2014
04/19

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Fitch Affirms Morgan Stanley Ratings at ‘A/F1’; Outlook Stable

(The following statement was released by the rating agency)
NEW YORK, March 26 (Fitch) Fitch Ratings has affirmed Morgan
Stanleys ratings
including its Issuer Default Ratings (IDRs) at A/F1, support
rating at 1,
support rating floor (SRF) at A and viability rating (VR) at
a-. The Rating
Outlook is Stable. A complete list of rating actions follows at
the end of this
press release.
The rating actions on Morgan Stanley have been taken in
conjunction with a
periodic review of the Global Trading and Universal Banks, which
comprise 12
large and globally active banking groups. Fitchs outlook for
the sector is
stable on balance. Earnings pressure in securities businesses
and continued
conduct and regulatory risks present in the GTUBs are offset by
stronger balance
sheets as capitalisation and liquidity remain sound. Fitch
forecasts stronger
GDP growth in most economies, which should contribute to a more
balanced
operating environment, but the operating environment is likely
to remain
challenging in 2014.
Todays rating actions assume that Morgan Stanley will perform
adequately under
the CCAR stress test, though Fitch has no visibility into any
potential
qualitative rejections for Morgan Stanley, or any of the other
29 banks subject
to regulatory stress testing. Although a qualitative rejection
of a capital plan
request under CCAR would be viewed negatively, it is not
expected to have any
rating implications for Morgan Stanley.
KEY RATING DRIVERS – IDRs, SENIOR DEBT, SR and SRF
Morgan Stanleys Long- and Short-term IDRs, Support Rating (SR),
Support Rating
Floor (SRF) and senior debt ratings reflect Fitchs expectation
that there
remains an extremely high probability of support from the US
government
(AAA/Outlook Stable) if required, and the Long-term IDR is at
its SRF. This
expectation reflects the USs extremely high ability to
support its banks
especially given its strong financial flexibility, though
propensity is becoming
less certain.
Specific to Morgan Stanley, our view of support likelihood is
based mostly on
its systemic importance in the US, its global
interconnectedness given its
size and operations in global capital markets, growing deposit
base and its
position as a key provider of financial services to the US
economy.
In Fitchs view, there is a clear intention to reduce support
for G-SIFIs in the
US, as demonstrated by the Dodd Frank Act (DFA) and progress
regulators have
made on implementing the Orderly Liquidation Authority (OLA).
The FDIC has
proposed its single point of entry (SPOE) strategy and further
initiatives are
demonstrating the US governments progress to eliminate state
support for US
banks going forward, which increases the likelihood of senior
debt losses if its
banks run afoul of solvency assessments. Despite the likely
removal of support
in the US, the Stable Outlook on Morgan Stanleys Long-term
IDR reflects
Fitchs view, that Morgan Stanleys fundamental credit profile
is improving and
that its viability rating is likely to improve over the next one
to two years.
Therefore the upward momentum in the VR offsets the likely
removal of sovereign
support in the US which would result in Morgan Stanleys IDR
and VR being
equalized.
RATING SENSITIVITIES – IDRS, SENIOR DEBT, SR AND SRF
The SR and SRF are sensitive to progress made in finalizing the
SPOE strategy
and any additional regulatory initiatives that may be imposed on
the G-SIFIs,
including debt thresholds at the holding company. Fitchs
assessment of
continuing support for US G-SIFIs has to some extent relied
upon the
feasibility of OLA implementation rather than its enactment into
law (when DFA
passed). Hurdles that remain include the resolution of how
cross-border
derivative acceleration/termination provisions are handled and
that there is
sufficient contingent capital at the holding company to
recapitalize without
requiring government assistance.
Fitch expects that the SPOE strategy and regulatory action to
ensure sufficient
contingent capital will be finalized in the near term, but
regardless of its
finalization Fitch believes that sufficient regulatory progress
continues to be
made over the ratings time horizon.
Given the direction of the US governments willingness to
support banks in the
future, Fitch expects that Morgan Stanleys SR will be
downgraded to 5 and the
SRF will be downgraded to No Floor within one to two years,
likely to be some
point in the late 2014 or in 1H15.
It is unlikely that a revision of Morgan Stanleys SRF to No
Floor will lead
to a downgrade of its Long-term IDR despite the fact that Morgan
Stanleys IDR
is at its SRF because Fitch expects that there will be upward
momentum in Morgan
Stanleys Viability Rating over the rating over the next one to
two years.
Therefore, absent a material adverse change in market conditions
or individual
company profile, Morgan Stanleys IDRs are unlikely to change
when the support
rating floor is revised to No Floor.
KEY RATING DRIVERS – VR
Morgan Stanleys VR of a- continues to be supported by the
companys solid
liquidity position, improved risk management, and
higher-than-average capital
position. The VR also reflects Morgan Stanleys continued
execution of its
wealth management strategy based on its 100% ownership of Morgan
Stanley Smith
Barney including measured deployment of bank deposits into
appropriate
investments in lending products, improving margins and
navigation of evolving
regulatory challenges. The upward momentum in the VR reflects
Fitchs
expectation that Morgan Stanley will continue to effectively
execute on its
Wealth Management strategy, further reduce risk weighted assets,
and improve
ROEs to a level at or above its cost of capital. The VR remains
constrained by
wholesale funding risks, challenging industry prospects given
the impact of new
regulations and continued global economic uncertainty.
Overall, Morgan Stanleys performance (excluding legal expenses
and other
one-time items) has improved as it continues to benefit from
improved margins in
the wealth management platform and investment banking revenues,
which partially
offset weaker fixed income and commodities net revenues. Pre-tax
operating
margin for Wealth Management improved to 19% as of Dec. 31, 2013
(excluding a
one-time impairment charge), which is above the companys 2013
margin target of
18%. Fitch believes that if the company can successfully execute
on its strategy
to deploy deposits into loans and securities with higher returns
without
assuming outsized risks, then it will be able to achieve a
targeted pre-tax
margin of 22% – 25% by 4Q15 .
Morgan Stanleys earnings are becoming more balanced as the
company continues to
expand its wealth management platform. This reduces the
companys comparatively
higher reliance on capital market operations in relationship to
many other
GTUBs, reflecting its focus on the institutional securities
business. The
greater stability derived from its wealth management platform
and the measured
growth of the bank contributes to the positive momentum in
Morgan Stanleys VR.
That said, Morgan Stanleys future earnings will continue to be
less diverse
than other larger universal banks.
Morgan Stanleys capital position is relatively strong and
continues to improve.
Tier 1 common ratio under Basel III is estimated to be
approximately 10.5% at
4Q13 (in line with the average of the US GTUBs). Morgan
Stanley reported that
as of Dec. 31, 2013, the supplementary leverage ratio (SLR) for
the bank
exceeded the 6% threshold, while the holding company SLR was
4.2%, below the 5%
threshold. Fitch continues to believe that Morgan Stanley will
be able to meet
the SLR thresholds prior to the required timeframe.
Liquidity continues to be maintained at conservative levels,
which is viewed as
appropriate given Morgan Stanleys wholesale funding profile.
Unencumbered
highly liquid securities and cash was a solid $202 billion or
24% of total
assets as of Dec. 31, 2013. Morgan Stanley estimated that is
Basel III liquidity
coverage ratio remains well in excess of 100%.
Fitch believes that Morgan Stanley is more vulnerable to funding
and rollover
risks than a number of GTUB peers as it is primarily wholesale
funded. To reduce
wholesale funding risk, Morgan Stanley has reduced its reliance
on unsecured
short-term to minimal levels with no reliance on commercial
paper or 2a-7 funds
as of Dec. 31, 2013. Morgan Stanley has a strong governance
policy on secured
funding, including maturity targets and limits set for each tier
of collateral.
Although deposits are increasing at the subsidiary bank, they
remain a
relatively moderate portion of the overall funding mix.
In February 2014, Morgan Stanley settled it pre-crisis
residential
mortgage-backed securities lawsuit for $1.25 billion with the
Federal Home
Housing Finance Agency. The settlement had no ratings impact on
Morgan Stanleys
ratings. Morgan Stanleys pre-tax operating income was modestly
affected by this
settlement.
RATING SENSITIVITIES – IDRs, VR and SENIOR DEBT
Morgan Stanleys viability rating has a higher probability of
being upgraded to
a from a- upon further execution of its Wealth Management
strategy,
including measured deployment of bank deposits into appropriate
investments in
lending products, and improved returns on equity in excess of
cost of capital.
Successful navigation of evolving regulatory challenges
including the Volcker
Rule and Basel may also contribute to upward rating momentum as
will maintenance
of strong capital and liquidity levels.
Downward pressure on the VR could be driven by Morgan Stanleys
inability to
execute on its Wealth Management strategy, resulting in
sustained operating
weakness or returns on equity substantially below its cost of
capital.
Additional potential negative drivers could include an inability
to successfully
navigate evolving regulatory requirements such as the Volcker
Rule or Basel,
material losses, a significant increase in leverage and risk
weighted assets,
reduced capital ratios, deterioration in liquidity levels or
outsized fines,
settlements or other charges.
RATING DRIVERS AND SENSITIVITIES – SUBORDINATED DEBT OTHER
HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by Morgan
Stanley and by
various issuing vehicles are all notched down from Morgan
Stanleys VR in
accordance with Fitchs assessment of each instruments
respective
nonperformance and relative loss severity risk profiles.
Subordinated debt and
other hybrid capital ratings are primarily sensitive to any
change in the VRs of
Morgan Stanley.
RATING DRIVERS AND SENSITIVITIES – LONG- AND SHORT-TERM DEPOSIT
RATINGS
Morgan Stanleys uninsured deposit ratings are rated one notch
higher than the
companys IDR and senior unsecured debt because US uninsured
deposits benefit
from depositor preference. US depositor preference gives
deposit liabilities
superior recovery prospects in the event of default. However,
Morgan Stanleys
uninsured deposits outside of the US do not benefit from
rating uplift because
they do not typically benefit from the US depositor preference
unless the
deposit is expressly payable at an office of the bank in the
United States.
Since Fitch cannot determine which foreign branch deposits may
be dually
payable, they do not get the rating uplift.
The ratings of long and short-term deposits issued by Morgan
Stanley and its
subsidiaries are primarily sensitive to any change in Morgan
Stanleys IDR.
RATING DRIVERS SENSITIVITIES – HOLDING COMPANY
Morgan Stanleys IDRs are equalized with those of its operating
companies and
banks, reflecting its role as the bank holding company, which is
mandated in the
US to act as a source of strength for its bank subsidiaries,
as well as the
use of the holding company to fund subsidiary operations.
RATING DRIVERS AND SENSITIVITIES – SUBSIDIARY AFFILIATED
COMPANIES
The IDRs of Morgan Stanleys major rated operating subsidiaries
are equalized
with Morgan Stanleys IDR reflecting Fitchs view that these
entities are core
to Morgan Stanleys business strategy and financial profile.
Morgan Stanley is a leading global bank with three business
segments:
institutional securities, global wealth management, and asset
management. In
September 2008, Morgan Stanley converted to a bank holding
company (BHC)
regulated by the Federal Reserve. Morgan Stanley is currently
the sixth largest
bank by assets in the US and designated as a G-SIFI by the
Financial Stability
Board.
The following ratings were affirmed:
Morgan Stanley
–Long-term IDR at A with a Stable Outlook;
–Long-term senior debt at A;
–Short-term IDR at F1;
–Short-term debt at F1;
–Commercial paper at F1;
–Market linked securities at Aemr;
–VR at a-;
–Subordinated debt at BBB+;
–Preferred stock BB;
–Support at 1;
–Support floor at A.
Morgan Stanley Bank NA
–Long-term IDR at A with a Stable Outlook;
–Long-term Deposits at A+;
–Short-term IDR at F1;
–Short-term deposits at F1;
–Support at 1.
Morgan Stanley Australia Finance Ltd
–Long-term IDR at A with a Stable Outlook;
–Long-term senior debt at A;
–Short-term IDR at F1;
–Short-term debt at F1.
Morgan Stanley Canada Ltd
–Short-term IDR at F1;
–Short-term debt at F1;
–Commercial paper at F1.
Morgan Stanley International Finance SA
–Short-term debt at F1.
Bank Morgan Stanley AG
–Long-term IDR at A with a Stable Outlook;
–Short-term IDR at F1;
–Support at 1.
Morgan Stanley Secured Financing
–Long-term senior debt at A;
–Short-term debt at F1.
Morgan Stanley Capital Trust III-VIII
–Preferred stock at BB+.
Fitch will hold a teleconference to discuss sovereign support
for banks and give
an update on rating paths on Friday, March 28 at 15:00 GMT.
Callers must register in advance using the link below and are
requested to dial
in early:
here

DA40C4B1FED21
Contact:
Primary Analyst
Tara Kriss
Senior Director
+1-212-908-0369
Fitch Ratings, Inc., One State Street Plaza, New York, NY 10001
Secondary Analyst
Ilya Ivashkov, CFA
Senior Director
+1-212-908-0769
Committee Chairperson
Gordon Scott
Managing Director
+ 44 20 3530 1075
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
Email:
brian.bertsch@fitchratings.com.
Additional information is available at www.fitchratings.com.
In addition to the source(s) of information identified in
Fitchs Master
Criteria, these actions were additionally informed by
information provided by
the companies.
Applicable Criteria and Related Research:
–Global Financial Institutions Rating Criteria (Jan. 31,
2014);
–Securities Firms Criteria (Jan. 31, 2014) ;
–Assessing and Rating Bank Subordinated and Hybrid Securities
(Jan. 31, 2014);
–Rating FI Subsidiaries and Holding Companies (Aug. 10,
2012);
–The Evolving Dynamics of Support for Banks (Sept. 11, 2013);
–Bank Support: Likely Rating Paths (Sept. 11, 2013);
–Sovereign Support for Banks: Update On Position Outlined In
3Q13 (Dec.
2013);
–2014 Outlook: US Securities Firms (Nov. 21, 2013);
–2014 Outlook: US Banks (Nov. 21, 2013);
–Global Trading and Universal Banks – Periodic Review (Dec.
12, 2013);
–Fitch Fundamentals Index – US; Index Trend Analysis 4Q13
(Jan. 15, 2014);
–US Banking Quarterly Comment: 4Q13 (Earnings Continue to
Tick Up, but
Challenges Remain) (Jan. 27, 2014);
–US Banking Capital Market Update: 4Q13 (Weak FICC Results
Limit Overall
Revenue Growth) (Jan. 28, 2014).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
here
Securities Firms Criteria
here
Assessing and Rating Bank Subordinated and Hybrid Securities
Criteria
here
Rating FI Subsidiaries and Holding Companies
here
The Evolving Dynamics of Support for Banks
here
Bank Support: Likely Rating Paths
here
Sovereign Support For Banks: Update on Position Outlined in 3Q13
here
2014 Outlook: US Securities Firms (Capital and Liquidity
Counterbalance
Challenging Market Conditions)
here
2014 Outlook: US Banks
here
Global Trading and Universal Banks – Periodic Review
here
Fitch Fundamentals Index – US; Index Trend Analysis 3Q13
here
US Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick
Up, but
Challenges Remain)
here
US Banking Capital Market Update: 4Q13 (Weak FICC Results
Limit Overall
Revenue Growth)
here
Additional Disclosure
Solicitation Status
here
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DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS
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WEBSITE.

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