UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018March 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number1-11758
(Exact Name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 1585 Broadway New York, NY 10036 (Address of principal executive offices, including zip code)
| 36-3145972 (I.R.S. Employer Identification No.) | (212)761-4000 (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: | ||||||
Title of each class | Name of exchange on which registered | Trading Symbol(s) | ||||
Common Stock, $0.01 par value | New York Stock Exchange | MS | ||||
Depositary Shares, each representing 1/1,000th interest in a share of Floating Rate | New York Stock Exchange | MS/PA | ||||
Depositary Shares, each representing 1/1,000th interest in a share ofFixed-to-Floating RateNon-Cumulative Preferred Stock, Series E, $0.01 par value | New York Stock Exchange | MS/PE | ||||
Depositary Shares, each representing 1/1,000th interest in a share ofFixed-to-Floating RateNon-Cumulative Preferred Stock, Series F, $0.01 par value | New York Stock Exchange | MS/PF | ||||
Depositary Shares, each representing 1/1,000th interest in a share of 6.625% | New York Stock Exchange | MS/PG | ||||
Depositary Shares, each representing 1/1,000th interest in a share ofFixed-to-Floating RateNon-Cumulative Preferred Stock, Series I, $0.01 par value | New York Stock Exchange | MS/PI | ||||
Depositary Shares, each representing 1/1,000th interest in a share ofFixed-to-Floating RateNon-Cumulative Preferred Stock, Series K, $0.01 par value | New York Stock Exchange | MS/PK | ||||
Global Medium-Term Notes, Series A, Fixed RateStep-Up Senior Notes Due 2026 of | New York Stock Exchange | MS/26C | ||||
Market Vectors ETNs due March 31, 2020 (two issuances) | NYSE Arca, Inc. | URR/DDR | ||||
Market Vectors ETNs due April 30, 2020 (two issuances) | NYSE Arca, Inc. | CNY/INR | ||||
Morgan Stanley Cushing® MLP High Income Index ETNs due March 21, 2031 | NYSE Arca, Inc. | MLPY |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, anon-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 Rule12b-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 Rule12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 31, 2018,April 30, 2019, there were 1,744,789,7091,682,234,555 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.
For the quarter ended June 30, 2018March 31, 2019
Part | Item | Page | Table of Contents | Part | Item | Page | ||||||||||||||||||||
I | 1 | I | 1 | |||||||||||||||||||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | I | 2 | 1 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | I | 2 | 1 | |||||||||||||||||||
1 | 1 | |||||||||||||||||||||||||
2 | 2 | |||||||||||||||||||||||||
7 | 6 | |||||||||||||||||||||||||
18 | 13 | |||||||||||||||||||||||||
19 | 13 | |||||||||||||||||||||||||
19 | 14 | |||||||||||||||||||||||||
19 | 14 | |||||||||||||||||||||||||
I | 3 | 32 | ||||||||||||||||||||||||
14 | ||||||||||||||||||||||||||
19 | ||||||||||||||||||||||||||
I | 3 | 24 | ||||||||||||||||||||||||
24 | ||||||||||||||||||||||||||
26 | ||||||||||||||||||||||||||
30 | ||||||||||||||||||||||||||
41 | 33 | |||||||||||||||||||||||||
I | 1 | 42 | ||||||||||||||||||||||||
42 | I | 1 | 34 | |||||||||||||||||||||||
42 | 34 | |||||||||||||||||||||||||
43 | 35 | |||||||||||||||||||||||||
44 | ||||||||||||||||||||||||||
36 | ||||||||||||||||||||||||||
Consolidated Statements of Changes in Total Equity (Unaudited) | 45 | Consolidated Statements of Changes in Total Equity (Unaudited) | 37 | |||||||||||||||||||||||
46 | 38 | |||||||||||||||||||||||||
47 | 39 | |||||||||||||||||||||||||
47 | ||||||||||||||||||||||||||
48 | ||||||||||||||||||||||||||
50 | ||||||||||||||||||||||||||
61 | ||||||||||||||||||||||||||
65 | ||||||||||||||||||||||||||
68 | ||||||||||||||||||||||||||
7. Loans, Lending Commitments and Allowance for Credit Losses | 69 | |||||||||||||||||||||||||
71 | ||||||||||||||||||||||||||
72 | ||||||||||||||||||||||||||
72 | ||||||||||||||||||||||||||
72 | ||||||||||||||||||||||||||
76 | ||||||||||||||||||||||||||
79 | ||||||||||||||||||||||||||
81 | ||||||||||||||||||||||||||
83 | ||||||||||||||||||||||||||
84 | ||||||||||||||||||||||||||
84 | ||||||||||||||||||||||||||
84 | ||||||||||||||||||||||||||
85 | ||||||||||||||||||||||||||
87 | ||||||||||||||||||||||||||
39 | ||||||||||||||||||||||||||
40 | ||||||||||||||||||||||||||
40 | ||||||||||||||||||||||||||
48 | ||||||||||||||||||||||||||
51 | ||||||||||||||||||||||||||
54 | ||||||||||||||||||||||||||
55 | ||||||||||||||||||||||||||
57 | ||||||||||||||||||||||||||
58 | ||||||||||||||||||||||||||
58 | ||||||||||||||||||||||||||
58 | ||||||||||||||||||||||||||
63 | ||||||||||||||||||||||||||
65 | ||||||||||||||||||||||||||
67 | ||||||||||||||||||||||||||
69 | ||||||||||||||||||||||||||
69 | ||||||||||||||||||||||||||
69 | ||||||||||||||||||||||||||
70 | ||||||||||||||||||||||||||
71 | ||||||||||||||||||||||||||
Financial Data Supplement (Unaudited) | 88 | 72 | ||||||||||||||||||||||||
Glossary of Common Acronyms | 91 | 73 | ||||||||||||||||||||||||
Other Information | II | 93 | II | 75 | ||||||||||||||||||||||
Legal Proceedings | II | 1 | 93 | II | 1 | 75 | ||||||||||||||||||||
Unregistered Sales of Equity Securities and Use of Proceeds | II | 2 | 94 | II | 2 | 76 | ||||||||||||||||||||
Controls and Procedures | I | 4 | 95 | I | 4 | 77 | ||||||||||||||||||||
Exhibits | II | 6 | 95 | II | 6 | 77 | ||||||||||||||||||||
Exhibit Index | E-1 | E-1 | ||||||||||||||||||||||||
Signatures | S-1 | S-1 |
i
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site,www.sec.gov, that contains annual, quarterly and current reports, proxy and information statements and other information that issuers file electronically with the SEC. Our electronic SEC filings are available to the public at the SEC’s internet site.
Our internet site iswww.morganstanley.com. You can access our Investor Relations webpage atwww.morganstanley.com/about-us-ir. We make available free of charge, on or through our Investor Relations webpage, our Proxy Statements, Annual Reports on Form10-K, Quarterly Reports onForm 10-Q, Current Reports on Form8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We also make available, through our Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.
You can access information about our corporate governance atwww.morganstanley.com/about-us-governance. Our Corporate GovernanceGover-nance webpage includes:
Amended and Restated Certificate of Incorporation;
Amended and Restated Bylaws;
Charters for our Audit Committee, Compensation, Management Development and Succession Committee, Nominating and Governance Committee, Operations and Technology Committee, and Risk Committee;
Corporate Governance Policies;
Policy Regarding Corporate Political Activities;
Policy Regarding Shareholder Rights Plan;
Equity Ownership Commitment;
Code of Ethics and Business Conduct;
Code of Conduct;
Integrity Hotline Information; and
Environmental and Social Policies.
Our Code of Ethics and Business Conduct applies to all directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer and Deputy Chief Financial Officer. We will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC (“NYSE”) on our internet site. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036(212-761-4000). The information on our internet site is not incorporated by reference into this report.
ii
Management’s | ||
![]() Discussion and Analysis of Financial Condition and Results of Operations |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Morgan Stanley is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms “Morgan Stanley,” “Firm,” “us,” “we” or “our” mean Morgan Stanley (the “Parent Company”) together with its consolidated subsidiaries. We define the following as part of our consolidated financial statements (“financial statements”): consolidated income statements (“income statements”), consolidated balance sheets (“balance sheets”), and consolidated cash flow statements (“cash flow statements”). See the “Glossary of Common Acronyms” for definitionsthe definition of certain acronyms used throughout thisForm 10-Q.
A description of the clients and principal products and services of each of our business segments is as follows:
Institutional Securitiesprovides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions, and high to ultra-high net worth clients. Investment banking services consist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing, prime brokerage and market-making activities in equity and fixed income products, including foreign exchange and commodities. Lending servicesactivities include originating and/or purchasing corporate loans, commercial and residential mortgage lending, asset-backedproviding secured lending facilities and extending financing extended to equitiessales and commodities customers and municipalities.trading customers. Other activities include investments and research.
Wealth Managementprovides a comprehensive array of financial services and solutions to individual investors and small tomedium-sized businesses and institutions covering brokerage and investment advisory services,services; financial and wealth planning services,services; annuity and insurance products, creditproducts; securities-based lending, residential real estate loans and other lending products,products; banking and retirement plan services.
Investment Managementprovides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are servicedserved through intermediaries, including affiliated andnon-affiliated distributors.
The results of operations in the past have been, and in the future may continue to be, materially affected by competition; risk factors; and legislative, legal and regulatory developments; as well as other factors. These factors also may have an adverse impact on our ability to achieve our strategic objectives. Additionally, the discussion of our results of operations herein may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, see “Forward-Looking Statements,” “Business—Competition,” “Business—Supervision and Regulation”Regulation,” and “Risk Factors” in the 20172018 Form10-K, and “Liquidity and Capital Resources”Resources—Regulatory Requirements” herein.
1 |
![]() |
Management’s Discussion and Analysis
Overview of Financial Results
Consolidated Results
Net Revenues
($ in millions)
Net Income Applicable to Morgan Stanley
($ in millions)
Earnings per Common Share1
1. | For the calculation of basic and diluted EPS, see Note 15 to the financial statements. |
We reported net revenues of $10,610$10,286 million in the quarter ended June 30, 2018March 31, 2019 (“current quarter,” or “2Q 2018”“1Q 2019”), compared with $9,503$11,077 million in the quarter ended June 30, 2017March 31, 2018 (“prior year quarter,” or “2Q 2017”“1Q 2018”). For the current quarter, net income applicable to Morgan Stanley was $2,437$2,429 million, or $1.30$1.39 per diluted common share, compared with $1,757$2,668 million or $0.87$1.45 per diluted common share, in the prior year quarter.
We reported net revenues of $21,687 million in the six months ended June 30, 2018 (“current year period,” or “YTD 2018”), compared with $19,248 million in the six months ended June 30, 2017 (“prior year period,” or “YTD 2017”). For the current year period, net income applicable to Morgan Stanley was $5,105 million, or $2.75 per diluted common share, compared with $3,687 million, or $1.87 per diluted common share, in the prior year period.
![]() |
Non-interest Expenses1
($ in millions)
1. | The percentages on the bars in the |
Compensation and benefits expenses of $4,621$4,651 million in the current quarter and $9,535 million in the current year period each increased 9%decreased 5% from $4,252$4,914 million in the prior year quarter, and $8,718 million in the prior year period. These results primarily reflected increasesdue to decreases in discretionary incentive compensation mainly driven by higher revenues, as well as salaries, across all business segments,and the formulaic payout to Wealth Management representatives, and amortization of deferred cash and equity awards.both driven by lower revenues. These increasesdecreases were partially offset by a decreaseincreases in the fair value of investments to which certain deferred compensation plans are referenced.referenced and higher salaries.
Non-compensation expenses were $2,680 million in the current quarter compared with $2,743 million in the prior year quarter, representing a 2% decrease. This decrease was primarily due to lower litigation and volume-related expenses, partially offset by increased investment in technology.
|
Income Taxes
The current quarter and current year period includedincludes intermittent net discrete tax benefits of $88$101 million, primarily associated with the remeasurement of reserves and related interest due to new information pertainingwith regard to the resolution of multi-jurisdiction tax examinations and other matters. The prior year quarter and prior year period included intermittent tax provisions of $4 million and $18 million, respectively.examinations. For further information, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.
March 2019 Form 10-Q |
![]() |
Management’s Discussion and Analysis
Selected Financial Information and Other Statistical Data
Three Months June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
$ in millions | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Income from continuing operations applicable to Morgan Stanley | $ | 2,439 | $ | 1,762 | $ | 5,109 | $ | 3,714 | $ | 2,429 | $ | 2,670 | ||||||||||||
Income (loss) from discontinued operations applicable to Morgan Stanley | (2 | ) | (5 | ) | (4 | ) | (27 | ) | — | (2 | ) | |||||||||||||
Net income applicable to Morgan Stanley | 2,437 | 1,757 | 5,105 | 3,687 | 2,429 | 2,668 | ||||||||||||||||||
Preferred stock dividends and other | 170 | 170 | 263 | 260 | 93 | 93 | ||||||||||||||||||
Earnings applicable to Morgan Stanley common shareholders | $ | 2,267 | $ | 1,587 | $ | 4,842 | $ | 3,427 | $ | 2,336 | $ | 2,575 | ||||||||||||
Expense efficiency ratio1 | 70.7% | 72.2% | 69.9% | 71.7% | 71.3% | 69.1% | ||||||||||||||||||
ROE2 | 13.0% | 9.1% | 13.9% | 9.9% | 13.1% | 14.9% | ||||||||||||||||||
ROTCE2 | 14.9% | 10.4% | 16.0% | 11.4% | 14.9% | 17.2% |
in millions, except per share and employee data | At June 30, 2018 | At December 31, 2017 | | At March 31, 2019 |
| | At December 31, 2018 |
| ||||||||
GLR3 | $ | 226,322 | $ | 192,660 | $ | 233,148 | $ | 249,735 | ||||||||
Loans4 | $ | 112,113 | $ | 104,126 | $ | 116,197 | $ | 115,579 | ||||||||
Total assets | $ | 875,875 | $ | 851,733 | $ | 875,964 | $ | 853,531 | ||||||||
Deposits | $ | 172,802 | $ | 159,436 | $ | 179,731 | $ | 187,820 | ||||||||
Borrowings | $ | 192,244 | $ | 192,582 | $ | 190,691 | $ | 189,662 | ||||||||
Common shares outstanding | 1,686 | 1,700 | ||||||||||||||
Common shareholders’ equity | $ | 70,589 | $ | 68,871 | $ | 72,204 | $ | 71,726 | ||||||||
Common shares outstanding | 1,750 | 1,788 | ||||||||||||||
Tangible common shareholders’ equity2 | $ | 63,434 | $ | 62,879 | ||||||||||||
Book value per common share5 | $ | 40.34 | $ | 38.52 | $ | 42.83 | $ | 42.20 | ||||||||
Tangible book value per common share2, 5 | $ | 37.62 | $ | 36.99 | ||||||||||||
Worldwide employees | 58,010 | 57,633 | 60,469 | 60,348 |
At June 30, 2018 | At December 31, 2017 | |||||||
Capital ratios6 | ||||||||
Common Equity Tier 1 capital ratio | 15.8% | 16.5% | ||||||
Tier 1 capital ratio | 18.1% | 18.9% | ||||||
Total capital ratio | 20.6% | 21.7% | ||||||
Tier 1 leverage ratio | 8.2% | 8.3% | ||||||
SLR7 | 6.4% | 6.5% |
At March 31, 2019 | At December 31, 2018 | |||||||
Capital ratios6 | ||||||||
Common Equity Tier 1 capital | 16.7% | 16.9% | ||||||
Tier 1 capital | 19.0% | 19.2% | ||||||
Total capital | 21.6% | 21.8% | ||||||
Tier 1 leverage | 8.4% | 8.4% | ||||||
SLR | 6.5% | 6.5% |
1. | The expense efficiency ratio represents totalnon-interest expense as a percentage of net revenues. |
2. | Represents anon-GAAP measure. See “SelectedNon-GAAP Financial Information” herein. |
3. | For a discussion of the GLR, see “Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” herein. |
4. | Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 7 to the financial statements). |
5. | Book value per common share |
6. |
|
|
Business Segment Results
Net Revenues by Segment1, 2
($ in millions)
![]() |
Net Income Applicable to Morgan Stanley by Segment1, 3
($ in millions)
1. | The percentages on the bars in the charts represent the contribution of each business segment to the |
2. | The total amount of Net Revenues by Segment |
3. | The total amount of Net Income Applicable to Morgan Stanley by Segment |
Institutional Securities net revenues of $5,714$5,196 million in the current quarter and $11,814 million in the current year period increased 20%decreased 15% from the prior year quarter, and 19% from the prior year period primarily reflecting higherlower revenues from both sales and trading and Investment banking revenues.banking.
Wealth Management net revenues of $4,325 million in the current quarter and $8,699 million in the current year period increased 4%were relatively unchanged from the prior year quarter and 6% from the prior year period primarily reflecting growth in Asset management revenues.quarter.
Investment Management net revenues of $691$804 million in the current quarter and $1,409 million in the current year period increased 4%12% from the prior year quarter, and 11% from the prior year period primarily reflecting higher revenues from Asset management.Investments.
3 | March 2019 Form 10-Q |
Management’s Discussion and Analysis
Net Revenues by Region1, 2
($ in millions)
1. | For a discussion of how the geographic breakdown |
2. | The percentages on the bars in the charts represent the contribution of each region to the total. |
![]() |
SelectedNon-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 thenon-GAAP financial measures we disclose to be useful to us, analysts, investors and analystsother stakeholders by providing further transparency about, or an alternate means of assessing, our financial condition, operating results, prospective regulatory capital requirements or capital adequacy.
These measures are not in accordance with, or a substitute for, U.S. GAAP and may be different from or inconsistent withnon-GAAP financial measures used by other companies. Whenever we refer to anon-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 thenon-GAAP financial measure.
The principalnon-GAAP financial measures presented in this document are set forth below.in the following tables.
Reconciliations from U.S. GAAP toNon-GAAP Consolidated Financial Measures
Reconciliations from U.S. GAAP toNon-GAAP Consolidated
| ||||||||
Three Months Ended March 31, | ||||||||
$ in millions, except per share data | 2019 | 2018 | ||||||
Net income applicable to | $ | 2,429 | $ | 2,668 | ||||
Impact of adjustments | (101 | ) | — | |||||
Adjusted net income applicable to MorganStanley—non-GAAP1 | $ | 2,328 | $ | 2,668 | ||||
Earnings per diluted common share | $ | 1.39 | $ | 1.45 | ||||
Impact of adjustments | (0.06 | ) | — | |||||
Adjusted earnings per diluted commonshare—non-GAAP1 | $ | 1.33 | $ | 1.45 | ||||
Effective income tax rate | 16.5% | 20.9% | ||||||
Impact of adjustments | 3.4% | —% | ||||||
Adjusted effective income taxrate—non-GAAP1 | 19.9% | 20.9% |
$ in millions, except | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
per share data | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income applicable to Morgan Stanley | $ | 2,437 | $ | 1,757 | $ | 5,105 | $ | 3,687 | ||||||||
Impact of adjustments | (88 | ) | 4 | (88 | ) | 18 | ||||||||||
Adjusted net income applicable to MorganStanley—non-GAAP1 | $ | 2,349 | 1,761 | $ | 5,017 | 3,705 | ||||||||||
Earnings per diluted common share | $ | 1.30 | $ | 0.87 | $ | 2.75 | $ | 1.87 | ||||||||
Impact of adjustments | (0.05 | ) | — | (0.05 | ) | 0.01 | ||||||||||
Adjusted earnings per diluted common share—non-GAAP1 | $ | 1.25 | $ | 0.87 | $ | 2.70 | $ | 1.88 | ||||||||
Effective income tax rate | 20.6% | 32.0% | 20.7% | 30.5% | ||||||||||||
Impact of adjustments | 2.8% | (0.1)% | 1.4% | (0.4)% | ||||||||||||
Adjusted effective income taxrate—non-GAAP1 | 23.4% | 31.9% | 22.1% | 30.1% |
Average Monthly Balance | ||||||||||||||||||||||||
At 2018 | At 2017 | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||
$ in millions | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||
Tangible Equity | ||||||||||||||||||||||||
U.S. GAAP | ||||||||||||||||||||||||
Morgan Stanley shareholders’ equity | $ | 79,109 | $ | 77,391 | $ | 78,432 | $ | 78,436 | $ | 77,960 | $ | 77,836 | ||||||||||||
Less: Goodwill and net intangible assets | (9,022 | ) | (9,042 | ) | (9,076 | ) | (9,194 | ) | (9,049 | ) | (9,227 | ) | ||||||||||||
Morgan Stanley tangible shareholders’equity—non-GAAP | $ | 70,087 | $ | 68,349 | $ | 69,356 | $ | 69,242 | $ | 68,911 | $ | 68,609 | ||||||||||||
U.S. GAAP | ||||||||||||||||||||||||
Common equity | $ | 70,589 | $ | 68,871 | $ | 69,912 | $ | 69,916 | $ | 69,440 | $ | 69,459 | ||||||||||||
Less: Goodwill and net intangible assets | (9,022 | ) | (9,042 | ) | (9,076 | ) | (9,194 | ) | (9,049 | ) | (9,227 | ) | ||||||||||||
Tangible commonequity—non-GAAP | $ | 61,567 | $ | 59,829 | $ | 60,836 | $ | 60,722 | $ | 60,391 | $ | 60,232 |
ConsolidatedNon-GAAP Financial Measures
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
$ in billions | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Average common equity |
| |||||||||||||||
Unadjusted | $ | 69.9 | $ | 69.9 | $ | 69.4 | $ | 69.5 | ||||||||
Adjusted1 | 69.9 | 69.9 | 69.4 | 69.5 | ||||||||||||
ROE2 |
| |||||||||||||||
Unadjusted | 13.0% | 9.1% | 13.9% | 9.9% | ||||||||||||
Adjusted1, 3 | 12.5% | 9.1% | 13.7% | 9.9% | ||||||||||||
Average tangible common equity |
| |||||||||||||||
Unadjusted | $ | 60.8 | $ | 60.7 | $ | 60.4 | $ | 60.2 | ||||||||
Adjusted1 | 60.8 | 60.7 | 60.4 | 60.2 | ||||||||||||
ROTCE2 |
| |||||||||||||||
Unadjusted | 14.9% | 10.4% | 16.0% | 11.4% | ||||||||||||
Adjusted1, 3 | 14.3% | 10.5% | 15.7% | 11.4% |
At June 30, 2018 | At December 31, 2017 | |||||||
Tangible book value per common share4 | $ | 35.19 | $ | 33.46 |
$ in millions | At March 31, 2019 | At December 31, 2018 | ||||||
Tangible equity | ||||||||
U.S. GAAP | ||||||||
Morgan Stanley shareholders’ equity | $ | 80,724 | $ | 80,246 | ||||
Less: Goodwill and net intangible assets | (8,770 | ) | (8,847 | ) | ||||
Tangible Morgan Stanley shareholders’equity—non-GAAP | $ | 71,954 | $ | 71,399 | ||||
U.S. GAAP | ||||||||
Common shareholders’ equity | $ | 72,204 | $ | 71,726 | ||||
Less: Goodwill and net intangible assets | (8,770 | ) | (8,847 | ) | ||||
Tangible common shareholders’ equity—non-GAAP | $ | 63,434 | $ | 62,879 |
![]() |
Management’s Discussion and Analysis
ConsolidatedNon-GAAP Financial Measures
Average Monthly Balance Three Months Ended March 31, | ||||||||
$ in millions | 2019 | 2018 | ||||||
Tangible equity | ||||||||
Morgan Stanley shareholders’ equity | $ | 80,115 | $ | 77,507 | ||||
Less: Goodwill and net intangible assets | (8,806 | ) | (9,043 | ) | ||||
Tangible Morgan Stanley shareholders’ equity | $ | 71,309 | $ | 68,464 | ||||
Common shareholders’ equity | $ | 71,595 | $ | 68,987 | ||||
Less: Goodwill and net intangible assets | (8,806 | ) | (9,043 | ) | ||||
Tangible common shareholders’ equity | $ | 62,789 | $ | 59,944 |
Three Months Ended March 31, | ||||||||
$ in billions | 2019 | 2018 | ||||||
Average common equity |
| |||||||
Unadjusted | $ | 71.6 | $ | 69.0 | ||||
Adjusted1 | 71.5 | 69.0 | ||||||
ROE2 |
| |||||||
Unadjusted | 13.1% | 14.9% | ||||||
Adjusted1, 3 | 12.5% | 14.9% | ||||||
Average tangible common equity |
| |||||||
Unadjusted | $ | 62.8 | $ | 59.9 | ||||
Adjusted1 | 62.7 | 59.9 | ||||||
ROTCE2 |
| |||||||
Unadjusted | 14.9% | 17.2% | ||||||
Adjusted1, 3 | 14.2% | 17.2% |
Non-GAAP Financial Measures by Business Segment
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
$ in billions | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Pre-tax profit margin5 | ||||||||||||||||||||||||
Pre-tax margin4 | ||||||||||||||||||||||||
Institutional Securities | 32% | 30% | 33% | 32% | 31% | 35% | ||||||||||||||||||
Wealth Management | 27% | 25% | 27% | 25% | 27% | 27% | ||||||||||||||||||
Investment Management | 20% | 21% | 20% | 19% | 22% | 21% | ||||||||||||||||||
Consolidated | 29% | 28% | 30% | 28% | 29% | 31% | ||||||||||||||||||
Average common equity6 |
| |||||||||||||||||||||||
Average common equity5 | Average common equity5 |
| ||||||||||||||||||||||
Institutional Securities | $ | 40.8 | $ | 40.2 | $ | 40.8 | $ | 40.2 | $ | 40.4 | $ | 40.8 | ||||||||||||
Wealth Management | 16.8 | 17.2 | 16.8 | 17.2 | 18.2 | 16.8 | ||||||||||||||||||
Investment Management | 2.6 | 2.4 | 2.6 | 2.4 | 2.5 | 2.6 | ||||||||||||||||||
Parent Company | 9.7 | 10.1 | 9.2 | 9.7 | ||||||||||||||||||||
Parent | 10.5 | 8.8 | ||||||||||||||||||||||
Consolidated average common equity | $ | 69.9 | $ | 69.9 | $ | 69.4 | $ | 69.5 | $ | 71.6 | $ | 69.0 | ||||||||||||
Average tangible common equity6 |
| |||||||||||||||||||||||
Average tangible common equity5 | Average tangible common equity5 |
| ||||||||||||||||||||||
Institutional Securities | $ | 40.1 | $ | 39.6 | $ | 40.1 | $ | 39.6 | $ | 39.9 | $ | 40.1 | ||||||||||||
Wealth Management | 9.2 | 9.3 | 9.2 | 9.3 | 10.2 | 9.2 | ||||||||||||||||||
Investment Management | 1.7 | 1.6 | 1.7 | 1.6 | 1.5 | 1.7 | ||||||||||||||||||
Parent Company | 9.8 | 10.2 | 9.4 | 9.7 | ||||||||||||||||||||
Parent | 11.2 | 8.9 | ||||||||||||||||||||||
Consolidated average tangible common equity | $ | 60.8 | $ | 60.7 | $ | 60.4 | $ | 60.2 | $ | 62.8 | $ | 59.9 | �� | |||||||||||
ROE2, 7 |
| |||||||||||||||||||||||
ROE2, 6 | ROE2, 6 |
| ||||||||||||||||||||||
Institutional Securities | 13.0% | 8.5% | 14.1% | 9.9% | 12.9% | 15.2% | ||||||||||||||||||
Wealth Management | 20.0% | 14.6% | 20.7% | 14.6% | 19.8% | 21.3% | ||||||||||||||||||
Investment Management | 15.7% | 16.3% | 17.5% | 13.7% | 21.9% | 19.3% | ||||||||||||||||||
Consolidated | 13.0% | 9.1% | 13.9% | 9.9% | 13.1% | 14.9% | ||||||||||||||||||
ROTCE2, 7 |
| |||||||||||||||||||||||
ROTCE2, 6 | ROTCE2, 6 |
| ||||||||||||||||||||||
Institutional Securities | 13.2% | 8.7% | 14.3% | 10.1% | 13.0% | 15.5% | ||||||||||||||||||
Wealth Management | 36.6% | 27.0% | 37.8% | 27.0% | 35.6% | 38.9% | ||||||||||||||||||
Investment Management | 24.5% | 24.1% | 27.4% | 20.2% | 35.3% | 30.3% | ||||||||||||||||||
Consolidated | 14.9% | 10.4% | 16.0% | 11.4% | 14.9% | 17.2% |
1. | Adjusted amounts exclude intermittent net discrete tax provisions (benefits). |
2. | ROE and ROTCE |
3. | The calculations used in determining |
4. |
|
Pre-tax |
Average common equity and average tangible common equity for each business segment are determined using our Required Capital framework (see “Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity According to the Required Capital Framework” herein). |
The calculation of |
5 | March 2019 Form 10-Q |
Management’s Discussion and Analysis
Return on Equity and Tangible Common Equity Targets
In January 2018, weWe have established an ROE Target of 10% to 13% for the medium term, which is equivalent toand an ROTCE Target of 11.5% to 14.5%.
Our ROE and ROTCE Targets are forward-looking statements that may be materially affected by many factors, including, among other things: macroeconomic and market conditions; legislative and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; outsizeoutsized legal expenses or penalties and the ability to maintain a reduced level of expenses; and capital levels. For further information on our ROE and ROTCE Targets and related assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Return on Equity and Tangible Common Equity Targets” in the 20172018 Form10-K.
Substantially all of our operating revenues and operating expenses are directly attributable to theour 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.
As a result of treating certain intersegment transactions as transactions with external parties, we include an Intersegment Eliminations category to reconcile the business segment results to our consolidated results.
Net Revenues, Compensation Expense and Income Taxes
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 20172018 Form10-K.
With respect to Institutional Securities sales and trading activities, Commodities products and Other also includes Trading revenues from managing derivative counterparty credit risk on behalf of clients, in addition to results from the centralized management of our fixed income derivative counterparty exposures.
March 2019 Form 10-Q |
![]() |
Management’s Discussion and Analysis
Institutional Securities
Income Statement Information
Three Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||||||||||
$ in millions | 2018 | 2017 | % Change | 2019 | 2018 | % Change | ||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Investment banking | $ | 1,699 | $ | 1,413 | 20% | $ | 1,151 | $ | 1,513 | (24)% | ||||||||||||||
Trading | 3,128 | 2,725 | 15% | 3,130 | 3,643 | (14)% | ||||||||||||||||||
Investments | 89 | 37 | 141% | 81 | 49 | 65% | ||||||||||||||||||
Commissions and fees | 674 | 630 | 7% | 621 | 744 | (17)% | ||||||||||||||||||
Asset management | 102 | 89 | 15% | 107 | 110 | (3)% | ||||||||||||||||||
Other | 168 | 126 | 33% | 222 | 136 | 63% | ||||||||||||||||||
Totalnon-interest revenues | 5,860 | 5,020 | 17% | 5,312 | 6,195 | (14)% | ||||||||||||||||||
Interest income | 2,195 | 1,243 | 77% | 3,056 | 1,804 | 69% | ||||||||||||||||||
Interest expense | 2,341 | 1,501 | 56% | 3,172 | 1,899 | 67% | ||||||||||||||||||
Net interest | (146 | ) | (258 | ) | 43% | (116 | ) | (95 | ) | (22)% | ||||||||||||||
Net revenues | 5,714 | 4,762 | 20% | 5,196 | 6,100 | (15)% | ||||||||||||||||||
Compensation and benefits | 1,993 | 1,667 | 20% | 1,819 | 2,160 | (16)% | ||||||||||||||||||
Non-compensation expenses | 1,909 | 1,652 | 16% | 1,782 | 1,828 | (3)% | ||||||||||||||||||
Totalnon-interest expenses | 3,902 | 3,319 | 18% | 3,601 | 3,988 | (10)% | ||||||||||||||||||
Income from continuing operations before income taxes | 1,812 | 1,443 | 26% | 1,595 | 2,112 | (24)% | ||||||||||||||||||
Provision for income taxes | 323 | 413 | (22)% | 190 | 449 | (58)% | ||||||||||||||||||
Income from continuing operations | 1,489 | 1,030 | 45% | 1,405 | 1,663 | (16)% | ||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | (2 | ) | (5 | ) | 60% | — | (2 | ) | 100% | |||||||||||||||
Net income | 1,487 | 1,025 | 45% | 1,405 | 1,661 | (15)% | ||||||||||||||||||
Net income applicable to noncontrolling interests | 30 | 33 | (9)% | 34 | 34 | —% | ||||||||||||||||||
Net income applicable to Morgan Stanley | $ | 1,457 | $ | 992 | 47% | $ | 1,371 | $ | 1,627 | (16)% |
Six Months Ended June 30, | ||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues | ||||||||||||
Investment banking | $ | 3,212 | $ | 2,830 | 13% | |||||||
Trading | 6,771 | 5,737 | 18% | |||||||||
Investments | 138 | 103 | 34% | |||||||||
Commissions and fees | 1,418 | 1,250 | 13% | |||||||||
Asset management | 212 | 180 | 18% | |||||||||
Other | 304 | 299 | 2% | |||||||||
Totalnon-interest revenues | 12,055 | 10,399 | 16% | |||||||||
Interest income | 3,999 | 2,367 | 69% | |||||||||
Interest expense | 4,240 | 2,852 | 49% | |||||||||
Net interest | (241 | ) | (485 | ) | 50% | |||||||
Net revenues | 11,814 | 9,914 | 19% | |||||||||
Compensation and benefits | 4,153 | 3,537 | 17% | |||||||||
Non-compensation expenses | 3,737 | 3,204 | 17% | |||||||||
Totalnon-interest expenses | 7,890 | 6,741 | 17% | |||||||||
Income from continuing operations before income taxes | 3,924 | 3,173 | 24% | |||||||||
Provision for income taxes | 772 | 872 | (11)% | |||||||||
Income from continuing operations | 3,152 | 2,301 | 37% | |||||||||
Income (loss) from discontinued operations, net of income taxes | (4 | ) | (27 | ) | 85% | |||||||
Net income | 3,148 | 2,274 | 38% | |||||||||
Net income applicable to noncontrolling interests | 64 | 68 | (6)% | |||||||||
Net income applicable to Morgan Stanley | $ | 3,084 | $ | 2,206 | 40% |
![]() |
Investment Banking
Investment Banking Revenues
Three Months Ended June 30, | ||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Advisory | $ | 618 | $ | 504 | 23% | |||||||
Underwriting: | ||||||||||||
Equity | 541 | 405 | 34% | |||||||||
Fixed income | 540 | 504 | 7% | |||||||||
Total underwriting | 1,081 | 909 | 19% | |||||||||
Total investment banking | $ | 1,699 | $ | 1,413 | 20% |
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||||||||||
$ in millions | 2018 | 2017 | % Change | 2019 | 2018 | % Change | ||||||||||||||||||
Advisory | $ | 1,192 | $ | 1,000 | 19% | $ | 406 | $ | 574 | (29)% | ||||||||||||||
Underwriting: | ||||||||||||||||||||||||
Equity | 962 | 795 | 21% | 339 | 421 | (19)% | ||||||||||||||||||
Fixed income | 1,058 | 1,035 | 2% | 406 | 518 | (22)% | ||||||||||||||||||
Total underwriting | 2,020 | 1,830 | 10% | |||||||||||||||||||||
Total investment banking | $ | 3,212 | $ | 2,830 | 13% | |||||||||||||||||||
Total Underwriting | 745 | 939 | (21)% | |||||||||||||||||||||
Total Investment banking | $ | 1,151 | $ | 1,513 | (24)% |
Investment Banking Volumes
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
$ in billions | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Completed mergers and acquisitions1 | $ | 325 | $ | 212 | $ | 488 | $ | 375 | $ | 187 | $ | 170 | ||||||||||||
Equity and equity-related offerings2, 3 | 16 | 20 | 37 | 30 | 14 | 22 | ||||||||||||||||||
Fixed income offerings2, 4 | 61 | 70 | 116 | 145 | 54 | 58 |
Source: Refinitiv (formerly Thomson Reuters Financial & Risk), data as of July 2, 2018.April 1, 2019. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal, change in value, or change in the valuetiming of a transaction.certain transactions.
1. |
|
2. |
|
3. |
|
4. |
|
Investment banking revenues are composed of fees from advisory services and revenues from the underwriting of securities offerings and syndication of loans, net of syndication expenses.
Investment banking revenues of $1,699$1,151 million in the current quarter decreased 24%, reflecting lower results in both our advisory and $3,212 million in the current year period increased 20% and 13% from the comparable prior year periods. The adoption of the accounting updateRevenue from Contracts with Customers had the effect of increasing the revenues reported in investment banking by approximately $101 million in the current quarter and $161 million in the current year period compared with the prior year periods (see Notes 2 and 19 to the financial statements for further information). The drivers of the increase in our Investment banking revenues, other than the effect of the above accounting update, were:underwriting businesses.
Advisory revenues increaseddecreased in the current quarter and current year period primarily reflecting higher volumesdue to the effect of completed M&A activity (see Investment Banking Volumes table), partially offset by lower fee realizations.
Equity underwriting revenues increaseddecreased in the current quarter primarily as a result of higher fee realizationslower volumes. Revenues decreased primarily in initial public offerings,follow-ons and convertibles. In the current year period, equity underwriting revenues increased due to higher equity market volumes (see Investment Banking Volumes table).convertible issuances, partially offset by an increase in secondary block share trades.
Fixed income underwriting revenues increaseddecreased in the current quarter primarily due to higherthe effect of lower fee realizations and lower volumes. Revenues decreased primarily innon-investment grade loan fees. Fixed income underwriting revenues in the current year period were relatively unchanged from the prior year period.
See “Investment Banking Volumes” herein.
7 | March 2019 Form 10-Q |
Management’s Discussion and Analysis
Sales and Trading Net Revenues
By Income Statement Line Item
Three Months Ended June 30, | ||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Trading | $ | 3,128 | $ | 2,725 | 15% | |||||||
Commissions and fees | 674 | 630 | 7% | |||||||||
Asset management | 102 | 89 | 15% | |||||||||
Net interest | (146 | ) | (258 | ) | 43% | |||||||
Total | $ | 3,758 | $ | 3,186 | 18% |
Six Months Ended June 30, | ||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Trading | $ | 6,771 | $ | 5,737 | 18% | |||||||
Commissions and fees | 1,418 | 1,250 | 13% | |||||||||
Asset management | 212 | 180 | 18% | |||||||||
Net interest | (241 | ) | (485 | ) | 50% | |||||||
Total | $ | 8,160 | $ | 6,682 | 22% |
![]() |
Three Months Ended | ||||||||||||
March 31, | ||||||||||||
$ in millions | 2019 | 2018 | % Change | |||||||||
Trading | $ | 3,130 | $ | 3,643 | (14 | )% | ||||||
Commissions and fees | 621 | 744 | (17 | )% | ||||||||
Asset management | 107 | 110 | (3 | )% | ||||||||
Net interest | (116 | ) | (95 | ) | (22 | )% | ||||||
Total | $ | 3,742 | $ | 4,402 | (15 | )% |
By Business
Three Months Ended June 30, | ||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Equity | $ | 2,470 | $ | 2,155 | 15% | |||||||
Fixed income | 1,389 | 1,239 | 12% | |||||||||
Other | (101 | ) | (208 | ) | 51% | |||||||
Total | $ | 3,758 | $ | 3,186 | 18% |
Three Months Ended March 31, | ||||||||||||||||||||||||
Six Months Ended June 30, | ||||||||||||||||||||||||
$ in millions | 2018 | 2017 | % Change | 2019 | 2018 | % Change | ||||||||||||||||||
Equity | $ | 5,028 | $ | 4,171 | 21% | $ | 2,015 | $ | 2,558 | (21)% | ||||||||||||||
Fixed income | 3,262 | 2,953 | 10% | 1,710 | 1,873 | (9)% | ||||||||||||||||||
Other | (130 | ) | (442 | ) | 71% | 17 | (29 | ) | 159% | |||||||||||||||
Total | $ | 8,160 | $ | 6,682 | 22% | $ | 3,742 | $ | 4,402 | (15)% |
Sales and Trading Revenues—Equity and Fixed Income
Three Months Ended | ||||||||||||||||||||||||||||||||
March 31, 2019 | ||||||||||||||||||||||||||||||||
Three Months Ended June 30, 2018 | Net | |||||||||||||||||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 | Total | Trading | Fees1 | Interest2 | Total | ||||||||||||||||||||||||
Financing | $ | 1,373 | $ | 89 | $ | (192 | ) | $ | 1,270 | $ | 1,115 | $ | 98 | $ | (258 | ) | $ | 955 | ||||||||||||||
Execution services | 661 | 605 | (66 | ) | 1,200 | 551 | 553 | (44 | ) | 1,060 | ||||||||||||||||||||||
Total Equity | $ | 2,034 | $ | 694 | $ | (258 | ) | $ | 2,470 | $ | 1,666 | $ | 651 | $ | (302 | ) | $ | 2,015 | ||||||||||||||
Total Fixed Income | $ | 1,299 | $ | 83 | $ | 7 | $ | 1,389 | ||||||||||||||||||||||||
Total Fixed income | $ | 1,727 | $ | 78 | $ | (95 | ) | $ | 1,710 |
Three Months Ended June 30, 2017 | ||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 | Total | ||||||||||||
Financing | $ | 1,166 | $ | 88 | $ | (227 | ) | $ | 1,027 | |||||||
Execution services | 601 | 580 | (53 | ) | 1,128 | |||||||||||
Total Equity | $ | 1,767 | $ | 668 | $ | (280 | ) | $ | 2,155 | |||||||
Total Fixed income | $ | 1,114 | $ | 48 | $ | 77 | $ | 1,239 |
Six Months Ended June 30, 2018 | ||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 | Total | ||||||||||||
Financing | $ | 2,607 | $ | 196 | $ | (338 | ) | $ | 2,465 | |||||||
Execution services | 1,452 | 1,269 | (158 | ) | 2,563 | |||||||||||
Total Equity | $ | 4,059 | $ | 1,465 | $ | (496 | ) | $ | 5,028 | |||||||
Total Fixed Income | $ | 3,014 | $ | 166 | $ | 82 | $ | 3,262 |
Three Months Ended | ||||||||||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||||||||||
Six Months Ended June 30, 2017 | Net | |||||||||||||||||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 | Total | Trading | Fees1 | Interest2 | Total | ||||||||||||||||||||||||
Financing | $ | 2,097 | $ | 177 | $ | (415 | ) | $ | 1,859 | $ | 1,234 | $ | 107 | $ | (146 | ) | $ | 1,195 | ||||||||||||||
Execution services | 1,265 | 1,148 | (101 | ) | 2,312 | 791 | 664 | (92 | ) | 1,363 | ||||||||||||||||||||||
Total Equity | $ | 3,362 | $ | 1,325 | $ | (516 | ) | $ | 4,171 | $ | 2,025 | $ | 771 | $ | (238 | ) | $ | 2,558 | ||||||||||||||
Total Fixed income | $ | 2,712 | $ | 102 | $ | 139 | $ | 2,953 | $ | 1,715 | $ | 83 | $ | 75 | $ | 1,873 |
1. | Includes Commissions and fees and Asset management revenues. |
2. |
|
As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in the 20172018 FormForm 10-K, we manage each of the sales and trading businesses based on its aggregate net revenues. We provide qualitative commentary in the discussion of results that follow on the key drivers of period over period variances, as the quantitative impact of the various market dynamics typically cannot be disaggregated.
For additional information on total Trading revenues, see the table “Trading Revenues by Product Type” in Note 418 to the financial statements.
Sales and Trading Net Revenues during the Current Quarter
Equity
Equity sales and trading net revenues of $2,470$2,015 million in the current quarter increased 15%decreased 21% from the prior year quarter, reflecting higherlower results in both our financing businesses and execution services.services businesses.
Financing revenues increaseddecreased from the prior year quarter, primarily due to higherlower average client balances, which resulted in lower Trading and Net interest revenues. Additionally, Net interest revenues decreased due to higher funding costs attributable to higher rates and changes in funding mix which resulted in increased Trading and Net interest revenues.mix.
Execution services increaseddecreased from the prior year quarter, primarily reflecting higherlower Trading revenues driven by effectiveas a result of less favorable inventory management and lower client activity in derivativederivatives products. In addition, Commissions and fees increased from higherdecreased due to lower client activity in cash equities products.
Fixed Income
Fixed income net revenues of $1,389$1,710 million in the current quarter were 12% higher9% lower than the prior year quarter, primarily driven by lower revenues in global macro products and lower Net interest revenues due to higher resultsfunding costs, partially offset by higher revenues in credit products and commodities products and other and credit products, partially offset by lower results in global macro products.other.
Global macro products revenues decreased as higher client activity was more than offset byreflecting unfavorable inventory management results in foreign exchange and emerging markets products.while the level of client activity remained consistent.
Credit products Trading revenues increased primarily in corporate credit products driven by higher client activity, partially offset by lower client activity in securitized products.
Commodities products and Net interestOther Trading revenues increased primarily as a result of increasedgains from client structuring activity within derivatives counterparty credit risk management and effective inventory management in commodities, partially offset by decreased client activity in lending products,structured transactions within commodities.
Other
Other sales and trading net gains of $17 million in the current quarter increased from the prior year quarter, primarily due to an increase in the fair value of investments to which certain deferred compensation plans are referenced, partially offset by the impact of credit spread wideninghigher losses on inventory.
Commodities products and Other increased primarily due to increased client trading activity across commodities products and higher Trading revenues principally from a reduction in counterparty credit risk.hedges associated with corporate loans.
Management’s Discussion and Analysis | ![]() |
Other
Other sales and trading net losses of $101 million in the current quarter decreased from the prior year quarter, primarily reflecting higher revenues on economic hedges related to our long-term debt and corporate loan activity.
Sales and Trading Net Revenues during the Current Year Period
Equity
Equity sales and trading net revenues of $5,028 million in the current year period increased 21% from the prior year period, reflecting higher results in both our financing businesses and execution services.
Financing revenues increased from the prior year period, primarily due to higher average client balances and changes in funding mix which resulted in increased Trading and Net interest revenues.
Execution services increased from the prior year period, primarily reflecting higher Trading revenues driven by effective inventory management and higher client activity in derivative products. In addition, Commissions and fees increased from higher client activity in cash equities products.
Fixed Income
Fixed income net revenues of $3,262 million in the current year period were 10% higher than the prior year period, primarily driven by higher results in commodities products and other.
Global macro and Credit products revenues remained relatively unchanged from the prior year period.
Commodities products and Other increased primarily due to increased Commodities structured transactions and client flow and higher Trading revenues principally from a reduction in counterparty credit risk.
Other
Other sales and trading net losses of $130 million in the current year period decreased from the prior year period, primarily reflecting higher revenues on economic hedges related to our long-term debt and lower losses associated with corporate loan hedging activity.
Investments, Other Revenues,Non-interest Expenses, and Income Tax Items
Investments
Net investment gains of $89$81 million in the current quarter and $138 million in the current year period increased from the prior year periods, primarilyquarter as a result of higher revenues driven by a fund distribution and gains on business-related investments, partially offset by lower results from real estate limited partnership investments.
Other Revenues
Other revenues of $168$222 million in the current quarter and $304 million in the current year period increased from the prior year periods,quarter, primarily reflecting the recovery of a previously charged off energy industry related loan and improved results from other equity method investments. These results werehighermark-to-market gains on held for sale loans, partially offset by losses associated withheld-for-sale corporate loans compared with gains in the respective prior year periods.lower results from certain equity method investments.
Non-interest Expenses
Non-interest expenses of $3,902$3,601 million in the current quarter increaseddecreased from the prior year quarter, reflecting a 20% increase16% decrease in Compensation and benefits expenses and a 16% increase3% decrease inNon-compensation expenses.Non-interest expenses of $7,890 million in the current year period increased from the prior year period reflecting a 17% increase in both Compensation and benefits expenses andNon-compensation expenses.
Compensation and benefits expenses increaseddecreased in the current quarter, and current year period, primarily due to increasesdecreases in discretionary incentive compensation driven by higherlower revenues, as well as amortization of deferred cash and equity awards and salaries, partially offset by a decreaseincreases in the fair value of investments to which certain deferred compensation plans are referenced.referenced and higher salaries.
|
Non-compensation expenses decreased in the current quarter, primarily due to lower litigation and volume-related expenses, partially offset by increased investment in technology and higher professional service expenses.
Income Tax Items
The current quarter includes intermittent net discrete tax benefits of $101 million. For further information, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.
Management’s Discussion and Analysis | ![]() |
Income Tax Items
The effective tax rate in the current quarter and current year period is lower compared with the prior year periods primarily as a result of the enactment of the U.S. Tax Cuts and Jobs Act (“Tax Act”). For a discussion of the Tax Act, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.
In both the current quarter and current year period, we recognized in Provision for income taxes an intermittent net discrete tax benefit of $97 million, primarily associated with new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters.
![]() |
Wealth Management
Income Statement Information
Three Months Ended June 30, | ||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues | ||||||||||||
Investment banking | $ | 114 | $ | 135 | (16)% | |||||||
Trading | 135 | 207 | (35)% | |||||||||
Investments | 3 | 1 | 200% | |||||||||
Commissions and fees | 442 | 424 | 4% | |||||||||
Asset management | 2,514 | 2,302 | 9% | |||||||||
Other | 74 | 73 | 1% | |||||||||
Totalnon-interest revenues | 3,282 | 3,142 | 4% | |||||||||
Interest income | 1,320 | 1,114 | 18% | |||||||||
Interest expense | 277 | 105 | 164% | |||||||||
Net interest | 1,043 | 1,009 | 3% | |||||||||
Net revenues | 4,325 | 4,151 | 4% | |||||||||
Compensation and benefits | 2,356 | 2,297 | 3% | |||||||||
Non-compensation expenses | 812 | 797 | 2% | |||||||||
Totalnon-interest expenses | 3,168 | 3,094 | 2% | |||||||||
Income from continuing operations before income taxes | 1,157 | 1,057 | 9% | |||||||||
Provision for income taxes | 281 | 392 | (28)% | |||||||||
Net income applicable to Morgan Stanley | $ | 876 | $ | 665 | 32% |
Six Months Ended June 30, | ||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues | ||||||||||||
Investment banking | $ | 254 | $ | 280 | (9)% | |||||||
Trading | 244 | 445 | (45)% | |||||||||
Investments | 3 | 2 | 50% | |||||||||
Commissions and fees | 940 | 864 | 9% | |||||||||
Asset management | 5,009 | 4,486 | 12% | |||||||||
Other | 137 | 129 | 6% | |||||||||
Totalnon-interest revenues | 6,587 | 6,206 | 6% | |||||||||
Interest income | 2,600 | 2,193 | 19% | |||||||||
Interest expense | 488 | 190 | 157% | |||||||||
Net interest | 2,112 | 2,003 | 5% | |||||||||
Net revenues | 8,699 | 8,209 | 6% | |||||||||
Compensation and benefits | 4,806 | 4,614 | 4% | |||||||||
Non-compensation expenses | 1,576 | 1,565 | 1% | |||||||||
Totalnon-interest expenses | 6,382 | 6,179 | 3% | |||||||||
Income from continuing operations before income taxes | 2,317 | 2,030 | 14% | |||||||||
Provision for income taxes | 527 | 718 | (27)% | |||||||||
Net income applicable to Morgan Stanley | $ | 1,790 | $ | 1,312 | 36% |
Three Months Ended March 31, | ||||||||||||
$ in millions | 2019 | 2018 | % Change | |||||||||
Revenues | ||||||||||||
Investment banking | $ | 109 | $ | 140 | (22)% | |||||||
Trading | 302 | 109 | 177% | |||||||||
Investments | 1 | — | N/M | |||||||||
Commissions and fees | 406 | 498 | (18)% | |||||||||
Asset management | 2,361 | 2,495 | (5)% | |||||||||
Other | 80 | 63 | 27% | |||||||||
Totalnon-interest revenues | 3,259 | 3,305 | (1)% | |||||||||
Interest income | 1,413 | 1,280 | 10% | |||||||||
Interest expense | 283 | 211 | 34% | |||||||||
Net interest | 1,130 | 1,069 | 6% | |||||||||
Net revenues | 4,389 | 4,374 | —% | |||||||||
Compensation and benefits | 2,462 | 2,450 | —% | |||||||||
Non-compensation expenses | 739 | 764 | (3)% | |||||||||
Totalnon-interest expenses | 3,201 | 3,214 | —% | |||||||||
Income from continuing operations before income taxes | 1,188 | 1,160 | 2% | |||||||||
Provision for income taxes | 264 | 246 | 7% | |||||||||
Net income applicable to Morgan Stanley | $ | 924 | $ | 914 | 1% |
Financial Information and Statistical Data
$ in billions | At June 30, | At December 31, 2017 | ||||||||||||||
At March 31, | At December 31, | |||||||||||||||
$ in billions, except employee data | 2019 | 2018 | ||||||||||||||
Client assets | $ | 2,411 | $ | 2,373 | $ | 2,476 | $ | 2,303 | ||||||||
Fee-based client assets1 | $ | 1,084 | $ | 1,045 | $ | 1,116 | $ | 1,046 | ||||||||
Fee-based client assets as a percentage of total client assets | 45% | 44% | 45% | 45% | ||||||||||||
Client liabilities2 | $ | 82 | $ | 80 | $ | 82 | $ | 83 | ||||||||
Investment securities portfolio | $ | 59.7 | $ | 59.2 | $ | 71.3 | $ | 68.6 | ||||||||
Loans and lending commitments | $ | 80.7 | $ | 77.3 | $ | 83.6 | $ | 82.9 | ||||||||
Wealth Management representatives | 15,632 | 15,712 | 15,708 | 15,694 |
Three Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Per representative: | ||||||||||||||||
Annualized revenues ($ in thousands)3 | $ | 1,105 | $ | 1,052 | $ | 1,118 | $ | 1,115 | ||||||||
Client assets ($ in millions)4 | $ | 154 | $ | 142 | $ | 158 | $ | 151 | ||||||||
Fee-based asset flows ($ in billions)5 | $ | 15.3 | $ | 19.9 | $ | 14.8 | $ | 18.2 | ||||||||
Six Months Ended June 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Per representative: | ||||||||||||||||
Annualized revenues ($ in thousands)3 | $ | 1,110 | $ | 1,041 | ||||||||||||
Client assets ($ in millions)4 | $ | 154 | $ | 142 | ||||||||||||
Fee-based asset flows ($ in billions)5 | $ | 33.5 | $ | 38.7 |
1. | Fee-based client assets represent the amount of assets in client accounts where the |
2. | Client liabilities include securities-based and tailored lending, residential real estate loans and margin lending. |
3. |
|
4. | Client assets per representative equal totalperiod-end client assets divided byperiod-end |
5. | For a description of the Inflows and Outflows included withinFee-based asset flows, |
Transactional Revenues
Three Months Ended March 31, | ||||||||||||
$ in millions | 2019 | 2018 | % Change | |||||||||
Investment banking | $ | 109 | $ | 140 | (22)% | |||||||
Trading | 302 | 109 | 177% | |||||||||
Commissions and fees | 406 | 498 | (18)% | |||||||||
Total | $ | 817 | $ | 747 | 9% | |||||||
Transactional revenues as a % of Net revenues | 19% | 17% |
Net Revenues
Transactional Revenues
Transactional revenues of $817 million in the current quarter increased 9% from the prior year quarter as a result of higher Trading revenues, partially offset by lower Commissions and fees and Investment banking revenues.
Investment banking revenues decreased in the current quarter primarily due to lower revenues from structured products issuances.
Trading revenues increased in the current quarter primarily due to gains related to investments associated with certain employee deferred compensation plans compared with losses in the prior year quarter.
Commissions and fees decreased in the current quarter primarily due to decreased client activity in equities.
Asset Management
Asset management revenues of $2,361 million in the current quarter decreased 5% from the prior year quarter primarily reflecting lowerfee-based client assets levels at the beginning of the current quarter due to fourth quarter market depreciation, partially offset by positive net flows.
See“Fee-Based Client Assets—Rollforwards” herein.
March 2019 Form 10-Q |
Management’s Discussion and Analysis | ![]() |
Transactional Revenues
Three Months Ended June 30, | ||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Investment banking | $ | 114 | $ | 135 | (16)% | |||||||
Trading | 135 | 207 | (35)% | |||||||||
Commissions and fees | 442 | 424 | 4% | |||||||||
Total | $ | 691 | $ | 766 | (10)% | |||||||
Transactional revenues as a % of Net revenues | 16% | 18% |
Six Months Ended June 30, | ||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Investment banking | $ | 254 | $ | 280 | (9)% | |||||||
Trading | 244 | 445 | (45)% | |||||||||
Commissions and fees | 940 | 864 | 9% | |||||||||
Total | $ | 1,438 | $ | 1,589 | (10)% | |||||||
Transactional revenues as a % of Net revenues | 17% | 19% |
Net Revenues
Transactional Revenues
Transactional revenues of $691 million in the current quarter and $1,438 million in the current year period decreased 10% from the respective prior year periods primarily as a result of lower Trading and Investment banking revenues, partially offset by higher Commissions and fees.
Investment banking revenues decreased in the current quarter and current year period primarily due to lower revenues from equity and structured products issuances.
Trading revenues decreased in the current quarter and current year period primarily as a result of lower gains related to investments associated with certain employee deferred compensation plans and lower fixed income revenue driven by product mix.
Commissions and fees increased in the current quarter and current year period primarily as a result of increased client transactions in alternative products, and options and futures.
Asset Management
Asset management revenues of $2,514 million in the current quarter and $5,009 million in the current year period increased 9% and 12%, respectively, primarily due to the effect of market appreciation and net positive flows on the respective beginning of periodfee-based client assets balances on which billings are generally based.
See“Fee-Based Client Assets Rollforwards” herein.
Net Interest
Net interest of $1,043$1,130 million in the current quarter and $2,112 million inincreased 6% from the currentprior year period increased 3% and 5%, respectively,quarter primarily as a result of higher Loan balances. In the current quarterinterest rates on loans and current year period,cash management activities and higher investment securities balances, partially offset by the effect of higher interest rates on Loans and Investment securities was essentially offset by higher average interest rates on Deposits due to changes in our depositfunding mix.
In addition, we centralized certain internal treasury activities as of January 1, 2019, which partially offset the increases in Interest income and Interest expense compared with the prior year quarter. This impact is expected to continue in future periods. The effect on Net interest income was not significant in the current quarter, nor is it expected to be for the full year 2019.
Non-interest Expenses
Non-interest expenses of $3,168$3,201 million inwere relatively unchanged from the current quarter and $6,382 million in the currentprior year period increased 2% and 3%, respectively, primarily as a result of higher Compensation and benefits expenses.quarter.
Compensation and benefits expenses increased inmodestly from the currentprior year quarter, and current year period primarily due to the formulaic payout to Wealth Management representatives linked to higher revenues andreflecting increases in salaries, partially offset by decreases in the fair value of investments to which certain deferred compensation plans are referenced.referenced and salaries, offset by decreases in the formulaic payout to Wealth Management representatives linked to lower revenues and theroll-off of certain merger-related employee retention loans.
Non-compensation expenses were relatively unchanged in both the current quarterdecreased due to lower consulting fees and current year period.deposit insurance expenses.
Income Tax Items
The effective tax rate in the current quarter and current year period is lower compared with the prior year periods primarily as a result of the enactment of the Tax Act. For a discussion of the Tax Act, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.
![]() |
Fee-Based Client Assets
For a description offee-based client assets, including descriptions of the fee based client asset types and rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—WealthManagement—Fee-Based Client Assets” in the 2017 Form10-K.
Fee-Based Client Assets Rollforwards
$ in billions | At March 31, | Inflows | Outflows | Market Impact | At June 30, 2018 | At December 31, | Inflows | Outflows | Market Impact | At March 31, 2019 | ||||||||||||||||||||||||||||||
Separately managed1 | $ | 260 | $ | 9 | $ | (5) | $ | 3 | $ | 267 | $ | 279 | $ | 14 | $ | (5 | ) | $ | (12 | ) | $ | 276 | ||||||||||||||||||
Unified managed | 254 | 12 | (8) | 1 | 259 | |||||||||||||||||||||||||||||||||||
Mutual fund advisory | 20 | — | (1) | 1 | 20 | |||||||||||||||||||||||||||||||||||
Unified managed2 | 257 | 13 | (11 | ) | 24 | 283 | ||||||||||||||||||||||||||||||||||
Advisor | 147 | 8 | (8) | 2 | 149 | 137 | 8 | (9 | ) | 11 | 147 | |||||||||||||||||||||||||||||
Portfolio manager | 356 | 20 | (12) | 3 | 367 | 353 | 19 | (14 | ) | 33 | 391 | |||||||||||||||||||||||||||||
Subtotal | $ | 1,037 | $ | 49 | $ | (34) | $ | 10 | $ | 1,062 | $ | 1,026 | $ | 54 | $ | (39 | ) | $ | 56 | $ | 1,097 | |||||||||||||||||||
Cash management | 21 | 6 | (5) | — | 22 | 20 | 4 | (5 | ) | — | 19 | |||||||||||||||||||||||||||||
Totalfee-based client assets | $ | 1,058 | $ | 55 | $ | (39) | $ | 10 | $ | 1,084 | $ | 1,046 | $ | 58 | $ | (44 | ) | $ | 56 | $ | 1,116 |
$ in billions | At March 31, | Inflows | Outflows | Market Impact | At June 30, 2017 | |||||||||||||||
Separately managed1 | $ | 230 | $ | 8 | $ | (7) | $ | 6 | $ | 237 | ||||||||||
Unified managed | 217 | 13 | (7) | 5 | 228 | |||||||||||||||
Mutual fund advisory | 21 | — | (1) | 1 | 21 | |||||||||||||||
Advisor | 133 | 10 | (8) | 3 | 138 | |||||||||||||||
Portfolio manager | 305 | 23 | (11) | 4 | 321 | |||||||||||||||
Subtotal | $ | 906 | $ | 54 | $ | (34) | $ | 19 | $ | 945 | ||||||||||
Cash management | 21 | 2 | (6) | — | 17 | |||||||||||||||
Totalfee-based client assets | $ | 927 | $ | 56 | $ | (40) | $ | 19 | $ | 962 |
$ in billions | At December 31, | Inflows | Outflows | Market Impact | At June 30, 2018 | At December 31, | Inflows | Outflows | Market Impact | At March 31, 2018 | ||||||||||||||||||||||||||||||
Separately managed1 | $ | 252 | $ | 18 | $ | (10) | $ | 7 | $ | 267 | $ | 252 | $ | 10 | $ | (6 | ) | $ | 4 | $ | 260 | |||||||||||||||||||
Unified managed | 250 | 25 | (16) | — | 259 | |||||||||||||||||||||||||||||||||||
Mutual fund advisory | 21 | 1 | (2) | — | 20 | |||||||||||||||||||||||||||||||||||
Unified managed2 | 271 | 14 | (9 | ) | (2 | ) | 274 | |||||||||||||||||||||||||||||||||
Advisor | 149 | 16 | (16) | — | 149 | 149 | 9 | (9 | ) | (2 | ) | 147 | ||||||||||||||||||||||||||||
Portfolio manager | 353 | 39 | (22) | (3) | 367 | 353 | 21 | (12 | ) | (6 | ) | 356 | ||||||||||||||||||||||||||||
Subtotal | $ | 1,025 | $ | 99 | $ | (66) | $ | 4 | $ | 1,062 | $ | 1,025 | $ | 54 | $ | (36 | ) | $ | (6 | ) | $ | 1,037 | ||||||||||||||||||
Cash management | 20 | 11 | (9) | — | 22 | 20 | 4 | (3 | ) | — | 21 | |||||||||||||||||||||||||||||
Totalfee-based client assets | $ | 1,045 | $ | 110 | $ | (75) | $ | 4 | $ | 1,084 | $ | 1,045 | $ | 58 | $ | (39 | ) | $ | (6 | ) | $ | 1,058 |
$ in billions | At December 31, | Inflows | Outflows | Market Impact | At June 30, 2017 | |||||||||||||||
Separately managed1 | $ | 222 | $ | 16 | $ | (11) | $ | 10 | $ | 237 | ||||||||||
Unified managed | 204 | 25 | (15) | 14 | 228 | |||||||||||||||
Mutual fund advisory | 21 | 1 | (3) | 2 | 21 | |||||||||||||||
Advisor | 125 | 19 | (14) | 8 | 138 | |||||||||||||||
Portfolio manager | 285 | 42 | (21) | 15 | 321 | |||||||||||||||
Subtotal | $ | 857 | $ | 103 | $ | (64) | $ | 49 | $ | 945 | ||||||||||
Cash management | 20 | 5 | (8) | — | 17 | |||||||||||||||
Totalfee-based client assets | $ | 877 | $ | 108 | $ | (72) | $ | 49 | $ | 962 |
Average Fee Rates3
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
Fee rate in bps | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Separately managed | 16 | 17 | 16 | 16 | 14 | 16 | ||||||||||||||||||
Unified managed | 97 | 98 | 98 | 98 | ||||||||||||||||||||
Mutual fund advisory | 120 | 118 | 120 | 118 | ||||||||||||||||||||
Unified managed2 | 101 | 99 | ||||||||||||||||||||||
Advisor | 84 | 84 | 85 | 85 | 88 | 85 | ||||||||||||||||||
Portfolio manager | 96 | 96 | 96 | 97 | 96 | 96 | ||||||||||||||||||
Subtotal | 77 | 77 | 76 | 76 | 74 | 76 | ||||||||||||||||||
Cash management | 6 | 6 | 6 | 6 | 6 | 6 | ||||||||||||||||||
Totalfee-based client assets | 75 | 75 | 75 | 75 | 73 | 75 |
1. | Includesnon-custody account values reflecting priorquarter-end balances due to a lag in the reporting of asset values by third-party custodians. |
2. | Includes Mutual fund advisory accounts. Prior periods have been recast to conform to the current presentation. |
3. | The calculation of average fee rates was changed in the current quarter to more closely align with the recognition of the related fee revenue. Prior period rates were not changed due to immateriality. |
For a description offee-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—WealthManagement—Fee-Based Client Assets” in the 2018 Form10-K.
![]() |
Management’s Discussion and Analysis
Investment Management
Income Statement Information
Three Months Ended June 30, | ||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues | ||||||||||||
Trading | $ | 16 | $ | (3 | ) | N/M | ||||||
Investments | 55 | 125 | (56)% | |||||||||
Asset management | 610 | 539 | 13% | |||||||||
Other | 3 | 4 | (25)% | |||||||||
Totalnon-interest revenues | 684 | 665 | 3% | |||||||||
Interest income | 17 | 1 | N/M | |||||||||
Interest expense | 10 | 1 | N/M | |||||||||
Net interest | 7 | — | N/M | |||||||||
Net revenues | 691 | 665 | 4% | |||||||||
Compensation and benefits | 272 | 288 | (6)% | |||||||||
Non-compensation expenses | 279 | 235 | 19% | |||||||||
Totalnon-interest expenses | 551 | 523 | 5% | |||||||||
Income from continuing operations before income taxes | 140 | 142 | (1)% | |||||||||
Provision for income taxes | 36 | 41 | (12)% | |||||||||
Net income | 104 | 101 | 3% | |||||||||
Net income (loss) applicable to noncontrolling interests | — | 1 | N/M | |||||||||
Net income applicable to Morgan Stanley | $ | 104 | $ | 100 | 4% |
Six Months Ended June 30, | ||||||||||||
$ in millions | 2018 | 2017 | % Change | |||||||||
Revenues | ||||||||||||
Trading | $ | 21 | $ | (14 | ) | N/M | ||||||
Investments | 132 | 223 | (41)% | |||||||||
Asset management | 1,236 | 1,056 | 17% | |||||||||
Other | 13 | 8 | 63% | |||||||||
Totalnon-interest revenues | 1,402 | 1,273 | 10% | |||||||||
Interest income | 18 | 2 | N/M | |||||||||
Interest expense | 11 | 1 | N/M | |||||||||
Net interest | 7 | 1 | N/M | |||||||||
Net revenues | 1,409 | 1,274 | 11% | |||||||||
Compensation and benefits | 576 | 567 | 2% | |||||||||
Non-compensation expenses | 545 | 462 | 18% | |||||||||
Totalnon-interest expenses | 1,121 | 1,029 | 9% | |||||||||
Income from continuing operations before income taxes | 288 | 245 | 18% | |||||||||
Provision for income taxes | 55 | 71 | (23)% | |||||||||
Net income | 233 | 174 | 34% | |||||||||
Net income (loss) applicable to noncontrolling interests | 2 | 7 | (71)% | |||||||||
Net income applicable to Morgan Stanley | $ | 231 | $ | 167 | 38% |
Three Months Ended March 31, | ||||||||||||
$ in millions | 2019 | 2018 | % Change | |||||||||
Revenues | ||||||||||||
Trading | $ | (3 | ) | $ | 5 | (160)% | ||||||
Investments | 191 | 77 | 148% | |||||||||
Asset management | 617 | 626 | (1)% | |||||||||
Other | 3 | 10 | (70)% | |||||||||
Totalnon-interest revenues | 808 | 718 | 13% | |||||||||
Interest income | 4 | 1 | N/M | |||||||||
Interest expense | 8 | 1 | N/M | |||||||||
Net interest | (4 | ) | — | N/M | ||||||||
Net revenues | 804 | 718 | 12% | |||||||||
Compensation and benefits | 370 | 304 | 22% | |||||||||
Non-compensation expenses | 260 | 266 | (2)% | |||||||||
Totalnon-interest expenses | 630 | 570 | 11% | |||||||||
Income from continuing operations before income taxes | 174 | 148 | 18% | |||||||||
Provision for income taxes | 33 | 19 | 74% | |||||||||
Net income | 141 | 129 | 9% | |||||||||
Net income applicable to noncontrolling interests | 5 | 2 | 150% | |||||||||
Net income applicable to Morgan Stanley | $ | 136 | $ | 127 | 7% |
Net Revenues
Investments
Investments gains of $55$191 million in the current quarter and $132 million in the current year period compared with $125 million inincreased 148% from the prior year quarter and $223 million in the prior year period, respectively. These decreases reflect the absenceprimarily as a result of realized investment gains in an infrastructure fund, as well as the reversal of previously accruedhigher carried interest in certain Asia private equity funds, primarily due to losses associated with weakening Asia-Pacific currencies.and infrastructure funds.
Asset Management
Asset management revenues of $610$617 million in the current quarter and $1,236 million inwere relatively unchanged from the currentprior year period increased 13% and 17%, respectively, primarilyquarter, as a result of higher average AUM across all asset classes. and average fee rates remained stable.
See “AUM Rollforwards”“Assets Under Management or Supervision” herein.
The adoption of the accounting updateRevenue from Contracts with Customers had the effect of increasing Asset management revenues due to the gross presentation of distribution fees. This increase (approximately $44 million in the current year period) was partially offset by the delayed recognition of certain performance fees not in the form of carried interest until they are no longer probable of reversing. For 2018, the recognition of a greater portion of these revenues is expected to occur in the fourth quarter based on current fee arrangements. See Notes 2 and 19 to the financial statements for further details.
Non-interest Expenses
Non-interest expenses of $551$630 million in the current quarter increased 11% from the prior year quarter primarily as a result of higher compensation and $1,121 million in the current year period increased 5% and 9%, respectively, primarily due to higherNon-compensationbenefits expenses.
Compensation and benefits expenses decreasedincreased in the current quarter primarily due to decreases in deferred compensation associated with carried interest and the fair value of investments to which certain deferred compensation plans are referenced. Compensation and benefitsinterest.
Non-compensation expenses were relatively unchanged in the current year period.
|
![]() |
Income Tax Items
The effective tax rate in the current quarter and current year period is lower compared with the prior year periods primarily as a result of the enactment of the Tax Act. For a discussion of the Tax Act, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.quarter.
Assets Under Management or Supervision
Rollforwards
$ in billions | At December 31, 2018 | Inflows | Outflows | Market Impact | Other | At March 31, 2019 | ||||||||||||||||||
Equity | $ | 103 | $ | 9 | $ | (8 | ) | $ | 16 | $ | — | $ | 120 | |||||||||||
Fixed income | 68 | 6 | (7 | ) | 1 | — | 68 | |||||||||||||||||
Alternative/Other | 128 | 5 | (4 | ) | 5 | (1 | ) | 133 | ||||||||||||||||
Long-term AUM subtotal | 299 | 20 | (19 | ) | 22 | (1 | ) | 321 | ||||||||||||||||
Liquidity | 164 | 343 | (348 | ) | 1 | (1 | ) | 159 | ||||||||||||||||
Total AUM | $ | 463 | $ | 363 | $ | (367 | ) | $ | 23 | $ | (2 | ) | $ | 480 | ||||||||||
Shares of minority | 7 | 6 |
$ in billions | At December 31, | Inflows | Outflows | Market Impact | Other1 | At March 31, 2018 | ||||||||||||||||||
Equity | $ | 105 | $ | 9 | $ | (7 | ) | $ | 1 | $ | 1 | $ | 109 | |||||||||||
Fixed income | 73 | 7 | (8 | ) | (1 | ) | 1 | 72 | ||||||||||||||||
Alternative/Other | 128 | 4 | (4 | ) | — | 3 | 131 | |||||||||||||||||
Long-term AUM subtotal | 306 | 20 | (19 | ) | — | 5 | 312 | |||||||||||||||||
Liquidity | 176 | 325 | (344 | ) | — | — | 157 | |||||||||||||||||
Total AUM | $ | 482 | $ | 345 | $ | (363 | ) | $ | — | $ | 5 | $ | 469 | |||||||||||
Shares of minority | 7 | 7 |
1. | Includes the impact of the Mesa West Capital, LLC acquisition. |
Average AUM
Three Months Ended March 31, | ||||||||
$ in billions | 2019 | 2018 | ||||||
Equity | $ | 113 | $ | 109 | ||||
Fixed income | 68 | 73 | ||||||
Alternative/Other | 131 | 129 | ||||||
Long-term AUM subtotal | 312 | 311 | ||||||
Liquidity | 163 | 163 | ||||||
Total AUM | $ | 475 | $ | 474 | ||||
Shares of minority stake assets | 6 | 7 |
Average Fee Rates
Three Months Ended March 31, | ||||||||
Fee rate in bps | 2019 | 2018 | ||||||
Equity | 76 | 76 | ||||||
Fixed income | 32 | 35 | ||||||
Alternative/Other | 68 | 68 | ||||||
Long-term AUM | 63 | 63 | ||||||
Liquidity | 17 | 18 | ||||||
Total AUM | 47 | 47 |
For a description of the asset classes and rollforward items in the followingprevious 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 20172018 Form10-K.
AUM Rollforwards
$ in billions | At March 31, | Inflows | Outflows | Market Impact | Other1 | At June 30, 2018 | ||||||||||||||||||
Equity | $ | 109 | $ | 10 | $ | (7 | ) | $ | 3 | $ | (1 | ) | $ | 114 | ||||||||||
Fixed income | 72 | 7 | (7 | ) | (1 | ) | (2 | ) | 69 | |||||||||||||||
Alternative/Other | 131 | 6 | (4 | ) | 1 | (2 | ) | 132 | ||||||||||||||||
Long-term AUM subtotal | 312 | 23 | (18 | ) | 3 | (5 | ) | 315 | ||||||||||||||||
Liquidity | 157 | 375 | (373 | ) | 1 | (1 | ) | 159 | ||||||||||||||||
Total AUM | $ | 469 | $ | 398 | $ | (391 | ) | $ | 4 | $ | (6 | ) | $ | 474 | ||||||||||
Shares of minority stake assets | 7 | 7 | ||||||||||||||||||||||
$ in billions | At March 31, 2017 | Inflows | Outflows | Market Impact | Other1 | At June 30, 2017 | ||||||||||||||||||
Equity | $ | 87 | $ | 6 | $ | (5 | ) | $ | 5 | $ | 1 | $ | 94 | |||||||||||
Fixed income | 62 | 8 | (6 | ) | 1 | 1 | 66 | |||||||||||||||||
Alternative/Other | 119 | 6 | (6 | ) | 3 | (1 | ) | 121 | ||||||||||||||||
Long-term AUM subtotal | 268 | 20 | (17 | ) | 9 | 1 | 281 | |||||||||||||||||
Liquidity | 153 | 308 | (308 | ) | — | 1 | 154 | |||||||||||||||||
Total AUM | $ | 421 | $ | 328 | $ | (325 | ) | $ | 9 | $ | 2 | $ | 435 | |||||||||||
Shares of minority stake assets | 7 | 8 |
$ in billions | At December 31, | Inflows | Outflows | Market Impact | Other1 | At June 30, 2018 | ||||||||||||||||||
Equity | $ | 105 | $ | 20 | $ | (14 | ) | $ | 3 | $ | — | $ | 114 | |||||||||||
Fixed income | 73 | 14 | (16 | ) | (1 | ) | (1 | ) | 69 | |||||||||||||||
Alternative/Other | 128 | 11 | (9 | ) | 1 | 1 | 132 | |||||||||||||||||
Long-term AUM subtotal | 306 | 45 | (39 | ) | 3 | — | 315 | |||||||||||||||||
Liquidity | 176 | 700 | (717 | ) | 1 | (1 | ) | 159 | ||||||||||||||||
Total AUM | $ | 482 | $ | 745 | $ | (756 | ) | $ | 4 | $ | (1 | ) | $ | 474 | ||||||||||
Shares of minority stake assets | 7 | 7 | ||||||||||||||||||||||
$ in billions | At December 31, | Inflows | Outflows | Market Impact | Other1 | At June 30, 2017 | ||||||||||||||||||
Equity | $ | 79 | $ | 11 | $ | (10 | ) | $ | 13 | $ | 1 | $ | 94 | |||||||||||
Fixed income | 60 | 13 | (11 | ) | 2 | 2 | 66 | |||||||||||||||||
Alternative/Other | 115 | 13 | (10 | ) | 4 | (1 | ) | 121 | ||||||||||||||||
Long-term AUM subtotal | 254 | 37 | (31 | ) | 19 | 2 | 281 | |||||||||||||||||
Liquidity | 163 | 636 | (646 | ) | — | 1 | 154 | |||||||||||||||||
Total AUM | $ | 417 | $ | 673 | $ | (677 | ) | $ | 19 | $ | 3 | $ | 435 | |||||||||||
Shares of minority stake assets | 8 | 8 |
|
Average AUM
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
$ in billions | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Equity | $ | 111 | $ | 91 | $ | 110 | $ | 87 | ||||||||
Fixed income | 71 | 64 | 72 | 63 | ||||||||||||
Alternative/Other | 131 | 120 | 130 | 119 | ||||||||||||
Long-term AUM subtotal | 313 | 275 | 312 | 269 | ||||||||||||
Liquidity | 161 | 153 | 163 | 155 | ||||||||||||
Total AUM | $ | 474 | $ | 428 | $ | 475 | $ | 424 | ||||||||
Shares of minority stake assets | 7 | 8 | 7 | 8 |
Average Fee Rate
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Fee rate in bps | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Equity | 77 | 73 | 76 | 74 | ||||||||||||
Fixed income | 33 | 33 | 34 | 33 | ||||||||||||
Alternative/Other | 67 | 70 | 67 | 70 | ||||||||||||
Long-term AUM | 63 | 62 | 63 | 63 | ||||||||||||
Liquidity | 18 | 17 | 18 | 18 | ||||||||||||
Total AUM | 47 | 46 | 47 | 46 |
March 2019 Form 10-Q |
![]() |
Management’s Discussion and Analysis
Supplemental Financial Information and
Disclosures
Income Tax Matters
Effective Tax Rate from Continuing Operations
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||
$ in millions | 2019 | 2018 | ||||||||||||||||||||||
U.S. GAAP | 20.6% | 32.0% | 20.7% | 30.5% | 16.5 | % | 20.9 | % | ||||||||||||||||
Adjusted effective incometax rate—non-GAAP1 | 23.4% | 31.9% | 22.1% | 30.1% | 19.9 | % | 20.9 | % | ||||||||||||||||
Net discrete tax provisions/(benefits) | ||||||||||||||||||||||||
Recurring2 | $ | (107 | ) | $ | (147 | ) | ||||||||||||||||||
Intermittent3 | $ | (101 | ) | $ | — |
1. | Adjusted |
2. | We consider certain income tax consequences associated with employeeshare-based awards recognized in Provision for income taxes in the income statements to be Recurring discrete tax items as we anticipate some level of conversion activity each quarter. Accordingly, these Recurring discrete tax provisions (benefits) are not part of the adjustment for intermittent net discrete tax provisions (benefits). |
3. | Includes all tax provisions (benefits) that have been determined to be discrete, other than Recurring items as defined above. |
Adjusted amounts exclude anThe current quarter includes intermittent net discrete tax benefit of $88 million in the current quarter and current year period,benefits primarily associated with the remeasurement of reserves and related interest due to new information pertainingwith regard to the resolution of multi-jurisdiction tax examinations and other matters. Intermittent net discrete tax provisions were $4 million and $18 million in the prior year quarter and prior year period, respectively.
The effective tax rates include recurring-type discrete tax benefits associated with employee share-based payments of $17 million and $16 million in the current quarter and prior year quarter, respectively. The effective tax rates include recurring-type discrete tax benefits associated with employee share-based payments of $164 million and $128 million in the current year period and prior year period, respectively.
The effective tax rate reflects our current assumptions, estimates and interpretations related to the Tax Act and other factors. The Tax Act, enacted on December 22, 2017, significantly revised U.S. corporate income tax law by, among other things, reducing the corporate income tax rate to 21%, and implementing a modified territorial tax system that includes aone-time transition tax on deemed repatriated earnings ofnon-U.S. subsidiaries; imposes a minimum tax on global intangiblelow-taxed income (“GILTI”) and an alternative base erosion and anti-abuse tax (“BEAT”) on U.S. corporations that make deductible payments tonon-U.S. related persons in excess of specified amounts; and broadens the tax base by partially or wholly eliminating tax deductions for certain historically deductible expenses.
Our income tax estimates may change as additional clarification and implementation guidance continue to be received from the U.S. Treasury Department and as the interpretation of the Tax Act evolves over time. Taking into account continuing developments related to provisions of the Tax Act
such as the modified territorial tax system and GILTI, we expect our effective tax rate from continuing operations for 2018 to be approximately 22% to 25% (see “Forward-Looking Statements” in the 2017 Form10-K).examinations.
U.S. Bank Subsidiaries
Our U.S. bank subsidiaries, Morgan Stanley Bank N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”) accept deposit accounts, provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, and invest in securities. The lending activities in the Institutional Securities business segment primarily include loans and lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily include:include securities-based lending, which allows clients to borrow money against the value of qualifying securities;securities, and residential real estate loans.
We expect our lending activities to continue to grow through further market penetration of theour client base. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk.” For a further discussion about loans and lending commitments, see Notes 7 and 11 to the financial statements.
U.S. Bank Subsidiaries’ Supplemental Financial Information1
$ in billions | At 2018 | At December 31, 2017 | At March 31, 2019 | At December 31, 2018 | ||||||||||||
Assets | $ | 200.5 | $ | 185.3 | $ | 210.3 | $ | 216.9 | ||||||||
Investment securities portfolio: | ||||||||||||||||
Investment securities—AFS | 41.3 | 42.0 | 44.5 | 45.5 | ||||||||||||
Investment securities—HTM | 18.8 | 17.5 | 27.8 | 23.7 | ||||||||||||
Total investment securities | $ | 60.1 | $ | 59.5 | $ | 72.3 | $ | 69.2 | ||||||||
Deposits2 | $ | 172.6 | $ | 159.1 | $ | 179.1 | $ | 187.1 | ||||||||
Wealth Management |
| |||||||||||||||
Securities-based lending and other loans3 | $ | 43.6 | $ | 41.2 | ||||||||||||
Residential real estate loans | 26.4 | 26.7 | ||||||||||||||
Wealth Management Loans | Wealth Management Loans |
| ||||||||||||||
Securities-based lending and other3 | $ | 43.5 | $ | 44.7 | ||||||||||||
Residential real estate | 28.0 | 27.5 | ||||||||||||||
Total | $ | 70.0 | $ | 67.9 | $ | 71.5 | $ | 72.2 | ||||||||
Institutional Securities |
| |||||||||||||||
Corporate loans | $ | 26.7 | $ | 24.2 | ||||||||||||
Wholesale real estate loans | 14.5 | 12.2 | ||||||||||||||
Institutional Securities Loans4 | Institutional Securities Loans4 |
| ||||||||||||||
Corporate5: | ||||||||||||||||
Corporate relationship and | $ | 7.4 | $ | 7.4 | ||||||||||||
Secured lending facilities | 19.3 | 17.5 | ||||||||||||||
Securities-based lending and other | 5.6 | 6.0 | ||||||||||||||
Commercial and residential real estate | 11.8 | 10.5 | ||||||||||||||
Total | $ | 41.2 | $ | 36.4 | $ | 44.1 | $ | 41.4 |
1. | Amounts exclude transactions |
2. | For further information on deposits, see “Liquidity and Capital Resources—Funding Management—Unsecured Financing” herein. |
3. | Other loans primarily include tailored lending. |
4. | ||||
Prior periods have been conformed to the current presentation. |
5. | ||
![]() For a further discussion of Corporate loans in the Institutional Securities business segment, see “Credit Risk—Institutional Securities Corporate Loans” herein. |
Accounting Development Updates
The Financial Accounting Standards Board has issued certain accounting updates that apply to us. Accounting updates not listed below were assessed and determined to be either not applicable or are not expected to have a significant impact on our financial statements.
The following accounting updates areupdate is currently being evaluated to determine the potential impact of adoption:
• |
|
|
Financial Instruments–Credit Losses. This accounting update impacts the impairment model for certain financial assets measured at amortized cost by requiring a CECL methodology to estimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase. CECL will replace the loss model currently applicable to loans held for investment, HTM securities and other receivables carried at amortized |
|
|
|
Management’s Discussion and Analysis The update also eliminates the concept of other-than-temporary impairment for AFS securities. Impairments on AFS securities will be required to be recognized in earnings through an allowance when the fair value is less than amortized cost and a credit loss exists or the securities are expected to be sold before recovery of amortized cost. For certain portfolios, we have determined that there are no expected credit losses, for example based on collateral arrangements for lending and financing transactions such as for Securities borrowed, Securities purchased under agreements to resell and certain other portfolios. Also, we have a zero loss expectation for certain financial assets based on the credit quality of the borrower or issuer such as U.S. government and agency securities. We expect the following portfolios to be primarily impacted: employee loans, commercial real estate, corporate and residential real estate. The models we expect to use for these portfolios in the future are in the process of being tested. Based on preliminary analyses and estimates, we do not expect the increase in the allowance for credit losses resulting from the adoption of this standard will be significant to our financial statements. The ultimate impact will depend upon macroeconomic conditions, forecasts and our portfolios at the adoption date. This update is effective as of January 1, 2020. |
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 20172018 Form10-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 20172018 Form10-K.
Liquidity and Capital Resources
Senior management, with oversight by the Asset and Asset/Liability Management Committee and the Board of Directors (“Board”), establishes and maintains our liquidity and capital policies. Through various risk and control committees, senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity, interest rate and currency sensitivity of our asset and liability position. TheOur Treasury department, Firm Risk Committee, Asset and Asset/Liability Management Committee, and other committees and control groups assist in evaluating, monitoring and controlling the impact that our business activities have on our balance sheet, liquidity and capital structure. Liquidity and capital matters are reported regularly to the Board and the Risk Committee of the Board.
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 orand market fluctuations. On a regular basis, we review current performance versus established thresholds and assess the need tore-allocate our balance sheet based on business unit needs. We also monitor key metrics, including asset and liability size and capital usage.
Total Assets by Business Segment
At March 31, 2019 | ||||||||||||||||
$ in millions | IS | WM | IM | Total | ||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents1 | $ | 66,685 | $ | 13,952 | $ | 45 | $ | 80,682 | ||||||||
Trading assets at fair value | 262,249 | 52 | 2,517 | 264,818 | ||||||||||||
Investment securities | 26,619 | 71,325 | — | 97,944 | ||||||||||||
Securities purchased under agreements to resell | 87,061 | 9,509 | — | 96,570 | ||||||||||||
Securities borrowed | 138,710 | 181 | — | 138,891 | ||||||||||||
Customer and other receivables | 36,314 | 15,732 | 621 | 52,667 | ||||||||||||
Loans, net of allowance2 | 44,742 | 71,450 | 5 | 116,197 | ||||||||||||
Other assets3 | 13,390 | 12,696 | 2,109 | 28,195 | ||||||||||||
Total assets | $ | 675,770 | $ | 194,897 | $ | 5,297 | $ | 875,964 |
March 2019 Form 10-Q |
![]() |
Management’s Discussion and Analysis
Total Assets by Business Segment
At June 30, 2018 | At December 31, 2018 | |||||||||||||||||||||||||||||||
$ in millions | IS | WM | IM | Total | IS | WM | IM | Total | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents1 | $ | 66,624 | $ | 14,891 | $ | 74 | $ | 81,589 | $ | 69,526 | $ | 17,621 | $ | 49 | $ | 87,196 | ||||||||||||||||
Trading assets at fair value | 262,743 | 78 | 3,617 | 266,438 | 263,870 | 60 | 2,369 | 266,299 | ||||||||||||||||||||||||
Investment securities | 22,204 | 59,744 | — | 81,948 | 23,273 | 68,559 | — | 91,832 | ||||||||||||||||||||||||
Securities purchased under agreements to resell | 79,509 | 14,419 | — | 93,928 | 80,660 | 17,862 | — | 98,522 | ||||||||||||||||||||||||
Securities borrowed | 153,062 | 186 | — | 153,248 | 116,207 | 106 | — | 116,313 | ||||||||||||||||||||||||
Customer and other receivables | 43,664 | 17,467 | 583 | 61,714 | 35,777 | 16,865 | 656 | 53,298 | ||||||||||||||||||||||||
Loans, net of allowance2 | 42,071 | 70,037 | 5 | 112,113 | 43,380 | 72,194 | 5 | 115,579 | ||||||||||||||||||||||||
Other assets3 | 14,011 | 9,227 | 1,659 | 24,897 | 13,734 | 9,125 | 1,633 | 24,492 | ||||||||||||||||||||||||
Total assets | $ | 683,888 | $ | 186,049 | $ | 5,938 | $ | 875,875 | $ | 646,427 | $ | 202,392 | $ | 4,712 | $ | 853,531 | ||||||||||||||||
At December 31, 2017 | ||||||||||||||||||||||||||||||||
$ in millions | IS | WM | IM | Total | ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents1 | $ | 63,597 | $ | 16,733 | $ | 65 | $ | 80,395 | ||||||||||||||||||||||||
Trading assets at fair value | 295,678 | 59 | 2,545 | 298,282 | ||||||||||||||||||||||||||||
Investment securities | 19,556 | 59,246 | — | 78,802 | ||||||||||||||||||||||||||||
Securities purchased under agreements to resell | 74,732 | 9,526 | — | 84,258 | ||||||||||||||||||||||||||||
Securities borrowed | 123,776 | 234 | — | 124,010 | ||||||||||||||||||||||||||||
Customer and other receivables | 36,803 | 18,763 | 621 | 56,187 | ||||||||||||||||||||||||||||
Loans, net of allowance2 | 36,269 | 67,852 | 5 | 104,126 | ||||||||||||||||||||||||||||
Other assets3 | 14,563 | 9,596 | 1,514 | 25,673 | ||||||||||||||||||||||||||||
Total assets | $ | 664,974 | $ | 182,009 | $ | 4,750 | $ | 851,733 |
IS—Institutional Securities
WM—Wealth Management
IM—Investment Management
1. | Cash and cash equivalents includes Cash and due from banks, Interest bearing deposits with banks and Restricted cash. |
2. | Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 7 to the financial statements). |
3. | Other assets primarily includes Goodwill, Intangible assets, premises, equipment, software, other investments, ROU assets related to leases and deferred tax assets. |
A substantial portion of total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. Total assets increased to $875.9$876 billion at June 30, 2018March 31, 2019 from $851.7$854 billion at December 31, 2017,2018, primarily driven by increasesdue to support client activity inhigher Securities borrowed and Securities purchased under agreements to resell in the Institutional Securities business segment as a result of higherperiod-end client balances and Loans across all segments. Trading assets within the Institutional Securities business segment declined due to reductions in Equities inventory to support increased demand and changes in client positioning. The decrease in Trading assets resulted in greater liquidity, as reflectedliabilities. These increases were partially offset by increases inGLR-eligiblelower Securities purchased under agreements to resell Investment securitieswithin the Wealth Management business segment as a result of lower Deposits.
Liquidity Risk Management Framework
The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and Cashthe GLR, which support our target liquidity profile. For a further discussion about the Firm’s Required Liquidity Framework and cash equivalents.Liquidity Stress Tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework” in the 2018 Form10-K.
At March 31, 2019 and December 31, 2018, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.
Global Liquidity Reserve
We maintain sufficient liquidity reserves to cover daily funding needs and to meet strategic liquidity targets sized by
the Required Liquidity Framework and Liquidity Stress Tests. For a further information regardingdiscussion of our GLR, see “Global“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” herein.in the 2018 Form10-K.
GLR by Type of Investment
$ in millions | At March 31, 2019 | At December 31, 2018 | ||||||
Cash deposits with banks1 | $ | 11,457 | $ | 10,441 | ||||
Cash deposits with central banks1 | 34,170 | 36,109 | ||||||
Unencumbered highly liquid securities: | ||||||||
U.S. government obligations | 105,425 | 119,138 | ||||||
U.S. agency and agency mortgage-backed securities | 42,228 | 41,473 | ||||||
Non-U.S. sovereign obligations2 | 36,341 | 39,869 | ||||||
Other investment grade securities | 3,527 | 2,705 | ||||||
Total | $ | 233,148 | $ | 249,735 |
1. | Included in Cash and due from banks and Interest bearing deposits with banks in the balance sheets. |
2. | Primarily composed of unencumbered Japanese, U.K., Brazilian and French government obligations. |
GLR Managed by Bank andNon-Bank Legal Entities
$ in millions | At March 31, | At | Average Daily Balance Three Months Ended March 31, 2019 | |||||||||
Bank legal entities | ||||||||||||
Domestic | $ | 80,296 | $ | 88,809 | $ | 80,670 | ||||||
Foreign | 5,492 | 4,896 | 4,672 | |||||||||
Total Bank legal entities | 85,788 | 93,705 | 85,342 | |||||||||
Non-Bank legal entities | ||||||||||||
Domestic: | ||||||||||||
Parent Company | 52,086 | 64,262 | 62,283 | |||||||||
Non-Parent Company | 40,807 | 40,936 | 39,980 | |||||||||
Total Domestic | 92,893 | 105,198 | 102,263 | |||||||||
Foreign | 54,467 | 50,832 | 54,820 | |||||||||
TotalNon-Bank legal entities | 147,360 | 156,030 | 157,083 | |||||||||
Total | $ | 233,148 | $ | 249,735 | $ | 242,425 |
Regulatory Liquidity Framework
Liquidity Coverage Ratio
We and our U.S. Bank Subsidiaries are subject to LCR requirements, including a requirement to calculate each entity’s LCR on each business day. The requirements are designed to ensure that banking organizations have sufficient HQLA to cover net cash outflows arising from significant stress over 30 calendar days, thus promoting the short-term resilience of the liquidity risk profile of banking organizations.
15 | March 2019 Form 10-Q |
Management’s Discussion and Analysis
The regulatory definition of HQLA is substantially the same as our GLR. GLR includes cash placed at institutions other than central banks that is considered an inflow for LCR purposes. HQLA includes a portion of cash placed at central banks, certain unencumbered investment grade corporate bonds and publicly traded common equities, which do not meet the definition of our GLR.
Based on our daily calculations, we and our U.S. Bank Subsidiaries are compliant with the minimum required LCR of 100%.
HQLA by Type of Asset and LCR
Average Daily Balance Three Months Ended | ||||||||
$ in millions | March 31, 2019 | December 31, 2018 | ||||||
HQLA | ||||||||
Cash deposits with central banks | $ | 37,070 | $ | 44,225 | ||||
Securities1 | 155,713 | 150,792 | ||||||
Total | $ | 192,783 | $ | 195,017 | ||||
LCR | 150% | 145% |
1. | Primarily includes U.S. Treasuries, U.S. agency mortgage-backed securities, sovereign bonds and investment grade corporate bonds. |
The increase in the LCR in the current quarter is due to a reduction in net outflows (i.e., the denominator of the ratio) primarily driven by higher cash inflows from Securities borrowed and Securities purchased under agreements to resell, and due to certainsecurities-for-securities transactions.
Net Stable Funding Ratio
The Basel Committee on Banking Supervision (“Basel Commit-tee”) has previously finalized the NSFR framework. In May 2016, the U.S. banking agencies issued a proposal to implement the NSFR in the U.S. however, a final rule has not yet been issued in the U.S. For an additional discussion of the NSFR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Liquidity Framework—Net Stable Funding Ratio” in the 2018 Form 10-K.
Funding Management
We manage our funding in a manner that reduces the risk of disruption to our operations. We pursue a strategy of diversification of secured and unsecured funding sources (by product, investor and region) and attempt to ensure that the tenor of our liabilities equals or exceeds the expected holding period of the assets being financed.
We fund our balance sheet on a global basis through diverse sources. These sources include our equity capital, borrowings, securities sold under agreements to repurchase, securities lending, deposits, letters of credit and lines of credit. We have active financing programs for both standard and structured products targeting global investors and currencies.
Secured Financing
For a discussion of our secured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Re-sources—Funding Management—Secured Financing” in the 2018 Form 10-K.
Collateralized Financing TransactionsHQLA by Type of Asset and LCR
$ in millions | At June 30, 2018 | At December 31, 2017 | ||||||
Securities purchased under agreements to resell and Securities borrowed | $ | 247,176 | $ | 208,268 | ||||
Securities sold under agreements to repurchase and Securities loaned | $ | 63,370 | $ | 70,016 | ||||
Securities received as collateral1 | $ | 8,209 | $ | 13,749 | ||||
Average Daily Balance Three Months Ended | ||||||||
$ in millions | June 30, 2018 | December 31, 2017 | ||||||
Securities purchased under agreements to resell and Securities borrowed | $ | 227,527 | $ | 214,343 | ||||
Securities sold under agreements to repurchase and Securities loaned | $ | 64,404 | $ | 66,879 |
Average Daily Balance Three Months Ended | ||||||||
$ in millions | March 31, 2019 | December 31, 2018 | ||||||
HQLA | ||||||||
Cash deposits with central banks | $ | 37,070 | $ | 44,225 | ||||
Securities1 | 155,713 | 150,792 | ||||||
Total | $ | 192,783 | $ | 195,017 | ||||
LCR | 150% | 145% |
1. |
|
See Note 2 to the financial statementsThe increase in the 2017 Form10-KLCR in the current quarter is due to a reduction in net outflows (i.e., the denominator of the ratio) primarily driven by higher cash inflows from Securities borrowed and Note 6Securities purchased under agreements to the financial statements for more details on collateralized financingresell, and due to certainsecurities-for-securities transactions.
Net Stable Funding Ratio
The Basel Committee on Banking Supervision (“Basel Commit-tee”) has previously finalized the NSFR framework. In additionMay 2016, the U.S. banking agencies issued a proposal to implement the collateralized financing transactions shownNSFR in the previous table, we also 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 receivablesU.S. however, a final rule has not yet been issued in the balance sheets, and payables under these financing transactions, primarily to prime brokerage customers, are included in Customer and other payables inU.S. For an additional discussion of the balance sheets. Our risk exposure on these transactions is mitigated by collateral maintenance policies that limit our credit exposure to customers and liquidity reserves held against this risk exposure.
Liquidity Risk Management Framework
The primary goal of our Liquidity Risk Management Framework is to ensure that we have access to adequate funding across a wide range of market conditions and time horizons. The framework is designed to enable us to fulfill our financial obligations and support the execution of our business strategies.
The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the GLR, which support our target liquidity profile. For further discussion about the Firm’s Required Liquidity Framework and Liquidity Stress Tests,NSFR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Liquidity Risk Management Framework”Framework—Net Stable Funding Ratio” in the 20172018 Form10-K.
Funding Management
We manage our funding in a manner that reduces the risk of disruption to our operations. We pursue a strategy of diversification of secured and unsecured funding sources (by product, investor and region) and attempt to ensure that the tenor of our liabilities equals or exceeds the expected holding period of the assets being financed.
We fund our balance sheet on a global basis through diverse sources. These sources include our equity capital, borrowings, securities sold under agreements to repurchase, securities lending, deposits, letters of credit and lines of credit. We have active financing programs for both standard and structured products targeting global investors and currencies.
![]() |
At June 30, 2018 and December 31, 2017, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.
Global Liquidity ReserveSecured Financing
We maintain sufficient global liquidity reserves pursuant to our Required Liquidity Framework. For furthera discussion of our GLR,secured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve”Re-sources—Funding Management—Secured Financing” in the 20172018 Form10-K.
GLR by Type of Investment
$ in millions | At June 30, 2018 | At December 31, 2017 | ||||||
Cash deposits with banks1 | $ | 10,345 | $ | 7,167 | ||||
Cash deposits with central banks1 | 33,948 | 33,791 | ||||||
Unencumbered highly liquid securities: | ||||||||
U.S. government obligations | 88,979 | 73,422 | ||||||
U.S. agency and agency mortgage-backed securities | 59,143 | 55,750 | ||||||
Non-U.S. sovereign obligations2 | 31,157 | 19,424 | ||||||
Other investment grade securities | 2,750 | 3,106 | ||||||
Total | $ | 226,322 | $ | 192,660 |
|
|
GLR Managed by Bank andNon-Bank Legal Entities
At 2018 | At 2017 | Average Daily Balance Three Months Ended | ||||||||||
$ in millions | June 30, 2018 | |||||||||||
Bank legal entities | ||||||||||||
Domestic | $ | 76,667 | $ | 70,364 | $ | 70,962 | ||||||
Foreign | 4,365 | 4,756 | 4,144 | |||||||||
Total Bank legal entities | 81,032 | 75,120 | 75,106 | |||||||||
Non-Bank legal entities |
| |||||||||||
Domestic: | ||||||||||||
Parent Company | 63,401 | 41,642 | 55,887 | |||||||||
Non-Parent Company | 31,652 | 35,264 | 32,307 | |||||||||
Total Domestic | 95,053 | 76,906 | 88,194 | |||||||||
Foreign | 50,237 | 40,634 | 50,650 | |||||||||
TotalNon-Bank legal entities | 145,290 | 117,540 | 138,844 | |||||||||
Total | $ | 226,322 | $ | 192,660 | $ | 213,950 |
Regulatory Liquidity Framework
Liquidity Coverage Ratio
We and our U.S. Bank Subsidiaries are subject to the LCR requirements including a requirement to calculate each entity’s LCR on each business day. The requirements are designed to ensure that banking organizations have sufficient HQLA to cover net cash outflows arising from significant stress over 30 calendar days, thus promoting the short-term resilience of the liquidity risk profile of banking organizations. Based on our daily calculations, we and our U.S. Bank Subsidiaries are compliant with the minimum required LCR of 100%.
The Firm’s calculations are based on our current understanding of the LCR and other factors, which may be subject to change as we receive additional clarification and implementation guidance from regulators relating to the LCR, and as the interpretation of the LCR evolves over time.
HQLA by Type of Asset and LCR
Average Daily Balance Three Months Ended | Average Daily Balance Three Months Ended | |||||||||||||||
$ in millions | June 30, 2018 | March 31, 2018 | March 31, 2019 | December 31, 2018 | ||||||||||||
HQLA | ||||||||||||||||
Cash deposits with central banks | $ | 38,456 | $ | 33,350 | $ | 37,070 | $ | 44,225 | ||||||||
Securities1 | 128,268 | 125,015 | 155,713 | 150,792 | ||||||||||||
Total | $ | 166,724 | $ | 158,365 | $ | 192,783 | $ | 195,017 | ||||||||
LCR | 128% | 121% | 150% | 145% |
1. | Primarily includes U.S. |
The increase in the LCR in the current quarter is due to increased HQLA resultinga reduction in net outflows (i.e., the denominator of the ratio) primarily driven by higher cash inflows from changes in the composition of assets within the Institutional Securities business segment.
The regulatory definition of HQLA is substantially the same as our GLR. GLR includes cash placed at institutions other than central banks that is considered an inflow for LCR purposes. HQLA includes a portion of cash placed at central banks,borrowed and Securities purchased under agreements to resell, and due to certain unencumbered investment grade corporate bonds and publicly traded common equities, which do not meet the definition of our GLR.securities-for-securities transactions.
Net Stable Funding Ratio
The objective of the NSFR is to reduce funding risk over aone-year horizon by requiring banking organizations to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress.
![]() |
The Basel Committee on Banking Supervision (“Basel Committee”Commit-tee”) has previously finalized the NSFR framework. In May 2016, the U.S. banking agencies issued a proposal to implement the NSFR in the U.S., which would apply to us and our U.S. Bank Subsidiaries. Our preliminary estimates, based on the current proposal, indicate that actions will be necessary to meet the requirement, which we would expect to accomplish by the effective date of any final rule. Our preliminary estimates are subject to risks and uncertainties that may cause actual results based on the however, a final rule to differ materially from estimates.has not yet been issued in the U.S. For an additional discussion of the NSFR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Liquidity Framework—Net Stable Funding Ratio” in the 20172018 Form 10-K.
Funding Management
We manage our funding in a manner that reduces the risk of disruption to our operations. We pursue a strategy of diversification of secured and unsecured funding sources (by product, investor and region) and attempt to ensure that the tenor of our liabilities equals or exceeds the expected holding period of the assets being financed.
We fund our balance sheet on a global basis through diverse sources. These sources may 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—Re-sources—Funding Management—Secured Financing” in the 20172018 Form10-K.
At June 30,Collateralized Financing Transactions
$ in millions | At March 31, 2019 | At December 31, 2018 | ||||||
Securities purchased under agreements to resell and Securities borrowed | $ | 235,461 | $ | 214,835 | ||||
Securities sold under agreements to repurchase and Securities loaned | $ | 60,456 | $ | 61,667 | ||||
Securities received as collateral1 | $ | 5,426 | $ | 7,668 |
Average Daily Balance Three Months Ended | ||||||||
$ in millions | March 31, 2019 | December 31, 2018 | ||||||
Securities purchased under agreements to resell and Securities borrowed | $ 219,062 | $ 213,974 | ||||||
Securities sold under agreements to repurchase and Securities loaned | $ 58,965 | $ 57,677 |
1. | Securities received as collateral are included in Trading assets in the balance sheets. |
See Note 2 to the financial statements in the 2018 Form10-Kand December 31, 2017,Note 6 to the weighted average maturity offinancial statements for more details on collateralized financing transactions.
In addition to the collateralized financing transactions shown in the previous table, we engage in financing transactions collateralized by customer-owned securities, which are segregated in accordance with regulatory requirements. Receivables under these financing transactions, primarily margin loans, are included in Customer and other receivables in the balance sheets, and payables under these financing transactions, primarily to prime brokerage customers, are included in Customer and other payables in the balance sheets. Our risk exposure on these transactions is mitigated by collateral maintenance policies that limit our secured financing of less liquid assets was greater than 120 days.credit exposure to customers and liquidity reserves held against this risk exposure.
Unsecured Financing
For a discussion of our unsecured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Unsecured Financing” in the 20172018 Form10-K.
March 2019 Form 10-Q | 16 |
Management’s Discussion and Analysis
Deposits
$ in millions | At June 30, | At December 31, 2017 | At March 31, 2019 | At December 31, 2018 | ||||||||||||
Savings and demand deposits: | ||||||||||||||||
Brokerage sweep deposits1 | $ | 130,698 | $ | 135,946 | $ 127,678 | $ 141,255 | ||||||||||
Savings and other | 9,038 | 8,541 | 15,523 | 13,642 | ||||||||||||
Total Savings and demand deposits | 139,736 | 144,487 | 143,201 | 154,897 | ||||||||||||
Time deposits2 | 33,066 | 14,949 | ||||||||||||||
Time deposits | 36,530 | 32,923 | ||||||||||||||
Total | $ | 172,802 | $ | 159,436 | $ 179,731 | $ 187,820 |
1. |
|
|
Deposits are primarily sourced from our Wealth Management clients and are considered to have stable,low-cost funding characteristics. Total deposits at June 30, 2018 increasedMarch 31, 2019 decreased compared with December 31, 2017, primarily2018, due to a decrease in Brokerage sweep deposits driven by redeployment of client cash partially offset by increases in Time deposits and Savings and other deposits partially offsetdriven by a reduction in Brokerage sweep deposits due to client deploymentpromotional offerings.
Borrowings by Remaining Maturity at March 31, 20191
$ in millions | Parent Company | Subsidiaries | Total | |||||||||
Original maturities of one year or less | $ | — | $ | 1,498 | $ | 1,498 | ||||||
Original maturities greater than one year |
| |||||||||||
2019 | $ | 14,187 | $ | 3,937 | $ | 18,124 | ||||||
2020 | 15,690 | 4,082 | 19,772 | |||||||||
2021 | 21,256 | 3,936 | 25,192 | |||||||||
2022 | 14,952 | 2,322 | 17,274 | |||||||||
2023 | 11,624 | 2,642 | 14,266 | |||||||||
Thereafter | 75,346 | 19,219 | 94,565 | |||||||||
Total | $ | 153,055 | $ | 36,138 | $ | 189,193 | ||||||
Total Borrowings | $ | 153,055 | $ | 37,636 | $ | 190,691 | ||||||
Maturities over next 12 months2 |
| 26,068 |
1. | Original maturity in the table is generally based on contractual final maturity. For borrowings with put options, remaining maturity represents the earliest put date. |
2. | Includes only borrowings with original maturities greater than one year. |
Borrowings of cash into investments and typical seasonal client tax payments. In the current quarter we initiated a redesign$190,691 million as of our Brokerage sweep deposit program, resulting in approximately $10 billion in incremental deposits in higher balance accounts, which partially offset the reductions noted sinceMarch 31, 2019 were relatively unchanged compared with $189,662 million at December 31, 2017. As we make additional adjustments in the third quarter of 2018, we anticipate a similar amount of incremental deposits.2018.
Borrowings
We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of borrowings with original maturities greater than one year allows us to reduce reliance on short-term credit sensitive instruments. Borrowings with original maturities greater than one year are generally managed to achieve staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients across regions, currencies and product types.
The availability and cost of financing to us can vary depending on market conditions, the volume of certain trading and lending activities, our credit ratings and the overall availability of credit. We also engage in, and may continue to engage in, repurchases of our borrowings in the ordinary course of business.
![]() |
Borrowings by Remaining Maturity at June 30, 20181
$ in millions | Parent Company | Subsidiaries | Total | |||||||||
Original maturities of one year or less | $ | — | $ | 2,329 | $ | 2,329 | ||||||
Original maturities greater than one year |
| |||||||||||
2018 | $ | 3,652 | $ | 2,436 | $ | 6,088 | ||||||
2019 | 21,497 | 4,095 | 25,592 | |||||||||
2020 | 18,781 | 2,400 | 21,181 | |||||||||
2021 | 21,294 | 2,984 | 24,278 | |||||||||
2022 | 14,969 | 1,874 | 16,843 | |||||||||
Thereafter | 80,964 | 14,969 | 95,933 | |||||||||
Total | $ | 161,157 | $ | 28,758 | $ | 189,915 | ||||||
Total Borrowings | $ | 161,157 | $ | 31,087 | $ | 192,244 | ||||||
Maturities over next 12 months2 |
| $ | 17,330 |
|
|
Borrowings of $192,244 million as of June 30, 2018 remained relatively unchanged compared with $192,582 million at December 31, 2017.
For further information on Borrowings, see Note 10 to the financial statements.
Credit Ratings
We rely on external sources to finance a significant portion of our daily operations. The cost and availability of financing generally are impacted by our credit ratings, among other things. In addition, our credit ratings can have an impact on certain trading revenues, particularly in those businesses where longer-term counterparty performance is a key consideration, such as OTC derivative transactions, including credit derivatives and interest rate swaps. When determining credit ratings, rating agencies consider company-specific factors, other industry factors such as regulatory or legislative changes and the macroeconomic environment, among other things.
Our credit ratings do not include any uplift from perceived government support from any rating agency given the significant progress of U.S. financial reform legislation and regulations. Some rating agencies have stated that they currently incorporate various degrees of credit rating uplift fromnon-governmental third-party sources of potential support.
Parent Company and U.S. Bank Subsidiaries’ Senior Unsecured Ratings at April 30, 2019
Parent Company | ||||||||
Short-Term Debt | Long-Term Debt | Rating Outlook | ||||||
DBRS, Inc. | R-1 (middle) | A (high) | Stable | |||||
Fitch Ratings, Inc. | F1 | A | Stable | |||||
Moody’s Investors Service, Inc. | P-2 | A3 | Stable | |||||
Rating and Investment Information, Inc. | a-1 | A- | Positive | |||||
S&P Global Ratings | A-2 | BBB+ | Stable |
17 | March 2019 Form 10-Q |
Management’s Discussion and Analysis
MSBNA | ||||||||
Short-Term Debt | Long-Term Debt | Rating Outlook | ||||||
Fitch Ratings, Inc. | F1 | A+ | Stable | |||||
Moody’s Investors Service, Inc. | P-1 | A1 | Stable | |||||
S&P Global Ratings | A-1 | A+ | Stable |
MSPBNA | ||||||
Short-Term Debt | Long-Term Debt | Rating Outlook | ||||
Moody’s Investors Service, Inc. | P-1 | A1 | Stable | |||
S&P Global Ratings | A-1 | A+ | Stable |
Incremental Collateral or Terminating Payments
In connection with certain OTC trading agreementsderivatives 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.
The See Note 4 to the financial statements for additional collateral or termination paymentsinformation on OTC derivatives that may be called in the event of a future credit rating downgrade vary by contract andcan be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and S&P Global Ratings. The following table shows the future potential collateral amounts and termination payments that could be called or required by counterparties and clearing organizations in the event ofone-notch ortwo-notch downgrade scenarios, from the lowest of Moody’s ratings or S&P Global Ratings, based on the relevant contractual downgrade triggers.contain such contingent features.
Incremental Collateral or Terminating Payments upon Potential Future Rating Downgrade
$ in millions | At June 30, | At December 31, 2017 | ||||||
One-notch downgrade | $ | 828 | $ | 822 | ||||
Two-notch downgrade | 596 | 596 |
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 others,other things, the magnitude of the downgrade, the rating relative to peers, the
![]() |
rating assigned by the relevant agencypre-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 and, therefore, inguidelines. In the future, we may expand or contract our capital base to address the changing needs of our businesses. We attempt to maintain total capital, on a consolidated basis, at least equal to the sum of our operating subsidiaries’ required equity.
Common Stock Repurchases
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
$ in millions | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Repurchases of common stock under our share repurchase program | $ | 1,250 | $ | 500 | $ | 2,500 | $ | 1,250 |
Three Months Ended March 31, | ||||||||
in millions, except for per share data | 2019 | 2018 | ||||||
Repurchases | $ | 1,180 | $ | 1,250 | ||||
Number of shares | 28 | 22 | ||||||
Average price per share | $ | 42.19 | $ | 55.98 |
From time to time we repurchase our outstanding common stock including as part of our share repurchase program. On April 18, 2018, we entered intoShare Repurchase Program. A portion of common stock repurchases in the current quarter was conducted under a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”), whereby MUFG sellssold shares of the Firm’s common stock to us, as part of our share repurchase program.Share Repurchase Program. The sales plan which began to be executed in the current quarter, is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Board of Governors of the Federal Reserve System (“Federal Reserve”) and will havehas no impact on the strategic alliance between MUFG and us, including theour joint ventures in Japan. For a description of our share repurchase program,Share Repurchase Program, see “Unregistered Sales of Equity Securities and Use of Proceeds.”
For a description of our capital plan, see “Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests.”
Common Stock Dividend Announcement
Announcement date | April 17, 2019 | |||
Amount per share | $0.30 | |||
Date to be paid | May 15, | |||
Shareholders of record as of | April 30, 2019 |
Preferred Stock
Preferred Stock Dividend Announcement
Announcement date | March 15, | |||
Date paid | April 15, 2019 | |||
Shareholders of record as of | March 29, |
For additional information on common and preferred stock, see Note 14 to the financial statements.
Regulatory RequirementsOff-Balance Sheet Arrangements and Contractual Obligations
Regulatory Capital FrameworkOff-Balance Sheet Arrangements
We enter into variousoff-balance sheet arrangements, including through unconsolidated SPEs and lending-related financial instruments (e.g., guarantees and commitments), primarily in connection with the Institutional Securities and Investment Management business segments.
We utilize SPEs primarily in connection with securitization activities. For information on our securitization activities, see Note 12 to the financial statements.
For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 11 to the financial statements. For further information on our lending commitments, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Loans and Lending Commitments.”
March 2019 Form 10-Q | 18 |
Management’s Discussion and Analysis
Contractual Obligations
For a discussion about our contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations” in the 2018 Form10-K.
Regulatory Capital Framework
We are a financial holding company (“FHC”)an FHC under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and are subject to the regulation and oversight of the Federal Reserve. The Federal Reserve establishes capital requirements for us, including “well-capitalized” standards, and evaluates our compliance with such capital requirements. The OCC establishes similar capital requirements and standards for our U.S. Bank Subsidiaries. For us to remain an FHC, we must remain well-capitalized in accordance with standards established by the Federal Reserve and our U.S. Bank Subsidiaries must remain well-capitalized in accordance with standards established by the OCC. For additional information on regulatory capital requirements for our U.S. Bank Subsidiaries, see Note 13 to the financial statements.
Regulatory capital requirements established by the Federal Reserve are largely based on the Basel III capital standards established by the Basel Committee and also implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).
Regulatory Capital Requirements
We are required to maintain minimum risk-based andcapital, leverage-based capital ratios under the regulatory capital requirements.and total loss-absorbing capacity (“TLAC”) ratios. For more information, on our regulatory capital requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Capital Requirements” in the 20172018 Form10-K. For additional information on TLAC, see Total Loss-Absorbing Capacity herein.
Risk-basedRisk-Based Regulatory Capital.Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 capital). Certain adjustments to and deductions from capital are required for purposes of determining these ratios, such as goodwill, intangible assets, certain deferred tax assets, other amounts in AOCI and investments in the capital instruments of unconsolidated financial institutions.
![]() |
In addition to the minimum risk-based capital ratio requirements, by 2019 we will beare subject to the following buffers:buffers in 2019:
A greater than 2.5% Common Equity Tier 1 capital conservation buffer;
The Common Equity Tier 1G-SIB capital surcharge, currently at 3%; and
Up to a 2.5% Common Equity Tier 1 CCyB, currently set by U.S. banking agencies at zero.
In 2017 and 2018, each of thethese buffers is 50% andwas 75%, respectively, of the fullyphased-in 2019 requirement noted above. Failure to maintain the buffers would result in restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. For a further discussion of theG-SIB capital surcharge, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—RegulatoryRequirements—G-SIB Capital Surcharge” in the 20172018 Form10-K.
Our risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWA (“Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWA (“Advanced Approach”). The credit risk RWA calculations between the two approaches differ in that the Standardized Approach requires calculation of RWA using prescribed risk weights, whereas the Advanced Approach utilizes models to calculate exposure amounts and risk weights. At June 30, 2018March 31, 2019 and December 31, 2017,2018, our ratios for determining regulatory compliance are based on the Standardized Approach rules.
Effective January 1, 2019, Common Equity Tier 1 capital, Tier 1 capital and Total capital requirements, inclusive of buffers, will increase to 10.0%, 11.5%, and 13.5%, respectively.
See “Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” herein for additional capital requirements effective January 1, 2019.
Leverage-basedLeverage-Based Regulatory Capital. Minimum leverage-based capital requirements include a Tier 1 leverage ratio and an SLR. The SLR became effective as a capital standard on January 1, 2018. We are required to maintain a Tier 1 SLR of 3% as well as5%, inclusive of an enhanced SLR capital buffer of at least 2% (for a total of at least 5%) in order to avoid potential limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers.
19 | March 2019 Form 10-Q |
Management’s Discussion and Analysis
Regulatory Capital Ratios
At June 30, 2018 | ||||||||||||||||||||||||
FullyPhased-In | At March 31, 2019 | |||||||||||||||||||||||
$ in millions | Required Ratio | Standardized | Advanced | Required Ratio1 | Standardized | Advanced | ||||||||||||||||||
Risk-based capital | ||||||||||||||||||||||||
Common Equity Tier 1 capital | $ | 61,352 | $ | 61,352 | $ | 63,344 | $ | 63,344 | ||||||||||||||||
Tier 1 capital | 70,017 | 70,017 | 71,910 | 71,910 | ||||||||||||||||||||
Total capital | 79,681 | 79,425 | 81,570 | 81,284 | ||||||||||||||||||||
Total RWA | 387,414 | 369,383 | 378,420 | 366,353 | ||||||||||||||||||||
Common Equity Tier 1 capital ratio | 8.6% | 15.8% | 16.6% | 10.0% | 16.7% | 17.3% | ||||||||||||||||||
Tier 1 capital ratio | 10.1% | 18.1% | 19.0% | 11.5% | 19.0% | 19.6% | ||||||||||||||||||
Total capital ratio | 12.1% | 20.6% | 21.5% | 13.5% | 21.6% | 22.2% | ||||||||||||||||||
Leverage-based capital | ||||||||||||||||||||||||
Adjusted average assets1 | $ | 852,726 | N/A | |||||||||||||||||||||
Adjusted average assets2 | $ | 855,192 | N/A | |||||||||||||||||||||
Tier 1 leverage ratio | 4.0% | 8.2% | N/A | 4.0% | 8.4% | N/A | ||||||||||||||||||
Supplementary leverage exposure2 | N/A | 1,096,953 | ||||||||||||||||||||||
Supplementary leverage exposure3 | N/A | $ | 1,104,264 | |||||||||||||||||||||
SLR | 5.0% | N/A | 6.4% | 5.0% | N/A | 6.5% |
At December 31, 2017 | ||||||||||||||||||||||||||||||||
Transitional3 | Pro Forma Fully Phased-In | At December 31, 2018 | ||||||||||||||||||||||||||||||
$ in millions | Required Ratio | Standardized | Advanced | Standardized | Advanced | Required Ratio1 | Standardized | Advanced | ||||||||||||||||||||||||
Risk-based capital | ||||||||||||||||||||||||||||||||
Common Equity | ||||||||||||||||||||||||||||||||
Tier 1 capital | $ | 61,134 | $ | 61,134 | $ | 60,564 | $ | 60,564 | ||||||||||||||||||||||||
Common Equity Tier 1 capital | $ | 62,086 | $ | 62,086 | ||||||||||||||||||||||||||||
Tier 1 capital | 69,938 | 69,938 | 69,120 | 69,120 | 70,619 | 70,619 | ||||||||||||||||||||||||||
Total capital | 80,275 | 80,046 | 79,470 | 79,240 | 80,052 | 79,814 | ||||||||||||||||||||||||||
Total RWA | 369,578 | 350,212 | 377,241 | 358,324 | 367,309 | 363,054 | ||||||||||||||||||||||||||
Common Equity Tier 1 capital ratio | 7.3% | 16.5% | 17.5% | 16.1% | 16.9% | 8.6% | 16.9% | 17.1% | ||||||||||||||||||||||||
Tier 1 capital ratio | 8.8% | 18.9% | 20.0% | 18.3% | 19.3% | 10.1% | 19.2% | 19.5% | ||||||||||||||||||||||||
Total capital ratio | 10.8% | 21.7% | 22.9% | 21.1% | 22.1% | 12.1% | 21.8% | 22.0% | ||||||||||||||||||||||||
Leverage-based capital | Leverage-based capital |
| ||||||||||||||||||||||||||||||
Adjusted average assets1 | $ | 842,270 | N/A | $ | 841,756 | N/A | ||||||||||||||||||||||||||
Adjusted average assets2 | $ | 843,074 | N/A | |||||||||||||||||||||||||||||
Tier 1 leverage ratio | 4.0% | 8.3% | N/A | 8.2% | N/A | 4.0% | 8.4% | N/A | ||||||||||||||||||||||||
Supplementary leverage exposure2 | N/A | 1,082,683 | N/A | 1,082,170 | ||||||||||||||||||||||||||||
Pro forma SLR | 5.0% | N/A | 6.5% | N/A | 6.4% | |||||||||||||||||||||||||||
Supplementary leverage exposure3 | N/A | $ | 1,092,672 | |||||||||||||||||||||||||||||
SLR | 5.0% | N/A | 6.5% |
1. | Required ratios are inclusive of any buffers applicable as of the date presented. For 2018, the minimum required regulatory capital ratios for risk-based capital are under the transitional rules. |
2. | Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is composed of the average daily balance of consolidatedon-balance sheet assets under U.S. GAAP during the |
Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily (i) potential future exposure for derivative exposures,gross-up for cash collateral netting where qualifying criteria are not met, and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount foroff-balance sheet exposures. |
|
At December 31, 2017, the pro forma fullyphased-in estimated amounts and the pro forma estimated SLR utilized fullyphased-in Tier 1 capital, including the fullyphased-in Tier 1 capital deductions that applied beginning January 1, 2018. These pro formafully phased-in estimates were
![]() |
non-GAAP financial measures as the related capital rules were not yet effective at December 31, 2017. These estimates were based on our understanding of the capital rules and other factors at the time.
Regulatory compliance was determined based on capital ratios including regulatory capital and RWA calculated under the transitional rules until December 31, 2017. The regulatory capital analyses in the following tables are presented using pro forma fullyphased-in estimates as of December 31, 2017, which are equivalent to amounts calculated as of June 30, 2018.
FullyPhased-In Regulatory Capital
$ in millions | At June 30, 2018 | At December 31, 20171 | ||||||
Common Equity Tier 1 capital | ||||||||
Common stock and surplus | $ | 11,824 | $ | 14,354 | ||||
Retained earnings | 61,835 | 57,577 | ||||||
AOCI | (3,070 | ) | (3,060 | ) | ||||
Regulatory adjustments and deductions: | ||||||||
Net goodwill | (6,682 | ) | (6,599 | ) | ||||
Net intangible assets (other than goodwill and mortgage servicing assets) | (2,329 | ) | (2,446 | ) | ||||
Other adjustments and deductions2 | (226 | ) | 738 | |||||
Total Common Equity Tier 1 capital | $ | 61,352 | $ | 60,564 | ||||
Additional Tier 1 capital | ||||||||
Preferred stock | $ | 8,520 | $ | 8,520 | ||||
Noncontrolling interests | 501 | 415 | ||||||
Other adjustments and deductions | (1 | ) | (23 | ) | ||||
Additional Tier 1 capital | $ | 9,020 | $ | 8,912 | ||||
Deduction for investments in covered funds | (355 | ) | (356 | ) | ||||
Total Tier 1 capital | $ | 70,017 | $ | 69,120 | ||||
Standardized Tier 2 capital | ||||||||
Subordinated debt | $ | 9,141 | $ | 9,839 | ||||
Noncontrolling interests | 118 | 98 | ||||||
Eligible allowance for credit losses | 444 | 423 | ||||||
Other adjustments and deductions | (39 | ) | (10 | ) | ||||
Total Standardized Tier 2 capital | $ | 9,664 | $ | 10,350 | ||||
Total Standardized capital | $ | 79,681 | $ | 79,470 | ||||
Advanced Tier 2 capital | ||||||||
Subordinated debt | $ | 9,141 | $ | 9,839 | ||||
Noncontrolling interests | 118 | 98 | ||||||
Eligible credit reserves | 188 | 193 | ||||||
Other adjustments and deductions | (39 | ) | (10 | ) | ||||
Total Advanced Tier 2 capital | $ | 9,408 | $ | 10,120 | ||||
Total Advanced capital | $ | 79,425 | $ | 79,240 |
FullyPhased-In Regulatory Capital Rollforward
$ in millions | Six Months Ended June 30, 2018 | |||
Common Equity Tier 1 capital | ||||
Common Equity Tier 1 capital at December 31, 20171 | $ | 60,564 | ||
Change related to the following items: | ||||
Value of shareholders’ common equity | 1,718 | |||
Net goodwill | (83 | ) | ||
Net intangible assets (other than goodwill and mortgage servicing assets) | 117 | |||
Other adjustments and deductions2 | (964 | ) | ||
Common Equity Tier 1 capital at June 30, 2018 | $ | 61,352 | ||
Additional Tier 1 capital | ||||
Additional Tier 1 capital at December 31, 20171 | $ | 8,912 | ||
Change related to the following items: | ||||
Noncontrolling interests | 86 | |||
Other adjustments and deductions | 22 | |||
Additional Tier 1 capital at June 30, 2018 | 9,020 | |||
Deduction for investments in covered funds at December 31, 20171 | (356 | ) | ||
Change in deduction for investments in covered funds | 1 | |||
Deduction for investments in covered funds at June 30, 2018 | (355 | ) | ||
Tier 1 capital at June 30, 2018 | $ | 70,017 | ||
Standardized Tier 2 capital | ||||
Tier 2 capital at December 31, 20171 | $ | 10,350 | ||
Change related to the following items: | ||||
Eligible allowance for credit losses | 21 | |||
Other changes, adjustments and deductions3 | (707 | ) | ||
Standardized Tier 2 capital at June 30, 2018 | $ | 9,664 | ||
Total Standardized capital at June 30, 2018 | $ | 79,681 | ||
Advanced Tier 2 capital | ||||
Tier 2 capital at December 31, 20171 | $ | 10,120 | ||
Change related to the following items: | ||||
Eligible credit reserves | (5 | ) | ||
Other changes, adjustments and deductions3 | (707 | ) | ||
Advanced Tier 2 capital at June 30, 2018 | $ | 9,408 | ||
Total Advanced capital at June 30, 2018 | $ | 79,425 |
$ in millions | At March 31, 2019 | At December 31, 2018 | Change | |||||||||
Common Equity Tier 1 capital | ||||||||||||
Common stock and surplus | $ | 8,616 | $ | 9,843 | $ | (1,227 | ) | |||||
Retained earnings | 66,061 | 64,175 | 1,886 | |||||||||
AOCI | (2,473 | ) | (2,292 | ) | (181 | ) | ||||||
Regulatory adjustments and deductions: | ||||||||||||
Net goodwill | (6,655 | ) | (6,661 | ) | 6 | |||||||
Net intangible assets (other than goodwill and mortgage servicing assets) | (2,084 | ) | (2,158 | ) | 74 | |||||||
Other adjustments and deductions1 | (121 | ) | (821 | ) | 700 | |||||||
Total Common Equity Tier 1 capital | $ | 63,344 | $ | 62,086 | $ | 1,258 | ||||||
Additional Tier 1 capital | ||||||||||||
Preferred stock | $ | 8,520 | $ | 8,520 | $ | — | ||||||
Noncontrolling interests | 475 | 454 | 21 | |||||||||
Additional Tier 1 capital | $ | 8,995 | $ | 8,974 | $ | 21 | ||||||
Deduction for investments in covered funds | (429 | ) | (441 | ) | 12 | |||||||
Total Tier 1 capital | $ | 71,910 | $ | 70,619 | $ | 1,291 | ||||||
Standardized Tier 2 capital | ||||||||||||
Subordinated debt | $ | 9,087 | $ | 8,923 | $ | 164 | ||||||
Noncontrolling interests | 112 | 107 | 5 | |||||||||
Eligible allowance for credit losses | 470 | 440 | 30 | |||||||||
Other adjustments and deductions | (9 | ) | (37 | ) | 28 | |||||||
Total Standardized Tier 2 capital | $ | 9,660 | $ | 9,433 | $ | 227 | ||||||
Total Standardized capital | $ | 81,570 | $ | 80,052 | $ | 1,518 | ||||||
Advanced Tier 2 capital | ||||||||||||
Subordinated debt | $ | 9,087 | $ | 8,923 | $ | 164 | ||||||
Noncontrolling interests | 112 | 107 | 5 | |||||||||
Eligible credit reserves | 184 | 202 | (18 | ) | ||||||||
Other adjustments and deductions | (9 | ) | (37 | ) | 28 | |||||||
Total Advanced Tier 2 capital | $ | 9,374 | $ | 9,195 | $ | 179 | ||||||
Total Advanced capital | $ | 81,284 | $ | 79,814 | $ | 1,470 |
1. |
|
Other adjustments and deductions used in the calculation of Common Equity Tier 1 capital include credit spread premium over risk-free rate for derivative liabilities, net deferred tax assets, netafter-tax DVA and other netafter-taxadjustments related to AOCI. |
|
![]() |
Management’s Discussion and Analysis
FullyPhased-InRWA Rollforward
Six Months Ended June 30, 20181 | ||||||||
$ in millions | Standardized | Advanced | ||||||
Credit risk RWA | ||||||||
Balance at December 31, 20172 | $ | 301,946 | $ | 170,754 | ||||
Change related to the following items: | ||||||||
Derivatives | (1,584 | ) | 2,153 | |||||
Securities financing transactions | 2,558 | 1,120 | ||||||
Securitizations | (599 | ) | (2,103 | ) | ||||
Investment securities | (435 | ) | 384 | |||||
Commitments, guarantees and loans | 16,870 | 19,132 | ||||||
Cash | 783 | 420 | ||||||
Equity investments | 1,824 | 1,933 | ||||||
Other credit risk3 | 685 | 901 | ||||||
Total change in credit risk RWA | $ | 20,102 | $ | 23,940 | ||||
Balance at June 30, 2018 | $ | 322,048 | $ | 194,694 | ||||
Market risk RWA | ||||||||
Balance at December 31, 20172 | $ | 75,295 | $ | 74,907 | ||||
Change related to the following items: | ||||||||
Regulatory VaR | 435 | 435 | ||||||
Regulatory stressed VaR | (2,634 | ) | (2,634 | ) | ||||
Incremental risk charge | 1,986 | 1,986 | ||||||
Comprehensive risk measure | (2,035 | ) | (1,752 | ) | ||||
Specific risk: | ||||||||
Non-securitizations | (3,018 | ) | (3,018 | ) | ||||
Securitizations | (4,663 | ) | (4,663 | ) | ||||
Total change in market risk RWA | $ | (9,929 | ) | $ | (9,646 | ) | ||
Balance at June 30, 2018 | $ | 65,366 | $ | 65,261 | ||||
Operational risk RWA | ||||||||
Balance at December 31, 20172 | $ | N/A | $ | 112,663 | ||||
Change in operational risk RWA | N/A | (3,235 | ) | |||||
Balance at June 30, 2018 | $ | N/A | $ | 109,428 | ||||
Total RWA | $ | 387,414 | $ | 369,383 |
Regulatory
At March 31, 20191 | ||||||||
$ in millions | Standardized | Advanced | ||||||
Credit risk RWA | ||||||||
Balance at December 31, 2018 | $ | 305,531 | $ | 190,595 | ||||
Change related to the following items: | ||||||||
Derivatives | 2,095 | 7,246 | ||||||
Securities financing transactions | 8,269 | 2,353 | ||||||
Securitizations | 358 | 402 | ||||||
Investment securities | 1,503 | 2,616 | ||||||
Commitments, guarantees and loans | 2,067 | 1,648 | ||||||
Cash | (610 | ) | (361 | ) | ||||
Equity investments | 369 | 390 | ||||||
Other credit risk2 | 4,105 | 4,263 | ||||||
Total change in credit risk RWA | $ | 18,156 | $ | 18,557 | ||||
Balance at March 31, 2019 | $ | 323,687 | $ | 209,152 | ||||
Market risk RWA | ||||||||
Balance at December 31, 2018 | $ | 61,778 | $ | 61,857 | ||||
Change related to the following items: | ||||||||
Regulatory VaR | (610 | ) | (610 | ) | ||||
Regulatory stressed VaR | (2,934 | ) | (2,934 | ) | ||||
Incremental risk charge | (4,980 | ) | (4,980 | ) | ||||
Comprehensive risk measure | 96 | 55 | ||||||
Specific risk: | ||||||||
Non-securitizations | 1,141 | 1,141 | ||||||
Securitizations | 242 | 242 | ||||||
Total change in market risk RWA | $ | (7,045 | ) | $ | (7,086 | ) | ||
Balance at March 31, 2019 | $ | 54,733 | �� | $ | 54,771 | |||
Operational risk RWA | ||||||||
Balance at December 31, 2018 | N/A | $ | 110,602 | |||||
Change in operational risk RWA | N/A | (8,172 | ) | |||||
Balance at March 31, 2019 | N/A | $ | 102,430 | |||||
Total RWA | $ | 378,420 | $ | 366,353 |
Regulatory | VaR—VaR for regulatory capital requirements |
1. | The RWA for each category |
2. |
|
Amount reflects assets not in a defined category,non-material portfolios of exposures and unsettled transactions, as applicable. |
Credit risk RWA increased in the current year periodquarter under the Standardized and Advanced Approaches primarily due to increased exposures in corporate lending withinSecurities financing transactions and Derivatives, and an increase in Other credit risk mainly driven by the Institutional Securities business segment.Firm’s adoption of theLeases accounting update on January 1, 2019. Under the Advanced Approach, the increased derivatives exposure also led to increased RWA related to CVA.
Market risk RWA decreased in the current year periodquarter under the Standardized and Advanced Approaches primarily due to decreasesa decrease in both securitization andnon-securitization standardized specificthe Incremental risk chargescharge driven by reduced exposures and improved hedging in residential mortgage-backed securities and equity derivatives, respectively.credit products.
The decrease in operational risk RWA under the Advanced Approach in the current year periodquarter reflects a continued reduction in the frequency and magnitude of internal losses related to transactional execution and litigation utilized in the operational risk capital model.model related to litigation.
Total Loss-Absorbing Capacity Long-Term Debt and Clean Holding Company Requirements
On December 15, 2016, the. The Federal Reserve adopted a final rule fortop-tier BHCs of U.S.G-SIB (“covered BHC”), including the Parent Company, that establisheshas established external TLAC, long-term debt (“LTD”) and clean holding company requirements. The final rule containsrequirements fortop-tier BHCs of U.S.G-SIBs (“covered BHCs”), including the Parent Company. These requirements include various definitions and restrictions, such as requiring eligible LTD to be issued by the covered BHC and be unsecured, have a maturity of one year or more from the date of issuance and not have certain derivative-linked features typically associated with certain types of structured notes. We expectA covered BHC is required to be in compliance with all requirementsmaintain minimum levels of the rule by January 1, 2019, the date that compliance is required.
The Federal Reserve’s proposed modifications to the enhanced SLR would also make corresponding changes to the calibration of theexternal TLAC leverage-based requirements,and eligible LTD, as well as certain other technical changesTLAC buffer requirements. Failure to maintain the TLAC rule. For a further discussion of the enhanced SLR, see “Regulatory Developments—Proposed Modificationsbuffers would result in restrictions on capital distributions and discretionary bonus payments to the Enhanced SLRexecutive officers.
Required and to the SLR Applicable to Our U.S. Bank Subsidiaries” herein.Actual TLAC and Eligible LTD Ratios
At March 31, 2019 | ||||||||
$ in millions | Required Ratio1 | Actual Amount/Ratio | ||||||
Total Loss-Absorbing Capacity | ||||||||
External TLAC2 | $ 198,965 | |||||||
External TLAC as a % of RWA | 21.5 | % | 52.6% | |||||
External TLAC as a % of | 9.5 | % | 18.0% | |||||
Eligible LTD3 | $ 120,983 | |||||||
Eligible LTD as a % of RWA | 9.0 | % | 32.0% | |||||
Eligible LTD as a % of | 4.5 | % | 11.0% |
1. | Required ratios are inclusive of any buffers applicable as of the date presented. |
2. | External TLAC consists of Common Equity Tier 1 capital and Additional Tier 1 capital (each excluding any noncontrolling minority interests), as well as eligible LTD. |
3. | Consists of TLAC-eligible LTD reduced by 50% for amounts of unpaid principal due to be paid in more than one year but less than two years from March 31, 2019. |
For a further discussion of TLAC and LTDrelated requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding CompanyRegulatory Capital Requirements” in the 2017 Form10-K. For discussions about the interaction between the SPOE resolution strategy and the TLAC and LTD requirements, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” and “Risk Factors—Legal, Regulatory and Compliance Risk” in the 20172018 Form10-K.
Capital Plans and Stress Tests
Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large BHCs, including us, which form part of the Federal Reserve’s annual CCAR framework.
We submitted our 20182019 Capital Plan (“Capital Plan”) andcompany-run stress test results to the Federal Reserve on April 5, 2018. On June 21, 2018,2019. We expect that the Federal Reserve published summary resultswill provide its response to our 2019 Capital Plan by June 30, 2019. There could be a range of potential outcomes to our Capital Plan whereby the Dodd-Frank Act supervisory stress tests of each large BHC, including us.Federal Reserve could object to, or otherwise require us to modify, such plan. See “Risk Factors”
![]() |
Management’s Discussion and Analysis
On June 28,in the 2018 theForm10-K. The Federal Reserve publishedis expected to publish summary results of the CCAR and we received a conditional non-objection to our Capital Plan, where the only condition was that our capital distributions not exceed the greaterDodd-Frank Act supervisory stress tests of the actual distributions we made over the previous four calendar quarters or the annualized average of actual distributions over the previous eight calendar quarters. Our 2018 Capital Plan includes the repurchase of up to $4.7 billion of outstanding common stock for the period beginning July 1, 2018 througheach large BHC, including us, by June 30, 2019, and an increase in our quarterly common stock dividend2019. We are required to $0.30 per share from the current $0.25 per share, beginning with the common stock dividend announced on July 18, 2018. The total amount of expected 2018 capital distributions is consistent with the $6.8 billion of actual dividends and gross share repurchases included in our 2017 Capital Plan. We discloseddisclose a summary of the results ofourcompany-run stress tests within 15 days of the date the Federal Reserve discloses the results of the supervisory stress tests on June 21, 2018 on our Investor Relations website.tests. In addition, we must submit the results ofour mid-cyclecompany-runmid-cycle company-run stress stress test to the Federal Reserve by October 5, 20182019 and disclose a summary of the results between October 5, 2018 and November 4, 2018.
The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), which was enacted on May 24, 2018, modifies certain aspectswithin 30 days of the stress-testing process applicable to BHCs, including us. The Federal Reserve has not yet taken actions to modify its stress-testing rules applicable to us in response to EGRRCPA, which becomes effective, in relevant part, in November 2019.
Each of our U.S. Bank Subsidiaries is also currently required to conduct an annual stress test. MSBNA and MSPBNA submitted their 2018 annualcompany-run stress tests to the OCC on April 5, 2018 and published a summary of their stress test results on June 21, 2018.
EGRRCPA also eliminates the statutory requirement for banks with less than $250 billion of total assets, which includes both of our U.S. Bank Subsidiaries, to conduct stress-testing, effective November 2019. The OCC provided guidance in July 2018 that MSPBNA, as a national bank with less than $100 billion of total consolidated assets, would be immediately exempted fromcompany-run stress-testing requirements.submission date.
For a further discussion of our capital plans and stress tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests” in the 20172018 Form10-K.
Attribution of Average Common Equity According to the Required Capital Framework
Our required capital (“Required Capital”) estimation is based on the Required Capital framework, an internal capital
adequacy measure. Common equity attribution to the business segments is based on capital usage calculated under the Required Capital framework, as well as each business segment’s relative contribution to our total Required Capital.
The Required Capital framework is a risk-based and leverageuse-of-capital measure, which is compared with our regulatory capital to ensure that we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. 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 Company common equity. We generally hold Parent Company common equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.
The estimation and attribution of common equity to the business segments are based on the fullyphased-in regulatory capital rules. The amount of capital allocated to the business segments is generally set at the beginning of each year and remains fixed throughout the year until the next annual reset unless a significant business change occurs (e.g., acquisition or disposition). DifferencesWe define the difference between available and Required Capital are attributed to Parent Companyour total average common equity duringand the year.sum of the average common equity amounts allocated to our business segments as Parent common equity. We generally hold Parent common equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.
The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory environment, for example, to incorporate changes in stress testing or enhancements to modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.
Average Common Equity Attribution1
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
$ in billions | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Institutional Securities | $ | 40.8 | $ | 40.2 | $ | 40.8 | $ | 40.2 | $ | 40.4 | $ | 40.8 | ||||||||||||
Wealth Management | 16.8 | 17.2 | 16.8 | 17.2 | 18.2 | 16.8 | ||||||||||||||||||
Investment Management | 2.6 | 2.4 | 2.6 | 2.4 | 2.5 | 2.6 | ||||||||||||||||||
Parent Company | 9.7 | 10.1 | 9.2 | 9.7 | ||||||||||||||||||||
Parent | 10.5 | 8.8 | ||||||||||||||||||||||
Total | $ | 69.9 | $ | 69.9 | $ | 69.4 | $ | 69.5 | $ | 71.6 | $ | 69.0 |
1. | Average common equity is anon-GAAP financial measure. See “SelectedNon-GAAP Financial Information” herein. |
Resolution and Recovery Planning
Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure.
![]() |
Our preferred resolution strategy which is set out in our 2017 resolution plan, is an SPOE strategy. The Parent Company has amended and restated its support agreement with its material entities, as defined in our 2017 resolution plan. Under the secured amended and restated support agreement,Currently, upon the occurrence of a resolution scenario, the Parent Company would be obligated, under a support agreement with its material entities, to contribute or loan on a subordinated basis all of its contributable material assets, other than shares in subsidiaries of the Parent Company and certain intercompany receivables, to provide capital and liquidity, as applicable, to our material entities.
The obligations of the Parent Company under the secured amended and restatedexisting support agreement are in most cases secured on a senior basis by the assets of the Parent Company (other than shares in subsidiaries of the Parent Company). As a result, claims of our material entities against the assets of the Parent Company (other than shares in subsidiaries of the Parent Company) are effectively senior to unsecured obligations of the Parent Company.
In addition, onfurther development of our SPOE strategy, we have created a wholly owned, direct subsidiary of the Parent Company, MS Holdings LLC (the “Funding IHC”), to serve as a resolution funding vehicle. We expect that, prior to the submission of our 2019 resolution plan by July 1, 2018, MSBNA and MSPBNA each submitted2019, the Parent Company will contribute certain of its assets to the FDIC a resolution planFunding IHC and enter into an updated support agreement with the Funding IHC as well as certain other subsidiaries to facilitate the execution of our SPOE strategy. The updated agreement will
March 2019 Form 10-Q | 22 |
Management’s Discussion and Analysis
obligate the Parent Company to transfer capital and liquidity to the Funding IHC, and that describes its strategy for a rapidthe Parent Company and/or the Funding IHC will recapitalize and orderly resolutionprovide liquidity to material entities in the event of itsour material financial distress or failure.
For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” and “Risk Factors—Legal, Regulatory and Compliance Risk” in the 20172018 Form10-K.
Regulatory Developments
Single-Counterparty Credit LimitsContractual Obligations
On June 14, 2018, the Federal Reserve finalized rules that establish single-counterparty credit limits (“SCCL”) for large banking organizations. U.S.G-SIBs, including us, are subject to a limit of 15% of Tier 1 capital for aggregate net credit exposures to any “major counterparty” (defined to include other U.S.G-SIBs, foreignG-SIBs, and nonbank systemically important financial institutions supervised by the Federal Reserve). In addition, we are subject to a limit of 25% of Tier 1 capital for aggregate net credit exposures to any other unaffiliated counterparty. We must comply with the final SCCL rules beginning on January 1, 2020.
Volcker Rule
The Volcker Rule prohibits “banking entities,” including us and our affiliates, from engaging in certain “proprietary trading” activities, as defined in the Volcker Rule, subject to
exemptions for underwriting, market-making activities, risk-mitigating hedging and certain other activities. The Volcker Rule also prohibits certain investments and relationships by banking entities with “covered funds,” with a number of exemptions and exclusions.
On June 5, 2018, the Federal Reserve and the other federal financial regulatory agencies responsible for the Volcker Rule’s implementing regulations released an interagency proposal that would revise certain elements of the Volcker Rule regulations. The proposed changes focus on proprietary trading, including the metrics reporting requirements and certain requirements imposed in connection with permitted market making, underwriting and risk-mitigating hedging activities, including market-making in and underwriting of covered funds. The impact of this proposal on us will not be known with certainty until final rules are issued. For more information about the Volcker Rule, see “Business—Supervision and Regulation—Activities Restrictions under the Volcker Rule” in the 2017 Form10-K.
Proposed Stress Buffer Requirements
On April 10, 2018, the Federal Reserve issued a proposal to integrate its annual capital planning and stress testing requirements with certain ongoing regulatory capital requirements. The proposal, which would apply to certain BHCs, including us, would introduce a stress capital buffer and a stress leverage buffer (collectively, “Stress Buffer Requirements”) and related changes to the capital planning and stress testing processes. Under the proposal, Stress Buffer Requirements would apply only with respect to the Standardized Approach and Tier 1 leverage regulatory capital requirements and would generally be effective on October 1, 2019.
In the Standardized Approach, the stress capital buffer would replace the existing Common Equity Tier 1 capital conservation buffer, which will be 2.5% as of January 1, 2019. The Standardized Approach stress capital buffer would equal the greater of (i) the maximum decline in our Common Equity Tier 1 capital ratio under the severely adverse scenario over the supervisory stress test measurement period, plus the sum of the ratios of the dollar amount of our planned common stock dividends to our projected RWA for each of the fourth through seventh quarters of the supervisory stress test projection period, and (ii) 2.5%. Regulatory capital requirements under the Standardized Approach would include the stress capital buffer, as summarized above, as well as our Common Equity Tier 1G-SIB capital surcharge and any applicable Common Equity Tier 1 CCyB.
Like the stress capital buffer, the stress leverage buffer would be calculated based on the results of our annual supervisory stress tests. The stress leverage buffer would equal the maximum decline in our Tier 1 leverage ratio under the severely adverse scenario, plus the sum of the ratios of the
![]() |
dollar amount of our planned common stock dividends to our projected leverage ratio denominator for each of the fourth through seventh quarters of the supervisory stress test projection period. No floor would be established for the stress leverage buffer, which would apply in addition to the current minimum Tier 1 leverage ratio of 4%.
The proposal would make related changes to capital planning and stress testing processes for BHCs subject to the Stress Buffer Requirements. In particular, the proposal would limit projected capital actions to planned common stock dividends in the fourth through seventh quarters of the supervisory stress test projection period and would assume that BHCs maintain a constant level of assets and RWA throughout the supervisory stress test projection period.
The proposal does not change regulatory capital requirements under the Advanced Approach or the SLR, although the Federal Reserve and the OCC have separately proposed to modify the enhanced SLR requirements, as summarized below. If the proposal is adopted in its current form, limitations on capital distributions and discretionary bonus payments to executive officers would be determined by the most stringent limitation, if any, as determined under the Standardized Approach or the Tier 1 leverage ratio, inclusive of Stress Buffer Requirements, or the Advanced Approach or SLR or TLAC requirements, inclusive of applicable buffers.
Proposed Modifications to the Enhanced SLR and to the SLR Applicable to Our U.S. Bank Subsidiaries
On April 11, 2018, the Federal Reserve proposed modifications to the enhanced SLR that would replace the current 2% enhanced SLR buffer applicable to U.S.G-SIBs, including us, with a leverage buffer equal to 50% of our Common Equity Tier 1G-SIB capital surcharge, which is currently 3%. Under the proposal, our enhanced SLR buffer would become 1.5%, for a total enhanced SLR requirement of 4.5%, assuming that ourG-SIB capital surcharge remains the same when the proposal becomes effective, which may be as early as 2018 under the proposal.
As part of the same proposal, the Federal Reserve and the OCC also proposed to align the well-capitalized SLR standard applicable to our U.S. Bank Subsidiaries with the proposed enhanced SLR buffer applicable to us. Under the proposal, the well-capitalized SLR requirement for our U.S. Bank Subsidiaries would change from the current 6% to 3% plus 50% of our current Common Equity Tier 1G-SIB capital surcharge, for a total well-capitalized SLR requirement of 4.5%, assuming that ourG-SIB capital surcharge remains the same when the proposal becomes effective.
Proposed Regulatory Capital Adjustments Related to Implementation of the Current Expected Credit Losses Methodology
On April 17, 2018, the U.S. banking agencies issued a proposal to revise the regulatory capital framework applicable to banking organizations, including us and our U.S. Bank Subsidiaries, to address the new accounting standard for credit losses, known as a CECL methodology. For a further discussion of CECL, see “Accounting Development Updates—Financial Instruments—Credit Losses” herein.
The proposal modifies the regulatory capital rules to identify which credit loss allowances under the new accounting standard are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in, over a three-year period, the adverse effects on regulatory capital that may result from the adoption of the new accounting standard. The proposal requires a banking organization that has adopted a CECL methodology to include the provision for credit losses beginning in the 2020 stress test cycle.
U.S. Department of Labor Conflict of Interest Rule and SEC Standards of Conduct for Investment Professionals
The U.S. DOL’s final Conflict of Interest Rule under ERISA went into effect on June 9, 2017. On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit vacated the Conflict of Interest Rule and accompanying exemptions in their entirety. On June 22, 2018, the Court issued the mandate that makes effective its decision to vacate the rule.
On April 18, 2018, the SEC released for public comment a package of proposed rulemaking on the standards of conduct and required disclosures for broker-dealers and investment advisers. One of the proposals, entitled “Regulation Best Interest,” would require broker-dealers to act in the “best interest” of retail customers at the time a recommendation is made without placing the financial or other interests of the broker-dealer ahead of the interest of the retail customer. Additionally, the SEC proposed a new requirement for both broker-dealers and investment advisers to provide a brief relationship summary to retail investors with information intended to clarify the relationship between the parties. Finally, the SEC issued a proposed interpretation regarding the fiduciary duty that investment advisers owe their clients.
U.K. Withdrawal from the E.U.
Following the U.K. electorate vote to leave the E.U., the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017, which triggered atwo-year period, subject to extension (which would need the unanimous approval of the E.U. Member States), during which the U.K. government has been
![]() |
negotiating its withdrawal agreement with the E.U. For further discussion of the potential impact of the U.K.’s withdrawal from the E.U. on our operations, see “Risk Factors—International Risk” in the 2017 Form10-K. For further information regarding our exposure to the U.K., see also “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Country Risk Exposure.”
Expected Replacement of London Interbank Offered Rate
Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR based on observable market transactions. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next few years. The U.K. Financial Conduct Authority (“FCA”), which regulates LIBOR, has announced that it has commitments from panel banks to continue to contribute to LIBOR through the end of 2021, but that it will not use its powers to compel contributions beyond such date. Accordingly, there is considerable uncertainty regarding the publication of such rates beyond 2021.
On April 3, 2018, the Federal Reserve Bank of New York commenced publication of three reference rates based on overnight U.S. Treasury repurchase agreement transactions, including the Secured Overnight Financing Rate (“SOFR”), which has been recommended as an alternative to U.S. dollar LIBOR by the Alternative Reference Rates Committee. Further, the Bank of England has commenced publication of a reformed Sterling Overnight Index Average (“reformed SONIA”), comprised of a broader set of overnight Sterling money market transactions, as of April 23, 2018. Reformed SONIA has been recommended as the alternative to Sterling LIBOR by the Working Group on Sterling Risk-Free Reference Rates.
Although the full impact of such reforms and actions, together with any transition away from LIBOR, including the potential or actual discontinuance of LIBOR publication, remains unclear, these changes may have an adverse impact on the value of, return on and trading markets for a broad array of financial products, including any LIBOR-based securities, loans and derivatives that are included in our
financial assets and liabilities. Such reforms and actions may also require extensive changes to the contracts that govern these LIBOR-based products, as well as our systems and processes.
Effects of Inflation and Changes in Interest and Foreign Exchange Rates
For a discussion of the effects of inflation and changes in interest and foreign exchange rates onabout our business and financial results and strategies to mitigate potential exposures,contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Effects of Inflation and Changes in Interest and Foreign Exchange Rates”Contractual Obligations” in the 20172018 Form10-K.
Off-Balance Sheet Arrangements and Contractual ObligationsRegulatory Requirements
Off-Balance Sheet ArrangementsRegulatory Capital Framework
We enter into variousoff-balance sheet arrangements,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 through unconsolidated SPEs“well-capitalized” standards, and lending-related financial instruments (e.g., guaranteesevaluates our compliance with such capital requirements. The OCC establishes similar capital requirements and commitments), primarilystandards for our U.S. Bank Subsidiaries. For us to remain an FHC, we must remain well-capitalized in connectionaccordance with standards established by the Institutional SecuritiesFederal Reserve and Investment Management business segments.
We utilize SPEs primarilyour U.S. Bank Subsidiaries must remain well-capitalized in connectionaccordance with securitization activities.standards established by the OCC. For additional information on regulatory capital requirements for our securitization activities,U.S. Bank Subsidiaries, see Note 1213 to the financial statements.
Regulatory capital requirements established by the Federal Reserve are largely based on the Basel III capital standards established by the Basel Committee and also implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).
Regulatory Capital Requirements
We are required to maintain minimum risk-based capital, leverage-based capital and total loss-absorbing capacity (“TLAC”) ratios. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Capital Requirements” in the 2018 Form10-K. For additional information on our commitments, obligations underTLAC, see Total Loss-Absorbing Capacity herein.
Risk-Based Regulatory Capital.Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 capital). Certain adjustments to and deductions from capital are required for purposes of determining these ratios, such as goodwill, intangible assets, certain guarantee arrangementsdeferred tax assets, other amounts in AOCI and indemnities, see Note 11investments in the capital instruments of unconsolidated financial institutions.
In addition to the financial statements. For further informationminimum risk-based capital ratio requirements, we are subject to the following buffers in 2019:
A greater than 2.5% Common Equity Tier 1 capital conservation buffer;
The Common Equity Tier 1G-SIB capital surcharge, currently at 3%; and
Up to a 2.5% Common Equity Tier 1 CCyB, currently set by U.S. banking agencies at zero.
In 2018, each of these buffers was 75% of the fullyphased-in 2019 requirement noted above. Failure to maintain the buffers would result in restrictions on our lending commitments,ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. For a further discussion of theG-SIB capital surcharge, see “Quantitative“Management’s Discussion and Qualitative DisclosuresAnalysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—RegulatoryRequirements—G-SIB Capital Surcharge” in the 2018 Form10-K.
Our risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWA (“Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWA (“Advanced Approach”). The credit risk RWA calculations between the two approaches differ in that the Standardized Approach requires calculation of RWA using prescribed risk weights, whereas the Advanced Approach utilizes models to calculate exposure amounts and risk weights. At March 31, 2019 and December 31, 2018, our ratios for determining regulatory compliance are based on the Standardized Approach rules.
Leverage-Based Regulatory Capital. Minimum leverage-based capital requirements include a Tier 1 leverage ratio and an SLR. We are required to maintain a Tier 1 SLR of 5%, inclusive of an enhanced SLR capital buffer of at least 2% in order to avoid potential limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers.
19 | March 2019 Form 10-Q |
Management’s Discussion and Analysis
Regulatory Capital Ratios
At March 31, 2019 | ||||||||||||
$ in millions | Required Ratio1 | Standardized | Advanced | |||||||||
Risk-based capital | ||||||||||||
Common Equity Tier 1 capital | $ | 63,344 | $ | 63,344 | ||||||||
Tier 1 capital | 71,910 | 71,910 | ||||||||||
Total capital | 81,570 | 81,284 | ||||||||||
Total RWA | 378,420 | 366,353 | ||||||||||
Common Equity Tier 1 capital ratio | 10.0% | 16.7% | 17.3% | |||||||||
Tier 1 capital ratio | 11.5% | 19.0% | 19.6% | |||||||||
Total capital ratio | 13.5% | 21.6% | 22.2% | |||||||||
Leverage-based capital | ||||||||||||
Adjusted average assets2 | $ | 855,192 | N/A | |||||||||
Tier 1 leverage ratio | 4.0% | 8.4% | N/A | |||||||||
Supplementary leverage exposure3 | N/A | $ | 1,104,264 | |||||||||
SLR | 5.0% | N/A | 6.5% |
At December 31, 2018 | ||||||||||||
$ in millions | Required Ratio1 | Standardized | Advanced | |||||||||
Risk-based capital | ||||||||||||
Common Equity Tier 1 capital | $ | 62,086 | $ | 62,086 | ||||||||
Tier 1 capital | 70,619 | 70,619 | ||||||||||
Total capital | 80,052 | 79,814 | ||||||||||
Total RWA | 367,309 | 363,054 | ||||||||||
Common Equity Tier 1 capital ratio | 8.6% | 16.9% | 17.1% | |||||||||
Tier 1 capital ratio | 10.1% | 19.2% | 19.5% | |||||||||
Total capital ratio | 12.1% | 21.8% | 22.0% | |||||||||
Leverage-based capital | ||||||||||||
Adjusted average assets2 | $ | 843,074 | N/A | |||||||||
Tier 1 leverage ratio | 4.0% | 8.4% | N/A | |||||||||
Supplementary leverage exposure3 | N/A | $ | 1,092,672 | |||||||||
SLR | 5.0% | N/A | 6.5% |
1. | Required ratios are inclusive of any buffers applicable as of the date presented. For 2018, the minimum required regulatory capital ratios for risk-based capital are under the transitional rules. |
2. | Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is composed of the average daily balance of consolidatedon-balance sheet assets under U.S. GAAP during the quarters ended March 31, 2019 and December 31, 2018, adjusted for disallowed goodwill, intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other capital deductions. |
3. | Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily (i) potential future exposure for derivative exposures,gross-up for cash collateral netting where qualifying criteria are not met, and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount foroff-balance sheet exposures. |
Regulatory Capital
$ in millions | At March 31, 2019 | At December 31, 2018 | Change | |||||||||
Common Equity Tier 1 capital | ||||||||||||
Common stock and surplus | $ | 8,616 | $ | 9,843 | $ | (1,227 | ) | |||||
Retained earnings | 66,061 | 64,175 | 1,886 | |||||||||
AOCI | (2,473 | ) | (2,292 | ) | (181 | ) | ||||||
Regulatory adjustments and deductions: | ||||||||||||
Net goodwill | (6,655 | ) | (6,661 | ) | 6 | |||||||
Net intangible assets (other than goodwill and mortgage servicing assets) | (2,084 | ) | (2,158 | ) | 74 | |||||||
Other adjustments and deductions1 | (121 | ) | (821 | ) | 700 | |||||||
Total Common Equity Tier 1 capital | $ | 63,344 | $ | 62,086 | $ | 1,258 | ||||||
Additional Tier 1 capital | ||||||||||||
Preferred stock | $ | 8,520 | $ | 8,520 | $ | — | ||||||
Noncontrolling interests | 475 | 454 | 21 | |||||||||
Additional Tier 1 capital | $ | 8,995 | $ | 8,974 | $ | 21 | ||||||
Deduction for investments in covered funds | (429 | ) | (441 | ) | 12 | |||||||
Total Tier 1 capital | $ | 71,910 | $ | 70,619 | $ | 1,291 | ||||||
Standardized Tier 2 capital | ||||||||||||
Subordinated debt | $ | 9,087 | $ | 8,923 | $ | 164 | ||||||
Noncontrolling interests | 112 | 107 | 5 | |||||||||
Eligible allowance for credit losses | 470 | 440 | 30 | |||||||||
Other adjustments and deductions | (9 | ) | (37 | ) | 28 | |||||||
Total Standardized Tier 2 capital | $ | 9,660 | $ | 9,433 | $ | 227 | ||||||
Total Standardized capital | $ | 81,570 | $ | 80,052 | $ | 1,518 | ||||||
Advanced Tier 2 capital | ||||||||||||
Subordinated debt | $ | 9,087 | $ | 8,923 | $ | 164 | ||||||
Noncontrolling interests | 112 | 107 | 5 | |||||||||
Eligible credit reserves | 184 | 202 | (18 | ) | ||||||||
Other adjustments and deductions | (9 | ) | (37 | ) | 28 | |||||||
Total Advanced Tier 2 capital | $ | 9,374 | $ | 9,195 | $ | 179 | ||||||
Total Advanced capital | $ | 81,284 | $ | 79,814 | $ | 1,470 |
1. | Other adjustments and deductions used in the calculation of Common Equity Tier 1 capital include credit spread premium over risk-free rate for derivative liabilities, net deferred tax assets, netafter-tax DVA and other netafter-tax adjustments related to AOCI. |
March 2019 Form 10-Q | 20 |
Management’s Discussion and Analysis
RWA Rollforward
At March 31, 20191 | ||||||||
$ in millions | Standardized | Advanced | ||||||
Credit risk RWA | ||||||||
Balance at December 31, 2018 | $ | 305,531 | $ | 190,595 | ||||
Change related to the following items: | ||||||||
Derivatives | 2,095 | 7,246 | ||||||
Securities financing transactions | 8,269 | 2,353 | ||||||
Securitizations | 358 | 402 | ||||||
Investment securities | 1,503 | 2,616 | ||||||
Commitments, guarantees and loans | 2,067 | 1,648 | ||||||
Cash | (610 | ) | (361 | ) | ||||
Equity investments | 369 | 390 | ||||||
Other credit risk2 | 4,105 | 4,263 | ||||||
Total change in credit risk RWA | $ | 18,156 | $ | 18,557 | ||||
Balance at March 31, 2019 | $ | 323,687 | $ | 209,152 | ||||
Market risk RWA | ||||||||
Balance at December 31, 2018 | $ | 61,778 | $ | 61,857 | ||||
Change related to the following items: | ||||||||
Regulatory VaR | (610 | ) | (610 | ) | ||||
Regulatory stressed VaR | (2,934 | ) | (2,934 | ) | ||||
Incremental risk charge | (4,980 | ) | (4,980 | ) | ||||
Comprehensive risk measure | 96 | 55 | ||||||
Specific risk: | ||||||||
Non-securitizations | 1,141 | 1,141 | ||||||
Securitizations | 242 | 242 | ||||||
Total change in market risk RWA | $ | (7,045 | ) | $ | (7,086 | ) | ||
Balance at March 31, 2019 | $ | 54,733 | �� | $ | 54,771 | |||
Operational risk RWA | ||||||||
Balance at December 31, 2018 | N/A | $ | 110,602 | |||||
Change in operational risk RWA | N/A | (8,172 | ) | |||||
Balance at March 31, 2019 | N/A | $ | 102,430 | |||||
Total RWA | $ | 378,420 | $ | 366,353 |
Regulatory | VaR—VaR for regulatory capital requirements |
1. | The RWA for each category reflects bothon- andoff-balance sheet exposures, where appropriate. |
2. | Amount reflects assets not in a defined category,non-material portfolios of exposures and unsettled transactions, as applicable. |
Credit risk RWA increased in the current quarter under the Standardized and Advanced Approaches primarily due to increased exposures in Securities financing transactions and Derivatives, and an increase in Other credit risk mainly driven by the Firm’s adoption of theLeases accounting update on January 1, 2019. Under the Advanced Approach, the increased derivatives exposure also led to increased RWA related to CVA.
Market risk RWA decreased in the current quarter under the Standardized and Advanced Approaches primarily due to a decrease in the Incremental risk charge driven by reduced exposures and improved hedging in credit products.
The decrease in operational risk RWA under the Advanced Approach in the current quarter reflects a continued reduction in the magnitude of internal losses utilized in the operational risk capital model related to litigation.
Total Loss-Absorbing Capacity. The Federal Reserve has established external TLAC, long-term debt (“LTD”) and clean holding company requirements fortop-tier BHCs of U.S.G-SIBs (“covered BHCs”), including the Parent Company. These requirements include various definitions and restrictions, such as requiring eligible LTD to be issued by the covered BHC and be unsecured, have a maturity of one year or more from the date of issuance and not have certain derivative-linked features typically associated with certain types of structured notes. A covered BHC is required to maintain minimum levels of external TLAC and eligible LTD, as well as certain TLAC buffer requirements. Failure to maintain the TLAC buffers would result in restrictions on capital distributions and discretionary bonus payments to executive officers.
Required and Actual TLAC and Eligible LTD Ratios
At March 31, 2019 | ||||||||
$ in millions | Required Ratio1 | Actual Amount/Ratio | ||||||
Total Loss-Absorbing Capacity | ||||||||
External TLAC2 | $ 198,965 | |||||||
External TLAC as a % of RWA | 21.5 | % | 52.6% | |||||
External TLAC as a % of | 9.5 | % | 18.0% | |||||
Eligible LTD3 | $ 120,983 | |||||||
Eligible LTD as a % of RWA | 9.0 | % | 32.0% | |||||
Eligible LTD as a % of | 4.5 | % | 11.0% |
1. | Required ratios are inclusive of any buffers applicable as of the date presented. |
2. | External TLAC consists of Common Equity Tier 1 capital and Additional Tier 1 capital (each excluding any noncontrolling minority interests), as well as eligible LTD. |
3. | Consists of TLAC-eligible LTD reduced by 50% for amounts of unpaid principal due to be paid in more than one year but less than two years from March 31, 2019. |
For a further discussion of TLAC and related requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Requirements” in the 2018 Form10-K.
Capital Plans and Stress Tests
Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large BHCs, including us, which form part of the Federal Reserve’s annual CCAR framework.
We submitted our 2019 Capital Plan (“Capital Plan”) andcompany-run stress test results to the Federal Reserve on April 5, 2019. We expect that the Federal Reserve will provide its response to our 2019 Capital Plan by June 30, 2019. There could be a range of potential outcomes to our Capital Plan whereby the Federal Reserve could object to, or otherwise require us to modify, such plan. See “Risk Factors”
21 | March 2019 Form 10-Q |
Management’s Discussion and Analysis
in the 2018 Form10-K. The Federal Reserve is expected to publish summary results of the CCAR and Dodd-Frank Act supervisory stress tests of each large BHC, including us, by June 30, 2019. We are required to disclose a summary of the results ofour company-run stress tests within 15 days of the date the Federal Reserve discloses the results of the supervisory stress tests. In addition, we must submit the results ofour mid-cycle company-run stress test to the Federal Reserve by October 5, 2019 and disclose a summary of the results within 30 days of the submission date.
For a further discussion of our capital plans and stress tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests” in the 2018 Form10-K.
Attribution of Average Common Equity According to the Required Capital Framework
Our required capital (“Required Capital”) estimation is based on the Required Capital framework, an internal capital adequacy measure. Common equity attribution to the business segments is based on capital usage calculated under the Required Capital framework, as well as each business segment’s relative contribution to our total Required Capital.
The Required Capital framework is a risk-based and leverageuse-of-capital measure, which is compared with our regulatory capital to ensure that we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. The amount of capital allocated to the business segments is generally set at the beginning of each year and remains fixed throughout the year until the next annual reset unless a significant business change occurs (e.g., acquisition or disposition). We define the difference between our total average common equity and the sum of the average common equity amounts allocated to our business segments as Parent common equity. We generally hold Parent common equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.
The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory environment, for example, to incorporate changes in stress testing or enhancements to modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.
Average Common Equity Attribution1
Three Months Ended March 31, | ||||||||
$ in billions | 2019 | 2018 | ||||||
Institutional Securities | $ | 40.4 | $ | 40.8 | ||||
Wealth Management | 18.2 | 16.8 | ||||||
Investment Management | 2.5 | 2.6 | ||||||
Parent | 10.5 | 8.8 | ||||||
Total | $ | 71.6 | $ | 69.0 |
1. | Average common equity is anon-GAAP financial measure. See “SelectedNon-GAAP Financial Information” herein. |
Resolution and Recovery Planning
Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure.
Our preferred resolution strategy is an SPOE strategy. Currently, upon the occurrence of a resolution scenario, the Parent Company would be obligated, under a support agreement with its material entities, to contribute or loan on a subordinated basis all of its contributable material assets, other than shares in subsidiaries of the Parent Company and certain intercompany receivables, to provide capital and liquidity, as applicable, to our material entities.
The obligations of the Parent Company under the existing support agreement are in most cases secured on a senior basis by the assets of the Parent Company (other than shares in subsidiaries of the Parent Company). As a result, claims of our material entities against the assets of the Parent Company (other than shares in subsidiaries of the Parent Company) are effectively senior to unsecured obligations of the Parent Company.
In further development of our SPOE strategy, we have created a wholly owned, direct subsidiary of the Parent Company, MS Holdings LLC (the “Funding IHC”), to serve as a resolution funding vehicle. We expect that, prior to the submission of our 2019 resolution plan by July 1, 2019, the Parent Company will contribute certain of its assets to the Funding IHC and enter into an updated support agreement with the Funding IHC as well as certain other subsidiaries to facilitate the execution of our SPOE strategy. The updated agreement will
March 2019 Form 10-Q | 22 |
Management’s Discussion and Analysis
obligate the Parent Company to transfer capital and liquidity to the Funding IHC, and that the Parent Company and/or the Funding IHC will recapitalize and provide liquidity to material entities in the event of our material financial distress or failure.
For more information about Market Risk—Risk Management—Credit Risk—Lending Activities Includedresolution and recovery planning requirements and our activities in Loansthese areas, including the implications of such activities in a resolution scenario, see “Business—Supervision and Trading Assets.”Regulation—Financial Holding Company—Resolution and Recovery Planning” and “Risk Factors—Legal, Regulatory and Compliance Risk” in the 2018 Form10-K.
Contractual Obligations
For a discussion about our contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations” in the 2018 Form10-K.
Regulatory Capital Framework
We are an FHC under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and are subject to the regulation and oversight of the Federal Reserve. The Federal Reserve establishes capital requirements for us, including “well-capitalized” standards, and evaluates our compliance with such capital requirements. The OCC establishes similar capital requirements and standards for our U.S. Bank Subsidiaries. For us to remain an FHC, we must remain well-capitalized in accordance with standards established by the Federal Reserve and our U.S. Bank Subsidiaries must remain well-capitalized in accordance with standards established by the OCC. For additional information on regulatory capital requirements for our U.S. Bank Subsidiaries, see Note 13 to the financial statements.
Regulatory capital requirements established by the Federal Reserve are largely based on the Basel III capital standards established by the Basel Committee and also implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).
Regulatory Capital Requirements
We are required to maintain minimum risk-based capital, leverage-based capital and total loss-absorbing capacity (“TLAC”) ratios. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Capital Requirements” in the 2018 Form10-K. For additional information on TLAC, see Total Loss-Absorbing Capacity herein.
Risk-Based Regulatory Capital.Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 capital). Certain adjustments to and deductions from capital are required for purposes of determining these ratios, such as goodwill, intangible assets, certain deferred tax assets, other amounts in AOCI and investments in the capital instruments of unconsolidated financial institutions.
In addition to the minimum risk-based capital ratio requirements, we are subject to the following buffers in 2019:
A greater than 2.5% Common Equity Tier 1 capital conservation buffer;
The Common Equity Tier 1G-SIB capital surcharge, currently at 3%; and
Up to a 2.5% Common Equity Tier 1 CCyB, currently set by U.S. banking agencies at zero.
In 2018, each of these buffers was 75% of the fullyphased-in 2019 requirement noted above. Failure to maintain the buffers would result in restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. For a further discussion of theG-SIB capital surcharge, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—RegulatoryRequirements—G-SIB Capital Surcharge” in the 2018 Form10-K.
Our risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWA (“Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWA (“Advanced Approach”). The credit risk RWA calculations between the two approaches differ in that the Standardized Approach requires calculation of RWA using prescribed risk weights, whereas the Advanced Approach utilizes models to calculate exposure amounts and risk weights. At March 31, 2019 and December 31, 2018, our ratios for determining regulatory compliance are based on the Standardized Approach rules.
Leverage-Based Regulatory Capital. Minimum leverage-based capital requirements include a Tier 1 leverage ratio and an SLR. We are required to maintain a Tier 1 SLR of 5%, inclusive of an enhanced SLR capital buffer of at least 2% in order to avoid potential limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers.
19 | March 2019 Form 10-Q |
Management’s Discussion and Analysis
Regulatory Capital Ratios
At March 31, 2019 | ||||||||||||
$ in millions | Required Ratio1 | Standardized | Advanced | |||||||||
Risk-based capital | ||||||||||||
Common Equity Tier 1 capital | $ | 63,344 | $ | 63,344 | ||||||||
Tier 1 capital | 71,910 | 71,910 | ||||||||||
Total capital | 81,570 | 81,284 | ||||||||||
Total RWA | 378,420 | 366,353 | ||||||||||
Common Equity Tier 1 capital ratio | 10.0% | 16.7% | 17.3% | |||||||||
Tier 1 capital ratio | 11.5% | 19.0% | 19.6% | |||||||||
Total capital ratio | 13.5% | 21.6% | 22.2% | |||||||||
Leverage-based capital | ||||||||||||
Adjusted average assets2 | $ | 855,192 | N/A | |||||||||
Tier 1 leverage ratio | 4.0% | 8.4% | N/A | |||||||||
Supplementary leverage exposure3 | N/A | $ | 1,104,264 | |||||||||
SLR | 5.0% | N/A | 6.5% |
At December 31, 2018 | ||||||||||||
$ in millions | Required Ratio1 | Standardized | Advanced | |||||||||
Risk-based capital | ||||||||||||
Common Equity Tier 1 capital | $ | 62,086 | $ | 62,086 | ||||||||
Tier 1 capital | 70,619 | 70,619 | ||||||||||
Total capital | 80,052 | 79,814 | ||||||||||
Total RWA | 367,309 | 363,054 | ||||||||||
Common Equity Tier 1 capital ratio | 8.6% | 16.9% | 17.1% | |||||||||
Tier 1 capital ratio | 10.1% | 19.2% | 19.5% | |||||||||
Total capital ratio | 12.1% | 21.8% | 22.0% | |||||||||
Leverage-based capital | ||||||||||||
Adjusted average assets2 | $ | 843,074 | N/A | |||||||||
Tier 1 leverage ratio | 4.0% | 8.4% | N/A | |||||||||
Supplementary leverage exposure3 | N/A | $ | 1,092,672 | |||||||||
SLR | 5.0% | N/A | 6.5% |
1. | Required ratios are inclusive of any buffers applicable as of the date presented. For 2018, the minimum required regulatory capital ratios for risk-based capital are under the transitional rules. |
2. | Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is composed of the average daily balance of consolidatedon-balance sheet assets under U.S. GAAP during the quarters ended March 31, 2019 and December 31, 2018, adjusted for disallowed goodwill, intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other capital deductions. |
3. | Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily (i) potential future exposure for derivative exposures,gross-up for cash collateral netting where qualifying criteria are not met, and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount foroff-balance sheet exposures. |
Regulatory Capital
$ in millions | At March 31, 2019 | At December 31, 2018 | Change | |||||||||
Common Equity Tier 1 capital | ||||||||||||
Common stock and surplus | $ | 8,616 | $ | 9,843 | $ | (1,227 | ) | |||||
Retained earnings | 66,061 | 64,175 | 1,886 | |||||||||
AOCI | (2,473 | ) | (2,292 | ) | (181 | ) | ||||||
Regulatory adjustments and deductions: | ||||||||||||
Net goodwill | (6,655 | ) | (6,661 | ) | 6 | |||||||
Net intangible assets (other than goodwill and mortgage servicing assets) | (2,084 | ) | (2,158 | ) | 74 | |||||||
Other adjustments and deductions1 | (121 | ) | (821 | ) | 700 | |||||||
Total Common Equity Tier 1 capital | $ | 63,344 | $ | 62,086 | $ | 1,258 | ||||||
Additional Tier 1 capital | ||||||||||||
Preferred stock | $ | 8,520 | $ | 8,520 | $ | — | ||||||
Noncontrolling interests | 475 | 454 | 21 | |||||||||
Additional Tier 1 capital | $ | 8,995 | $ | 8,974 | $ | 21 | ||||||
Deduction for investments in covered funds | (429 | ) | (441 | ) | 12 | |||||||
Total Tier 1 capital | $ | 71,910 | $ | 70,619 | $ | 1,291 | ||||||
Standardized Tier 2 capital | ||||||||||||
Subordinated debt | $ | 9,087 | $ | 8,923 | $ | 164 | ||||||
Noncontrolling interests | 112 | 107 | 5 | |||||||||
Eligible allowance for credit losses | 470 | 440 | 30 | |||||||||
Other adjustments and deductions | (9 | ) | (37 | ) | 28 | |||||||
Total Standardized Tier 2 capital | $ | 9,660 | $ | 9,433 | $ | 227 | ||||||
Total Standardized capital | $ | 81,570 | $ | 80,052 | $ | 1,518 | ||||||
Advanced Tier 2 capital | ||||||||||||
Subordinated debt | $ | 9,087 | $ | 8,923 | $ | 164 | ||||||
Noncontrolling interests | 112 | 107 | 5 | |||||||||
Eligible credit reserves | 184 | 202 | (18 | ) | ||||||||
Other adjustments and deductions | (9 | ) | (37 | ) | 28 | |||||||
Total Advanced Tier 2 capital | $ | 9,374 | $ | 9,195 | $ | 179 | ||||||
Total Advanced capital | $ | 81,284 | $ | 79,814 | $ | 1,470 |
1. | Other adjustments and deductions used in the calculation of Common Equity Tier 1 capital include credit spread premium over risk-free rate for derivative liabilities, net deferred tax assets, netafter-tax DVA and other netafter-tax adjustments related to AOCI. |
March 2019 Form 10-Q | 20 |
Management’s Discussion and Analysis
RWA Rollforward
At March 31, 20191 | ||||||||
$ in millions | Standardized | Advanced | ||||||
Credit risk RWA | ||||||||
Balance at December 31, 2018 | $ | 305,531 | $ | 190,595 | ||||
Change related to the following items: | ||||||||
Derivatives | 2,095 | 7,246 | ||||||
Securities financing transactions | 8,269 | 2,353 | ||||||
Securitizations | 358 | 402 | ||||||
Investment securities | 1,503 | 2,616 | ||||||
Commitments, guarantees and loans | 2,067 | 1,648 | ||||||
Cash | (610 | ) | (361 | ) | ||||
Equity investments | 369 | 390 | ||||||
Other credit risk2 | 4,105 | 4,263 | ||||||
Total change in credit risk RWA | $ | 18,156 | $ | 18,557 | ||||
Balance at March 31, 2019 | $ | 323,687 | $ | 209,152 | ||||
Market risk RWA | ||||||||
Balance at December 31, 2018 | $ | 61,778 | $ | 61,857 | ||||
Change related to the following items: | ||||||||
Regulatory VaR | (610 | ) | (610 | ) | ||||
Regulatory stressed VaR | (2,934 | ) | (2,934 | ) | ||||
Incremental risk charge | (4,980 | ) | (4,980 | ) | ||||
Comprehensive risk measure | 96 | 55 | ||||||
Specific risk: | ||||||||
Non-securitizations | 1,141 | 1,141 | ||||||
Securitizations | 242 | 242 | ||||||
Total change in market risk RWA | $ | (7,045 | ) | $ | (7,086 | ) | ||
Balance at March 31, 2019 | $ | 54,733 | �� | $ | 54,771 | |||
Operational risk RWA | ||||||||
Balance at December 31, 2018 | N/A | $ | 110,602 | |||||
Change in operational risk RWA | N/A | (8,172 | ) | |||||
Balance at March 31, 2019 | N/A | $ | 102,430 | |||||
Total RWA | $ | 378,420 | $ | 366,353 |
Regulatory | VaR—VaR for regulatory capital requirements |
1. | The RWA for each category reflects bothon- andoff-balance sheet exposures, where appropriate. |
2. | Amount reflects assets not in a defined category,non-material portfolios of exposures and unsettled transactions, as applicable. |
Credit risk RWA increased in the current quarter under the Standardized and Advanced Approaches primarily due to increased exposures in Securities financing transactions and Derivatives, and an increase in Other credit risk mainly driven by the Firm’s adoption of theLeases accounting update on January 1, 2019. Under the Advanced Approach, the increased derivatives exposure also led to increased RWA related to CVA.
Market risk RWA decreased in the current quarter under the Standardized and Advanced Approaches primarily due to a decrease in the Incremental risk charge driven by reduced exposures and improved hedging in credit products.
The decrease in operational risk RWA under the Advanced Approach in the current quarter reflects a continued reduction in the magnitude of internal losses utilized in the operational risk capital model related to litigation.
Total Loss-Absorbing Capacity. The Federal Reserve has established external TLAC, long-term debt (“LTD”) and clean holding company requirements fortop-tier BHCs of U.S.G-SIBs (“covered BHCs”), including the Parent Company. These requirements include various definitions and restrictions, such as requiring eligible LTD to be issued by the covered BHC and be unsecured, have a maturity of one year or more from the date of issuance and not have certain derivative-linked features typically associated with certain types of structured notes. A covered BHC is required to maintain minimum levels of external TLAC and eligible LTD, as well as certain TLAC buffer requirements. Failure to maintain the TLAC buffers would result in restrictions on capital distributions and discretionary bonus payments to executive officers.
Required and Actual TLAC and Eligible LTD Ratios
At March 31, 2019 | ||||||||
$ in millions | Required Ratio1 | Actual Amount/Ratio | ||||||
Total Loss-Absorbing Capacity | ||||||||
External TLAC2 | $ 198,965 | |||||||
External TLAC as a % of RWA | 21.5 | % | 52.6% | |||||
External TLAC as a % of | 9.5 | % | 18.0% | |||||
Eligible LTD3 | $ 120,983 | |||||||
Eligible LTD as a % of RWA | 9.0 | % | 32.0% | |||||
Eligible LTD as a % of | 4.5 | % | 11.0% |
1. | Required ratios are inclusive of any buffers applicable as of the date presented. |
2. | External TLAC consists of Common Equity Tier 1 capital and Additional Tier 1 capital (each excluding any noncontrolling minority interests), as well as eligible LTD. |
3. | Consists of TLAC-eligible LTD reduced by 50% for amounts of unpaid principal due to be paid in more than one year but less than two years from March 31, 2019. |
For a further discussion of TLAC and related requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Requirements” in the 2018 Form10-K.
Capital Plans and Stress Tests
Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large BHCs, including us, which form part of the Federal Reserve’s annual CCAR framework.
We submitted our 2019 Capital Plan (“Capital Plan”) andcompany-run stress test results to the Federal Reserve on April 5, 2019. We expect that the Federal Reserve will provide its response to our 2019 Capital Plan by June 30, 2019. There could be a range of potential outcomes to our Capital Plan whereby the Federal Reserve could object to, or otherwise require us to modify, such plan. See “Risk Factors”
21 | March 2019 Form 10-Q |
Management’s Discussion and Analysis
in the 2018 Form10-K. The Federal Reserve is expected to publish summary results of the CCAR and Dodd-Frank Act supervisory stress tests of each large BHC, including us, by June 30, 2019. We are required to disclose a summary of the results ofour company-run stress tests within 15 days of the date the Federal Reserve discloses the results of the supervisory stress tests. In addition, we must submit the results ofour mid-cycle company-run stress test to the Federal Reserve by October 5, 2019 and disclose a summary of the results within 30 days of the submission date.
For a further discussion of our capital plans and stress tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests” in the 2018 Form10-K.
Attribution of Average Common Equity According to the Required Capital Framework
Our required capital (“Required Capital”) estimation is based on the Required Capital framework, an internal capital adequacy measure. Common equity attribution to the business segments is based on capital usage calculated under the Required Capital framework, as well as each business segment’s relative contribution to our total Required Capital.
The Required Capital framework is a risk-based and leverageuse-of-capital measure, which is compared with our regulatory capital to ensure that we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. The amount of capital allocated to the business segments is generally set at the beginning of each year and remains fixed throughout the year until the next annual reset unless a significant business change occurs (e.g., acquisition or disposition). We define the difference between our total average common equity and the sum of the average common equity amounts allocated to our business segments as Parent common equity. We generally hold Parent common equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.
The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory environment, for example, to incorporate changes in stress testing or enhancements to modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.
Average Common Equity Attribution1
Three Months Ended March 31, | ||||||||
$ in billions | 2019 | 2018 | ||||||
Institutional Securities | $ | 40.4 | $ | 40.8 | ||||
Wealth Management | 18.2 | 16.8 | ||||||
Investment Management | 2.5 | 2.6 | ||||||
Parent | 10.5 | 8.8 | ||||||
Total | $ | 71.6 | $ | 69.0 |
1. | Average common equity is anon-GAAP financial measure. See “SelectedNon-GAAP Financial Information” herein. |
Resolution and Recovery Planning
Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure.
Our preferred resolution strategy is an SPOE strategy. Currently, upon the occurrence of a resolution scenario, the Parent Company would be obligated, under a support agreement with its material entities, to contribute or loan on a subordinated basis all of its contributable material assets, other than shares in subsidiaries of the Parent Company and certain intercompany receivables, to provide capital and liquidity, as applicable, to our material entities.
The obligations of the Parent Company under the existing support agreement are in most cases secured on a senior basis by the assets of the Parent Company (other than shares in subsidiaries of the Parent Company). As a result, claims of our material entities against the assets of the Parent Company (other than shares in subsidiaries of the Parent Company) are effectively senior to unsecured obligations of the Parent Company.
In further development of our SPOE strategy, we have created a wholly owned, direct subsidiary of the Parent Company, MS Holdings LLC (the “Funding IHC”), to serve as a resolution funding vehicle. We expect that, prior to the submission of our 2019 resolution plan by July 1, 2019, the Parent Company will contribute certain of its assets to the Funding IHC and enter into an updated support agreement with the Funding IHC as well as certain other subsidiaries to facilitate the execution of our SPOE strategy. The updated agreement will
March 2019 Form 10-Q | 22 |
Management’s Discussion and Analysis
obligate the Parent Company to transfer capital and liquidity to the Funding IHC, and that the Parent Company and/or the Funding IHC will recapitalize and provide liquidity to material entities in the event of our material financial distress or failure.
For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” and “Risk Factors—Legal, Regulatory and Compliance Risk” in the 2018 Form10-K.
Regulatory Developments
Proposed Revisions to the Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments Issued byG-SIBs
The Federal Reserve, the OCC and the FDIC have issued a proposed rule that would, among other things, modify the regulatory capital framework for Advanced Approach banking organizations, including us. Such firms would be required to make certain deductions from regulatory capital for their investments in certain unsecured debt instruments (including eligible LTD in the TLAC framework) issued by the Parent Company and other G-SIBs.
Proposed Revisions to Resolution Planning Requirements
The Federal Reserve and the FDIC have issued a proposed rule that would change our resolution planning obligations under the Dodd-Frank Act. The proposed rule would require us to file resolution plans once every two years and would allow us to alternate between submitting a full, detailed resolution plan and a streamlined, targeted resolution plan. The proposed rule also makes certain changes to the information required to be included in our resolution plan.
For a discussion of other regulatory developments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” in the 2018 Form10-K.
Other Matters
U.K. Withdrawal from the E.U.
Following the U.K. electorate vote to leave the E.U., the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017, which triggered atwo-year period during which the U.K. government negotiated a form of withdrawal agreement with the E.U. The U.K. government and the E.U. have agreed to delay the U.K.’s scheduled withdrawal from the E.U. until
October 31, 2019. However, if the U.K. does not hold elections to the European Parliament in accordance with applicable E.U. law and ratify the withdrawal agreement by the applicable deadlines, the U.K.’s withdrawal date would become June 1, 2019. Absent any further changes to this time schedule, the U.K. is expected to leave the E.U. by October 31, 2019 at the latest. Discussions are ongoing within the U.K. Parliament on the negotiated withdrawal agreement and the alternatives to it, and between the U.K. government and the E.U.
For more information on the U.K.’s withdrawal from the E.U., our related preparations and the potential impact on our operations, see “Quantitative and Qualitative Disclosures about Risk—Country Risk” herein, and see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Other Matters” and “Risk Factors—International Risk” in the 2018 Form 10-K.
Expected Replacement of London Interbank Offered Rate and Replacement or Reform of Other Interest Rates
Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR and replacements or reforms of other interest rate benchmarks, such as EURIBOR and EONIA (collectively, the “IBORs”).
For a further discussion of the expected replacement of the IBORs and/or reform of interest rate benchmarks, and the related risks and our transition plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” and “Risk Factors—Legal, Regulatory and Compliance Risk,” respectively, in the 2018 Form10-K.
![]() |
Quantitative and Qualitative Disclosures about Risk
Management believes effective risk management is vital to the success of our business activities. For a discussion of our risk management functions, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in the 20172018 Form10-K.
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of our VaR for market risk exposures is generated. In addition, we incur market risk within the Wealth Management and Investment Management business segments. The Wealth Management business segment primarily incursnon-trading market risk from lending and deposit-taking activities. The Investment Management business segment primarily incursnon-trading market risk from capital investments in alternative and other funds. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” in the 20172018 FormForm 10-K.
Value-at-RiskTrading Risks
Value-at-Risk.The statistical technique known as VaR is one of the tools we use to measure, monitor and review the market risk exposures of our trading portfolios. The Market Risk Department calculates and distributes dailyVaR-based risk measures to various levels of management.
VaR Methodology, Assumptions and Limitations.For information regarding our VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Risk—Market Risk—Risk Management—Market Risk—Sales and Trading and Related Activities—VaR Methodology, Assumptions and Limitations”Risks—Value-at-Risk” in the 20172018 Form10-K.
We utilize the same VaR model for risk management purposes and for regulatory capital calculations. Our regulators have approved our VaR model for use in regulatory calculations.
The portfolio of positions used for our VaR for risk management purposes (“Management VaR”) differs from that used for regulatory capital requirements (“Regulatory VaR”). Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include CVA and related hedges, as well as loans that are carried at fair value and associated hedges.
The following table presents the Management VaR for the Trading portfolio. To further enhance the transparency of the traded market risk, the Credit Portfolio VaR has been disclosed as a separate category from the Primary Risk Categories. The Credit Portfolio includes counterparty CVA
and related hedges, as well as loans that are carried at fair value and associated hedges.
Trading Risks
95%/One-Day Management VaR
Three Months Ended June 30, 2018 | Three Months Ended March 31, 2019 | |||||||||||||||||||||||||||||||
$ in millions | Period End | Average | High | Low | Period End | Average | High2 | Low2 | ||||||||||||||||||||||||
Interest rate and credit spread | $ | 32 | $ | 35 | $ | 43 | $ | 29 | $ | 32 | $ | 32 | $ | 39 | $ | 26 | ||||||||||||||||
Equity price | 13 | 14 | 17 | 12 | 15 | 16 | 19 | 12 | ||||||||||||||||||||||||
Foreign exchange rate | 11 | 9 | 12 | 7 | 15 | 14 | 16 | 11 | ||||||||||||||||||||||||
Commodity price | 8 | 9 | 12 | 7 | 9 | 10 | 12 | 9 | ||||||||||||||||||||||||
Less: Diversification benefit1, 2 | (25 | ) | (26 | ) | N/ | A | N/ | A | ||||||||||||||||||||||||
Less: Diversification benefit1 | (32 | ) | (32 | ) | N/A | N/A | ||||||||||||||||||||||||||
Primary Risk Categories | $ | 39 | $ | 41 | $ | 51 | $ | 35 | $ | 39 | $ | 40 | $ | 48 | $ | 36 | ||||||||||||||||
Credit Portfolio | 14 | 11 | 14 | 9 | 17 | 16 | 18 | 14 | ||||||||||||||||||||||||
Less: Diversification benefit1, 2 | (10 | ) | (8 | ) | N/ | A | N/ | A | ||||||||||||||||||||||||
Less: Diversification benefit1 | (12 | ) | (10 | ) | N/A | N/A | ||||||||||||||||||||||||||
Total Management VaR | $ | 43 | $ | 44 | $ | 54 | $ | 38 | $ | 44 | $ | 46 | $ | 55 | $ | 42 | ||||||||||||||||
Three Months Ended March 31, 2018 | ||||||||||||||||||||||||||||||||
$ in millions | Period End | Average | High | Low | ||||||||||||||||||||||||||||
Interest rate and credit spread | $ | 41 | $ | 35 | $ | 46 | $ | 30 | ||||||||||||||||||||||||
Equity price | 16 | 14 | 17 | 11 | ||||||||||||||||||||||||||||
Foreign exchange rate | 10 | 9 | 13 | 7 | ||||||||||||||||||||||||||||
Commodity price | 10 | 9 | 11 | 7 | ||||||||||||||||||||||||||||
Less: Diversification benefit1, 2 | (27 | ) | (25 | ) | N/ | A | N/ | A | ||||||||||||||||||||||||
Primary Risk Categories | $ | 50 | $ | 42 | $ | 51 | $ | 36 | ||||||||||||||||||||||||
Credit Portfolio | 11 | 10 | 11 | 9 | ||||||||||||||||||||||||||||
Less: Diversification benefit1, 2 | (7 | ) | (6 | ) | N/ | A | N/ | A | ||||||||||||||||||||||||
Total Management VaR | $ | 54 | $ | 46 | $ | 55 | $ | 40 |
Three Months Ended December 31, 2018 | ||||||||||||||||
$ in millions | Period End | Average | High2 | Low2 | ||||||||||||
Interest rate and credit spread | $ | 38 | $ | 36 | $ | 51 | $ | 25 | ||||||||
Equity price | 14 | 13 | 18 | 12 | ||||||||||||
Foreign exchange rate | 13 | 13 | 16 | 11 | ||||||||||||
Commodity price | 13 | 12 | 18 | 7 | ||||||||||||
Less: Diversification benefit1 | (27 | ) | (30 | ) | N/A | N/A | ||||||||||
Primary Risk Categories | $ | 51 | $ | 44 | $ | 62 | $ | 34 | ||||||||
Credit Portfolio | 15 | 13 | 16 | 11 | ||||||||||||
Less: Diversification benefit1 | (9 | ) | (8 | ) | N/A | N/A | ||||||||||
Total Management VaR | $ | 57 | $ | 49 | $ | 67 | $ | 39 |
1. | Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulatedone-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component. |
2. | The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the quarter, and therefore, the diversification benefit is not an applicable measure. |
Average total Management VaR and average Management VaR for the Primary Risk Categories of $44 million and $41 million, respectively, decreased from the three-months ended MarchDecember 31, 2018, primarily as a result of lower market volatilityreduced interest rate and increased diversification benefit.
![]() |
Distribution of VaR Statistics and Net Revenues.Revenues
One method of evaluating the reasonableness of our VaR model as a measure of our potential volatility of net revenues is to compare VaR with corresponding actual trading revenues. Assuming no intraday trading, for a95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the VaR model would be questioned.
March 2019 Form 10-Q | 24 |
Risk Disclosures
We evaluate the reasonableness of our VaR model by comparing the potential declines in portfolio values generated by the model with corresponding actual trading results for the Firm, as well as individual business units. For days where losses exceed the VaR statistic, we examine the drivers of trading losses to evaluate the VaR model’s accuracy relative to realized trading results. There were no days in the current year period on whichwith trading losses exceeded VaR.
The distribution of VaR statistics and net revenues is presented in the following histograms for the Total Trading populations.
Total Trading.As shown in the95%/One-Day Management VaR table, the average95%/one-day total Management VaR for the current quarter was $44 million. The following histogram presents the distribution of the daily95%/one-day total Management VaR for the current quarter.
Daily95%/One-Day Total Management VaR for the Current Quarter1
($ in millions)
The following histogram shows the distribution for the current quarter of daily net trading revenues, including 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. Daily net trading revenues also include intraday trading activities but exclude certain items not captured in the
VaR model, such as fees, commissions and net interest income. Daily net trading revenues differ from the definition of revenues required for Regulatory VaR backtesting, which further excludes intraday trading.
1. | The average95%/one-day total Management VaR for the current quarter was $46 million. |
Daily Net Trading Revenues for the Current Quarter
($ in millions)
The previous histogram shows the distribution for the current quarter of daily net trading revenues. Daily net trading revenues include profits and losses from Interest rate and credit spread, Equity price, Foreign exchange rate, Commodity price, and Credit Portfolio positions and intraday trading activities for our trading businesses. Certain items such as fees, commissions and net
interest income are excluded from daily net trading revenues and the VaR model. Revenues required for Regulatory VaR backtesting further exclude intraday trading.
Non-Trading Risks
We believe that sensitivity analysis is an appropriate representation of ournon-trading risks. The following sensitivity analyses cover substantially all of thenon-trading risk in our portfolio.
Exposure Related to Our Own Credit Spread.
Credit Spread Risk Sensitivity1
$ in millions | At June 30, 2018 | At March 31, 2018 | At March 31, 2019 | At December 31, 2018 | ||||||||||||
Derivatives | $ | 6 | $ | 6 | $ | 6 | $ | 6 | ||||||||
Funding liabilities2 | 32 | 31 | 37 | 34 |
1. | Amounts represent the |
2. | Relates to structured note liabilities carried at fair value. |
U.S. Bank Subsidiaries’ Net Interest Rate Risk Sensitivity.Income Sensitivity Analysis
$ in millions | At March 31, 2019 | At December 31, 2018 | ||||||
Basis point change | ||||||||
+200 | $ | 484 | $ | 340 | ||||
+100 | 274 | 182 | ||||||
- 100 | (619 | ) | (428 | ) |
The followingprevious table presents an analysis of selected instantaneous upward and downward parallel interest rate shocks on net interest income over the next 12 months for our U.S. Bank Subsidiaries. These shocks are applied to our12-month forecast for our U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and our forecasted business activity, including our deposit deployment strategy and asset-liability management hedges.activity.
![]() |
U.S. Bank Subsidiaries’ Net Interest Income Sensitivity Analysis
$ in millions | At June 30, 2018 | At March 31, 2018 | ||||||
Basis point change | ||||||||
+200 | $ | 531 | $ | 438 | ||||
+100 | 273 | 226 | ||||||
-100 | (489 | ) | (464 | ) |
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, includingnon-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 marketre-pricing behavior and other factors. The change in sensitivity to interest rates between June 30, 2018March 31, 2019 and MarchDecember 31, 2018 is related to overallprimarily driven by a flatter yield curve, expectations of deposit pricing and changes in our asset-liability profile and higher market rates.profile.
25 | March 2019 Form 10-Q |
Investments.
Risk Disclosures
Investments Sensitivity, Including Related Carried Interest
Loss from 10% Decline | ||||||||
$ in millions | At March 31, 2019 | At December 31, 2018 | ||||||
Investments related to Investment Management activities | $ | 334 | $ | 298 | ||||
Other investments: | ||||||||
MUMSS | 164 | 165 | ||||||
Other Firm investments | 187 | 179 |
MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
We have exposure to public and private companies through direct investments, as well as through funds that invest in these assets. These investments are predominantly equity positions with long investment horizons, a portion of which areis for business facilitation purposes. The market risk related to these investments is measured by estimating the potential reduction in net income associated with a 10% decline in investment values and related impact on performance fees.carried interest. The change in investments sensitivity related to Investment Management activities between December 31, 2018 and March 31, 2019 is primarily the result of higher carried interest.
Investments Sensitivity, Including Related Performance Fees
Loss from 10% Decline | ||||||||
$ in millions | At June 30, 2018 | At March 31, 2018 | ||||||
Investments related to Investment | ||||||||
Management activities | $ | 301 | $ | 321 | ||||
Other investments: | ||||||||
MUMSS | 164 | 172 | ||||||
Other Firm investments | 181 | 187 |
MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
Equity Market Sensitivity.Sensitivity
In the Wealth Management and Investment Management business segments, certainfee-based revenue streams are driven by the value of clients’ equity holdings. The overall level of revenues for these streams also depends on multiple additional factors that include, but are not limited to, the level and duration of the equity market increase or decline, price volatility, the geographic and industry mix of client assets, the rate and magnitude of client investments and redemptions, and the impact of such market increase or decline and price volatility on client behavior.
Therefore, overall revenues do not correlate completely with changes in the equity markets.
Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to us. We primarily incur credit risk exposure to institutions and individuals through our Institutional Securities and Wealth Management business segments. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Risk—Credit Risk” in the 20172018 Form10-K. Also, see Notes 7 and 11 to the financial statements for additional information about our loans and lending commitments, respectively.
Lending Activities Included in Loans and Trading Assets
We provide loans and lending commitments to a variety of customers, from large corporate and institutional clients to high net worth individuals. In addition, we purchase loans in the secondary market. In the balance sheets, these loans and lending commitments are carried as held for investment, which are recorded at amortized cost; as held for sale, which are recorded at the lower of cost or fair value; or at fair value with changes in fair value recorded in earnings. Loans held for investment and loans held for sale are classified in Loans, and loans held at fair value are classified in Trading assets in the balance sheets. See Notes 3, 7 and 11 to the financial statements for further information.
Loans and Lending Commitments
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At March 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ in millions | IS | WM | IM1 | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | $ | 22,283 | $ | 16,136 | $ | 5 | $ | 38,424 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | — | 27,300 | — | 27,300 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | — | 28,037 | — | 28,037 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 7,764 | — | — | 7,764 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans held for investment, gross of allowance | 30,047 | 71,473 | 5 | 101,525 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses | (215 | ) | (44 | ) | — | (259 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans held for investment, net of allowance | 29,832 | 71,429 | 5 | 101,266 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | 12,469 | — | — | 12,469 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | 1 | 21 | — | 22 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 2,440 | — | — | 2,440 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans held for sale | 14,910 | 21 | — | 14,931 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | 8,286 | — | 21 | 8,307 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | 1,282 | — | — | 1,282 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 1,766 | — | — | 1,766 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans held at fair value | 11,334 | — | 21 | 11,355 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans | 56,076 | 71,450 | 26 | 127,552 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lending commitments2 | 102,174 | 12,147 | — | 114,321 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans and lending commitments2 | $ | 158,250 | $ | 83,597 | $ | 26 | $ | 241,873 |
![]() |
At December 31, 2017 | ||||||||||||||||
$ in millions | IS | WM | IM | Total | ||||||||||||
Corporate loans | $ | 15,332 | $ | 14,417 | $ | 5 | $ | 29,754 | ||||||||
Consumer loans | — | 26,808 | — | 26,808 | ||||||||||||
Residential real estate loans | — | 26,635 | — | 26,635 | ||||||||||||
Wholesale real estate loans | 9,980 | — | — | 9,980 | ||||||||||||
Loans held for investment, gross of allowance | 25,312 | 67,860 | 5 | 93,177 | ||||||||||||
Allowance for loan losses | (182 | ) | (42 | ) | — | (224 | ) | |||||||||
Loans held for investment, net of allowance | 25,130 | 67,818 | 5 | 92,953 | ||||||||||||
Corporate loans | 9,456 | — | — | 9,456 | ||||||||||||
Residential real estate loans | 1 | 34 | — | 35 | ||||||||||||
Wholesale real estate loans | 1,682 | — | — | 1,682 | ||||||||||||
Loans held for sale | 11,139 | 34 | — | 11,173 | ||||||||||||
Corporate loans | 8,336 | — | 22 | 8,358 | ||||||||||||
Residential real estate loans | 799 | — | — | 799 | ||||||||||||
Wholesale real estate loans | 1,579 | — | — | 1,579 | ||||||||||||
Loans held at fair value | 10,714 | — | 22 | 10,736 | ||||||||||||
Total loans | 46,983 | 67,852 | 27 | 114,862 | ||||||||||||
Lending commitments2, 3 | 92,588 | 9,481 | — | 102,069 | ||||||||||||
Total loans and lending commitments2, 3 | $ | 139,571 | $ | 77,333 | $ | 27 | $ | 216,931 |
At December 31, 2018 | ||||||||||||||||
$ in millions | IS | WM | IM1 | Total | ||||||||||||
Corporate | $ | 20,020 | $ | 16,884 | $ | 5 | $ | 36,909 | ||||||||
Consumer | — | 27,868 | — | 27,868 | ||||||||||||
Residential real estate | — | 27,466 | — | 27,466 | ||||||||||||
Commercial real estate3 | 7,810 | — | — | 7,810 | ||||||||||||
Loans held for investment, gross of allowance | 27,830 | 72,218 | 5 | 100,053 | ||||||||||||
Allowance for loan losses | (193 | ) | (45 | ) | — | (238 | ) | |||||||||
Loans held for investment, net of allowance | 27,637 | 72,173 | 5 | 99,815 | ||||||||||||
Corporate | 13,886 | — | — | 13,886 | ||||||||||||
Residential real estate | 1 | 21 | — | 22 | ||||||||||||
Commercial real estate3 | 1,856 | — | — | 1,856 | ||||||||||||
Loans held for sale | 15,743 | 21 | — | 15,764 | ||||||||||||
Corporate | 9,150 | — | 21 | 9,171 | ||||||||||||
Residential real estate | 1,153 | — | — | 1,153 | ||||||||||||
Commercial real estate3 | 601 | — | — | 601 | ||||||||||||
Loans held at fair value | 10,904 | — | 21 | 10,925 | ||||||||||||
Total loans | 54,284 | 72,194 | 26 | 126,504 | ||||||||||||
Lending commitments2 | 95,065 | 10,663 | — | 105,728 | ||||||||||||
Total loans and lending commitments2 | $ | 149,349 | $ | 82,857 | $ | 26 | $ | 232,232 |
1. | Investment Management business segment loans are entered into in conjunction with certain investment advisory activities. |
2. |
|
|
3. |
|