Fitch Affirms Morgan Stanley’s Long-Term IDR at ‘A’; Outlook Stable

0
87

Fitch Ratings has affirmed Morgan Stanley’s (MS) Long-Term and Short-Term Issuer Default Ratings (IDRs) at ‘A/F1’, and its Viability Rating (VR) at ‘a’. The Rating Outlook is Stable.

The rating affirmations have been taken in conjunction with Fitch’s periodic review of the Global Trading and Universal Banks (GTUBs).

KEY RATING DRIVERS

IDRs, VR, SENIOR DEBT, AND DERIVATIVE COUNTERPARTY

Fitch’s affirmation of MS’s ratings and maintenance of a Stable Outlook reflect its strong global franchise, continued execution of its wealth management strategy, higher than peer group capital ratios, and good funding and liquidity positions. These rating strengths continue to be offset by the company’s exposure to market-sensitive businesses and its reliance primarily on wholesale funding and still challenging earnings performance.

In addition, Fitch has assigned Derivative Counterparty Ratings (DCRs) to Morgan Stanley as part of its roll out of DCRs to significant derivative counterparties in Western Europe and the U.S. DCRs are issuer ratings and express Fitch’s view of banks’ relative vulnerability to default under derivative contracts with third-party, non-government counterparties. The DCR of each entity is equalized with each entity’s Long-Term IDR.

Fitch views MS’s balanced business model across capital markets, wealth management and investment management favorably. Through the first nine months of 2016, MS derived nearly 50% of its net revenue from wealth management and investment management activities, and the other half from investment banking, equity sales and trading, and fixed income, currency, and commodities (FICC). Fitch believes MS’s business diversity contributes to more stable and sustainable earnings and should eventually help overall returns on equity (ROE) to sustainably meet long-term targets.

MS is increasing its use of technology in order to drive efficiencies and enhance customer-wallet share. To this end, MS has continued to execute on its “Project Streamline” efficiency initiative, which is targeting to reduce overall company expenses by $1.0 billion through 2017. This initiative is focused on optimizing support services through the use of technology, actively managing compensation expenses and the absence of additional large litigation charges. The company has indicated that it remains on track to realize the targeted savings by year-end 2017.

Fitch believes that these expense control efforts helped buoy the wealth management segment’s pre-tax margin of 23.2% in third-quarter 2016 (3Q16), which was in line with the company’s stated wealth management margin target of 23%-25%. To the extent that the company is successful in continuing to harness technology to support its business activities, Fitch believes there is further incremental upside to the wealth management pre-tax margin over a medium-term time horizon.

Additionally, Fitch notes that as MS continues to migrate the wealth management business away from more transactional sources of revenue and towards more recurring fee-based revenue, this should help the durability of the segment’s overall revenue profile. That said, MS’s intention to utilize the best interests contract exemption to the Department of Labor’s (DOL) fiduciary rule, would to allow MS to continue maintain transactional Individual Retirement Accounts (IRA), thereby slowing the evolution to fee based accounts.

While the wealth management business has been growing, MS’s capital markets activities still comprise a significant portion of the company’s earnings. Recent performance within MS’s Institutional Securities Group has improved but still remains below company targets. MS’s advisory and equities franchises remain strong, although initial public offerings have been relatively weak in 2016.

The performance of the company’s FICC business, while improved in 3Q16, still has weighed on overall performance. Fitch views the de-risking of MS’s FICC business over the last few years as a positive from a creditor’s perspective in that it reduces both the volatility of results and the potential for unexpected losses. However, it also makes generating long-term returns that consistently meet targets more challenging.

MS’s fully phased-in Basel III Common Equity Tier 1 (CET1) ratio improved to 15.8% as of 3Q16, at the top of the peer-group. In addition, MS’s Fitch Core Capital (FCC) ratio was a strong 16.5% at 3Q16.

Fitch views capital levels as temporarily elevated and expects MS will look to return more capital to owners after certain regulatory capital rules are finalized and it completes the remediation in its capital planning process as required by the last CCAR review.

While the company’s more wholesale-funded business model is a rating constraint relative to some peer institutions Fitch acknowledges that MS has grown deposits, substantially reducing its reliance on short-term unsecured funding, and increasing its weighted average maturity of wholesale obligations.

DERIVATIVE COUNTERPARTY RATING

Fitch has assigned a derivative counterparty rating (DCR) of ‘A’ to MS. The DCR is equalized with MS’s IDR reflecting Fitch’s view that derivative counterparties to MS will rank equally to other senior unsecured creditors.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by MS are all notched down from the VR in accordance with Fitch’s assessment of each instrument’s respective non-performance and relative loss severity risk profiles, which vary considerably.

Subordinated debt issued by the operating companies is rated at the same level as subordinated debt issued by MS reflecting the potential for subordinated creditors in the operating companies to be exposed to loss ahead of senior creditors in MS. MS’s subordinated debt is rated one notch below MS’s VR, its preferred stock is rated five notches below (which encompasses two notches for non-performance and three notches for loss severity), and its trust preferred stock is rated four notches below MS’s VR(encompassing two notches for non-performance and two notches for loss severity).

LONG- AND SHORT-TERM DEPOSIT RATINGS

U.S. deposit ratings of Morgan Stanley Bank, N.A. (MSBNA) are one-notch higher than senior debt ratings of MSBNA reflecting the deposits’ superior recovery prospects in case of default given depositor preference in the U.S.

SUBSIDIARY AND AFFILIATED COMPANY

The Long-Term IDR of MSBNA benefits from an institutional Support Rating of ‘1’, which indicates Fitch’s view that the propensity of the parent to provide capital support to the operating subsidiaries is extremely high.

The institutional Support Rating of ‘1’ suggests that MSBNA’s Long-Term IDR would typically be equalized with that of the parent company due; however, MSBNA’s ratings also receive an additional one-notch uplift above MS’s Long-Term IDR to reflect Fitch’s belief that the U.S. single point of entry (SPOE) resolution regime, the likely implementation of total loss absorbing capacity (TLAC) requirements for U.S. global systemically important banks (G-SIBs), and the presence of substantial holding company debt reduce the default risk of these domestic operating subsidiaries’ senior liabilities relative to holding company senior debt.

Additionally, MSBNA’s ‘F1’ Short-Term IDR is at the lower of two potential Short-Term IDRs which map to an ‘A’ Long-Term IDR on Fitch’s rating scale, in order to reflect the company’s greater reliance on wholesale funding than more retail-focused banks. MS and its non-bank operating companies Short-Term IDRs of ‘F1’ reflect Fitch’s view that there is less surplus liquidity at these entities than at the bank, particularly given their greater reliance on the holding company for liquidity.

SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Rating and Support Rating Floor for MS reflect Fitch’s view that senior creditors cannot rely on receiving extraordinary support from the sovereign in the event that MS becomes non-viable. In Fitch’s view, implementation of the Dodd Frank Orderly Liquidation Authority legislation has now sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors to participate in losses, if necessary, instead of or ahead of the company receiving sovereign support. As previously noted, MSBNA has a Support Rating of ‘1’, which reflects Fitch’s view of an extremely high probability of institutional support for the entity. MSBNA does not have a VR at this time, given Fitch’s view of its more limited role within the group structure.

RATING SENSITIVITIES

VR, IDRs, SENIOR DEBT, AND DERIVATIVE COUNTERPARTY RATING

Fitch considers MS’s VR to be well situated at its current level. There could be modest longer-term upside to ratings, although this would likely be limited to the ‘A’ rating category, reflecting the cyclicality of many of MS’s business activities and its primary reliance on wholesale, confidence sensitive funding sources. Should MS further improve the level and stability of its earnings such that returns on equity (ROEs) are sustainably in excess of the company’s targets of 9%-11%, while further reducing its reliance on wholesale funding and maintaining strong capital ratios, this could lead to some modest upside to the ratings.

Potential downside risks to ratings include any large and/or unforeseen losses from either litigation or a risk management failure, particularly if permanent franchise damage is incurred as a result.

In addition, and while not expected, if the company’s operating performance, as measured by ROE, remains challenged and is consistently below peers for a sustained period this could ultimately lead to negative ratings pressure over a longer-term time horizon.

Fitch notes that MS’s Long-Term IDR, senior debt, and DCR are equalized with the VR at the holding company. Thus MS’s IDR, senior debt ratings and DCR would be sensitive to any changes in MS’s VR.

DERIVATIVE COUNTERPARTY RATING

DCRs are primarily sensitive to changes in the respective issuers’ Long-Term IDRs. In addition, they could be upgraded to one notch above the IDR if a change in legislation (for example as recently proposed in the EU) creates legal preference for derivatives over certain other senior obligations and, in Fitch’s view, the volume of all legally subordinated obligations provides a substantial enough buffer to protect derivative counterparties from default in a resolution scenario.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid ratings are primarily sensitive to any change in MS’s VR and secondarily to a change in Fitch’s recovery expectations for such instruments.

LONG- AND SHORT-TERM DEPOSIT RATINGS

MSBNA’s deposit ratings are sensitive to any change in the entity’s IDR, which is sensitive to any change in the VR of the parent company given the institutional SR of ‘1’. Thus, deposit ratings are ultimately sensitive to any change in MS’s VR or Fitch’s view of institutional support for that entity.

SUBSIDIARY AND AFFILIATED COMPANY

MSBNA’s IDR is rated one-notch higher than the parent holding company’s IDR because the bank subsidiary benefits from the structural subordination of holding company TLAC, which effectively supports senior operating liabilities of the bank subsidiary. Any change in Fitch’s view on the structural subordination of TLAC with respect to MSBNA could also result in a change in MSBNA’s IDR.

SUPPORT RATING AND SUPPORT RATING FLOOR

Support Ratings and Support Rating Floors would be sensitive to any change in Fitch’s view of support. However, since these two were downgraded to ‘5’ and ‘No Floor’, respectively, in May 2015, there is unlikely to be any change to these ratings in the foreseeable future.

MSBNA’s Institutional SR of ‘1’ is sensitive to any change in Fitch’s views of potential institutional support for this entity from the parent company.

Fitch affirms the following:

Morgan Stanley

–Long-Term IDR at ‘A’; Outlook Stable;

–Long-term senior debt at ‘A’;

–Short-Term IDR at ‘F1’;

–Short-term debt at ‘F1’;

–Commercial paper at ‘F1’;

–Market linked securities at ‘Aemr’;

–VR at ‘a’;

–Subordinated debt at ‘A-‘;

–Preferred stock at ‘BB+’;

–Support at ‘5’;

–Support floor at ‘NF’.

Morgan Stanley Bank N.A.

–Long-Term IDR at ‘A+’; Outlook Stable;

–Long-term Deposits at ‘AA-‘;

–Short-Term IDR at ‘F1’;

–Short-term Deposits at ‘F1+’;

–Support at ‘1’.

Morgan Stanley Canada Ltd

–Short-Term IDR at ‘F1’;

–Short-term debt at ‘F1’;

–Commercial paper at ‘F1’.

Morgan Stanley International Finance SA

–Short-Term debt at ‘F1’.

Morgan Stanley Secured Financing LLC

–Long-term senior debt at ‘A’;

–Short-term debt at ‘F1’.

Fitch assigns the following rating:

Morgan Stanley

–Derivative Counterparty Rating ‘A(dcr)’.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Global Bank Rating Criteria (pub. 25 Nov 2016)

https://www.fitchratings.com/site/re/891051

Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884128

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016420

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016420

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001