Morningstar DBRS Revises Morgan Stanley’s Trend to Positive; Confirms LT Issuer Rating at A (high)

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of Morgan Stanley (MS or the Company), including the Company's Long-Term Issuer Rating of A (high) and Short-Term Issuer Rating of R-1 (middle). The trend for all credit ratings has been revised to Positive from Stable. The Intrinsic Assessment (IA) for the Company is AA (low), while its Support Assessment remains SA3. The Company's Long-Term Issuer Rating is positioned one notch below the IA.

KEY CREDIT RATING CONSIDERATIONS
The Positive trend considers MS's sustained franchise momentum, including the Company's unique global positioning, integrated business model and the significant progress made toward reaching its long-term goals. The Positive trend also recognizes the steady progress MS has made in transforming its revenue mix to become more heavily weighted towards Wealth and Investment Management, which Morningstar DBRS views as more steady and predictable.

The credit ratings confirmation reflects the strength of Morgan Stanley's franchise, which includes a mix of scaled businesses with leading market positions that provide durable earnings. The Company's effective risk management and strong balance sheet fundamentals are also taken into consideration. Additionally, the credit ratings consider MS's exposure to a wide range of capital markets activities that are integral to the value of its franchise, but also contribute a notable level of market risk that characterizes the Company's risk profile.

CREDIT RATING DRIVERS
If Morgan Stanley continues to deliver above peer-median returns, while maintaining its strong balance sheet fundamentals, the credit ratings would be upgraded. Earnings performance more commensurate with peers in MS's current credit rating category would revert the trend to Stable. A sustained deterioration of earnings or balance sheet fundamentals would result in a credit ratings downgrade. Any indications of significant weakening in MS's franchise due to reputational issues, risk management deficiencies or operational missteps, would also result in a downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong
Morgan Stanley's very strong franchise is underpinned by the largest wealth and investment management platform globally by total net revenues and is in the top five by client assets with approximately $7 trillion. Overall, MS's Wealth and Investment Management businesses generate more than half of the Company's total net revenues, providing stability and predictability to results, which we view favorably from a credit ratings perspective.

MS's Institutional Securities' businesses also have top-tier positions globally across investment banking and trading activities. While the latter are capital intensive and contribute a notable amount of market risk and revenue volatility, they can still generate a substantial amount of revenue even during adverse market conditions, as evidenced in the Company's results during the pandemic.

Earnings Combined Building Block (BB) Assessment: Strong
Morningstar DBRS views favorably MS's ability to deliver steady and above peer-median profitability metrics. Despite decade low levels of investment banking activity in 2023, the Company performed well, reporting $9.1 billion of net income on $54.1 billion of net revenue, representing a 9.4% return on equity (ROE). Excluding the impact of nearly $900 million of one-time items related to severance, an FDIC special assessment and legal settlement, MS's ROE would have been above 10% for the full year.

Benefiting from an improved operating environment, MS delivered a strong ROE of 14.5% in 1Q24. Highlights from the quarter included strong net new asset growth, with the Company reaching $7 trillion in client assets, as well as another robust trading performance and considerably improved underwriting results. Looking forward, Morningstar DBRS sees MS as well positioned to achieve its long-term goals, including reaching $10 trillion in client assets and generating firmwide returns on tangible common equity of 20%.

Risk Combined Building Block (BB) Assessment: Strong
We view MS's risk management capabilities and cohesive culture as contributing to the strength of the franchise. Morgan Stanley's business activities inherently require it to take significant risk, making skillful risk management a critical component of its success. Considering its long and successful track record, Morningstar DBRS sees MS as having the appropriate processes and governance in place for managing risk across its businesses.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong / Strong
MS has a comprehensive framework in place to manage its funding and liquidity needs. While the Company has a higher reliance on wholesale funding than its universal bank peers, Morningstar DBRS views MS's wholesale funding as well managed, with diverse funding sources and well-laddered maturities. In addition, deposits remain as a more meaningful portion of the funding stack. At the end of 1Q24, the Company had $352 billion of total deposits, representing 42% of core funding sources. Liquidity resources remain substantial, totaling $319 billion, or 26% of total assets.

Capitalization Combined Building Block (BB) Assessment: Very Strong / Strong
Even with ongoing capital returns to shareholders, the Company's capital metrics remain robust. In 2023, MS returned more than $10 billion of capital to shareholders via dividends and share repurchases, while maintaining a substantial capital buffer. At the end of 1Q24, the Company reported a peer-leading Standardized CET1 ratio of 15.0%, which was approximately 210 basis points above its regulatory requirement.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/434582.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in US Dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organizations (4 June 2024) https://dbrs.morningstar.com/research/433881/global-methodology-for-rating-banks-and-banking-organisations. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The following methodology has also been applied:

Morningstar DBRS Global Corporate Criteria (15 April 2024)
https://dbrs.morningstar.com/research/431186/morningstar-dbrs-global-corporate-criteria

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The last credit rating action on this issuer took place on June 15, 2023, when all ratings were confirmed.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's outlooks and credit ratings are monitored.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats

Lead Analyst: Michael McTamney, Senior Vice President,
Rating Committee Chair: Michael Driscoll, Managing Director,
Initial Rating Date: April 10, 1992

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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