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NEW YORK, October 18, 2012 – Morgan Stanley (NYSE: MS) today reported net revenues of $5.3 billion for the third quarter ended September 30, 2012 compared with $9.8 billion a year ago. For the current quarter, the loss from continuing operations applicable to Morgan Stanley was $1.0 billion, or a loss of $0.55 per diluted share,7 compared with income of $2.2 billion, or $1.14 per diluted share,7 for the same period a year ago. Results for the quarter included negative revenue of $2.3 billion compared with positive revenue of $3.4 billion a year ago related to changes in Morgan Stanley's debt-related credit spreads and other credit factors (Debt Valuation Adjustment, DVA).1 Excluding DVA, net revenues for the current quarter were $7.6 billion compared with $6.4 billion a year ago and income from continuing operations applicable to Morgan Stanley was $561 million, or $0.28 per diluted share, compared with income of $64 million, or $0.02 a year ago.3, 7, 8 Compensation expense of $3.9 billion increased from $3.6 billion a year ago. Non-compensation expenses of $2.8 billion increased from $2.5 billion a year ago primarily due to litigation costs reported in Institutional Securities and non-recurring expenses associated with the Morgan Stanley Wealth Management (MSWM)9 integration. For the current quarter, the net loss applicable to Morgan Stanley, including discontinued operations, was $0.55 per diluted share, compared with net income of $1.15 per diluted share in the third quarter of 2011.
Business Overview
James P. Gorman, Chairman and Chief Executive Officer, said, "Our third quarter results show a balanced, strategically focused franchise that has attained stronger revenues and executed on key goals. The rebound in Fixed Income & Commodities sales and trading indicates that clients have re-engaged after the uncertainty of the rating review in the previous quarter. We are beginning to unlock the full potential of the Global Wealth Management franchise, having increased our ownership of, and agreed on a purchase price for the rest of, Morgan Stanley Wealth Management. I am confident in our potential to enhance profitability and increase value for our shareholders in the quarters ahead."
INSTITUTIONAL SECURITIES Institutional Securities reported a pre-tax loss from continuing operations of $1.9 billion compared with pre-tax income of $3.4 billion in the third quarter of last year. Net revenues for the current quarter were $1.4 billion compared with $6.4 billion a year ago. DVA resulted in negative revenue of $2.3 billion in the current quarter compared with positive revenue of $3.4 billion a year ago. Excluding DVA, net revenues for the current quarter were $3.6 billion compared with $3.0 billion a year ago. The following discussion for sales and trading excludes DVA.
(1) 3Q 2012 pre-tax income includes $193 million of non-recurring costs associated with GLOBAL WEALTH MANAGEMENT GROUP Global Wealth Management Group reported pre-tax income from continuing operations of $239 million compared with $356 million in the third quarter of last year. Net revenues for the current quarter were $3.3 billion compared with $3.2 billion a year ago. The quarter's reported pre-tax margin was 7%; excluding $193 million of non-recurring costs associated with the MSWM integration and purchase of an additional 14% stake in the Joint Venture, the pre-tax margin was 13%.4, 5 Income after the noncontrolling interest allocation to Citigroup Inc. (Citi) and before taxes was $234 million.13
ASSET MANAGEMENT Asset Management reported pre-tax income from continuing operations of $198 million compared with a pre-tax loss of $118 million in last year's third quarter.15 The quarter's reported pre-tax margin was 31%.4 Income after the noncontrolling interest allocation and before taxes was $148 million.
Morgan Stanley's Tier 1 capital ratio under Basel I was approximately 16.7% and Tier 1 common ratio was approximately 13.7% at September 30, 2012.17 At September 30, 2012, book value and tangible book value per common share were $30.53 and $26.65,18 respectively, based on approximately 2.0 billion shares outstanding. Tangible book value per common share reflected a reduction of approximately $0.58 related to the increased 14% ownership interest in the Joint Venture. The effective tax rate from continuing operations for the current quarter was 35.4%. The current quarter includes an out of period net income tax provision of approximately $82 million to adjust previously recorded deferred tax assets.19 The Firm declared a $0.05 quarterly dividend per common share. The dividend is payable on November 15, 2012 to common shareholders of record on October 31, 2012. Morgan Stanley is a leading global financial services firm providing a wide range of investment banking, securities, investment management and wealth management services. The Firm's employees serve clients worldwide including corporations, governments, institutions and individuals from more than 1,200 offices in 43 countries. For further information about Morgan Stanley, please visit www.morganstanley.com. A financial summary follows. Financial, statistical and business-related information, as well as information regarding business and segment trends, is included in the Financial Supplement. Both the earnings release and the Financial Supplement are available online in the Investor Relations section at www.morganstanley.com. The information above contains forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and which reflect management's current estimates, projections, expectations or beliefs and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of additional risks and uncertainties that may affect the future results of the Company, please see "Forward-Looking Statements" immediately preceding Part I, Item 1, "Competition" and "Supervision and Regulation" in Part I, Item 1, "Risk Factors" in Part I, Item 1A, "Legal Proceedings" in Part I, Item 3, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 and "Quantitative and Qualitative Disclosures about Market Risk" in Part II, Item 7A, each of the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and other items throughout the Form 10-K, the Company's Quarterly Reports on Form 10-Q, including "Risk Factors" in Part II, Item 1A therein, and the Company's Current Reports on Form 8-K, including any amendments thereto. 1 Represents the change in the fair value of certain of Morgan Stanley's long-term and short-term borrowings resulting from fluctuations in its credit spreads and other credit factors (commonly referred to as "DVA"). 2 From time to time, Morgan Stanley may disclose certain "non-GAAP financial measures" in the course of its earnings releases, earnings conference calls, financial presentations and otherwise. For these purposes, "GAAP" refers to generally accepted accounting principles in the United States. The Securities and Exchange Commission (SEC) defines a "non-GAAP financial measure" as a numerical measure of historical or future financial performance, financial positions, or cash flows that is subject to adjustments that effectively exclude, or include amounts from the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures disclosed by Morgan Stanley are provided as additional information to investors in order to provide them with greater transparency about, or an alternative method for assessing our financial condition and operating results. These measures are not in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with non-GAAP financial measures used by other companies. Whenever we refer to a non-GAAP financial measure, we will also generally present the most directly comparable financial measure calculated and presented in accordance with GAAP, along with a reconciliation of the differences between the non-GAAP financial measure we reference with such comparable GAAP financial measure. 3 Income (loss) per diluted share amounts, excluding DVA, are non-GAAP financial measures that the Firm considers useful for investors to allow better comparability of period-to-period operating performance. Such exclusions are provided to differentiate revenues associated with Morgan Stanley borrowings, regardless of whether the impact is either positive, or negative, that result solely from fluctuations in credit spreads and other credit factors. The reconciliation of income (loss) per diluted share from continuing operations applicable to Morgan Stanley common shareholders and average diluted shares from a non-GAAP to GAAP basis is as follows (shares and DVA are presented in millions):
4 Pre-tax margin is a non-GAAP financial measure that the Firm considers useful for investors to assess operating performance. Pre-tax margin represents income (loss) from continuing operations before taxes, divided by net revenues. 5 Global Wealth Management's pre-tax margin was adjusted for approximately $193 million of non-recurring costs associated with the MSWM integration and the purchase of an additional 14% stake in the Joint Venture. The non-recurring items reflected approximately $176 million of non-compensation and $17 million of compensation related expenses, reported in the Global Wealth Management business segment. 6 The Firm completed the purchase of the additional 14% stake in the Joint Venture from Citi on September 17, 2012 for $1.89 billion. At September 30, 2012, the Firm holds a 65% stake in the Joint Venture. The Firm must use reasonable best efforts to obtain regulatory approvals required to purchase the remaining 35% stake in the Joint Venture by June 1, 2015. Due to the terms of the revised agreement with Citi, at September 30, 2012, the Firm reclassified approximately $4.3 billion of non-redeemable noncontrolling interests to redeemable noncontrolling interests on the condensed consolidated statements of financial condition. 7 Includes preferred dividends and other adjustments related to the calculation of earnings per share of approximately $24 million for the quarter ended September 30, 2012 and $46 million for the quarter ended September 30, 2011. Refer to page 3 of Morgan Stanley's Financial Supplement accompanying this release for the calculation of earnings per share. 8 Income (loss) applicable to Morgan Stanley, excluding DVA, is a non-GAAP financial measure that the Firm considers useful for investors to allow for better comparability of period-to-period operating performance. The reconciliation of income (loss) from continuing operations applicable to Morgan Stanley from a non-GAAP to GAAP basis is as follows (amounts are presented in millions):
9 On September 25, 2012, the Firm announced that its U.S. wealth management business, Morgan Stanley Smith Barney, was rebranded Morgan Stanley Wealth Management (MSWM). 10 Source: Thomson Reuters – for the period of January 1, 2012 to September 30, 2012 as of October 2, 2012. 11 Sales and trading net revenues, including Fixed Income & Commodities (FIC) and Equity sales and trading net revenues excluding DVA, are non-GAAP financial measures that the Firm considers useful for investors to allow better comparability of period-to-period operating performance. The reconciliation of sales and trading, including FIC and Equity sales and trading net revenues from a non-GAAP to GAAP basis, is as follows (amounts are presented in millions):
12 VaR represents the loss amount that one would not expect to exceed, on average, more than five times every one hundred trading days in the Firm's trading positions if the portfolio were held constant for a one-day period. Effective for the quarter ended September 30, 2012, the Firm enhanced its VaR model to make it more responsive to current market conditions while maintaining a longer-term perspective. The model has been approved by the Firm's regulators for use in the Firm's regulatory capital calculations. VaR has been recast for all periods to reflect this enhancement. Further discussion of the calculation of VaR and the limitations of the Firm's VaR methodology will be disclosed in Part I, Item 3 "Quantitative and Qualitative Disclosures about Market Risk" included in Morgan Stanley's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012. Refer to page 8 of Morgan Stanley's Financial Supplement accompanying this release for the VaR disclosure. 13 During the quarter ended September 30, 2012, Morgan Stanley completed the purchase of an additional 14% stake in the Joint Venture from Citi, increasing the Firm's interest from 51% to 65%. Prior to September 17, 2012, Citi's results related to its 49% interest were reported in net income (loss) applicable to nonredeemable noncontrolling interests on page 10 of Morgan Stanley's Financial Supplement accompanying this release. Due to the terms of the revised agreement with Citi, subsequent to the purchase of the additional 14% stake, Citi's results related to the 35% interest are reported in net income (loss) applicable to redeemable noncontrolling interests on page 10 of Morgan Stanley's Financial Supplement accompanying this release. 14 Transactional revenues include investment banking, principal transactions - trading and commissions and fee revenues. 15 Results for the third quarter of 2012 and 2011 included pre-tax income of $50 million and a pre-tax loss of $17 million, respectively, related to principal investments held by certain consolidated real estate funds. The limited partnership interests in these funds are reported in net income (loss) applicable to noncontrolling interests on page 12 of Morgan Stanley's Financial Supplement accompanying this release. 16 Results for the current quarter included gains of $51 million compared with losses of $13 million in the prior year third quarter related to principal investments held by certain consolidated real estate funds. 17 The Firm calculates its Tier 1 capital ratio and risk-weighted assets in accordance with the capital adequacy standards for financial holding companies adopted by the Federal Reserve Board. These standards are based upon a framework described in the International Convergence of Capital Measurement and Capital Standards, July 1988, as amended, also referred to as Basel I. In accordance with the Federal Reserve Board's definition, Tier 1 common capital is defined as Tier 1 capital less non-common elements in Tier 1 capital, including perpetual preferred stock and related surplus, minority interest in subsidiaries, trust preferred securities and mandatory convertible preferred securities. These computations are preliminary estimates as of October 18, 2012 (the date of this release) and could be subject to revision in Morgan Stanley's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012. 18 Tangible common equity and tangible book value per common share are non-GAAP financial measures that the Firm considers to be useful measures of capital adequacy. Tangible common equity equals common equity less goodwill and intangible assets net of allowable mortgage servicing rights deduction and includes only the Firm's share of the Joint Venture's goodwill and intangible assets. Tangible book value per common share equals tangible common equity divided by period end common shares outstanding. 19 The Firm recognized an out-of-period net income tax provision of approximately $82 million in the Institutional Securities business segment for the quarter ended September 30, 2012, primarily related to the overstatement of tax benefits associated with repatriated earnings of a foreign subsidiary in 2010. The Firm has evaluated the effects of the understatement of income tax provision both qualitatively and quantitatively, and concluded that it did not have a material impact on any prior annual or quarterly consolidated results.
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