inventory management and higherheld to facilitate client activity in commodities, partially offset by lower client structuring activity within derivatives counterparty credit risk management.
Other sales and tradingNet Revenues
Net revenues of $109$460 million in the current year period increased from 188% compared with the prior year period reflecting gainsprimarily due to lower losses on corporate loans held for sale, net of related economic hedges, associated with corporate lending activity, partially offset by lower yields on liquidity investments, lowerhigher gains from investments associated with certain employee deferred compensation plans and losses onimproved performance in economic hedges related to certain of the Firm’s Borrowings.
Net investments gains of $87 million in the current quarter include gains on certain business-related investments compared with losses in the prior year quarter.Interest
Net investments gainsinterest revenues of $98$1,964 million in the current year period include gains on certain business-related investments. Theare included within Equity, Fixed Income, and Other, and increased 21% compared with the prior year period included gains associated with an investment’s initial public offering.primarily driven by higher client balances in Equity Financing and increased revenues from higher balances in secured lending facilities.
In the current quarter, the Provision for credit losses on loans and lending commitments was $24 million, primarily driven by growth in corporate lending commitments. The Provision for credit losses on loans and lending commitments of $114$113 million in the prior year quarter was primarily driven by the risks related to vulnerable sectors and higher downgrade sensitivity, and changes in asset quality trends.
In the current year period, the Provision for credit losses on loans and lending commitments was flat, primarily as a result of provision for one secured lending facility in the second quarter of 2021, offset by the impact of paydowns on corporate loans, including by lower-rated borrowers. The Provision for credit losses on loans and lending commitments
of $718 million in the prior year period was primarily driven by the risks related to vulnerable sectors and higher downgrade sensitivity, changes in asset quality trends, and deterioration in the expected macroeconomic environment at that time.
For further information on the Provision for credit losses, see “Credit Risk” herein.
Non-interest Expenses
Non-interest expenses of $4,498 million in the current quarter increased 13% compared towith the prior year quarter, primarily as a result of mark-to-market gains on loansboth higher Non-compensation and lending commitments held for sale as credit spreads tightened, partially offset by an increase in the provision for credit losses on loans held for investment.
•Compensation and benefits expenses increased in the current quarter, primarily due to increasesan increase in discretionary incentive compensation driven by higher revenues, higher salaries on increased headcount, and higher expenses related to certain deferred compensation plans linked to investment performance.
In the current year period, non-interest expenses increased 12% compared with the prior year period to $14,321 million as a result of both higher Compensation and benefits and Non-compensation expenses.
•Compensation and benefits expenses increased in the current year period, primarily due to an increase in discretionary incentive compensation driven by higher revenue, higher expenses related to certain deferred compensation plans linked to the Firm’s share price, as well as higher salaries on increased headcount.
•Non-compensation expenses increased in the current year period, primarily due to higherincreased volume-related expenses, an increaseinvestments in the provision for credit losses for lending commitments held for investmenttechnology, and off-balance sheet instruments, and higher information processing and communicationsprofessional services, partially offset by a decrease in litigation expenses. Partially offsetting these increases were lower marketing and business development expenses.
Income Tax Items
The current quarter andeffective tax rate of 24.0% is higher than the prior year quarter which included intermittenta net discrete tax benefitsbenefit from the remeasurement of $115 millionreserves and $67 million, respectively.
| September | 11 | |||||||||
| Management’s Discussion and Analysis | | ||||
Wealth Management
Income Statement Information
| Three Months Ended September 30, | |||||||||||
| $ in millions | 2021 | 2020 | % Change | ||||||||
| Revenues | |||||||||||
| Asset management | $ | 3,628 | $ | 2,793 | 30 | % | |||||
Transactional1 | 832 | 880 | (5) | % | |||||||
| Net interest | 1,348 | 889 | 52 | % | |||||||
Other1,2 | 127 | 92 | 38 | % | |||||||
| Net revenues | 5,935 | 4,654 | 28 | % | |||||||
Provision for credit losses2 | — | (2) | 100 | % | |||||||
| Compensation and benefits | 3,159 | 2,684 | 18 | % | |||||||
| Non-compensation expenses | 1,246 | 852 | 46 | % | |||||||
| Total non-interest expenses | 4,405 | 3,536 | 25 | % | |||||||
Income before provision for income taxes | $ | 1,530 | $ | 1,120 | 37 | % | |||||
| Provision for income taxes | 373 | 278 | 34 | % | |||||||
Net income applicable to Morgan Stanley | $ | 1,157 | $ | 842 | 37 | % | |||||
| Nine Months Ended September 30, | |||||||||||
| $ in millions | 2021 | 2020 | % Change | ||||||||
| Revenues | |||||||||||
| Asset management | $ | 10,266 | $ | 7,980 | 29 | % | |||||
Transactional1 | 3,232 | 2,354 | 37 | % | |||||||
| Net interest | 3,988 | 2,815 | 42 | % | |||||||
Other1,2 | 503 | 265 | 90 | % | |||||||
| Net revenues | 17,989 | 13,414 | 34 | % | |||||||
Provision for credit losses2 | (2) | 39 | (105) | % | |||||||
| Compensation and benefits | 9,604 | 7,625 | 26 | % | |||||||
| Non-compensation expenses | 3,621 | 2,433 | 49 | % | |||||||
| Total non-interest expenses | 13,225 | 10,058 | 31 | % | |||||||
Income before provision for income taxes | $ | 4,766 | $ | 3,317 | 44 | % | |||||
| Provision for income taxes | 1,103 | 758 | 46 | % | |||||||
Net income applicable to Morgan Stanley | $ | 3,663 | $ | 2,559 | 43 | % | |||||
1.Transactional includes Investment banking, Trading, and Commissions and fees revenues. Other includes Investments and Other revenues.
2.Certain prior period amounts have been reclassified to conform to the current presentation. See "Business Segments" herein and Note 1 to the financial statements for additional information.
Acquisition of E*TRADE
The comparisons of current year results to prior periods are impacted by the acquisition of E*TRADE in the fourth quarter of 2020. For additional information on the acquisition of E*TRADE, see Note 3 to the financial statements in the Form 2020 10-K.
Wealth Management Metrics
| $ in billions | At September 30, 2021 | At December 31, 2020 | ||||||
| Total client assets | $ | 4,629 | $ | 3,999 | ||||
| U.S. Bank Subsidiary loans | $ | 121 | $ | 98 | ||||
Margin and other lending1 | $ | 29 | $ | 23 | ||||
Deposits2 | $ | 327 | $ | 306 | ||||
| Annualized weighted average cost of deposits | 0.13% | 0.24% | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||
Net new assets3 | $ | 134.5 | $ | 51.8 | $ | 310.6 | $ | 109.3 | ||||||
1.Margin and other lending represents margin lending arrangements, which allow customers to borrow against the value of qualifying securities and other lending which includes non‐purpose securities-based lending on non‐bank entities.
2.Deposits are sourced from Wealth Management clients and other sources of funding on the U.S. Bank Subsidiaries. Deposits include sweep deposit programs, savings and other, and time deposits. Excludes approximately $9 billion and $25 billion of off-balance sheet deposits as of September 30, 2021 and December 31, 2020, respectively.
3.Net new assets represent client inflows, including dividends and interest, and asset acquisitions, less client outflows, and exclude activity from business combinations/divestitures and the impact of fees and commissions.
Advisor-led channel
| $ in billions | At September 30, 2021 | At December 31, 2020 | |||||||||
Advisor-led client assets1 | $ | 3,647 | $ | 3,167 | |||||||
Fee-based client assets2 | $ | 1,752 | $ | 1,472 | |||||||
Fee-based client assets as a percentage of advisor-led client assets | 48% | 46% | |||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||
Fee-based asset flows3 | $ | 70.6 | $ | 23.8 | $ | 141.5 | $ | 53.3 | ||||||
1.Advisor-led client assets represent client assets in accounts that have a Wealth Management representative assigned.
2.Fee‐based client assets represent the amount of assets in client accounts where the basis of payment for services is a fee calculated on those assets.
3.Fee-based asset flows include net new fee-based assets (including asset acquisitions), net account transfers, dividends, interest and client fees, and exclude institutional cash management related activity. For a description of the Inflows and Outflows included in Fee-based asset flows, see Fee-based client assets in the 2020 Form 10-K.
Self-directed channel
| $ in billions | At September 30, 2021 | At December 31, 2020 | |||||||||
Self-directed assets1 | $ | 982 | $ | 832 | |||||||
Self-directed households (in millions)2 | 7.4 | 6.7 | |||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||
Daily average revenue trades (“DARTs”) (in thousands)3 | 959 | 6 | 1,200 | 6 | ||||||||||
1.Self-directed assets represent active accounts which are not advisor led. Active accounts are defined as having at least $25 in assets.
2.Self-directed households represent the total number of households that include at least one account with self-directed assets. Individual households or participants that are engaged in one or more of our Wealth Management channels will be included in each of the respective channel counts.
3.DARTs represent the total self-directed trades in a period divided by the number of trading days during that period.
| 12 | September 2021 Form 10-Q | |||||||
| Management’s Discussion and Analysis | | ||||
Workplace channel1
| $ in billions | At September 30, 2021 | At December 31, 2020 | |||||||||
Workplace unvested assets2 | $ | 495 | $ | 435 | |||||||
Number of participants (in millions)3 | 5.3 | 4.9 | |||||||||
| Three Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Revenues | ||||||||
| Investment banking | $ | 135 | $ | 118 | 14 | % | ||
| Trading | 268 | 61 | N/M | |||||
| Investments | 1 | — | N/M | |||||
| Commissions and fees | 477 | 416 | 15 | % | ||||
| Asset management | 2,793 | 2,639 | 6 | % | ||||
| Other | 94 | 81 | 16 | % | ||||
| Total non-interest revenues | 3,768 | 3,315 | 14 | % | ||||
| Interest income | 1,065 | 1,378 | (23 | )% | ||||
| Interest expense | 176 | 335 | (47 | )% | ||||
| Net interest | 889 | 1,043 | (15 | )% | ||||
| Net revenues | 4,657 | 4,358 | 7 | % | ||||
| Compensation and benefits | 2,684 | 2,340 | 15 | % | ||||
| Non-compensation expenses | 853 | 780 | 9 | % | ||||
| Total non-interest expenses | 3,537 | 3,120 | 13 | % | ||||
| Income before provision for income taxes | $ | 1,120 | $ | 1,238 | (10 | )% | ||
| Provision for income taxes | 278 | 276 | 1 | % | ||||
| Net income applicable to Morgan Stanley | $ | 842 | $ | 962 | (12 | )% | ||
| Nine Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Revenues | ||||||||
| Investment banking | $ | 403 | $ | 365 | 10 | % | ||
| Trading | 413 | 525 | (21 | )% | ||||
| Investments | 9 | 1 | N/M | |||||
| Commissions and fees | 1,538 | 1,250 | 23 | % | ||||
| Asset management | 7,980 | 7,544 | 6 | % | ||||
| Other | 216 | 281 | (23 | )% | ||||
| Total non-interest revenues | 10,559 | 9,966 | 6 | % | ||||
| Interest income | 3,468 | 4,139 | (16 | )% | ||||
| Interest expense | 653 | 950 | (31 | )% | ||||
| Net interest | 2,815 | 3,189 | (12 | )% | ||||
| Net revenues | 13,374 | 13,155 | 2 | % | ||||
| Compensation and benefits | 7,625 | 7,184 | 6 | % | ||||
| Non-compensation expenses | 2,432 | 2,302 | 6 | % | ||||
| Total non-interest expenses | 10,057 | 9,486 | 6 | % | ||||
| Income before provision for income taxes | $ | 3,317 | $ | 3,669 | (10 | )% | ||
| Provision for income taxes | 758 | 830 | (9 | )% | ||||
| Net income applicable to Morgan Stanley | $ | 2,559 | $ | 2,839 | (10 | )% | ||
| At September 30, 2020 | At December 31, 2019 | |||||
| $ in billions, except employee data | ||||||
| Client assets | $ | 2,852 | $ | 2,700 | ||
Fee-based client assets1 | $ | 1,333 | $ | 1,267 | ||
| Fee-based client assets as a percentage of total client assets | 47 | % | 47 | % | ||
Client liabilities2 | $ | 100 | $ | 90 | ||
| Investment securities | $ | 88.6 | $ | 67.2 | ||
| Loans and lending commitments | $ | 105.9 | $ | 93.2 | ||
| Wealth Management representatives | 15,469 | 15,468 | ||||
| Three Months Ended September 30, | ||||||
| 2020 | 2019 | |||||
| Per representative: | ||||||
Annualized revenues ($ in thousands)3 | $ | 1,207 | $ | 1,118 | ||
Client assets ($ in millions)4 | $ | 184 | $ | 165 | ||
Fee-based asset flows ($ in billions)5 | $ | 23.8 | $ | 15.5 | ||
| Nine Months Ended September 30, | ||||||
| 2020 | 2019 | |||||
| Per representative: | ||||||
Annualized revenues ($ in thousands)3 | $ | 1,155 | $ | 1,121 | ||
Client assets ($ in millions)4 | $ | 184 | $ | 165 | ||
Fee-based asset flows ($ in billions)5 | $ | 53.3 | $ | 40.1 | ||
| |
| Three Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Investment banking | $ | 135 | $ | 118 | 14 | % | ||
| Trading | 268 | 61 | N/M | |||||
| Commissions and fees | 477 | 416 | 15 | % | ||||
| Total | $ | 880 | $ | 595 | 48 | % | ||
| Transactional revenues as a % of Net revenues | 19 | % | 14 | % | ||||
| Nine Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Investment banking | $ | 403 | $ | 365 | 10 | % | ||
| Trading | 413 | 525 | (21 | )% | ||||
| Commissions and fees | 1,538 | 1,250 | 23 | % | ||||
| Total | $ | 2,354 | $ | 2,140 | 10 | % | ||
| Transactional revenues as a % of Net revenues | 18 | % | 16 | % | ||||
Net Revenues
| |
| $ in billions | At June 30, 2020 | Inflows | Outflows | Market Impact | At September 30, 2020 | ||||||||||
Separately managed1 | $ | 313 | $ | 19 | $ | (4 | ) | $ | 14 | $ | 342 | ||||
| Unified managed | 305 | 16 | (12 | ) | 18 | 327 | |||||||||
| Advisor | 149 | 8 | (8 | ) | 9 | 158 | |||||||||
| Portfolio manager | 431 | 21 | (16 | ) | 23 | 459 | |||||||||
| Subtotal | $ | 1,198 | $ | 64 | $ | (40 | ) | $ | 64 | $ | 1,286 | ||||
| Cash management | 38 | 12 | (3 | ) | — | 47 | |||||||||
| Total fee-based client assets | $ | 1,236 | $ | 76 | $ | (43 | ) | $ | 64 | $ | 1,333 | ||||
| $ in billions | At June 30, 2019 | Inflows | Outflows | Market Impact | At September 30, 2019 | ||||||||||
Separately managed1 | $ | 296 | $ | 15 | $ | (5 | ) | $ | 6 | $ | 312 | ||||
| Unified managed | 292 | 12 | (10 | ) | 1 | 295 | |||||||||
| Advisor | 149 | 7 | (8 | ) | — | 148 | |||||||||
| Portfolio manager | 400 | 19 | (14 | ) | 2 | 407 | |||||||||
| Subtotal | $ | 1,137 | $ | 53 | $ | (37 | ) | $ | 9 | $ | 1,162 | ||||
| Cash management | 22 | 4 | (3 | ) | 1 | 24 | |||||||||
| Total fee-based client assets | $ | 1,159 | $ | 57 | $ | (40 | ) | $ | 10 | $ | 1,186 | ||||
| $ in billions | At December 31, 2019 | Inflows | Outflows | Market Impact | At September 30, 2020 | ||||||||||
Separately managed1 | $ | 322 | $ | 37 | $ | (14 | ) | $ | (3 | ) | $ | 342 | |||
| Unified managed | 313 | 43 | (33 | ) | 4 | 327 | |||||||||
| Advisor | 155 | 22 | (21 | ) | 2 | 158 | |||||||||
| Portfolio manager | 435 | 62 | (43 | ) | 5 | 459 | |||||||||
| Subtotal | $ | 1,225 | $ | 164 | $ | (111 | ) | $ | 8 | $ | 1,286 | ||||
| Cash management | 42 | 21 | (16 | ) | — | 47 | |||||||||
| Total fee-based client assets | $ | 1,267 | $ | 185 | $ | (127 | ) | $ | 8 | $ | 1,333 | ||||
| $ in billions | At December 31, 2018 | Inflows | Outflows | Market Impact | At September 30, 2019 | ||||||||||
Separately managed1 | $ | 279 | $ | 38 | $ | (15 | ) | $ | 10 | $ | 312 | ||||
| Unified managed | 257 | 35 | (30 | ) | 33 | 295 | |||||||||
| Advisor | 137 | 20 | (24 | ) | 15 | 148 | |||||||||
| Portfolio manager | 353 | 54 | (38 | ) | 38 | 407 | |||||||||
| Subtotal | $ | 1,026 | $ | 147 | $ | (107 | ) | $ | 96 | $ | 1,162 | ||||
| Cash management | 20 | 12 | (12 | ) | 4 | 24 | |||||||||
| Total fee-based client assets | $ | 1,046 | $ | 159 | $ | (119 | ) | $ | 100 | $ | 1,186 | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| Fee rate in bps | 2020 | 2019 | 2020 | 2019 | ||||
| Separately managed | 15 | 15 | 14 | 15 | ||||
| Unified managed | 99 | 99 | 99 | 100 | ||||
| Advisor | 85 | 86 | 85 | 87 | ||||
| Portfolio manager | 94 | 96 | 94 | 95 | ||||
| Subtotal | 73 | 74 | 72 | 74 | ||||
| Cash management | 5 | 6 | 5 | 6 | ||||
| Total fee-based client assets | 71 | 73 | 70 | 73 | ||||
| |
| Three Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Revenues | ||||||||
| Trading | $ | 2 | $ | 2 | — | % | ||
| Investments | 258 | 105 | 146 | % | ||||
| Commissions and fees | 1 | 1 | — | % | ||||
| Asset management | 795 | 664 | 20 | % | ||||
| Other | 1 | — | N/M | |||||
| Total non-interest revenues | 1,057 | 772 | 37 | % | ||||
| Interest income | 7 | 4 | 75 | % | ||||
| Interest expense | 8 | 12 | (33 | )% | ||||
| Net interest | (1 | ) | (8 | ) | 88 | % | ||
| Net revenues | 1,056 | 764 | 38 | % | ||||
| Compensation and benefits | 401 | 319 | 26 | % | ||||
| Non-compensation expenses | 340 | 280 | 21 | % | ||||
| Total non-interest expenses | 741 | 599 | 24 | % | ||||
| Income before provision for income taxes | 315 | 165 | 91 | % | ||||
| Provision for income taxes | 72 | 27 | 167 | % | ||||
| Net income | 243 | 138 | 76 | % | ||||
| Net income applicable to noncontrolling interests | 18 | — | N/M | |||||
| Net income applicable to Morgan Stanley | $ | 225 | $ | 138 | 63 | % | ||
| Nine Months Ended September 30, | ||||||||
| $ in millions | 2020 | 2019 | % Change | |||||
| Revenues | ||||||||
| Investment banking | $ | — | $ | (1 | ) | 100 | % | |
| Trading | (13 | ) | (2 | ) | N/M | |||
| Investments | 552 | 543 | 2 | % | ||||
| Commissions and fees | 1 | 1 | — | % | ||||
| Asset management | 2,144 | 1,893 | 13 | % | ||||
| Other | (39 | ) | (6 | ) | N/M | |||
| Total non-interest revenues | 2,645 | 2,428 | 9 | % | ||||
| Interest income | 22 | 14 | 57 | % | ||||
| Interest expense | 33 | 35 | (6 | )% | ||||
| Net interest | (11 | ) | (21 | ) | 48 | % | ||
| Net revenues | 2,634 | 2,407 | 9 | % | ||||
| Compensation and benefits | 1,012 | 1,049 | (4 | )% | ||||
| Non-compensation expenses | 948 | 820 | 16 | % | ||||
| Total non-interest expenses | 1,960 | 1,869 | 5 | % | ||||
| Income before provision for income taxes | 674 | 538 | 25 | % | ||||
| Provision for income taxes | 136 | 104 | 31 | % | ||||
| Net income | 538 | 434 | 24 | % | ||||
| Net income applicable to noncontrolling interests | 81 | 32 | 153 | % | ||||
| Net income applicable to Morgan Stanley | $ | 457 | $ | 402 | 14 | % | ||
Asset Management
Asset management revenues of $795$3,628 million in the current quarter and $2,144$10,266 million in the current year period increased 20%30% and 13%29% from the prior year quarter and the prior year period, respectively, primarily due to higher fee-based asset levels in the current year periods as a result of market appreciation and positive fee-based flows since the prior year periods.
See “Fee-Based Client Assets—Rollforwards” herein.
Transactional Revenues
Transactional revenues of $832 million in the current quarter decreased 5% compared with the prior year quarter, primarily due to losses related to investments associated with certain employee deferred compensation plans, partially offset by incremental revenues as a result of the E*TRADE acquisition.
In the current year period, Transactional revenues increased 37% to $3,232 million compared with the prior year period, primarily due to incremental revenues as a result of the E*TRADE acquisition and higher revenues from structured product and closed-end fund issuances.
Net Interest
Net interest of $1,348 million in the current quarter increased 52% compared with the prior year quarter, primarily due to incremental net interest as a result of the E*TRADE acquisition and continued growth in bank lending.
In the current year period, Net interest increased 42% to $3,988 million compared with the prior year period, primarily due to incremental net interest as a result of the E*TRADE acquisition, a decrease in prepayment amortization related to mortgage-backed securities, and continued growth in bank lending. These increases in Net interest were partially offset by the net effect of lower interest rates.
Other
Other revenues of $127 million in the current quarter increased 38% from the prior year quarter primarily due to incremental revenues as a result of the E*TRADE acquisition.
In the current year period, Other revenues increased 90% to $503 million compared with the prior year period, primarily due to incremental revenues as a result of the E*TRADE acquisition and higher realized gains from the AFS securities portfolio.
Non-interest Expenses
Non-interest expenses of $4,405 million in the current quarter increased 25% compared with the prior year quarter, as a result of both higher Compensation and benefits and Non-compensation expenses.
•Compensation and benefits expenses increased primarily due to an increase in the formulaic payout to Wealth Management representatives driven by higher compensable revenues and incremental compensation as a result of the E*TRADE acquisition, partially offset by lower expenses related to certain deferred compensation plans linked to investment performance.
•Non-compensation expenses increased primarily due to incremental expenses as a result of the E*TRADE acquisition.
In the current year period, Non-interest expenses increased 31% to $13,225 million compared with the prior year period, as a result of both higher Compensation and benefits and Non-compensation expenses.
•Compensation and benefits expenses increased primarily due to an increase in the formulaic payout to Wealth Management representatives driven by higher compensable revenues, and incremental compensation as a result of the E*TRADE acquisition.
•Non-compensation expenses increased primarily due to incremental expenses as a result of the E*TRADE acquisition.
Fee-Based Client Assets Rollforwards
| $ in billions | At June 30, 2021 | Inflows1 | Outflows | Market Impact | At September 30, 2021 | |||||||||||||||
Separately managed2 | $ | 407 | $ | 51 | $ | (4) | $ | 14 | $ | 468 | ||||||||||
| Unified managed | 436 | 27 | (18) | (6) | 439 | |||||||||||||||
| Advisor | 201 | 11 | (9) | (2) | 201 | |||||||||||||||
| Portfolio manager | 590 | 29 | (16) | (7) | 596 | |||||||||||||||
| Subtotal | $ | 1,634 | $ | 118 | $ | (47) | $ | (1) | $ | 1,704 | ||||||||||
| Cash management | 46 | 9 | (7) | — | 48 | |||||||||||||||
Total fee-based client assets | $ | 1,680 | $ | 127 | $ | (54) | $ | (1) | $ | 1,752 | ||||||||||
| $ in billions | At June 30, 2020 | Inflows | Outflows | Market Impact | At September 30, 2020 | ||||||||||||
Separately managed2 | $ | 313 | $ | 19 | $ | (4) | $ | 14 | $ | 342 | |||||||
| Unified managed | 305 | 16 | (12) | 18 | 327 | ||||||||||||
| Advisor | 149 | 8 | (8) | 9 | 158 | ||||||||||||
| Portfolio manager | 431 | 21 | (16) | 23 | 459 | ||||||||||||
| Subtotal | $ | 1,198 | $ | 64 | $ | (40) | $ | 64 | $ | 1,286 | |||||||
| Cash management | 38 | 12 | (3) | — | 47 | ||||||||||||
Total fee-based client assets | $ | 1,236 | $ | 76 | $ | (43) | $ | 64 | $ | 1,333 | |||||||
| September 2021 Form 10-Q | 13 | |||||||
| Management’s Discussion and Analysis | | ||||
| $ in billions | At December 31, 2020 | Inflows1 | Outflows | Market Impact | At September 30, 2021 | |||||||||||||||
Separately managed2 | $ | 359 | $ | 77 | $ | (15) | $ | 47 | $ | 468 | ||||||||||
| Unified managed | 379 | 75 | (42) | 27 | 439 | |||||||||||||||
| Advisor | 177 | 30 | (23) | 17 | 201 | |||||||||||||||
| Portfolio manager | 509 | 84 | (44) | 47 | 596 | |||||||||||||||
| Subtotal | $ | 1,424 | $ | 266 | $ | (124) | $ | 138 | $ | 1,704 | ||||||||||
| Cash management | 48 | 22 | (22) | — | 48 | |||||||||||||||
Total fee-based client assets | $ | 1,472 | $ | 288 | $ | (146) | $ | 138 | $ | 1,752 | ||||||||||
| $ in billions | At December 31, 2019 | Inflows | Outflows | Market Impact | At September 30, 2020 | ||||||||||||
Separately managed2 | $ | 322 | $ | 37 | $ | (14) | $ | (3) | $ | 342 | |||||||
| Unified managed | 313 | 43 | (33) | 4 | 327 | ||||||||||||
| Advisor | 155 | 22 | (21) | 2 | 158 | ||||||||||||
| Portfolio manager | 435 | 62 | (43) | 5 | 459 | ||||||||||||
| Subtotal | $ | 1,225 | $ | 164 | $ | (111) | $ | 8 | $ | 1,286 | |||||||
| Cash management | 42 | 21 | (16) | — | 47 | ||||||||||||
Total fee-based client assets | $ | 1,267 | $ | 185 | $ | (127) | $ | 8 | $ | 1,333 | |||||||
1.Includes $43 billion of fee-based assets acquired in an asset acquisition in the current quarter reflected in Separately managed.
2.Includes non-custody account values reflecting prior quarter-end balances due to a lag in the reporting of asset values by third-party custodians.
Average Fee Rates
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| Fee rate in bps | 2021 | 2020 | 2021 | 2020 | ||||||||||
| Separately managed | 14 | 15 | 14 | 14 | ||||||||||
| Unified managed | 95 | 99 | 96 | 99 | ||||||||||
| Advisor | 82 | 85 | 82 | 85 | ||||||||||
| Portfolio manager | 93 | 94 | 93 | 94 | ||||||||||
| Subtotal | 71 | 73 | 72 | 72 | ||||||||||
| Cash management | 5 | 5 | 5 | 5 | ||||||||||
| Total fee-based client assets | 70 | 71 | 70 | 70 | ||||||||||
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 2020 Form 10-K.
| 14 | September 2021 Form 10-Q | |||||||
| Management’s Discussion and Analysis | | ||||
Investment Management
Income Statement Information
| Three Months Ended September 30, | |||||||||||
| $ in millions | 2021 | 2020 | % Change | ||||||||
| Revenues | |||||||||||
| Asset management and related fees | $ | 1,470 | $ | 795 | 85 | % | |||||
Performance-based income and other1 | (17) | 261 | (107) | % | |||||||
| Net revenues | 1,453 | 1,056 | 38 | % | |||||||
| Compensation and benefits | 513 | 401 | 28 | % | |||||||
| Non-compensation expenses | 570 | 340 | 68 | % | |||||||
| Total non-interest expenses | 1,083 | 741 | 46 | % | |||||||
| Income before provision for income taxes | 370 | 315 | 17 | % | |||||||
| Provision for income taxes | 64 | 72 | (11) | % | |||||||
| Net income | 306 | 243 | 26 | % | |||||||
| Net income (loss) applicable to noncontrolling interests | (14) | 18 | (178) | % | |||||||
| Net income applicable to Morgan Stanley | $ | 320 | $ | 225 | 42 | % | |||||
| Nine Months Ended September 30, | |||||||||||
| $ in millions | 2021 | 2020 | % Change | ||||||||
| Revenues | |||||||||||
| Asset management and related fees | $ | 3,991 | $ | 2,144 | 86 | % | |||||
Performance-based income and other1 | 478 | 490 | (2) | % | |||||||
| Net revenues | 4,469 | 2,634 | 70 | % | |||||||
| Compensation and benefits | 1,742 | 1,012 | 72 | % | |||||||
| Non-compensation expenses | 1,557 | 948 | 64 | % | |||||||
| Total non-interest expenses | 3,299 | 1,960 | 68 | % | |||||||
| Income before provision for income taxes | 1,170 | 674 | 74 | % | |||||||
| Provision for income taxes | 253 | 136 | 86 | % | |||||||
| Net income | 917 | 538 | 70 | % | |||||||
| Net income (loss) applicable to noncontrolling interests | (19) | 81 | (123) | % | |||||||
| Net income applicable to Morgan Stanley | $ | 936 | $ | 457 | 105 | % | |||||
1.Includes Investments, Trading, Commissions and fees, Net interest, and Other revenues.
Acquisition of Eaton Vance
The comparisons of current year results to prior periods are impacted by the acquisition of Eaton Vance in the first quarter of 2021. For additional information on the acquisition of Eaton Vance, see Note 3 to the financial statements.
Net Revenues
Asset Management and related fees
Asset management and related fees of $1,470 million in the current quarter and $3,991 million in the current year period increased 85% and 86% from the prior year quarter and prior year period, respectively, primarily due to incremental revenues as a result of the Eaton Vance acquisition, and higher average AUM driven by strong investment performance and positive long-term net flows.flows since the prior year periods.
See “Assets Under Management or Supervision” herein.
Performance-based income and other
| |
Non-interest Expenses
Non-interest expenses of $741$1,083 million in the current quarter increased 24%46% from the prior year quarter as a result of higher Compensation and benefits expenses and higher Non-compensation expenses.
•Compensation and benefits expenses increased in the current quarter primarily due to incremental compensation as a result of the Eaton Vance acquisition, partially offset by lower compensation associated with carried interest.
•Non-compensation expenses in the current quarter increased primarily due to incremental expenses as a result of the Eaton Vance acquisition.
| September 2021 Form 10-Q | 15 | |||||||
| Management’s Discussion and Analysis | | ||||
Non-interest expenses of $3,299 million in the current year period increased 68% from the prior year period as a result of higher Compensation and benefits and higher Non-compensation expenses.
•Compensation and benefits expenses relatedincreased in the current year period primarily due to certain deferredincremental compensation plans linked to investment performance, increasesas a result of the Eaton Vance acquisition, an increase in discretionary incentive compensation driven by higher Assetasset management revenues, and higher compensation associated with carried interest.
•Non-compensation expenses in the current quarteryear period increased from the prior year quarter primarily due to incremental expenses as a result of the Eaton Vance acquisition and higher fee sharing paid to intermediaries on higher average AUM.
Assets Under Management or Supervision
Rollforwards
| $ in billions | Equity | Fixed income | Alternatives and Solutions | Long-term AUM Subtotal | Liquidity and Overlay Services | Total | ||||||||||||||
| June 30, 2021 | $ | 404 | $ | 207 | $ | 445 | $ | 1,056 | $ | 468 | $ | 1,524 | ||||||||
| Inflows | 18 | 17 | 24 | 59 | 462 | 521 | ||||||||||||||
| Outflows | (19) | (16) | (23) | (58) | (448) | (506) | ||||||||||||||
| Market Impact | (12) | — | — | (12) | — | (12) | ||||||||||||||
| Other | — | (2) | (3) | (5) | — | (5) | ||||||||||||||
| September 30, 2021 | $ | 391 | $ | 206 | $ | 443 | $ | 1,040 | $ | 482 | $ | 1,522 | ||||||||
| $ in billions | At June 30, 2020 | Inflows | Outflows | Market Impact | Other | At September 30, 2020 | ||||||||||||
| Equity | $ | 168 | $ | 24 | $ | (14 | ) | $ | 23 | $ | 1 | $ | 202 | |||||
| Fixed income | 84 | 8 | (5 | ) | 1 | 4 | 92 | |||||||||||
| Alternative/Other | 145 | 6 | (7 | ) | 4 | 2 | 150 | |||||||||||
| Long-term AUM subtotal | 397 | 38 | (26 | ) | 28 | 7 | 444 | |||||||||||
| Liquidity | 268 | 319 | (317 | ) | — | 1 | 271 | |||||||||||
| Total AUM | $ | 665 | $ | 357 | $ | (343 | ) | $ | 28 | $ | 8 | $ | 715 | |||||
| $ in billions | Equity | Fixed income | Alternatives and Solutions | Long-term AUM Subtotal | Liquidity and Overlay Services | Total | ||||||||||||||
| June 30, 2020 | $ | 168 | $ | 84 | $ | 145 | $ | 397 | $ | 268 | $ | 665 | ||||||||
| Inflows | 24 | 8 | 6 | 38 | 319 | 357 | ||||||||||||||
| Outflows | (14) | (5) | (7) | (26) | (317) | (343) | ||||||||||||||
| Market Impact | 23 | 1 | 4 | 28 | — | 28 | ||||||||||||||
| Other | 1 | 4 | 2 | 7 | 1 | 8 | ||||||||||||||
| September 30, 2020 | $ | 202 | $ | 92 | $ | 150 | $ | 444 | $ | 271 | $ | 715 | ||||||||
| $ in billions | Equity | Fixed income | Alternatives and Solutions | Long-term AUM Subtotal | Liquidity and Overlay Services | Total | ||||||||||||||
| December 31, 2020 | $ | 242 | $ | 98 | $ | 153 | $ | 493 | $ | 288 | $ | 781 | ||||||||
| Inflows | 73 | 49 | 68 | 190 | 1,375 | 1,565 | ||||||||||||||
| Outflows | (63) | (40) | (53) | (156) | (1,300) | (1,456) | ||||||||||||||
| Market Impact | 23 | 1 | 29 | 53 | 4 | 57 | ||||||||||||||
Acquired1 | 119 | 103 | 251 | 473 | 116 | 589 | ||||||||||||||
| Other | (3) | (5) | (5) | (13) | (1) | (14) | ||||||||||||||
| September 30, 2021 | $ | 391 | $ | 206 | $ | 443 | $ | 1,040 | $ | 482 | $ | 1,522 | ||||||||
1.Related to the Eaton Vance acquisition.
| $ in billions | At June 30, 2019 | Inflows | Outflows | Market Impact | Other | At September 30, 2019 | ||||||||||||
| Equity | $ | 128 | $ | 10 | $ | (8 | ) | $ | (4 | ) | $ | — | $ | 126 | ||||
| Fixed income | 71 | 6 | (4 | ) | 2 | (1 | ) | 74 | ||||||||||
| Alternative/Other | 135 | 5 | (4 | ) | 2 | (3 | ) | 135 | ||||||||||
| Long-term AUM subtotal | 334 | 21 | (16 | ) | — | (4 | ) | 335 | ||||||||||
| Liquidity | 163 | 311 | (301 | ) | (1 | ) | — | 172 | ||||||||||
| Total AUM | $ | 497 | $ | 332 | $ | (317 | ) | $ | (1 | ) | $ | (4 | ) | $ | 507 | |||
| $ in billions | Equity | Fixed income | Alternatives and Solutions | Long-term AUM Subtotal | Liquidity and Overlay Services | Total | ||||||||||||||
| December 31, 2019 | $ | 138 | $ | 79 | $ | 139 | $ | 356 | $ | 196 | $ | 552 | ||||||||
| Inflows | 56 | 29 | 21 | 106 | 1,174 | 1,280 | ||||||||||||||
| Outflows | (35) | (20) | (15) | (70) | (1,100) | (1,170) | ||||||||||||||
| Market Impact | 42 | 1 | (1) | 42 | 1 | 43 | ||||||||||||||
| Other | 1 | 3 | 6 | 10 | — | 10 | ||||||||||||||
| September 30, 2020 | $ | 202 | $ | 92 | $ | 150 | $ | 444 | $ | 271 | $ | 715 | ||||||||
| $ in billions | At December 31, 2019 | Inflows | Outflows | Market Impact | Other | At September 30, 2020 | ||||||||||||
| Equity | $ | 138 | $ | 56 | $ | (35 | ) | $ | 42 | $ | 1 | $ | 202 | |||||
| Fixed income | 79 | 29 | (20 | ) | 1 | 3 | 92 | |||||||||||
| Alternative/Other | 139 | 21 | (15 | ) | (1 | ) | 6 | 150 | ||||||||||
| Long-term AUM subtotal | 356 | 106 | (70 | ) | 42 | 10 | 444 | |||||||||||
| Liquidity | 196 | 1,174 | (1,100 | ) | 1 | — | 271 | |||||||||||
| Total AUM | $ | 552 | $ | 1,280 | $ | (1,170 | ) | $ | 43 | $ | 10 | $ | 715 | |||||
| $ in billions | At December 31, 2018 | Inflows | Outflows | Market Impact | Other | At September 30, 2019 | ||||||||||||
| Equity | $ | 103 | $ | 28 | $ | (23 | ) | $ | 18 | $ | — | $ | 126 | |||||
| Fixed income | 68 | 17 | (15 | ) | 5 | (1 | ) | 74 | ||||||||||
| Alternative/Other | 128 | 17 | (14 | ) | 8 | (4 | ) | 135 | ||||||||||
| Long-term AUM subtotal | 299 | 62 | (52 | ) | 31 | (5 | ) | 335 | ||||||||||
| Liquidity | 164 | 965 | (956 | ) | 1 | (2 | ) | 172 | ||||||||||
| Total AUM | $ | 463 | $ | 1,027 | $ | (1,008 | ) | $ | 32 | $ | (7 | ) | $ | 507 | ||||
Average AUM
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| $ in billions | 2021 | 2020 | 2021 | 2020 | ||||||||||
| Equity | $ | 402 | $ | 190 | $ | 350 | $ | 159 | ||||||
| Fixed income | 207 | 90 | 173 | 84 | ||||||||||
| Alternatives and Solutions | 451 | 148 | 356 | 143 | ||||||||||
| Long-term AUM subtotal | 1,060 | 428 | 879 | 386 | ||||||||||
| Liquidity and Overlay Services | 476 | 267 | 413 | 244 | ||||||||||
| Total AUM | $ | 1,536 | $ | 695 | $ | 1,292 | $ | 630 | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| $ in billions | 2020 | 2019 | 2020 | 2019 | ||||||||
| Equity | $ | 190 | $ | 127 | $ | 159 | $ | 120 | ||||
| Fixed income | 90 | 73 | 84 | 70 | ||||||||
| Alternative/Other | 148 | 135 | 143 | 133 | ||||||||
| Long-term AUM subtotal | 428 | 335 | 386 | 323 | ||||||||
| Liquidity | 267 | 169 | 244 | 166 | ||||||||
| Total AUM | $ | 695 | 504 | $ | 630 | $ | 489 | |||||
Average Fee Rates
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| Fee rate in bps | 2021 | 2020 | 2021 | 2020 | ||||||||||
| Equity | 72 | 76 | 76 | 75 | ||||||||||
| Fixed income | 37 | 29 | 38 | 29 | ||||||||||
| Alternatives and Solutions | 32 | 58 | 37 | 59 | ||||||||||
| Long-term AUM | 48 | 60 | 53 | 59 | ||||||||||
| Liquidity and Overlay Services | 5 | 15 | 6 | 16 | ||||||||||
| Total AUM | 35 | 43 | 38 | 42 | ||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||
| Fee rate in bps | 2020 | 2019 | 2020 | 2019 | ||
| Equity | 76 | 76 | 75 | 76 | ||
| Fixed income | 29 | 32 | 29 | 32 | ||
| Alternative/Other | 58 | 62 | 59 | 65 | ||
| Long-term AUM | 60 | 61 | 59 | 62 | ||
| Liquidity | 15 | 17 | 16 | 17 | ||
| Total AUM | 43 | 46 | 42 | 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 20192020 Form 10-K.10-K, except for the following updates to the definitions, which reflect the inclusion of certain Eaton Vance products.
•Alternatives and Solutions—includes products in fund of funds, real estate, infrastructure, private equity and credit strategies, multi-asset portfolios as well as custom separate account portfolios.
•Liquidity and Overlay Services—includes liquidity fund products as well as overlay services, which represent investment strategies that use passive exposure instruments to obtain, offset or substitute specific portfolio exposures, beyond those provided by the underlying holdings of the fund.
| 16 | September | |||||||||
|
| Management’s Discussion and Analysis | | ||
Supplemental Financial Information
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| $ in millions | 2020 | 2019 | 2020 | 2019 | ||||||||
| U.S. GAAP | 21.1 | % | 18.2 | % | 22.2 | % | 19.1 | % | ||||
Adjusted effective income tax rate—non-GAAP1 | 24.3 | % | 21.4 | % | 22.3 | % | 21.3 | % | ||||
| Net discrete tax provisions (benefits) | ||||||||||||
Recurring2 | $ | — | $ | — | $ | (94 | ) | $ | (127 | ) | ||
Intermittent3 | (113 | ) | (89 | ) | (10 | ) | (190 | ) | ||||
U.S. Bank Subsidiaries
Our U.S. bank subsidiaries, as of September 30, 2020, Morgan Stanley Bank N.A. (“MSBNA”) and, Morgan Stanley Private Bank, National Association (“MSPBNA”), E*TRADE Bank (“ETB”), and E*TRADE Savings Bank (“ETSB”) (collectively, “U.S. Bank Subsidiaries”) accept deposits;deposits, provide loans to corporations, governments, financial institutionsa variety of customers, including large corporate and institutional clients as well as high to ultra-high net worth clients;individuals, and invest in securities. Lending activity recorded in the U.S. Bank Subsidiaries from the Institutional Securities business segment primarily includes loansSecured lending facilities and lending commitments to corporate clients.Commercial real estate loans. Lending activity recorded in the U.S. Bank Subsidiaries from the Wealth Management business segment primarily includes securities-basedSecurities-based lending, which allows clients to borrow money against
the value of qualifying securities, and residentialResidential real estate loans.
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 10 and 14 to the financial statements.
U.S. Bank Subsidiaries’ Supplemental Financial Information1
| $ in billions | At September 30, 2021 | At December 31, 2020 | ||||||
| Investment securities portfolio: | ||||||||
| Investment securities—AFS | $ | 81.1 | $ | 90.3 | ||||
| Investment securities—HTM | 63.0 | 52.6 | ||||||
| Total investment securities | $ | 144.1 | $ | 142.9 | ||||
Wealth Management Loans2 | ||||||||
| Residential real estate | $ | 41.4 | $ | 35.2 | ||||
Securities-based lending and Other3 | 79.8 | 62.9 | ||||||
| Total, net of ACL | $ | 121.2 | $ | 98.1 | ||||
Institutional Securities Loans2 | ||||||||
| Corporate | $ | 8.1 | $ | 7.9 | ||||
| Secured lending facilities | 29.0 | 27.4 | ||||||
| Commercial and Residential real estate | 10.1 | 10.1 | ||||||
| Securities-based lending and Other | 6.2 | 5.4 | ||||||
| Total, net of ACL | $ | 53.4 | $ | 50.8 | ||||
| Total Assets | $ | 367.1 | $ | 346.5 | ||||
Deposits4 | $ | 326.9 | $ | 309.7 | ||||
| $ in billions | At September 30, 2020 | At December 31, 2019 | ||||
| Assets | $ | 266.2 | $ | 219.6 | ||
| Investment securities portfolio: | ||||||
| Investment securities—AFS | 62.9 | 42.4 | ||||
| Investment securities—HTM | 28.2 | 26.1 | ||||
| Total investment securities | $ | 91.1 | $ | 68.5 | ||
Deposits2 | $ | 238.0 | $ | 189.3 | ||
Wealth Management Loans3 | ||||||
| Residential real estate | $ | 33.6 | $ | 30.2 | ||
Securities-based lending and Other4 | 57.7 | 49.9 | ||||
| Total | $ | 91.3 | $ | 80.1 | ||
Institutional Securities Loans3 | ||||||
| Corporate | $ | 7.8 | $ | 5.6 | ||
| Secured lending facilities | 28.2 | 26.8 | ||||
| Commercial and Residential real estate | 8.6 | 12.0 | ||||
| Securities-based lending and Other | 4.7 | 5.4 | ||||
| Total | $ | 49.3 | $ | 49.8 | ||
3.Other loans primarily include tailored lending. 4.For further information on deposits, see “Liquidity and Capital Resources—Funding Management—Unsecured Financing” herein. |
Accounting Development Updates
The Financial Accounting Standards Board has issued certain accounting updates, which we have either determined are not applicable or are not expected to have a significant impact on our financial statements.
| |
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 20192020 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 20192020 Form 10-K. As discussed in Note 2 to the financial statements, our acquisition of Eaton Vance on March 1, 2021 included indefinite lived intangible assets. The initial valuation of an intangible asset, including indefinite lived intangible assets, as part of the acquisition method of accounting and the subsequent valuation of intangible assets as part of impairment assessments are subjective and based, in part, on inputs that are unobservable. These inputs include, but are not limited to, forecasted cash flows, revenue growth rates, attrition rates and discount rates.
Liquidity and Capital Resources
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 unitsegment needs. We also monitor key metrics, including asset and liability size and capital usage.
| September 2021 Form 10-Q | 17 | |||||||
| Management’s Discussion and Analysis | | ||||
Total Assets by Business Segment
| At September 30, 2021 | ||||||||||||||
| $ in millions | IS | WM | IM | Total | ||||||||||
| Assets | ||||||||||||||
| Cash and cash equivalents | $ | 98,346 | $ | 24,880 | $ | 637 | $ | 123,863 | ||||||
| Trading assets at fair value | 309,467 | 1,339 | 4,355 | 315,161 | ||||||||||
| Investment securities | 40,631 | 142,800 | — | 183,431 | ||||||||||
| Securities purchased under agreements to resell | 104,040 | 15,681 | — | 119,721 | ||||||||||
| Securities borrowed | 124,329 | 1,593 | — | 125,922 | ||||||||||
| Customer and other receivables | 62,270 | 34,872 | 1,211 | 98,353 | ||||||||||
Loans1 | 52,117 | 121,237 | 5 | 173,359 | ||||||||||
Other assets2 | 17,052 | 22,232 | 11,382 | 50,666 | ||||||||||
| Total assets | $ | 808,252 | $ | 364,634 | $ | 17,590 | $ | 1,190,476 | ||||||
| At September 30, 2020 | ||||||||||||
| $ in millions | IS | WM | IM | Total | ||||||||
| Assets | ||||||||||||
| Cash and cash equivalents | $ | 72,592 | $ | 22,018 | $ | 162 | $ | 94,772 | ||||
| Trading assets at fair value | 289,528 | 298 | 4,142 | 293,968 | ||||||||
| Investment securities | 42,149 | 88,556 | — | 130,705 | ||||||||
| Securities purchased under agreements to resell | 73,637 | 14,646 | — | 88,283 | ||||||||
| Securities borrowed | 100,175 | 628 | — | 100,803 | ||||||||
| Customer and other receivables | 57,593 | 14,067 | 877 | 72,537 | ||||||||
Loans1 | 54,918 | 91,302 | 17 | 146,237 | ||||||||
Other assets2 | 13,731 | 12,910 | 1,994 | 28,635 | ||||||||
| Total assets | $ | 704,323 | $ | 244,425 | $ | 7,192 | $ | 955,940 | ||||
| At December 31, 2019 | At December 31, 2020 | |||||||||||||||||||||||||
| $ in millions | IS | WM | IM | Total | $ in millions | IS | WM | IM | Total | |||||||||||||||||
| Assets | Assets | |||||||||||||||||||||||||
| Cash and cash equivalents | $ | 67,657 | $ | 14,247 | $ | 267 | $ | 82,171 | Cash and cash equivalents | $ | 74,281 | $ | 31,275 | $ | 98 | $ | 105,654 | |||||||||
| Trading assets at fair value | 293,477 | 47 | 3,586 | 297,110 | Trading assets at fair value | 308,413 | 280 | 4,045 | 312,738 | |||||||||||||||||
| Investment securities | 38,524 | 67,201 | — | 105,725 | Investment securities | 41,630 | 140,524 | — | 182,154 | |||||||||||||||||
| Securities purchased under agreements to resell | 80,744 | 7,480 | — | 88,224 | Securities purchased under agreements to resell | 84,998 | 31,236 | — | 116,234 | |||||||||||||||||
| Securities borrowed | 106,199 | 350 | — | 106,549 | Securities borrowed | 110,480 | 1,911 | — | 112,391 | |||||||||||||||||
| Customer and other receivables | 39,743 | 15,190 | 713 | 55,646 | Customer and other receivables | 67,085 | 29,781 | 871 | 97,737 | |||||||||||||||||
Loans1 | 50,557 | 80,075 | 5 | 130,637 | Loans1 | 52,449 | 98,130 | 18 | 150,597 | |||||||||||||||||
Other assets2 | 14,300 | 13,092 | 1,975 | 29,367 | Other assets2 | 13,986 | 22,458 | 1,913 | 38,357 | |||||||||||||||||
| Total assets | $ | 691,201 | $ | 197,682 | $ | 6,546 | $ | 895,429 | Total assets | $ | 753,322 | $ | 355,595 | $ | 6,945 | $ | 1,115,862 | |||||||||
A substantial portion of total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities inreceivables. In the Institutional Securities business segment. Total assets increased to $956 billion at September 30, 2020segment, these arise from $895 billion at December 31, 2019.
market-making, financing and prime brokerage activities, and in the Wealth Management assets increased driven by continued growth in Loans as well as inbusiness segment, these arise from banking activities, including management of the investment portfolio, comprising Investment securities, Cash and cash equivalents and Securities purchased under agreements to resell, as a result of significantly higher deposits in this segment.
Liquidity Risk Management Framework
The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and Liquidity Resources, 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 20192020 Form 10-K.
At September 30, 20202021 and December 31, 2019,2020, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.
Liquidity Resources
We maintain sufficient liquidity resources, which consist of HQLA and cash deposits with banks (“Liquidity Resources”) to cover daily funding needs and to meet strategic liquidity targets sized by the Required Liquidity Framework and Liquidity Stress Tests. The total amount of Liquidity Resources is actively managed by us considering the following components: unsecured debt maturity profile; balance sheet size and composition; funding needs in a stressed environment, inclusive of contingent cash outflows; legal entity, regional and segment liquidity requirements; regulatory requirements; and collateral requirements.
The amount of Liquidity Resources we hold is based on our risk tolerance and is subject to change depending on market and Firm-specific events. The Liquidity Resources are primarily held within the Parent Company and its major operating subsidiaries. The Total HQLA values in the tables immediately following are different from Eligible HQLA, which, in accordance with the LCR rule, also takes into account certain regulatory weightings and other operational considerations.
Liquidity Resources by Type of Investment
| $ in millions | At September 30, 2021 | At December 31, 2020 | ||||||
| Cash deposits with central banks | $ | 62,808 | $ | 49,669 | ||||
Unencumbered HQLA Securities1: | ||||||||
| U.S. government obligations | 138,588 | 136,555 | ||||||
| U.S. agency and agency mortgage-backed securities | 107,714 | 99,659 | ||||||
Non-U.S. sovereign obligations2 | 28,315 | 39,745 | ||||||
| Other investment grade securities | 632 | 2,053 | ||||||
Total HQLA1 | $ | 338,057 | $ | 327,681 | ||||
| Cash deposits with banks (non-HQLA) | 8,232 | 10,942 | ||||||
| Total Liquidity Resources | $ | 346,289 | $ | 338,623 | ||||
1.1HQLA is presented prior to applying weightings and includes all HQLA held in subsidiaries.
2.Primarily composed of unencumbered Japanese, U.K., German, French and Italian government obligations.
| $ in millions | At September 30, 2020 | At December 31, 2019 | ||||
| Cash deposits with central banks | $ | 41,639 | $ | 35,025 | ||
Unencumbered HQLA Securities2: | ||||||
| U.S. government obligations | 113,058 | 88,754 | ||||
| U.S. agency and agency mortgage-backed securities | 63,961 | 50,732 | ||||
Non-U.S. sovereign obligations3 | 37,470 | 29,909 | ||||
| Other investment grade securities | 1,398 | 1,591 | ||||
Total HQLA2 | $ | 257,526 | $ | 206,011 | ||
| Cash deposits with banks (non-HQLA) | 9,766 | 9,857 | ||||
| Total Liquidity Resources | $ | 267,292 | $ | 215,868 | ||
Liquidity Resources by Bank and Non-Bank Legal Entities1
| At September 30, 2021 | At December 31, 2020 | Average Daily Balance Three Months Ended | |||||||||
| $ in millions | September 30, 2021 | ||||||||||
| Bank legal entities | |||||||||||
| U.S. | $ | 168,880 | $ | 178,033 | $ | 173,306 | |||||
| Non-U.S. | 12,172 | 7,670 | 11,451 | ||||||||
| Total Bank legal entities | 181,052 | 185,703 | 184,757 | ||||||||
| Non-Bank legal entities | |||||||||||
| U.S.: | |||||||||||
| Parent Company | 55,918 | 59,468 | 71,622 | ||||||||
| Non-Parent Company | 53,565 | 33,368 | 45,116 | ||||||||
| Total U.S. | 109,483 | 92,836 | 116,738 | ||||||||
| Non-U.S. | 55,754 | 60,084 | 56,815 | ||||||||
| Total Non-Bank legal entities | 165,237 | 152,920 | 173,553 | ||||||||
| Total Liquidity Resources | $ | 346,289 | $ | 338,623 | $ | 358,310 | |||||
| $ in millions | At September 30, 2020 | At December 31, 2019 | Average Daily Balance Three Months Ended September 30, 2020 | ||||||
| Bank legal entities | |||||||||
| Domestic | $ | 115,821 | $ | 75,894 | $ | 113,991 | |||
| Foreign | 5,384 | 4,049 | 5,624 | ||||||
| Total Bank legal entities | 121,205 | 79,943 | 119,615 | ||||||
| Non-Bank legal entities | |||||||||
| Domestic: | |||||||||
| Parent Company | 62,561 | 53,128 | 74,587 | ||||||
| Non-Parent Company | 30,215 | 28,905 | 34,341 | ||||||
| Total Domestic | 92,776 | 82,033 | 108,928 | ||||||
| Foreign | 53,311 | 53,892 | 55,933 | ||||||
| Total Non-Bank legal entities | 146,087 | 135,925 | 164,861 | ||||||
| Total Liquidity Resources | $ | 267,292 | $ | 215,868 | $ | 284,476 | |||
| September 2021 Form 10-Q | ||||||||
| Management’s Discussion and Analysis | | ||||
Liquidity Resources may fluctuate from period to period based on the overall size and composition of our balance sheet, the maturity profile of our unsecured debt and estimates of funding needs in a stressed environment, among other factors. Liquidity Resources increased in the current year period primarily due to an increase in deposits.
Regulatory Liquidity Framework
Liquidity Coverage Ratio
As of September 30, 2020, we2021, the Firm, MSBNA, MSPBNA and our U.S. Bank SubsidiariesETB are compliant with the minimum required LCR of 100%.
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Liquidity Coverage Ratio
| Average Daily Balance Three Months Ended | ||||||||
| $ in millions | September 30, 2021 | June 30, 2021 | ||||||
Eligible HQLA1 | ||||||||
| Cash deposits with central banks | $ | 66,288 | $ | 56,430 | ||||
Securities2 | 174,068 | 171,729 | ||||||
Total Eligible HQLA1 | $ | 240,356 | $ | 228,159 | ||||
| LCR | 134 | % | 126 | % | ||||
| Average Daily Balance Three Months Ended | ||||||
| $ in millions | September 30, 2020 | June 30, 2020 | ||||
Eligible HQLA1 | ||||||
| Cash deposits with central banks | $ | 36,481 | $ | 52,369 | ||
Securities2 | 170,817 | 155,251 | ||||
Total Eligible HQLA1 | $ | 207,298 | $ | 207,620 | ||
| LCR | 136 | % | 147 | % | ||
| 1.Under |
2.Primarily includes U.S. Treasuries, U.S. agency mortgage-backed securities, sovereign bonds and investment grade corporate bonds.
Net Stable Funding Ratio
The U.S. banking agencies have finalizedFirm, MSBNA, MSPBNA, and ETB are required to maintain a rule to implement theminimum NSFR whichof 100%. The NSFR requires large banking organizations to maintain sufficiently stable sources of funding over a one-year time horizon,horizon.
As of September 30, 2021, the Firm, MSBNA, MSPBNA, and will apply to us and our U.S. Bank Subsidiaries. These requirements become effective on July 1, 2021 and we will be in complianceETB are compliant with the final rule by the effective date.100% minimum NSFR requirement.
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 Resources—Funding Management—Secured Financing” in the 20192020 Form 10-K.
Collateralized Financing Transactions
| $ in millions | At September 30, 2021 | At December 31, 2020 | ||||||
| Securities purchased under agreements to resell and Securities borrowed | $ | 245,643 | $ | 228,625 | ||||
| Securities sold under agreements to repurchase and Securities loaned | $ | 73,120 | $ | 58,318 | ||||
Securities received as collateral1 | $ | 7,746 | $ | 4,277 | ||||
| Average Daily Balance Three Months Ended | ||||||||||||||
| $ in millions | At September 30, 2020 | At December 31, 2019 | $ in millions | September 30, 2021 | December 31, 2020 | |||||||||
| Securities purchased under agreements to resell and Securities borrowed | $ | 189,086 | $ | 194,773 | Securities purchased under agreements to resell and Securities borrowed | $ | 225,388 | $ | 195,376 | |||||
| Securities sold under agreements to repurchase and Securities loaned | $ | 49,300 | $ | 62,706 | Securities sold under agreements to repurchase and Securities loaned | $ | 69,974 | $ | 54,528 | |||||
Securities received as collateral1 | $ | 8,799 | $ | 13,022 | ||||||||||
| Average Daily Balance Three Months Ended | ||||||
| $ in millions | September 30, 2020 | December 31, 2019 | ||||
| Securities purchased under agreements to resell and Securities borrowed | $ | 182,181 | $ | 210,257 | ||
| Securities sold under agreements to repurchase and Securities loaned | $ | 58,474 | $ | 64,870 | ||
| 1.Included within Trading assets |
See “Total Assets by Business Segment” herein for additional information on the assets shown in the previous table and liabilities.
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. We also hold related liquidity reserves.policies and the elements of our Liquidity Risk Management Framework.
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 20192020 Form 10-K.
| September | 19 | |||||||||
| Management’s Discussion and Analysis | | ||||
Deposits
| $ in millions | At September 30, 2021 | At December 31, 2020 | ||||||
| Savings and demand deposits: | ||||||||
Brokerage sweep deposits1 | $ | 273,137 | $ | 232,071 | ||||
| Savings and other | 37,708 | 47,150 | ||||||
| Total Savings and demand deposits | 310,845 | 279,221 | ||||||
| Time deposits | 18,196 | 31,561 | ||||||
Total2 | $ | 329,041 | $ | 310,782 | ||||
| $ in millions | At September 30, 2020 | At December 31, 2019 | ||||
| Savings and demand deposits: | ||||||
Brokerage sweep deposits1 | $ | 164,146 | $ | 121,077 | ||
| Savings and other | 38,431 | 28,388 | ||||
| Total Savings and demand deposits | 202,577 | 149,465 | ||||
| Time deposits | 36,676 | 40,891 | ||||
| Total | $ | 239,253 | $ | 190,356 | ||
2.Excludes approximately $9 billion and $25 billion of off-balance sheet deposits at unaffiliated financial institutions as of September 30, 2021 and December 31, 2020, respectively. This client cash held by third parties is not reflected in our balance sheets and is not immediately available for liquidity purposes.
Deposits are primarily sourced from our Wealth Management clients and are considered to have stable, low-cost funding characteristics. Totalcharacteristics. The increase in total deposits at September 30, 2020 increased compared with December 31, 2019,in the current year period was primarily driven by continued increases in brokerageBrokerage sweep deposits and savingsthe onboarding in the first quarter of 2021 of approximately $20 billion of E*TRADE sweep deposits previously held off-balance sheet at unaffiliated financial institutions, partially offset by maturities of Time deposits and lower Savings and other deposits.
Borrowings by Remaining Maturity at September 30, 202020211
| $ in millions | Parent Company | Subsidiaries | Total | ||||||||
| Original maturities of one year or less | $ | — | $ | 4,825 | $ | 4,825 | |||||
| Original maturities greater than one year | |||||||||||
| 2021 | $ | 3,398 | $ | 1,444 | $ | 4,842 | |||||
| 2022 | 9,097 | 7,053 | 16,150 | ||||||||
| 2023 | 17,272 | 5,623 | 22,895 | ||||||||
| 2024 | 20,688 | 8,224 | 28,912 | ||||||||
| 2025 | 16,754 | 6,579 | 23,333 | ||||||||
| Thereafter | 100,910 | 27,895 | 128,805 | ||||||||
| Total | $ | 168,119 | $ | 56,818 | $ | 224,937 | |||||
| Total Borrowings | $ | 168,119 | $ | 61,643 | $ | 229,762 | |||||
Maturities over next 12 months2 | $ | 13,899 | |||||||||
| $ in millions | Parent Company | Subsidiaries | Total | ||||||
| Original maturities of one year or less | $ | — | $ | 4,553 | $ | 4,553 | |||
| Original maturities greater than one year | |||||||||
| 2020 | $ | 641 | $ | 828 | $ | 1,469 | |||
| 2021 | 19,964 | 6,186 | 26,150 | ||||||
| 2022 | 16,418 | 4,011 | 20,429 | ||||||
| 2023 | 15,316 | 4,657 | 19,973 | ||||||
| 2024 | 15,938 | 5,436 | 21,374 | ||||||
| Thereafter | 83,172 | 26,324 | 109,496 | ||||||
| Total | $ | 151,449 | $ | 47,442 | $ | 198,891 | |||
| Total Borrowings | $ | 151,449 | $ | 51,995 | $ | 203,444 | |||
Maturities over next 12 months2 | $ | 20,247 | |||||||
2.Includes only borrowings with original maturities greater than one year.
Borrowings of $203$230 billion as of September 30, 20202021 increased modestlyslightly when compared with $193$217 billion at December 31, 2019.2020.
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, repurchasesrepurchases of our borrowings in the ordinary courseas part of business.our market-making activities.
For further information on Borrowings, see Note 13 to the financial statements.
Credit Ratings
We rely on external sources to finance a significant portion of our daily operations. TheOur credit ratings are one of the factors in the cost and availability of financing generally are impacted by our credit ratings, among other things. In addition, our credit ratingsand can have an impact on certain trading revenues, particularly in those businesses where longer-term counterparty performance is a key consideration, such as certain OTC derivative transactions. When determining credit ratings, rating agencies consider both company-specific and industry-wide factors. These include regulatory or legislative changes, the macroeconomic environment and perceived levels of support, among other things. See also “Risk Factors— Liquidity Risk” in the 20192020 Form 10-K.
Parent Company, MSBNA and U.S. Bank Subsidiaries'MSPBNA Issuer Ratings at October 30, 2020
29, 2021
| Parent Company | |||||||||||
| Short-Term Debt | Long-Term Debt | Rating Outlook | |||||||||
| DBRS, Inc. | R-1 (middle) | A (high) | Stable | ||||||||
| Fitch Ratings, Inc. | F1 | A | |||||||||
| Moody’s Investors Service, Inc. | P-1 | ||||||||||
| Rating and Investment Information, Inc. | a-1 | A | Stable | ||||||||
| S&P Global Ratings | A-2 | BBB+ | |||||||||
| MSBNA | |||||||||||
| Short-Term Debt | Long-Term Debt | Rating Outlook | |||||||||
| Fitch Ratings, Inc. | F1 | A+ | |||||||||
| Moody’s Investors Service, Inc. | P-1 | Aa3 | 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 | Aa3 | Stable | ||||||||
| S&P Global Ratings | A-1 | A+ | Stable | ||||||||
On April 22, 2020, FitchMay 24, 2021, S&P Global Ratings Inc. placedrevised the Parent Company and MSBNA ratings on Negative outlook, a change from Stable, related to their expectation of significant operating environment headwinds due to the disruption to economic activity and financial markets from the COVID-19 pandemic.
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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 7 to the financial statements for additional information on OTC derivatives that contain such contingent features.
| 20 | September 2021 Form 10-Q | |||||||
| Management’s Discussion and Analysis | | ||||
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 September 30, | Nine Months Ended September 30, | |||||||||||||
| in millions, except for per share data | 2021 | 2020 | 2021 | 2020 | ||||||||||
| Number of shares | 36 | — | 98 | 29 | ||||||||||
| Average price per share | $ | 99.44 | $ | — | $ | 88.60 | $ | 46.01 | ||||||
| Total | $ | 3,557 | $ | — | $ | 8,631 | $ | 1,347 | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| in millions, except for per share data | 2020 | 2019 | 2020 | 2019 | ||||||||
| Number of shares | — | 36 | 29 | 90 | ||||||||
| Average price per share | $ | — | $ | 41.92 | $ | 46.01 | $ | 42.77 | ||||
| Total | $ | — | $ | 1,500 | $ | 1,347 | $ | 3,860 | ||||
For a description of our capital plan, see “Liquidity and Capital Resources—Regulatory Requirements—Capital Plans, Stress Tests and the Stress Tests”Capital Buffer” herein.
Common Stock Dividend Announcement
| Announcement date | October | |||||
| Amount per share | ||||||
| Date to be paid | November | |||||
| Shareholders of record as of | October | |||||
For additional information on our common stock and information on our preferred stock, see Note 17 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 1416 to the financial statements in the 20192020 Form 10-K.
For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 14 to the financial statements. For a further discussion of our lending commitments, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Loans and Lending Commitments.”Commitments” herein.
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 20192020 Form 10-K.
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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. 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”). 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 16 to the financial statements.
Regulatory Capital Requirements
We are required to maintain minimum risk-based and leverage-based capital and 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
| September 2021 Form 10-Q | 21 | |||||||
| Management’s Discussion and Analysis | | ||||
the 20192020 Form 10-K. For additional information on TLAC, see “Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” 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). Capital standards require certain adjustments to, and deductions from, capital for purposes of determining these ratios.
Risk-Based Regulatory Capital Ratio Requirements
At September 30, 2021 and December 31, 2020 | |||||||||||||||||
| Standardized | Advanced | ||||||||||||||||
| Capital buffers | |||||||||||||||||
| Capital conservation buffer | — | 2.5% | |||||||||||||||
SCB1 | 5.7% | N/A | |||||||||||||||
G-SIB capital surcharge2 | 3.0% | 3.0% | |||||||||||||||
CCyB3 | 0% | 0% | |||||||||||||||
Capital buffer requirement4 | 8.7% | 5.5% | |||||||||||||||
At September 30, 2021 and December 31, 2020 | |||||||||||||||||
| Regulatory Minimum | Standardized | Advanced | |||||||||||||||
Required ratios5 | |||||||||||||||||
| Common Equity Tier 1 capital ratio | 4.5 | % | 13.2% | 10.0% | |||||||||||||
| Tier 1 capital ratio | 6.0 | % | 14.7% | 11.5% | |||||||||||||
| Total capital ratio | 8.0 | % | 16.7% | 13.5% | |||||||||||||
1.For additional information on the SCB, see “Capital Plans, Stress Tests and the Stress Capital Buffer” herein and in the 2020 Form 10-K.
At September 30, 2020 | Beginning October 1, 2020 | |||||||
| Standardized and Advanced | Standardized | Advanced | ||||||
| Capital buffers | ||||||||
| Capital conservation buffer | 2.5 | % | — | 2.5 | % | |||
Stress capital buffer (“SCB”)1 | N/A | 5.7 | % | N/A | ||||
G-SIB capital surcharge2 | 3 | % | 3 | % | 3 | % | ||
CCyB3 | 0 | % | 0 | % | 0 | % | ||
Capital buffer requirement4 | 5.5 | % | 8.7 | % | 5.5 | % | ||
At September 30, 2020 | Beginning October 1, 2020 | |||||||
| Regulatory Minimum | Standardized and Advanced | Standardized | Advanced | |||||
Required ratios5 | ||||||||
| Common Equity Tier 1 capital ratio | 4.5 | % | 10.0 | % | 13.2 | % | 10.0 | % |
| Tier 1 capital ratio | 6.0 | % | 11.5 | % | 14.7 | % | 11.5 | % |
| Total capital ratio | 8.0 | % | 13.5 | % | 16.7 | % | 13.5 | % |
3.The CCyB can be set up to 2.5%, but is currently set by the U.S. banking agencies at zero.
4.The capital buffer requirement represents the amount of Common Equity Tier 1 capital we must maintain above the minimum risk-based capital requirements in order to avoid 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. Our Standardized Approach capital buffer requirement is equal to the sum of our SCB, G-SIB capital surcharge and CCyB, and our Advanced Approach capital buffer requirement is equal to our 2.5% capital conservation buffer, G-SIB capital surcharge and CCyB.
5.Required ratios represent the regulatory minimum plus the capital buffer requirement.
Our risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under each of (i) the standardized approaches for calculating credit risk and market risk RWA (“Standardized Approach”) orand (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.weights. At September 30, 20202021 and December 31, 2019, our2020, the differences between the actual and required ratios for determining regulatory compliance are based on the Advanced Approach andwere lower under the Standardized Approach rules, respectively.Approach.
Leverage-Based Regulatory CapitalCapital.. Minimum leverage-based capital requirements include a Tier 1 leverage ratio and an SLR. We are required to maintain an SLR of 5%, inclusive of an enhanced SLR capital buffer of at least 2%.
As of September 30, 2021 and December 31, 2020, our risk-based and leverage-based capital amounts and ratios, as well as RWA, adjusted average assets and supplementary leverage exposure are calculated
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excluding the effect of the adoption of CECL based on our election to defer this effect over a five-year transition period.period which began on January 1, 2020. For further information, see “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” herein.in the2020 Form 10-K.
Regulatory Capital Ratios
| $ in millions | Required Ratio1 | At September 30, 2021 | At December 31, 2020 | ||||||||||||||||||||
| Risk-based capital— Standardized | |||||||||||||||||||||||
| Common Equity Tier 1 capital | $ | 75,785 | $ | 78,650 | |||||||||||||||||||
| Tier 1 capital | 83,435 | 88,079 | |||||||||||||||||||||
| Total capital | 94,062 | 97,213 | |||||||||||||||||||||
| Total RWA | 473,020 | 453,106 | |||||||||||||||||||||
| Common Equity Tier 1 capital ratio | 13.2 | % | 16.0 | % | 17.4 | % | |||||||||||||||||
| Tier 1 capital ratio | 14.7 | % | 17.6 | % | 19.4 | % | |||||||||||||||||
| Total capital ratio | 16.7 | % | 19.9 | % | 21.5 | % | |||||||||||||||||
| $ in millions | Required Ratio1 | At September 30, 2021 | At December 31, 2020 | |||||||||||
| Risk-based capital— Advanced | ||||||||||||||
| Common Equity Tier 1 capital | $ | 75,785 | $ | 78,650 | ||||||||||
| Tier 1 capital | 83,435 | 88,079 | ||||||||||||
| Total capital | 93,813 | 96,994 | ||||||||||||
| Total RWA | 441,214 | 445,151 | ||||||||||||
| Common Equity Tier 1 capital ratio | 10.0 | % | 17.2 | % | 17.7 | % | ||||||||
| Tier 1 capital ratio | 11.5 | % | 18.9 | % | 19.8 | % | ||||||||
| Total capital ratio | 13.5 | % | 21.3 | % | 21.8 | % | ||||||||
| $ in millions | Required Ratio1 | At September 30, 2021 | At December 31, 2020 | |||||||||||
| Leverage-based capital | ||||||||||||||
Adjusted average assets2 | $ | 1,145,682 | $ | 1,053,510 | ||||||||||
| Tier 1 leverage ratio | 4.0 | % | 7.3 | % | 8.4 | % | ||||||||
Supplementary leverage exposure3,4 | $ | 1,459,466 | $ | 1,192,506 | ||||||||||
SLR4 | 5.0 | % | 5.7 | % | 7.4 | % | ||||||||
1.Required ratios are inclusive of any buffers applicable as of the date presented. 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.
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 for the quarters ending on the respective balance sheet dates, reduced by disallowed goodwill, intangible assets, investments in covered funds, defined benefit pension plan assets, after-tax gain on sale from assets sold into securitizations, investments in our own capital instruments, certain deferred tax assets 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) for derivatives, potential future exposure 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.
4.Our SLR and Supplementary leverage exposure as of December 31, 2020 reflect the exclusion of U.S. Treasury securities and deposits at Federal Reserve Banks based on a Federal Reserve interim final rule that was in effect until March 31, 2021. As of December 31, 2020, the impact of the interim final rule on our SLR was an increase of 80 bps. For further information, see “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments and Other Matters” herein and “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments" in the 2020 Form 10-K.
| At September 30, 2020 | ||||||||
| $ in millions | Required Ratio1 | Standardized | Advanced | |||||
| Risk-based capital | ||||||||
| Common Equity Tier 1 capital | $ | 71,157 | $ | 71,157 | ||||
| Tier 1 capital | 79,905 | 79,905 | ||||||
| Total capital | 90,018 | 89,763 | ||||||
| Total RWA | 408,850 | 420,081 | ||||||
| Common Equity Tier 1 capital ratio | 10.0 | % | 17.4 | % | 16.9 | % | ||
| Tier 1 capital ratio | 11.5 | % | 19.5 | % | 19.0 | % | ||
| Total capital ratio | 13.5 | % | 22.0 | % | 21.4 | % | ||
| $ in millions | Required Ratio1 | At September 30, 2020 | ||||||
| Leverage-based capital | ||||||||
Adjusted average assets2 | $ | 962,435 | ||||||
| Tier 1 leverage ratio | 4.0 | % | 8.3 | % | ||||
Supplementary leverage exposure3,4 | $ | 1,084,348 | ||||||
SLR4 | 5.0 | % | 7.4 | % | ||||
| At December 31, 2019 | ||||||||
| $ in millions | Required Ratio1 | Standardized | Advanced | |||||
| Risk-based capital | ||||||||
| Common Equity Tier 1 capital | $ | 64,751 | $ | 64,751 | ||||
| Tier 1 capital | 73,443 | 73,443 | ||||||
| Total capital | 82,708 | 82,423 | ||||||
| Total RWA | 394,177 | 382,496 | ||||||
| Common Equity Tier 1 capital ratio | 10.0 | % | 16.4 | % | 16.9 | % | ||
| Tier 1 capital ratio | 11.5 | % | 18.6 | % | 19.2 | % | ||
| Total capital ratio | 13.5 | % | 21.0 | % | 21.5 | % | ||
| $ in millions | Required Ratio1 | At December 31, 2019 | ||||||
| Leverage-based capital | ||||||||
Adjusted average assets2 | $ | 889,195 | ||||||
| Tier 1 leverage ratio | 4.0 | % | 8.3 | % | ||||
Supplementary leverage exposure3 | $ | 1,155,177 | ||||||
| SLR | 5.0 | % | 6.4 | % | ||||
| September | ||||||||
| Management’s Discussion and Analysis | | ||||
Regulatory Capital
| $ in millions | At September 30, 2021 | At December 31, 2020 | Change | |||||||||||
| Common Equity Tier 1 capital | ||||||||||||||
| Common stock and surplus | $ | 13,755 | $ | 15,799 | $ | (2,044) | ||||||||
| Retained earnings | 87,356 | 78,978 | 8,378 | |||||||||||
| AOCI | (2,701) | (1,962) | (739) | |||||||||||
| Regulatory adjustments and deductions: | ||||||||||||||
| Net goodwill | (16,678) | (11,527) | (5,151) | |||||||||||
| Net intangible assets | (6,878) | (4,165) | (2,713) | |||||||||||
Other adjustments and deductions1 | 931 | 1,527 | (596) | |||||||||||
| Total Common Equity Tier 1 capital | $ | 75,785 | $ | 78,650 | $ | (2,865) | ||||||||
| Additional Tier 1 capital | ||||||||||||||
| Preferred stock | $ | 7,750 | $ | 9,250 | $ | (1,500) | ||||||||
| Noncontrolling interests | 534 | 619 | (85) | |||||||||||
| Additional Tier 1 capital | $ | 8,284 | $ | 9,869 | $ | (1,585) | ||||||||
| Deduction for investments in covered funds | (634) | (440) | (194) | |||||||||||
| Total Tier 1 capital | $ | 83,435 | $ | 88,079 | $ | (4,644) | ||||||||
| Standardized Tier 2 capital | ||||||||||||||
| Subordinated debt | $ | 9,522 | $ | 7,737 | $ | 1,785 | ||||||||
| Eligible ACL | 1,182 | 1,265 | (83) | |||||||||||
| Other adjustments and deductions | (77) | 132 | (209) | |||||||||||
| Total Standardized Tier 2 capital | $ | 10,627 | $ | 9,134 | $ | 1,493 | ||||||||
| Total Standardized capital | $ | 94,062 | $ | 97,213 | $ | (3,151) | ||||||||
| Advanced Tier 2 capital | ||||||||||||||
| Subordinated debt | $ | 9,522 | $ | 7,737 | $ | 1,785 | ||||||||
| Eligible credit reserves | 933 | 1,046 | (113) | |||||||||||
| Other adjustments and deductions | (77) | 132 | (209) | |||||||||||
| Total Advanced Tier 2 capital | $ | 10,378 | $ | 8,915 | $ | 1,463 | ||||||||
| Total Advanced capital | $ | 93,813 | $ | 96,994 | $ | (3,181) | ||||||||
1.Other adjustments and deductions used in the calculation of Common Equity Tier 1 capital primarily includes net after-tax DVA, the credit spread premium over risk-free rate for derivative liabilities, defined benefit pension plan assets, after-tax gain on sale from assets sold into securitizations, investments in our own capital instruments and certain deferred tax assets.
| $ in millions | At September 30, 2020 | At December 31, 2019 | Change | ||||||
| Common Equity Tier 1 capital | |||||||||
| Common stock and surplus | $ | 4,350 | $ | 5,228 | $ | (878 | ) | ||
| Retained earnings | 76,353 | 70,589 | 5,764 | ||||||
| AOCI | (537 | ) | (2,788 | ) | 2,251 | ||||
| Regulatory adjustments and deductions: | |||||||||
| Net goodwill | (7,242 | ) | (7,081 | ) | (161 | ) | |||
| Net intangible assets | (1,776 | ) | (2,012 | ) | 236 | ||||
Other adjustments and deductions1 | 9 | 815 | (806 | ) | |||||
Total Common Equity Tier 1 capital | $ | 71,157 | $ | 64,751 | $ | 6,406 | |||
| Additional Tier 1 capital | |||||||||
| Preferred stock | $ | 8,520 | $ | 8,520 | $ | — | |||
| Noncontrolling interests | 625 | 607 | 18 | ||||||
| Additional Tier 1 capital | $ | 9,145 | $ | 9,127 | $ | 18 | |||
| Deduction for investments in covered funds | (397 | ) | (435 | ) | 38 | ||||
| Total Tier 1 capital | $ | 79,905 | $ | 73,443 | $ | 6,462 | |||
| Standardized Tier 2 capital | |||||||||
| Subordinated debt | $ | 8,681 | $ | 8,538 | $ | 143 | |||
| Noncontrolling interests | 147 | 143 | 4 | ||||||
| Eligible ACL | 1,287 | 590 | 697 | ||||||
| Other adjustments and deductions | (2 | ) | (6 | ) | 4 | ||||
Total Standardized Tier 2 capital | $ | 10,113 | $ | 9,265 | $ | 848 | |||
| Total Standardized capital | $ | 90,018 | $ | 82,708 | $ | 7,310 | |||
| Advanced Tier 2 capital | |||||||||
| Subordinated debt | $ | 8,681 | $ | 8,538 | $ | 143 | |||
| Noncontrolling interests | 147 | 143 | 4 | ||||||
| Eligible credit reserves | 1,032 | 305 | 727 | ||||||
Other adjustments and deductions | (2 | ) | (6 | ) | 4 | ||||
| Total Advanced Tier 2 capital | $ | 9,858 | $ | 8,980 | $ | 878 | |||
| Total Advanced capital | $ | 89,763 | $ | 82,423 | $ | 7,340 | |||
RWA Rollforward
| Nine Months Ended September 30, 2020 | ||||||
| $ in millions | Standardized | Advanced | ||||
| Credit risk RWA | ||||||
| Balance at December 31, 2019 | $ | 342,684 | $ | 228,927 | ||
| Change related to the following items: | ||||||
| Derivatives | 4,622 | 24,322 | ||||
| Securities financing transactions | (9,314 | ) | 514 | |||
| Securitizations | (1,595 | ) | (3,016 | ) | ||
| Investment securities | 2,468 | 3,904 | ||||
| Commitments, guarantees and loans | 5,017 | 1,776 | ||||
| Cash | 718 | 1,838 | ||||
| Equity investments | 3,027 | 3,207 | ||||
Other credit risk1 | (601 | ) | (762 | ) | ||
| Total change in credit risk RWA | $ | 4,342 | $ | 31,783 | ||
| Balance at September 30, 2020 | $ | 347,026 | $ | 260,710 | ||
| Market risk RWA | ||||||
| Balance at December 31, 2019 | $ | 51,493 | $ | 51,597 | ||
| Change related to the following items: | ||||||
| Regulatory VaR | 9,673 | 9,673 | ||||
| Regulatory stressed VaR | 1,987 | 1,987 | ||||
| Incremental risk charge | 180 | 180 | ||||
| Comprehensive risk measure | 210 | 106 | ||||
| Specific risk: | ||||||
| Non-securitization | (99 | ) | (99 | ) | ||
| Securitization | (1,620 | ) | (1,620 | ) | ||
| Total change in market risk RWA | $ | 10,331 | $ | 10,227 | ||
| Balance at September 30, 2020 | $ | 61,824 | $ | 61,824 | ||
| Operational risk RWA | ||||||
| Balance at December 31, 2019 | N/A | $ | 101,972 | |||
| Change in operational risk RWA | N/A | (4,425 | ) | |||
| Balance at September 30, 2020 | N/A | $ | 97,547 | |||
| Total RWA | $ | 408,850 | $ | 420,081 | ||
| Nine Months Ended September 30, 2021 | ||||||||
| $ in millions | Standardized | Advanced | ||||||
| Credit risk RWA | ||||||||
| Balance at December 31, 2020 | $ | 387,066 | $ | 284,930 | ||||
| Change related to the following items: | ||||||||
| Derivatives | 10,529 | (14,533) | ||||||
| Securities financing transactions | 5,914 | 947 | ||||||
| Investment securities | (2,563) | 357 | ||||||
| Commitments, guarantees and loans | 639 | 4,260 | ||||||
| Equity investments | 2,117 | 2,196 | ||||||
Other credit risk1 | 6,884 | 6,395 | ||||||
| Total change in credit risk RWA | $ | 23,520 | $ | (378) | ||||
| Balance at September 30, 2021 | $ | 410,586 | $ | 284,552 | ||||
| Market risk RWA | ||||||||
| Balance at December 31, 2020 | $ | 66,040 | $ | 66,040 | ||||
| Change related to the following items: | ||||||||
| Regulatory VaR | (6,747) | (6,747) | ||||||
| Regulatory stressed VaR | (1,908) | (1,908) | ||||||
| Incremental risk charge | 3,032 | 3,032 | ||||||
| Comprehensive risk measure | (125) | (125) | ||||||
| Specific risk | 2,142 | 2,142 | ||||||
| Total change in market risk RWA | $ | (3,606) | $ | (3,606) | ||||
| Balance at September 30, 2021 | $ | 62,434 | $ | 62,434 | ||||
| Operational risk RWA | ||||||||
| Balance at December 31, 2020 | N/A | $ | 94,181 | |||||
| Change in operational risk RWA | N/A | 47 | ||||||
| Balance at September 30, 2021 | N/A | $ | 94,228 | |||||
| Total RWA | $ | 473,020 | $ | 441,214 | ||||
Regulatory VaR—VaR for regulatory capital requirements
Credit risk RWA increased in the current year period increased under both the Standardized andApproach, while it is relatively unchanged under the Advanced Approaches primarily from an increase in Derivatives exposure driven by market volatility, an increase in Investment securities mainly due to increased exposures to U.S. government and agency securities, and an increase in Equity investments due to increased exposure and market value gains.Approach. Under the Standardized Approach, increased exposures in lending activities within the Wealth Managementincrease was primarily from Derivatives and Institutional Securities business segments were partially offset by a decrease in Securities financing transactions.transactions driven by increased exposure. Under the Advanced Approach, thedecreased CVA in Derivatives due to lower credit spread volatility was offset by increased exposure in Derivativesevent lending within the Institutional Securities business segment and higher credit spread volatilities also led to an increase in RWA related to CVA.other increases.
Market risk RWA increaseddecreased in the current year period under both the Standardized and Advanced Approaches primarily due to an increasea decrease in Regulatory VaR mainly as a result of higherreduced volatility as the peak COVID-19 market volatility.
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Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements
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 are designed to ensure that covered BHCs will have enough loss-absorbing resources at the point of failure to be recapitalized through the conversion of eligible LTD to equity or otherwise
| September 2021 Form 10-Q | 23 | |||||||
| Management’s Discussion and Analysis | | ||||
by imposing losses on eligible LTD or other forms of TLAC where an SPOE resolution strategy is used.
Required and Actual TLAC and Eligible LTD Ratios
Actual Amount/Ratio | |||||||||||||||||
| $ in millions | Regulatory Minimum | Required Ratio1 | At September 30, 2021 | At December 31, 2020 | |||||||||||||
External TLAC2 | $ | 234,639 | $ | 216,129 | |||||||||||||
| External TLAC as a % of RWA | 18.0 | % | 21.5 | % | 49.6 | % | 47.7 | % | |||||||||
| External TLAC as a % of leverage exposure | 7.5 | % | 9.5 | % | 16.1 | % | 18.1 | % | |||||||||
Eligible LTD3 | $ | 142,978 | $ | 120,561 | |||||||||||||
| Eligible LTD as a % of RWA | 9.0 | % | 9.0 | % | 30.2 | % | 26.6 | % | |||||||||
| Eligible LTD as a % of leverage exposure | 4.5 | % | 4.5 | % | 9.8 | % | 10.1 | % | |||||||||
Actual Amount/Ratio | ||||||||||
| $ in millions | Regulatory Minimum | Required Ratio1 | At September 30, 2020 | At December 31, 2019 | ||||||
External TLAC2 | $ | 202,472 | $ | 196,888 | ||||||
| External TLAC as a % of RWA | 18.0 | % | 21.5 | % | 48.2 | % | 49.9 | % | ||
| External TLAC as a % of leverage exposure | 7.5 | % | 9.5 | % | 18.7 | % | 17.0 | % | ||
Eligible LTD3 | $ | 114,952 | $ | 113,624 | ||||||
| Eligible LTD as a % of RWA | 9.0 | % | 9.0 | % | 27.4 | % | 28.8 | % | ||
| Eligible LTD as a % of leverage exposure | 4.5 | % | 4.5 | % | 10.6 | % | 9.8 | % | ||
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 each respective balance sheet date. |
We are in compliance with all TLAC requirements as of September 30, 20202021 and December 31, 2019.2020. 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—Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” in the 20192020 Form 10-K.
Capital Plans, and Stress Tests and the Stress Capital Buffer
Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large BHCs, which form part of the Federal Reserve’s annual CCAR framework.
We must submit, on at least an annual basis, a capital plan to the Federal Reserve, taking into account the results of separate annual stress tests designed by us and the Federal Reserve, so that the Federal Reserve may assess our systems and processes that incorporate forward-looking projections of revenues and losses to monitor and maintain our internal capital adequacy. As banks with less than $250 billion of total assets, our U.S. Bank Subsidiaries are not subject to company-run stress test regulatory requirements.
For the 2021 capital planning and stress test cycle, we submitted our 2020 Capital Plan (“Capital Plan”)capital plan and company-run stress test results to the Federal Reserve on April 6, 2020.5, 2021. On June 25, 2020,24, 2021, the Federal Reserve published
summary results of its supervisory stress tests of each large BHC. On June 29, 2020, we disclosed a summaryBHC, and following the publication of the results of our company-run stress tests on our Investor Relations website. On September 4, 2020, we announced we will be subject to an SCB of 5.7% beginning October 1, 2020, which reflects the Federal Reserve’s corrected 2020 supervisory stress test results. We had previously announced that we would be subject to an SCB of 5.9%, which reflected the Federal Reserve’s original 2020 supervisory stress test results, released in June 2020.we
announced that our SCB will remain at 5.7% from October 1, 2021 through September 30, 2022. Together with other features of the regulatory capital framework, this revised SCB results in an aggregate Standardized Approach Common Equity Tier 1 required ratio of 13.2%. Generally, our SCB will be updatedis determined annually based on the results of the supervisory stress test. See “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments—Stress Capital Buffer Final Rule” herein for additional information on
Additionally, under the SCB.
Based on the results of the 2021 supervisory stress tests, the temporary capital action supervisory restrictions previously applicable to us ended on June 30, 2021. Beginning July 1, 2021, the Firm is permitted, in its discretion, to adjust its capital distributions without seeking prior approval from the Federal Reserve, provided that it remains in compliance with all applicable regulatory capital requirements, including the SCB. We disclosed a summary of the results of our company-run stress tests on our Investor Relations website, and announced that such capital action restrictions would be extended throughour Board of Directors authorized the fourth quarter of 2020. For a further discussionincrease of our quarterly common stock dividend to $0.70 per share from $0.35 per share beginning with the common stock dividend announced on July 15, 2021, and authorized the repurchase of up to $12 billion of outstanding common stock from July 1, 2021 through June 30, 2022, from time to time as conditions warrant, which supersedes the previous common stock repurchase authorization.
For additional information, on our capital plans,planning and stress tests, including the SCB, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Balance Sheet—Capital Management” hereinPlans, Stress Tests and the Stress Capital Buffer” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Action Supervisory Restrictions” in the 20192020 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
| 24 | September 2021 Form 10-Q | |||||||
| Management’s Discussion and Analysis | | ||||
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-based 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.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, potential future acquisitions and other capital needs.
Average Common Equity Attribution under the Required Capital Framework1
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| $ in billions | 2021 | 2020 | 2021 | 2020 | ||||||||||
| Institutional Securities | $ | 43.5 | $ | 42.8 | $ | 43.5 | $ | 42.8 | ||||||
Wealth Management2 | 28.6 | 18.2 | 28.6 | 18.2 | ||||||||||
Investment Management3 | 10.7 | 2.6 | 8.2 | 2.6 | ||||||||||
| Parent | 15.8 | 15.1 | 16.6 | 13.3 | ||||||||||
| Total | $ | 98.6 | $ | 78.7 | $ | 96.9 | $ | 76.9 | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| $ in billions | 2020 | 2019 | 2020 | 2019 | ||||||||
| Institutional Securities | $ | 42.8 | $ | 40.4 | $ | 42.8 | $ | 40.4 | ||||
| Wealth Management | 18.2 | 18.2 | 18.2 | 18.2 | ||||||||
| Investment Management | 2.6 | 2.5 | 2.6 | 2.5 | ||||||||
| Parent | 15.1 | 12.3 | 13.3 | 11.4 | ||||||||
| Total | $ | 78.7 | $ | 73.4 | $ | 76.9 | $ | 72.5 | ||||
2.The total average common equity and the allocation to the Wealth Management business segment in 2021 reflect the E*TRADE acquisition on October 2, 2020.
3. The total average common equity and the allocation to the Investment Management business segment in 2021 reflect the Eaton Vance acquisition on March 1, 2021. The Firm has made updates to its Required Capital framework for 2021 and continues to evaluate the impact of evolving regulatory requirements, as appropriate. |
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 next resolution plan submission will be a We submitted our 2021 targeted resolution plan in Julyon June 30, 2021.
As described in our most recent resolution plan, which was submitted on June 28, 2019, our preferred resolution strategy is an SPOE strategy. In line with our SPOE strategy, the Parent Company has transferred, and has agreed to transfer on an ongoing basis, certain assets to its wholly owned, direct subsidiary Morgan Stanley Holdings LLC (the “Funding IHC”). In addition, the Parent Company has entered into an amended and restated support agreement with its material entities (including the Funding IHC) and certain other subsidiaries. In the event of a resolution scenario, the Parent Company would be obligated to contribute all of its Contributable Assets to our
material entities and/or the Funding IHC. The Funding IHC would be
obligated to provide capital and liquidity, as applicable, to our material entities. The combined implication of the SPOE resolution strategy and the requirement to maintain certain levels of TLAC is that losses in resolution would be imposed on the holders of eligible long-term debt and other forms of eligible TLAC issued by the Parent Company before any losses are imposed on the holders of the debt securitiescreditors of our operating subsidiariesmaterial entities and without requiring taxpayer or before putting U.S. taxpayers at risk.government financial support.
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,” “Risk Factors—Legal, Regulatory and Compliance Risk” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Resolution and Recovery Planning” in the 20192020 Form 10-K.
Regulatory Developments and Other Matters
The U.S. banking agencies have issued aagencies’ final rule that, among other things, modifiesto implement SA-CCR requires compliance by January 1, 2022 for Advanced Approaches banking organizations, such as the Parent Company. We intend to early adopt SA-CCR under the final rule in the fourth quarter of 2021. SA-CCR replaces the current exposure method used to measure derivatives counterparty exposure on the Standardized Approach RWA and Supplementary leverage exposure calculations in the regulatory capital framework for large U.S. banking organizations, including usframework. In the absence of further mitigation, the adoption of SA-CCR could increase our RWA under the Standardized Approach by $35 billion to $45 billion and reduce our U.S. Bank Subsidiaries. UnderStandardized Common Equity Tier 1 capital ratio by approximately 120 basis points. This preliminary estimate of the final rule, such organizations are requiredinitial impact of adopting SA-CCR is subject to make certain deductions from regulatoryrisks and uncertainties, including regarding portfolio composition and mitigation efforts as of the adoption date, that may cause the actual impact to differ materially and should not be taken as a projection of what our capital for their investments in certain unsecured debt instruments (including eligible LTD in the TLAC framework) issued by the Parent Companyratios and other G-SIBs. These requirements become effective on April 1, 2021 and we expect toRWA will be in compliance with the final rule by the effective date.future periods.
Swap Dealer and Security-based Swap Dealer Regulations
CFTC Final Rule on Capital Requirements for Swap Dealers
| September | ||||||||
| Management’s Discussion and Analysis | | ||||
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Planned 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 committees and working groups of market participants and official sector representatives to replace LIBOR and replace or reform other interest rate benchmarks (collectively, the “IBORs”). Accordingly,On March 5, 2021, ICE Benchmark Administration, which administers LIBOR publication, announced that it will cease the publication of most LIBOR rates as of the end of December 2021, except for the publication until June 30, 2023 of the most widely used U.S. dollar LIBOR tenors, and the U.K. Financial Conduct Authority (“FCA”), which regulates LIBOR publication, announced that it would not compel panel banks to submit to LIBOR beyond those dates.
Subsequently, the International Swaps and Derivatives Association (“ISDA”) confirmed that the FCA’s announcement constituted an “Index Cessation Event” as defined in the IBOR Fallbacks Supplement, which amended ISDA’s interest rate definitions to include robust fallbacks for derivatives linked to LIBOR and certain other interest rate benchmarks, and the ISDA 2020 IBOR Fallbacks Protocol, which incorporates the fallbacks into legacy non-cleared derivatives entered into between Protocol adherents. The FCA’s announcement therefore triggered a fixing of the ISDA fallback spread adjustments for all LIBOR benchmarks, to be effective when the contractual fallbacks are implemented. The Alternative Reference Rates Committee (“ARRC”) also confirmed that the ICE Benchmark Administration and FCA announcements also constituted a “Benchmark Transition Event” with respect to all U.S. dollar LIBOR settings pursuant to the ARRC’s fallback recommendations for new issuances or originations of certain cash products.
Separately, the U.S. banking agencies and the FCA have been encouraging banks to cease entering into new contracts referencing LIBOR no later than December 31, 2021.
Further, New York State has enacted legislation that is intended to minimize legal and economic uncertainty following U.S. dollar LIBOR’s cessation by replacing LIBOR references in certain contracts governed by New York law with a benchmark based on the Secured Overnight Financing Rate, including any spread adjustment, recommended by the
Federal Reserve, the Federal Reserve Bank of New York or the ARRC.
We remain a party to a significant number of LIBOR-linked contracts, many of which extend beyond 2021 and, in the case of U.S. dollar LIBOR, June 30, 2023, composed of derivatives, securitizations, floating rate notes, loans and mortgages and we have established
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For a further discussion of regulatory developments and the related risks and our transition plan,other matters, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Other Matters” and “Risk Factors—Risk Management,Matters,” respectively, in the 20192020 Form 10-K.
| September | ||||||||
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 Enterprise Risk Management framework and risk management functions, see “Quantitative and Qualitative Disclosures about Risk—Risk Management” in the 20192020 Form 10-K.
Market Risk
Market risk refers to the risk that a change in the level of one or more market prices, rates, spreads, 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 non-trading market risk, principally within the Wealth Management and Investment Management business segments. The Wealth Management business segment primarily incurs non-trading market risk (including interest rate risk) from lending and deposit-taking activities. The Investment Management business segment primarily incurs non-trading market risk from capital investments in alternative and otherits funds. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Risk—Market Risk” in the 20192020 Form 10-K.
Trading Risks
We are exposed to a wide range of risks related to interest rates and credit spreads, equity prices, foreign exchange rates and commodity prices, and the associated implied volatilities and spreads, related to the global markets in which we conduct our trading activities.
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.
For information regarding our primary risk exposures and market risk management, VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Risk—Market Risk—Trading Risks” in the 20192020 Form 10-K.
95%/One-Day Management VaR for the Trading Portfolio
| Three Months Ended | ||||||||||||||
| September 30, 2021 | ||||||||||||||
| $ in millions | Period End | Average | High2 | Low2 | ||||||||||
| Interest rate and credit spread | $ | 27 | $ | 28 | $ | 33 | $ | 23 | ||||||
| Equity price | 28 | 24 | 32 | 20 | ||||||||||
| Foreign exchange rate | 7 | 8 | 11 | 6 | ||||||||||
| Commodity price | 19 | 12 | 19 | 9 | ||||||||||
Less: Diversification benefit1 | (34) | (29) | N/A | N/A | ||||||||||
| Primary Risk Categories | $ | 47 | $ | 43 | $ | 53 | $ | 38 | ||||||
| Credit Portfolio | 12 | 12 | 13 | 11 | ||||||||||
Less: Diversification benefit1 | (11) | (10) | N/A | N/A | ||||||||||
| Total Management VaR | $ | 48 | $ | 45 | $ | 56 | $ | 41 | ||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||
| September 30, 2020 | June 30, 2021 | |||||||||||||||||||||||||
| $ in millions | Period End | Average | High2 | Low2 | $ in millions | Period End | Average | High2 | Low2 | |||||||||||||||||
| Interest rate and credit spread | $ | 32 | $ | 38 | $ | 49 | $ | 29 | Interest rate and credit spread | $ | 29 | $ | 31 | $ | 39 | $ | 28 | |||||||||
| Equity price | 27 | 30 | 39 | 19 | Equity price | 21 | 24 | 32 | 19 | |||||||||||||||||
| Foreign exchange rate | 11 | 9 | 12 | 7 | Foreign exchange rate | 8 | 8 | 15 | 5 | |||||||||||||||||
| Commodity price | 17 | 22 | 29 | 16 | Commodity price | 10 | 11 | 16 | 8 | |||||||||||||||||
Less: Diversification benefit1 | (38 | ) | (53 | ) | N/A | N/A | Less: Diversification benefit1 | (28) | (29) | N/A | ||||||||||||||||
| Primary Risk Categories | $ | 49 | $ | 46 | $ | 57 | $ | 37 | Primary Risk Categories | $ | 40 | $ | 45 | $ | 58 | $ | 37 | |||||||||
| Credit Portfolio | 21 | 25 | 31 | 20 | Credit Portfolio | 12 | 13 | 17 | 11 | |||||||||||||||||
Less: Diversification benefit1 | (8 | ) | (13 | ) | N/A | N/A | Less: Diversification benefit1 | (9) | (10) | N/A | ||||||||||||||||
| Total Management VaR | $ | 62 | $ | 58 | $ | 78 | $ | 45 | Total Management VaR | $ | 43 | $ | 48 | $ | 60 | $ | 41 | |||||||||
1.Diversification benefit equals the difference between the total 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.
| Three Months Ended | ||||||||||||
| June 30, 2020 | ||||||||||||
| $ in millions | Period End | Average | High2 | Low2 | ||||||||
| Interest rate and credit spread | $ | 42 | $ | 47 | $ | 59 | $ | 36 | ||||
| Equity price | 38 | 25 | 38 | 20 | ||||||||
| Foreign exchange rate | 10 | 11 | 15 | 8 | ||||||||
| Commodity price | 25 | 16 | 25 | 11 | ||||||||
Less: Diversification benefit1 | (68 | ) | (49 | ) | N/A | N/A | ||||||
| Primary Risk Categories | $ | 47 | $ | 50 | $ | 62 | $ | 44 | ||||
| Credit Portfolio | 26 | 25 | 30 | 23 | ||||||||
Less: Diversification benefit1 | (1 | ) | (15 | ) | N/A | N/A | ||||||
| Total Management VaR | $ | 72 | $ | 60 | $ | 78 | $ | 47 | ||||
Average total Management VaR and average Management VaR for the Primary Risk Categories decreasedwere relatively unchanged from the three months ended June 30, 2020 primarily as a result of reduced credit spread risk partially offset by increased equity risk.2021.
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Distribution of VaR Statistics and Net Revenues
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.results. There were notwo loss days in the current quarter.quarter, which did not exceed the Firm’s VaR.
| September 2021 Form 10-Q | 27 | |||||||
| Risk Disclosures | | ||||
Daily 95%/One-Day Total Management VaR for the Current Quarter
($ in millions)
Daily Net Trading Revenues for the Current Quarter
($ in millions)
The previous histogram shows the distribution of daily net trading revenues for the current quarter. 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, and counterparty default risk 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 September 30, 2021 | At June 30, 2021 | ||||||
| Derivatives | $ | 7 | $ | 7 | ||||
| Borrowings carried at fair value | 48 | 48 | ||||||
| $ in millions | At September 30, 2020 | At June 30, 2020 | ||||
| Derivatives | $ | 7 | $ | 7 | ||
Funding liabilities2 | 46 | 45 | ||||
1.Amounts represent the potential gain for each 1 bps widening of our credit spread. |
U.S. Bank Subsidiaries’ Net Interest Income Sensitivity Analysis
| $ in millions | At September 30, 2021 | At June 30, 2021 | ||||||
| Basis point change | ||||||||
| +100 | $ | 1,540 | $ | 1,463 | ||||
| -100 | (494) | (498) | ||||||
| $ in millions | At September 30, 2020 | At June 30, 2020 | ||||
| Basis point change | ||||||
| +100 | $ | 1,014 | $ | 599 | ||
| -100 | (338 | ) | (351 | ) | ||
The previous table presents an analysis of selected instantaneous upward and downward parallel interest rate shocks (subject to a floor of zero percent in the downward scenario) 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 inNet interest income sensitivity to interest rates in the positive 100 basis point scenario between September 30, 2020 andwas relatively unchanged from June 30, 2020 was primarily driven by the impact of changes to assumptions as a result of an analysis of deposit pricing through a full interest rate cycle.2021.
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Investments Sensitivity, Including Related Carried Interest
| Loss from 10% Decline | ||||||
| $ in millions | At September 30, 2020 | At June 30, 2020 | ||||
| Investments related to Investment Management activities | $ | 349 | $ | 329 | ||
| Other investments: | ||||||
| MUMSS | 176 | 170 | ||||
| Other Firm investments | 203 | 188 | ||||
| Loss from 10% Decline | ||||||||
| $ in millions | At September 30, 2021 | At June 30, 2021 | ||||||
| Investments related to Investment Management activities | $ | 422 | $ | 477 | ||||
| Other investments: | ||||||||
| MUMSS | 174 | 172 | ||||||
| Other Firm investments | 261 | 232 | ||||||
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 incomerevenues associated with a reasonably possible 10% decline in investment values and relatedrelated impact on performance-based fees,income, as applicable.
| 28 | September 2021 Form 10-Q | |||||||
| Risk Disclosures | | ||||
Asset Management Revenue Sensitivity
Certain asset management revenues in the Wealth Management and Investment Management business segments are derived from management fees, which are based on fee-based client assets in Wealth Management or AUM in Investment Management (together, “client holdings”). The assets underlying client holdings are primarily composed of equity, fixed income and alternative investments, and are sensitive to changes in related markets. The overall level of these revenues depends on multiple factors that include, but are not limited to, the level and duration of a market increase or decline, price volatility, the geographic and industry mix of client assets, and client behavior such as the rate and magnitude of client investments and redemptions. Therefore, overall revenues do not correlate completely with changes in the related 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 are primarily exposed to credit risk from 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 20192020 Form 10-K.
Loans and Lending Commitments
| At September 30, 2021 | ||||||||||||||
| $ in millions | HFI | HFS | FVO | Total | ||||||||||
| Institutional Securities: | ||||||||||||||
| Corporate | $ | 4,774 | $ | 8,998 | $ | 13 | $ | 13,785 | ||||||
| Secured lending facilities | 27,345 | 3,650 | 350 | 31,345 | ||||||||||
| Commercial and Residential real estate | 6,915 | 434 | 5,536 | 12,885 | ||||||||||
| Securities-based lending and Other | 520 | 56 | 8,889 | 9,465 | ||||||||||
| Total Institutional Securities | 39,554 | 13,138 | 14,788 | 67,480 | ||||||||||
| Wealth Management: | ||||||||||||||
| Residential real estate | 41,428 | 8 | — | 41,436 | ||||||||||
| Securities-based lending and Other | 79,888 | 22 | — | 79,910 | ||||||||||
| Total Wealth Management | 121,316 | 30 | — | 121,346 | ||||||||||
Total Investment Management1 | 5 | — | 127 | 132 | ||||||||||
Total loans2 | 160,875 | 13,168 | 14,915 | 188,958 | ||||||||||
| ACL | (684) | (684) | ||||||||||||
| Total loans, net of ACL | $ | 160,191 | $ | 13,168 | $ | 14,915 | $ | 188,274 | ||||||
Lending commitments3 | $ | 137,116 | ||||||||||||
| Total exposure | $ | 325,390 | ||||||||||||
| At September 30, 2020 | ||||||||||||
| $ in millions | HFI | HFS | FVO | Total | ||||||||
| Institutional Securities: | ||||||||||||
| Corporate | $ | 7,628 | $ | 8,552 | $ | 14 | $ | 16,194 | ||||
| Secured lending facilities | 26,496 | 3,521 | 445 | 30,462 | ||||||||
| Commercial and Residential real estate | 7,265 | 928 | 1,593 | 9,786 | ||||||||
| Securities-based lending and Other | 1,277 | 57 | 5,729 | 7,063 | ||||||||
| Total Institutional Securities | 42,666 | 13,058 | 7,781 | 63,505 | ||||||||
| Wealth Management: | ||||||||||||
| Residential real estate | 33,674 | 12 | — | 33,686 | ||||||||
| Securities-based lending and Other | 57,723 | — | — | 57,723 | ||||||||
| Total Wealth Management | 91,397 | 12 | — | 91,409 | ||||||||
Total Investment Management1 | 6 | 11 | 552 | 569 | ||||||||
| Total loans | 134,069 | 13,081 | 8,333 | 155,483 | ||||||||
| ACL | (913 | ) | (913 | ) | ||||||||
| Total loans, net of ACL | $ | 133,156 | $ | 13,081 | $ | 8,333 | $ | 154,570 | ||||
Lending commitments2 | $ | 120,098 | ||||||||||
| Total exposure | $ | 274,668 | ||||||||||
| At December 31, 2019 | At December 31, 2020 | |||||||||||||||||||||||||
| $ in millions | HFI | HFS | FVO | Total | $ in millions | HFI | HFS | FVO | Total | |||||||||||||||||
| Institutional Securities: | Institutional Securities: | |||||||||||||||||||||||||
| Corporate | $ | 5,426 | $ | 6,192 | $ | 20 | $ | 11,638 | Corporate | $ | 6,046 | $ | 8,580 | $ | 13 | $ | 14,639 | |||||||||
| Secured lending facilities | 24,502 | 4,200 | 951 | 29,653 | Secured lending facilities | 25,727 | 3,296 | 648 | 29,671 | |||||||||||||||||
| Commercial and Residential real estate | 7,859 | 2,049 | 3,290 | 13,198 | Commercial and Residential real estate | 7,346 | 859 | 3,061 | 11,266 | |||||||||||||||||
| Securities-based lending and Other | 503 | 123 | 6,814 | 7,440 | Securities-based lending and Other | 1,279 | 55 | 7,001 | 8,335 | |||||||||||||||||
| Total Institutional Securities | 38,290 | 12,564 | 11,075 | 61,929 | Total Institutional Securities | 40,398 | 12,790 | 10,723 | 63,911 | |||||||||||||||||
| Wealth Management: | Wealth Management: | |||||||||||||||||||||||||
| Residential real estate | 30,184 | 13 | — | 30,197 | Residential real estate | 35,268 | 11 | — | 35,279 | |||||||||||||||||
| Securities-based lending and Other | 49,930 | — | — | 49,930 | Securities-based lending and Other | 62,947 | — | — | 62,947 | |||||||||||||||||
| Total Wealth Management | 80,114 | 13 | — | 80,127 | Total Wealth Management | 98,215 | 11 | — | 98,226 | |||||||||||||||||
Total Investment Management1 | 5 | — | 251 | 256 | Total Investment Management1 | 6 | 12 | 425 | 443 | |||||||||||||||||
| Total loans | 118,409 | 12,577 | 11,326 | 142,312 | ||||||||||||||||||||||
Total loans2 | Total loans2 | 138,619 | 12,813 | 11,148 | 162,580 | |||||||||||||||||||||
| ACL | (349 | ) | (349 | ) | ACL | (835) | (835) | |||||||||||||||||||
| Total loans, net of ACL | $ | 118,060 | $ | 12,577 | $ | 11,326 | $ | 141,963 | Total loans, net of ACL | $ | 137,784 | $ | 12,813 | $ | 11,148 | $ | 161,745 | |||||||||
Lending commitments2 | $ | 120,068 | ||||||||||||||||||||||||
Lending commitments3 | Lending commitments3 | $ | 127,855 | |||||||||||||||||||||||
| Total exposure | $ | 262,031 | Total exposure | $ | 289,600 | |||||||||||||||||||||
HFI—Held for investment; HFS—Held for sale; FVO—Fair value option
Total exposure—consists of Total loans, net of ACL, and Lending commitments
1.Investment Management business segment loans are related to certain of our activities as an investment advisor and manager. Loans held at fair value are the result of the consolidation of investment vehicles (including CLOs) managed by Investment Management, composed primarily of senior secured loans to corporations. 2.FVO also includes the fair value of certain unfunded lending commitments. 3.Lending commitments represent the notional amount of legally binding obligations to provide funding to clients for lending transactions. Since commitments associated with these business activities may expire unused or may not be utilized to full capacity, they do not necessarily reflect the actual future cash funding requirements. |
We provide loans and lending commitments to a variety of customers, including large corporate and institutional clients, as well as high to ultra-high net worth individuals. In addition, we purchase loans in the secondary market. Loans and lending
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commitments are either held for investment, held for sale or carried at fair value. For more information on these loan classifications, see Note 2 to the financial statements in the 20192020 Form 10-K.
Total loans and lending commitments increased by approximately $13$36 billion since December 31, 2019,2020, primarily due to growth in Securities-based and Residential real estate loans within the Wealth Management business segment, driven by securities-based loansas well as increases in Corporate lending commitments and residential real estate loans. WithinSecured lending facilities within the Institutional Securities business segment, growth in loans and lending commitments was primarily driven by Secured lending facilities and Corporate, partially offset by a decrease in Commercial real estate.segment.
See Notes 5, 6, 10 and 14 to the financial statements for further information.
Beginning late in the first quarter of 2020 and following in part from the U.S. government’s enactment of the CARES Act, we have receivedgranted requests from certain clients for modifications of their credit agreements with us, which in some cases include deferral of their loan payments. Requests for loan payment deferrals related to Residential real estate loans are immediately granted, while Commercial real estate loan deferrals require careful consideration prior to approval. As of September 30, 2020, the unpaid principal balance of loans with approved deferrals of principal and interest payments currently in place amounted to less than $2 billion, with approximately one-third in each of our Wealth Management business segment commercial real estate-related tailored lending portfolio, which is included within Securities-based lending and Other, our Wealth Management business segment Residential real estate loans and our Institutional Securities business segment, primarily within Commercial real estate.
In addition to these principal and interest deferrals, we are also workingcontinue to work with certain clients regarding modifications of certain other terms under their original loan agreements that do not impact contractual loan payments. We have granted such relief to certain borrowers, primarily within Secured lending facilities and Corporate loans. Such modifications include agreements to modify margin calls for Secured lending facilities, typically in return for additional payments which improve loan-to-value ratios. In some cases we have agreed to temporarily not enforce certain covenants, for example debt or interest coverage ratios, typically in return for other structural enhancements.
| September 2021 Form 10-Q | 29 | |||||||
| Risk Disclosures | | ||||
modifications have had a material impact on the risk profile of our loan portfolio. Modifications are considered in our evaluation of overall credit risk. Generally, loans with payment deferrals remain on accrual status and loans with other modifications remain on current status.
Requests for deferrals and other modifications could continue in future periods given the ongoing uncertain global economic
For additional information on regulatory guidance which permits certain loan modifications for borrowers impacted by COVID-19 to not be accounted for and reported as TDRs andas well as the Firm’s accounting policies for such modifications, see “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” herein and Note 2 to the financial statements in the 2020 Form 10-K, respectively. For information on HFI loans on nonaccrual status and HFI loans modified and reported as TDRs, see “Status of Loans Held for Investment” herein and Notes 2 andNote 10 to the financial statements. For HFI loans modifiedstatements, and reported as TDRs,for a discussion of the related accounting policies see NotesNote 2 and 10 to the financial statements.statements in the 2020 Form 10-K.
Allowance for Credit Losses—Loans and Lending Commitments
| $ in millions | |||
December 31, 20191 | $ | 590 | |
| Effect of CECL adoption | (41 | ) | |
| Gross charge-offs | (59 | ) | |
| Recoveries | 5 | ||
| Net (charge-offs) recoveries | (54 | ) | |
Provision2 | 757 | ||
| Other | 8 | ||
| September 30, 2020 | $ | 1,260 | |
| ACL—Loans | $ | 913 | |
| ACL—Lending commitments | 347 | ||
| $ in millions | |||||
| ACL—Loans | $ | 835 | |||
| ACL—Lending Commitments | 396 | ||||
| Total at December 31, 2020 | 1,231 | ||||
| Gross charge-offs | (107) | ||||
| Other | (10) | ||||
| Total at September 30, 2021 | $ | 1,113 | |||
| ACL—Loans | $ | 684 | |||
| ACL—Lending commitments | 429 | ||||
Provision for Credit Losses by Business Segment
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | |||||||||||||||||||
| $ in millions | IS | WM | Total | IS | WM | Total | ||||||||||||||
| Loans | $ | 3 | $ | 2 | $ | 5 | $ | (38) | $ | 1 | $ | (37) | ||||||||
| Lending commitments | 21 | (2) | 19 | 39 | (3) | 36 | ||||||||||||||
| Total | $ | 24 | $ | — | $ | 24 | $ | 1 | $ | (2) | $ | (1) | ||||||||
Credit exposure arising from our loans and lending commitments is measured in accordance with our internal risk management standards. Risk factors considered in determining the aggregate allowance for loan and commitment losses include the borrower’s financial strength, industry, facility structure, loan-to-valueLTV ratio, debt service ratio, collateral and covenants. Qualitative and environmental factors such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered.
The aggregate allowance for loans and lending commitments increaseddecreased in the current year period, principallyprimarily reflecting charge-offs, as well as an allowance release as a result of paydowns on Corporate loans, including by lower-rated borrowers, offset by the provision for credit losses within the Institutional Securities business segment primarily resulting from the continued economic impact of COVID-19. This provision was the result of risks related to vulnerable sectors and higher downgrade sensitivity, changes in asset quality trends, as well as revisions to our forecasts reflecting expected future market and macroeconomic conditions.one Secured lending facility. The base scenario used in our ACL models as of September 30, 20202021 was generated using a combination of
industry consensus economic forecasts, forward rates, and internally developed and validated models. Given the