Form 10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

Commission File Number 1-11758

 

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(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
Non-Cumulative Preferred Stock, Series A, $0.01 par value

  New York Stock Exchange   MS/PA

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-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 of Fixed-to-Floating Rate Non-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%
Non-Cumulative Preferred Stock, Series G, $0.01 par value

  New York Stock Exchange   MS/PG

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-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 of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series K, $0.01 par value

  New York Stock Exchange   MS/PK

Global Medium-Term Notes, Series A, Fixed Rate Step-Up Senior Notes Due 2026 of
Morgan Stanley Finance LLC (and Registrant’s guarantee with respect thereto)

  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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-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 Rule 12b-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 Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of April 30, 2019, there were 1,682,234,555 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


Table of Contents

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QUARTERLY REPORT ON FORM 10-Q

For the quarter ended March 31, 2019

 

Table of Contents   Part      Item      Page  

Financial Information

    I                 1  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    I        2        1  

Introduction

                      1  

Executive Summary

                      2  

Business Segments

                      6  

Supplemental Financial Information and Disclosures

                      13  

Accounting Development Updates

                      13  

Critical Accounting Policies

                      14  

Liquidity and Capital Resources

                      14  

Balance Sheet

                      14  

Regulatory Requirements

                      19  

Quantitative and Qualitative Disclosures about Risk

    I        3        24  

Market Risk

                      24  

Credit Risk

                      26  

Country and Other Risks

                      30  

Report of Independent Registered Public Accounting Firm

                      33  

Consolidated Financial Statements and Notes

    I        1        34  

Consolidated Income Statements (Unaudited)

                      34  

Consolidated Comprehensive Income Statements (Unaudited)

                      35  

Consolidated Balance Sheets (Unaudited at March 31, 2019)

                      36  

Consolidated Statements of Changes in Total Equity (Unaudited)

                      37  

Consolidated Cash Flow Statements (Unaudited)

                      38  

Notes to Consolidated Financial Statements (Unaudited)

                      39  

  1.

 

Introduction and Basis of Presentation

                      39  

  2.

 

Significant Accounting Policies

                      40  

  3.

 

Fair Values

                      40  

  4.

 

Derivative Instruments and Hedging Activities

                      48  

  5.

 

Investment Securities

                      51  

  6.

 

Collateralized Transactions

                      54  

  7.

 

Loans, Lending Commitments and Allowance for Credit Losses

                      55  

  8.

 

Equity Method Investments

                      57  

  9.

 

Deposits

                      58  

10.

 

Borrowings and Other Secured Financings

                      58  

11.

 

Commitments, Leases, Guarantees and Contingencies

                      58  

12.

 

Variable Interest Entities and Securitization Activities

                      63  

13.

 

Regulatory Requirements

                      65  

14.

 

Total Equity

                      67  

15.

 

Earnings per Common Share

                      69  

16.

 

Interest Income and Interest Expense

                      69  

17.

 

Income Taxes

                      69  

18.

 

Segment, Geographic and Revenue Information

                      70  

19.

 

Subsequent Events

                      71  

Financial Data Supplement (Unaudited)

                      72  

Glossary of Common Acronyms

                      73  

Other Information

    II                 75  

Legal Proceedings

    II        1        75  

Unregistered Sales of Equity Securities and Use of Proceeds

    II        2        76  

Controls and Procedures

    I        4        77  

Exhibits

    II        6        77  

Exhibit Index

                      E-1  

Signatures

                      S-1  

 

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Available Information

We file annual, quarterly and current reports, proxy statements and other information with the SEC. 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 is www.morganstanley.com. You can access our Investor Relations webpage at www.morganstanley.com/about-us-ir. We make available free of charge, on or through our Investor Relations webpage, our Proxy Statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-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 at www.morganstanley.com/about-us-governance. Our Corporate Gover-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.

 

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Management’s

Discussion and Analysis of Financial Condition and Results of Operations

Introduction

 

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 the definition of certain acronyms used throughout this Form 10-Q.

A description of the clients and principal products and services of each of our business segments is as follows:

Institutional Securities provides 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 activities include originating corporate loans, commercial mortgage lending, providing secured lending facilities and extending financing to sales and trading customers. Other activities include investments and research.

Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses and institutions covering brokerage and investment advisory services; financial and wealth planning services; annuity and insurance products; securities-based lending, residential real estate loans and other lending products; banking and retirement plan services.

Investment Management provides 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 served through intermediaries, including affiliated and non-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,” and “Risk Factors” in the 2018 Form 10-K, and “Liquidity and Capital Resources—Regulatory Requirements” herein.

 

 

  1   March 2019 Form 10-Q


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Management’s Discussion and Analysis

 

Executive Summary

Overview of Financial Results

Consolidated Results

Net Revenues

($ in millions)

 

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Net Income Applicable to Morgan Stanley

($ in millions)

 

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Earnings per Common Share1

 

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1.

For the calculation of basic and diluted EPS, see Note 15 to the financial statements.

 

We reported net revenues of $10,286 million in the quarter ended March 31, 2019 (“current quarter,” or “1Q 2019”), compared with $11,077 million in the quarter ended March 31, 2018 (“prior year quarter,” or “1Q 2018”). For the current quarter, net income applicable to Morgan Stanley was $2,429 million, or $1.39 per diluted common share, compared with $2,668 million or $1.45 per diluted common share, in the prior year quarter.

Non-interest Expenses1

($ in millions)

 

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1.

The percentages on the bars in the chart represent the contribution of compensation and benefits expenses and non-compensation expenses to total non-interest expenses.

 

 

Compensation and benefits expenses of $4,651 million in current quarter decreased 5% from $4,914 million in the prior year quarter, primarily due to decreases in discretionary incentive compensation and the formulaic payout to Wealth Management representatives, both driven by lower revenues. These decreases were partially offset by increases in the fair value of investments to which certain deferred compensation plans are 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 includes intermittent net discrete tax benefits of $101 million, primarily associated with the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations. For further information, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

 

 

March 2019 Form 10-Q   2  


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Management’s Discussion and Analysis

 

Selected Financial Information and Other Statistical Data

 

     Three Months Ended
March 31,
 
$ in millions    2019      2018  

Income from continuing operations applicable to Morgan Stanley

   $         2,429      $         2,670  

Income (loss) from discontinued operations applicable to Morgan Stanley

            (2

Net income applicable to Morgan Stanley

     2,429        2,668  

Preferred stock dividends and other

     93        93  

Earnings applicable to Morgan Stanley common shareholders

   $ 2,336      $ 2,575  

Expense efficiency ratio1

     71.3%        69.1%  

ROE2

     13.1%        14.9%  

ROTCE2

     14.9%        17.2%  

 

in millions, except per share and employee data

   

At

March 31,

2019

 

 

 

   

At

December 31,

2018

 

 

 

GLR3

  $              233,148     $ 249,735  

Loans4

  $ 116,197     $ 115,579  

Total assets

  $ 875,964     $ 853,531  

Deposits

  $ 179,731     $ 187,820  

Borrowings

  $ 190,691     $ 189,662  

Common shares outstanding

    1,686       1,700  

Common shareholders’ equity

  $ 72,204     $ 71,726  

Tangible common shareholders’ equity2

  $ 63,434     $ 62,879  

Book value per common share5

  $ 42.83     $ 42.20  

Tangible book value per common share2, 5

  $ 37.62     $ 36.99  

Worldwide employees

    60,469       60,348  

 

     

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 total non-interest expense as a percentage of net revenues.

2.

Represents a non-GAAP measure. See “Selected Non-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 and tangible book value per common share equal common shareholders’ equity and tangible common shareholders’ equity, respectively, divided by common shares outstanding.

6.

At March 31, 2019 and December 31 2018, our risk-based capital ratios are based on the Standardized Approach rules. For a discussion of our capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.

Business Segment Results

Net Revenues by Segment1, 2 

($ in millions)

 

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Net Income Applicable to Morgan Stanley by Segment1, 3

($ in millions)

 

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1.

The percentages on the bars in the charts represent the contribution of each business segment to the total of the applicable financial category and may not total to 100% due to intersegment eliminations.

2.

The total amount of Net Revenues by Segment includes intersegment eliminations of $(103) million and $(115) million in the current quarter and prior year quarter, respectively.

3.

The total amount of Net Income Applicable to Morgan Stanley by Segment includes intersegment eliminations of $(2) million in the current quarter.

 

 

Institutional Securities net revenues of $5,196 million in the current quarter decreased 15% from the prior year quarter, primarily reflecting lower revenues from both sales and trading and Investment banking.

 

 

Wealth Management net revenues were relatively unchanged from the prior year quarter.

 

 

Investment Management net revenues of $804 million in the current quarter increased 12% from the prior year quarter, primarily reflecting higher revenues from Investments.

 

 

  3   March 2019 Form 10-Q


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Management’s Discussion and Analysis

 

Net Revenues by Region1, 2

($ in millions)

 

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1.

For a discussion of how the geographic breakdown of net revenues is determined, see Note 18 to the financial statements.

2.

The percentages on the bars in the charts represent the contribution of each region to the total.

Selected Non-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 the non-GAAP financial measures we disclose to be useful to us, analysts, investors and other 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 with non-GAAP financial measures used by other companies. Whenever we refer to a non-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 the non-GAAP financial measure.

The principal non-GAAP financial measures presented in this document are set forth in the following tables.

Reconciliations from U.S. GAAP to Non-GAAP Consolidated
Financial Measures

 

 
     Three Months Ended
March 31,
 
$ in millions, except per share data    2019     2018  

Net income applicable to
Morgan Stanley

   $             2,429     $             2,668  

Impact of adjustments

     (101      

Adjusted net income applicable to Morgan Stanley—non-GAAP1

   $ 2,328     $ 2,668  

Earnings per diluted common share

   $ 1.39     $ 1.45  

Impact of adjustments

     (0.06      

Adjusted earnings per diluted common share—non-GAAP1

   $ 1.33     $ 1.45  

Effective income tax rate

     16.5%       20.9%  

Impact of adjustments

     3.4%       —%  

Adjusted effective income tax rate—non-GAAP1

     19.9%       20.9%  

 

$ 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  
 

 

March 2019 Form 10-Q   4  


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Management’s Discussion and Analysis

 

 

Consolidated Non-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

March 31,

 
$ in billions   2019     2018  

Pre-tax margin4

   

Institutional Securities

    31%       35%  

Wealth Management

    27%       27%  

Investment Management

    22%       21%  

Consolidated

    29%       31%  

Average common equity5

 

 

Institutional Securities

  $             40.4     $             40.8  

Wealth Management

    18.2       16.8  

Investment Management

    2.5       2.6  

Parent

    10.5       8.8  

Consolidated average common equity

  $ 71.6     $ 69.0  

Average tangible common equity5

 

 

Institutional Securities

  $ 39.9     $ 40.1  

Wealth Management

    10.2       9.2  

Investment Management

    1.5       1.7  

Parent

    11.2       8.9  

Consolidated average tangible common equity

  $ 62.8     $ 59.9  

ROE2, 6

 

 

Institutional Securities

    12.9%       15.2%  

Wealth Management

    19.8%       21.3%  

Investment Management

    21.9%       19.3%  

Consolidated

    13.1%       14.9%  

ROTCE2, 6

 

 

Institutional Securities

    13.0%       15.5%  

Wealth Management

    35.6%       38.9%  

Investment Management

    35.3%       30.3%  

Consolidated

    14.9%       17.2%  

 

1.

Adjusted amounts exclude intermittent net discrete tax provisions (benefits). We consider certain income tax consequences associated with employee share-based awards recognized in Provision for income taxes in the income statements to be recurring-type (“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). For further information on the net discrete tax provisions (benefits), see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

2.

ROE and ROTCE represent annualized net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity and average tangible common equity, respectively. When excluding intermittent net discrete tax provisions (benefits), both the numerator and average denominator are adjusted.

3.

The calculations used in determining our “ROE and ROTCE Targets” referred to in the following section are the Adjusted ROE and Adjusted ROTCE amounts shown in this table.

4.

Pre-tax margin represents income from continuing operations before income taxes as a percentage of net revenues.

5.

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).

6.

The calculation of ROE and ROTCE by segment uses net income applicable to Morgan Stanley by segment less preferred dividends allocated to each segment as a percentage of average common equity and average tangible common equity, respectively, allocated to each segment.

 

 

  5   March 2019 Form 10-Q


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Management’s Discussion and Analysis

 

Return on Equity and Tangible Common Equity Targets

We have established an ROE Target of 10% to 13% and 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; outsized 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 2018 Form 10-K.

Business Segments

Substantially all of our operating revenues and operating expenses are directly attributable to our 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.

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 2018 Form 10-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   6  


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Management’s Discussion and Analysis

 

Institutional Securities

Income Statement Information

 

    Three Months Ended
March 31,
       
$ in millions   2019     2018     % Change  

Revenues

     

Investment banking

  $ 1,151     $ 1,513       (24)%  

Trading

    3,130       3,643       (14)%  

Investments

    81       49       65%  

Commissions and fees

    621       744       (17)%  

Asset management

    107       110       (3)%  

Other

    222       136       63%  

Total non-interest revenues

    5,312       6,195       (14)%  

Interest income

    3,056       1,804       69%  

Interest expense

    3,172       1,899       67%  

Net interest

    (116     (95     (22)%  

Net revenues

    5,196       6,100       (15)%  

Compensation and benefits

    1,819       2,160       (16)%  

Non-compensation expenses

    1,782       1,828       (3)%  

Total non-interest expenses

    3,601       3,988       (10)%  

Income from continuing operations before income taxes

    1,595       2,112       (24)%  

Provision for income taxes

    190       449       (58)%  

Income from continuing operations

    1,405       1,663       (16)%  

Income (loss) from discontinued operations, net of income taxes

          (2     100%  

Net income

    1,405       1,661       (15)%  

Net income applicable to noncontrolling interests

    34       34       —%  

Net income applicable to Morgan Stanley

  $ 1,371     $ 1,627       (16)%  

Investment Banking

Investment Banking Revenues

 

    Three Months Ended
March 31,
       
$ in millions       2019             2018         % Change  

Advisory

  $ 406     $ 574       (29)%  

Underwriting:

     

Equity

    339       421       (19)%  

Fixed income

    406       518       (22)%  

Total Underwriting

    745       939       (21)%  

Total Investment banking

  $ 1,151     $ 1,513       (24)%  

Investment Banking Volumes

 

     Three Months Ended
March 31,
 
$ in billions          2019                  2018        

Completed mergers and acquisitions1

   $ 187      $ 170  

Equity and equity-related offerings2, 3

     14        22  

Fixed income offerings2, 4

             54                58  

Source: Refinitiv (formerly Thomson Reuters Financial & Risk), data as of 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 timing of certain transactions.

 

1.

Includes transactions of $100 million or more. Based on full credit to each of the advisors in a transaction.

2.

Based on full credit for single book managers and equal credit for joint book managers.

3.

Includes Rule 144A issuances and registered public offerings of common stock and convertible securities and rights offerings.

4.

Includes Rule 144A and publicly registered issuances, non-convertible preferred stock, mortgage-backed and asset-backed securities, and taxable municipal debt. Excludes leveraged loans and self-led issuances.

Investment banking revenues of $1,151 million in the current quarter decreased 24%, reflecting lower results in both our advisory and underwriting businesses.

 

 

Advisory revenues decreased in the current quarter primarily due to the effect of lower fee realizations.

 

 

Equity underwriting revenues decreased in the current quarter primarily as a result of lower volumes. Revenues decreased primarily in initial public offerings, follow-ons and convertible issuances, partially offset by an increase in secondary block share trades.

 

 

Fixed income underwriting revenues decreased in the current quarter due to the effect of lower fee realizations and lower volumes. Revenues decreased primarily in non-investment grade loan fees.

See “Investment Banking Volumes” herein.

 

 

  7   March 2019 Form 10-Q


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Management’s Discussion and Analysis

 

Sales and Trading Net Revenues

By Income Statement Line Item

 

     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

March 31,

       
       
$ in millions          2019              2018       % Change  

Equity

   $ 2,015      $ 2,558       (21)%  

Fixed income

     1,710        1,873       (9)%  

Other

     17        (29     159%  

Total

   $ 3,742      $ 4,402       (15)%  

Sales and Trading Revenues—Equity and Fixed Income

 

     Three Months Ended  
     March 31, 2019  
                   Net        
$ in millions    Trading      Fees1      Interest2     Total  

Financing

   $       1,115      $ 98      $ (258   $ 955  

Execution services

     551        553        (44     1,060  

Total Equity

   $ 1,666      $       651      $       (302   $       2,015  

Total Fixed income

   $ 1,727      $ 78      $ (95   $ 1,710  

 

     Three Months Ended  
     March 31, 2018  
                   Net        
$ in millions    Trading      Fees1      Interest2     Total  

Financing

   $ 1,234      $ 107      $ (146   $ 1,195  

Execution services

     791        664        (92     1,363  

Total Equity

   $       2,025      $       771      $       (238   $ 2,558  

Total Fixed income

   $ 1,715      $ 83      $ 75     $       1,873  

 

1.

Includes Commissions and fees and Asset management revenues.

2.

Includes funding costs, which are allocated to the businesses based on funding usage.

As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in the 2018 Form 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 18 to the financial statements.

Equity

Equity sales and trading net revenues of $2,015 million in the current quarter decreased 21% from the prior year quarter, reflecting lower results in both our financing and execution services businesses.

 

 

Financing decreased from the prior year quarter, primarily due to lower 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.

 

 

Execution services decreased from the prior year quarter, reflecting lower Trading revenues as a result of less favorable inventory management and lower client activity in derivatives products. In addition, Commissions and fees decreased due to lower client activity in cash equities products.

Fixed Income

Fixed income net revenues of $1,710 million in the current quarter were 9% lower than the prior year quarter, primarily driven by lower revenues in global macro products and lower Net interest revenues due to higher funding costs, partially offset by higher revenues in credit products and commodities products and other.

 

 

Global macro products revenues decreased reflecting unfavorable inventory management 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 Other Trading revenues increased primarily as a result of gains from client structuring activity within derivatives counterparty credit risk management and effective inventory management in commodities, partially offset by decreased client activity in 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 higher losses on hedges associated with corporate loans.

 

 

March 2019 Form 10-Q   8  


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Management’s Discussion and Analysis

 

Investments, Other Revenues, Non-interest Expenses, and Income Tax Items

Investments

 

 

Net investment gains of $81 million in the current quarter increased from the prior year quarter as a result of higher revenues driven by a fund distribution and gains on real estate limited partnership investments.

Other Revenues

 

 

Other revenues of $222 million in the current quarter increased from the prior year quarter, primarily reflecting higher mark-to-market gains on held for sale loans, partially offset by lower results from certain equity method investments.

Non-interest Expenses

Non-interest expenses of $3,601 million in the current quarter decreased from the prior year quarter, reflecting a 16% decrease in Compensation and benefits expenses and a 3% decrease in Non-compensation expenses.

 

 

Compensation and benefits expenses decreased in the current quarter, primarily due to decreases in discretionary incentive compensation driven by lower revenues, partially offset by increases in the fair value of investments to which certain deferred compensation plans are 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.

 

 

  9   March 2019 Form 10-Q


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Management’s Discussion and Analysis

 

Wealth Management

 

Income Statement Information

 

     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%  

Total non-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)%  

Total non-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

 

    

At

March 31,

     At
December 31,
 
$ in billions, except employee data    2019      2018  

Client assets

   $ 2,476      $ 2,303  

Fee-based client assets1

   $ 1,116      $ 1,046  

Fee-based client assets as a percentage of total client assets

     45%        45%  

Client liabilities2

   $ 82      $ 83  

Investment securities portfolio

   $ 71.3      $ 68.6  

Loans and lending commitments

   $ 83.6      $ 82.9  

Wealth Management representatives

     15,708        15,694  

 

     Three Months Ended
March 31,
 
      2019      2018  

Per representative:

     

Annualized revenues ($ in thousands)3

   $ 1,118      $ 1,115  

Client assets ($ in millions)4

   $ 158      $ 151  

Fee-based asset flows ($ in billions)5

   $ 14.8      $ 18.2  

 

1.

Fee-based client assets represent the amount of assets in client accounts where the fee for services is calculated based on those assets.

2.

Client liabilities include securities-based and tailored lending, residential real estate loans and margin lending.

3.

Revenues per representative equal Wealth Management’s annualized net revenues divided by the average number of representatives.

4.

Client assets per representative equal total period-end client assets divided by period-end number of representatives.

5.

For a description of the Inflows and Outflows included within Fee-based asset flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in the 2018 Form 10-K. Excludes institutional cash management-related activity.

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 lower fee-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   10  


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Management’s Discussion and Analysis

 

Net Interest

Net interest of $1,130 million in the current quarter increased 6% from the prior year quarter primarily as a result of higher interest rates on loans and cash management activities and higher investment securities balances, partially offset by the effect of higher interest rates on Deposits due to changes in funding 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 $3,201 million were relatively unchanged from the prior year quarter.

 

 

Compensation and benefits expenses increased modestly from the prior year quarter, reflecting increases in the fair value of investments to which certain deferred compensation plans are referenced and salaries, offset by decreases in the formulaic payout to Wealth Management representatives linked to lower revenues and the roll-off of certain merger-related employee retention loans.

 

 

Non-compensation expenses decreased due to lower consulting fees and deposit insurance expenses.

Fee-Based Client Assets

Rollforwards

 

$ in billions  

At

December 31,
2018

    Inflows     Outflows     Market
Impact
   

At

March 31,

2019

 

Separately managed1

  $ 279     $ 14     $ (5   $ (12   $ 276  

Unified managed2

    257       13       (11     24       283  

Advisor

    137       8       (9     11       147  

Portfolio manager

    353       19       (14     33       391  

Subtotal

  $ 1,026     $ 54     $ (39   $ 56     $ 1,097  

Cash management

    20       4       (5           19  

Total fee-based
client assets

  $ 1,046     $ 58     $ (44   $ 56     $ 1,116  

 

$ in billions  

At

December 31,
2017

    Inflows     Outflows     Market
Impact
   

At

March 31,

2018

 

Separately managed1

  $ 252     $ 10     $ (6   $ 4     $ 260  

Unified managed2

    271       14       (9     (2     274  

Advisor

    149       9       (9     (2     147  

Portfolio manager

    353       21       (12     (6     356  

Subtotal

  $ 1,025     $ 54     $ (36   $ (6   $ 1,037  

Cash management

    20       4       (3           21  

Total fee-based
client assets

  $ 1,045     $ 58     $ (39   $ (6   $ 1,058  

Average Fee Rates3

 

     Three Months Ended
March 31,
 
Fee rate in bps    2019      2018  

Separately managed

     14        16  

Unified managed2

     101        99  

Advisor

     88        85  

Portfolio manager

     96        96  

Subtotal

     74        76  

Cash management

     6        6  

Total fee-based client assets

     73        75  

 

1.

Includes non-custody account values reflecting prior quarter-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 of fee-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—Wealth Management—Fee-Based Client Assets” in the 2018 Form 10-K.

 

 

  11   March 2019 Form 10-Q


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Management’s Discussion and Analysis

 

Investment Management

Income Statement Information

 

    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)%  

Total non-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)%  

Total non-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 $191 million in the current quarter increased 148% from the prior year quarter primarily as a result of higher carried interest in certain Asia private equity and infrastructure funds.

Asset Management

Asset management revenues of $617 million in the current quarter were relatively unchanged from the prior year quarter, as average AUM and average fee rates remained stable.

See “Assets Under Management or Supervision” herein.

Non-interest Expenses

Non-interest expenses of $630 million in the current quarter increased 11% from the prior year quarter primarily as a result of higher compensation and benefits expenses.

 

 

Compensation and benefits expenses increased in the current quarter primarily due to deferred compensation associated with carried interest.

 

 

Non-compensation expenses were relatively unchanged from the prior year 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
stake assets

    7                                       6  

 

$ in billions  

At

December 31,
2017

    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
stake assets

    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 previous 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 2018 Form 10-K.

 

 

March 2019 Form 10-Q   12  


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Management’s Discussion and Analysis

 

Supplemental Financial Information and

Disclosures

Income Tax Matters

Effective Tax Rate from Continuing Operations

 

     Three Months Ended
March 31,
 
$ in millions    2019     2018  

U.S. GAAP

     16.5     20.9

Adjusted effective income tax rate—non-GAAP1

     19.9     20.9

Net discrete tax provisions/(benefits)

    

Recurring2

   $ (107   $ (147

Intermittent3

   $ (101   $  

 

1.

Adjusted effective income tax rate is a non-GAAP measure that excludes intermittent net discrete tax provisions (benefits). For further information on non-GAAP measures, see “Selected Non-GAAP Financial Information” herein.

2.

We consider certain income tax consequences associated with employee share-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.

The current quarter includes intermittent net discrete tax benefits primarily associated with the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax 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 securities-based lending, which allows clients to borrow money against the value of qualifying securities, and residential real estate loans.

We expect our lending activities to continue to grow through further market penetration of our client base. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Risk—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
March 31,
2019
     At
December 31,
2018
 

Assets

   $ 210.3      $ 216.9  

Investment securities portfolio:

     

Investment securities—AFS

     44.5        45.5  

Investment securities—HTM

     27.8        23.7  

 

Total investment securities

   $ 72.3      $ 69.2  

 

Deposits2

   $ 179.1      $ 187.1  

Wealth Management Loans

 

Securities-based lending and other3

   $ 43.5      $ 44.7  

Residential real estate

     28.0        27.5  

 

Total

   $ 71.5      $ 72.2  

Institutional Securities Loans4

 

Corporate5:

     

Corporate relationship and
event-driven lending

   $ 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

   $ 44.1      $ 41.4  

 

1.

Amounts exclude transactions between the bank subsidiaries, as well as deposits from the Parent Company and affiliates.

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 update 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 cost, such as employee loans.

 

 

  13   March 2019 Form 10-Q


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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.

Critical Accounting Policies

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 2018 Form 10-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 2018 Form 10-K.

Liquidity and Capital Resources

Senior management, with oversight by the 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. Our Treasury department, Firm Risk Committee, 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.

Balance Sheet

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 and market fluctuations. On a regular basis, we review current performance versus established thresholds and assess the need to re-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   14  


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     At December 31, 2018  

$ in millions

     IS        WM        IM        Total  

Assets

           

Cash and cash equivalents1

   $ 69,526      $ 17,621      $ 49      $ 87,196  

Trading assets at fair value

     263,870        60        2,369        266,299  

Investment securities

     23,273        68,559               91,832  

Securities purchased under agreements to resell

     80,660        17,862               98,522  

Securities borrowed

     116,207        106               116,313  

Customer and other receivables

     35,777        16,865        656        53,298  

Loans, net of allowance2

     43,380        72,194        5        115,579  

Other assets3

     13,734        9,125        1,633        24,492  

Total assets

   $   646,427      $   202,392      $   4,712      $   853,531  

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 $876 billion at March 31, 2019 from $854 billion at December 31, 2018, primarily due to higher Securities borrowed and Securities purchased under agreements to resell in the Institutional Securities business segment as a result of higher period-end client balances and Trading liabilities. These increases were partially offset by lower Securities purchased under agreements to resell within 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 the GLR, which support our target liquidity profile. For a further discussion about the Firm’s Required Liquidity Framework and 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 Form 10-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 discussion of our GLR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in the 2018 Form 10-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 and Non-Bank Legal Entities

 

$ in millions  

At

March 31,
2019

   

At
December 31,
2018

    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  

Total Non-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


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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 certain securities-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 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 Form 10-K and Note 6 to the financial 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 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 2018 Form 10-K.

 

 

March 2019 Form 10-Q   16  


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Deposits

 

$ in millions   

At

March 31,

2019

     At
December 31,
2018
 

Savings and demand deposits:

     

Brokerage sweep deposits1

     $            127,678        $            141,255  

Savings and other

     15,523        13,642  

Total Savings and demand

deposits

     143,201        154,897  

Time deposits

     36,530        32,923  

Total

     $            179,731        $            187,820  

 

1.

Amounts represent balances swept from client brokerage accounts.

Deposits are primarily sourced from our Wealth Management clients and are considered to have stable, low-cost funding characteristics. Total deposits at March 31, 2019 decreased compared with December 31, 2018, 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 driven by promotional 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 $190,691 million as of March 31, 2019 were relatively unchanged compared with $189,662 million at December 31, 2018.

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.

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 from non-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


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     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 derivatives 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. See Note 4 to the financial statements for additional information on OTC derivatives that contain such contingent features.

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 other things, the magnitude of the downgrade, the rating relative to peers, the rating assigned by the relevant agency pre-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. In the future, we may expand or contract our capital base to address the changing needs of our businesses.

Common Stock Repurchases

 

     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 as part of our Share 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 sold shares of the Firm’s common stock to us, as part of our Share Repurchase Program. The sales plan 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 has no impact on the strategic alliance between MUFG and us, including our joint ventures in Japan. For a description of our 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, 2019  

Shareholders of record as of

     April 30, 2019  

Preferred Stock Dividend Announcement

          

Announcement date

     March 15, 2019  

Date paid

     April 15, 2019  

Shareholders of record as of

     March 29, 2019  

For additional information on common and preferred stock, see Note 14 to the financial statements.

Off-Balance Sheet Arrangements and Contractual Obligations

Off-Balance Sheet Arrangements

We enter into various off-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  


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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 Form 10-K.

Regulatory Requirements

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 Form 10-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 1 G-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 fully phased-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 the G-SIB capital surcharge, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—G-SIB Capital Surcharge” in the 2018 Form 10-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


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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 consolidated on-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 for off-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, net after-tax DVA and other net after-tax adjustments related to AOCI.

 

 

March 2019 Form 10-Q   20  


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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 both on- and off-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 the Leases 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 for top-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
leverage exposure

     9.5     18.0%  

Eligible LTD3

             $                120,983  

Eligible LTD as a % of RWA

     9.0     32.0%  

Eligible LTD as a % of
leverage exposure

     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 Form 10-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”) and company-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”

 

 

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Management’s Discussion and Analysis

 

in the 2018 Form 10-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 of our 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 of our 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 Form 10-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 leverage use-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 a non-GAAP financial measure. See “Selected Non-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  


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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 Form 10-K.

Regulatory Developments

Proposed Revisions to the Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments Issued by G-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 Form 10-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 a two-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 Form 10-K.

 

 

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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 Risk—Risk Management” in the 2018 Form 10-K.

Market Risk

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 incurs non-trading market risk from lending and deposit-taking activities. The Investment Management business segment primarily incurs non-trading market risk from capital investments in alternative and other funds. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Risk—Market Risk” in the 2018 Form 10-K.

Trading 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 daily VaR-based risk measures to various levels of management.

For information regarding our VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Risk—Market Risk—Trading Risks—Value-at-Risk” in the 2018 Form 10-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 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.

95%/One-Day Management VaR

 

     Three Months Ended
March 31, 2019
 

$ in millions

  

Period

End

    Average     High2      Low2  

Interest rate and credit spread

   $ 32     $     32     $ 39      $ 26  

Equity price

     15       16       19        12  

Foreign exchange rate

     15       14       16        11  

Commodity price

     9       10       12        9  

Less: Diversification benefit1

     (32     (32     N/A        N/A  

Primary Risk Categories

   $ 39     $ 40     $ 48      $ 36  

Credit Portfolio

     17       16       18        14  

Less: Diversification benefit1

     (12     (10     N/A        N/A  

Total Management VaR

   $     44     $ 46     $     55      $     42  

 

     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 simulated one-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 decreased from the three-months ended December 31, 2018, primarily as a result of reduced interest rate and credit spread exposure in the Fixed Income Division of the Institutional Securities business segment.

Distribution of VaR Statistics and Net 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 a 95%/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.

 

 

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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 with trading losses in the current quarter.

Daily 95%/One-Day Total Management VaR for the Current Quarter1

($ in millions)

LOGO

 

1.

The average 95%/one-day total Management VaR for the current quarter was $46 million.

Daily Net Trading Revenues for the Current Quarter

($ in millions)

LOGO

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 our non-trading risks. The following sensitivity analyses cover substantially all of the non-trading risk in our portfolio.

Credit Spread Risk Sensitivity1

 

$ in millions

  At
March 31,
2019
    At
December 31,
2018
 

Derivatives

  $ 6     $ 6  

Funding liabilities2

    37       34  

 

1.

Amounts represent the potential gain for each 1 bps widening of our credit spread.

2.

Relates to structured note liabilities carried at fair value.

U.S. Bank Subsidiaries’ Net Interest 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 previous 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 our 12-month forecast for our U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and our forecasted business activity.

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, including non-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 market re-pricing behavior and other factors. The change in sensitivity to interest rates between March 31, 2019 and December 31, 2018 is primarily driven by a flatter yield curve, expectations of deposit pricing and changes in our asset-liability profile.

 

 

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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 is 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 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.

Equity Market Sensitivity

In the Wealth Management and Investment Management business segments, certain fee-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

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 Risk—Credit Risk” in the 2018 Form 10-K.

 

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, 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.

Due to the nature of our obligations under the commitments, these amounts include certain commitments participated to third parties.

3.

Beginning in 2019, loans previously referred to as Wholesale real estate are referred to as Commercial real estate.

 

 

March 2019 Form 10-Q   26  


Table of Contents

LOGO

Risk Disclosures

 

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. Total loans and lending commitments increased by approximately $10 billion primarily due to increases in event-driven lending commitments within the Institutional Securities business segment.

Credit exposure arising from our loans and lending commitments is measured in accordance with our internal risk management standards. Risk factors considered in determining the aggregate allowance for loan and commitment losses include the borrower’s financial strength, industry, facility structure, loan-to-value ratio, debt service ratio, collateral and covenants. Qualitative and environmental factors such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered.

See Notes 3, 7 and 11 to the financial statements for further information.

Allowance for Loans and Lending Commitments Held for Investment

 

     At      At  
     March 31,      December 31,  
$ in millions    2019      2018  

Loans

   $ 259      $ 238  

Lending commitments

     211        203  

Total allowance for loans and
lending commitments

   $ 470      $ 441  

The aggregate allowance for loans and lending commitments increased in the current quarter primarily in Institutional Securities as a result of select downgrades within Corporate loans as well as growth in lending commitments. See Notes 7 and 11 to the financial statements for further information.

Status of Loans Held for Investment

 

     At March 31, 2019     At December 31, 2018  
      IS     WM     IS     WM  

Current

     99.1      99.9      99.8      99.9 

Nonaccrual1

     0.9      0.1      0.2      0.1 

 

1.

These loans are on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt.

Institutional Securities Loans and Lending Commitments1

 

    At March 31, 2019  
    Years to Maturity        

$ in millions

  Less than 1     1-3     3-5     Over 5     Total  

Loans

         

AA

  $ 369     $ 52     $     $ 19     $ 440  

A

    712       1,686       999       264       3,661  

BBB

    3,101       5,070       4,380       401       12,952  

NIG

    5,966       15,002       10,348       5,646       36,962  

Unrated2

    87       26       234       1,714       2,061  

Total loans

    10,235       21,836       15,961       8,044       56,076  

Lending commitments

 

       

AAA

    90       50                   140  

AA

    2,520       1,163       2,757             6,440  

A

    9,716       5,539       9,857       428       25,540  

BBB

    3,259       12,132       21,084       374       36,849  

NIG

    1,637       10,832       15,833       4,750       33,052  

Unrated2

    8             134       11       153  

Total lending commitments

    17,230       29,716       49,665       5,563       102,174  

Total exposure

  $ 27,465     $ 51,552     $ 65,626     $ 13,607     $ 158,250  

 

    At December 31, 2018  
    Years to Maturity        

$ in millions

  Less than 1     1-3     3-5     Over 5     Total  

Loans

         

AA

  $ 7     $ 430     $     $ 19     $ 456  

A

    565       1,580       858       267       3,270  

BBB

    3,775       4,697       4,251       495       13,218  

NIG

    7,151       12,882       9,313       5,889       35,235  

Unrated2

    88       95       160       1,762       2,105  

Total loans

    11,586       19,684       14,582       8,432       54,284  

Lending commitments

 

       

AAA

    90       75                   165  

AA

    2,491       1,177       2,863             6,531  

A

    2,892       6,006       9,895       502       19,295  

BBB

    2,993       11,825       19,461       638       34,917  

NIG

    1,681       10,604       16,075       5,751       34,111  

Unrated2

    8             38             46  

Total lending commitments

    10,155       29,687       48,332       6,891       95,065  

Total exposure

  $ 21,741     $ 49,371     $ 62,914     $ 15,323     $ 149,349  

 

NIG–Non-investment

grade

1.

Obligor credit ratings are internally determined by CRM.

2.

Unrated loans and lending commitments are primarily trading positions that are measured at fair value and risk managed as a component of market risk. For a further discussion of our market risk, see “Market Risk” herein.

 

 

  27   March 2019 Form 10-Q


Table of Contents

LOGO

Risk Disclosures

 

Institutional Securities Loans and Lending Commitments by Industry

 

$ in millions

  

At

March 31,
2019

     At
December 31,
2018
 

Industry

     

Financials

   $ 34,152      $ 32,655  

Real estate

     26,666        24,133  

Healthcare

     17,348        10,158  

Communications services

     12,427        11,244  

Industrials

     11,398        13,701  

Energy

     9,774        9,847  

Utilities

     9,360        9,856  

Information technology

     9,086        9,896  

Consumer discretionary

     8,087        8,314  

Consumer staples

     7,583        7,921  

Materials

     7,033        5,969  

Insurance

     3,637        3,744  

Other

     1,699        1,911  

Total

     $            158,250        $            149,349  

In connection with certain Institutional Securities business segment activities, we provide loans and lending commitments to a diverse group of corporate and other institutional clients. We also purchase a variety of loans in the secondary market. Our loans and lending commitments may have varying terms; may be senior or subordinated; may be secured or unsecured; are generally contingent upon representations, warranties and contractual conditions applicable to the borrower; and may be syndicated, traded or hedged by us.

We also participate in securitization activities, whereby we extend short- or long-term collateralized lines of credit and term loans with various types of collateral, including residential real estate, commercial real estate, corporate and financial assets. These collateralized loans and lending commitments generally provide for over­collateralization. Credit risk with respect to these loans and lending commitments arises from the failure of a borrower to perform according to the terms of the loan agreement or a decline in the underlying collateral value. The Firm monitors collateral levels against the requirements of lending agreements. See Note 12 to the financial statements for information about our securitization activities.

Institutional Securities Corporate Loans1

 

$ in millions    At
March 31,
2019
    

At
December 31,
2018

 

Corporate relationship and
event-driven lending2

   $ 13,248      $ 13,317  

Secured lending facilities3

     22,388        21,408  

Securities-based lending and other4

     7,402        8,331  

Total Corporate

   $         43,038      $         43,056  

 

1.

Amounts include loans held for investment, loans held for sale and loans measured at fair value. Loans at fair value are included in Trading assets in the balance sheets.

2.

Relationship and event-driven loans typically consist of revolving lines of credit, term loans and bridge loans. For additional information on event-driven loans, see “Institutional Securities Event-Driven Loans and Lending Commitments” herein.

3.

Secured lending facilities includes loans provided to clients to warehouse loans secured by underlying real estate and other assets.

4.

Securities-based lending and other includes financing extended to sales and trading customers and corporate loans purchased in the secondary market.

Institutional Securities Event-Driven Loans and Lending Commitments

 

    At March 31, 2019  
    Years to Maturity        
$ in millions   Less than 1     1-3     3-5     Over 5     Total      

Loans

  $ 2,010     $ 307     $ 476     $ 1,784     $ 4,577  

Lending commitments

    7,594       2,816       3,192       2,436       16,038  

Total loans and lending commitments

  $ 9,604     $     3,123     $     3,668     $     4,220     $     20,615  

 

    At December 31, 2018  
    Years to Maturity        
$ in millions   Less than 1     1-3     3-5     Over 5     Total  

Loans

  $ 2,582     $ 287     $ 656     $ 1,618     $ 5,143  

Lending commitments

    1,506       2,456       2,877       3,658       10,497  

Total loans and lending commitments

  $ 4,088     $     2,743     $     3,533     $     5,276     $     15,640  

Event-driven loans and lending commitments, which comprise a portion of corporate loans and lending commitments within the Institutional Securities business segment, are associated with a particular event or transaction, such as to support client merger, acquisition, recapitalization or project finance activities. Event-driven loans and lending commitments typically consist of revolving lines of credit, term loans and bridge loans. Amounts may fluctuate as they are transaction-specific, the timing and size of which can vary from period to period.

Wealth Management Loans and Lending Commitments

 

    At March 31, 2019  
    Contractual Years to Maturity        
$ in millions   Less than 1     1-3     3-5     Over 5     Total  

Securities-based lending and other loans

  $ 36,455     $ 3,352     $ 2,467     $ 1,138     $ 43,412  

Residential real estate loans

    1       29             28,008       28,038  

Total loans

  $ 36,456     $ 3,381     $ 2,467     $ 29,146     $ 71,450  

Lending commitments

    9,872       1,619       378       278       12,147  

Total loans and lending commitments

  $ 46,328     $     5,000     $     2,845     $     29,424     $     83,597  

Securities-based lending—LAL platform loans

 

          $ 32,731  

 

    At December 31, 2018  
    Contractual Years to Maturity        
$ in millions   Less than 1     1-3     3-5     Over 5     Total  

Securities-based lending and other loans

  $ 38,144     $ 3,573     $ 2,004     $ 1,006     $ 44,727  

Residential real estate loans

          30       1       27,436       27,467  

Total loans

  $ 38,144     $ 3,603     $ 2,005     $ 28,442     $ 72,194  

Lending commitments

    9,197       1,151       42       273       10,663  

Total loans and lending commitments

  $ 47,341     $     4,754     $     2,047     $     28,715     $     82,857  

Securities-based lending—LAL platform loans

 

  $ 33,247  
 

 

March 2019 Form 10-Q   28  


Table of Contents

LOGO

Risk Disclosures

 

The principal Wealth Management lending activities include securities-based lending and residential real estate loans.

Securities-based lending provided to our clients is primarily conducted through our Liquidity Access Line (“LAL”) platform. For more information about our securities-based lending and residential real estate loans, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Wealth Management” in the 2018 Form 10-K.

For the current quarter, Loans and Lending commitments associated with the Wealth Management business segment were relatively unchanged.

Customer and Other Receivables

Margin Loans

 

    At March 31, 2019  
$ in millions   IS     WM     Total  

Customer receivables representing margin loans

  $  16,800     $  10,627     $  27,427  

 

    At December 31, 2018  
$ in millions   IS     WM     Total  

Customer receivables representing margin loans

  $  14,842     $  11,383     $  26,225  

The Institutional Securities and Wealth Management business segments provide margin lending arrangements, which allow customers to borrow against the value of qualifying securities. Margin lending activities generally have minimal credit risk due to the value of collateral held and their short-term nature. Amounts may fluctuate from period to period as overall client balances change as a result of market levels, client positioning and leverage.

Employee Loans

 

$ in millions

   At
March 31,
2019
    At
December 31,
2018
 

Balance

   $ 3,011     $ 3,415  

Allowance for loan losses

     (64     (63

Balance, net

   $ 2,947     $ 3,352  

Repayment term range, in years

     1 to 20       1 to 20  

Employee loans are granted in conjunction with a program established primarily to recruit certain Wealth Management representatives, are full recourse and generally require periodic repayments. We establish an allowance for loan amounts to terminated employees that we do not consider recoverable, which is recorded in Compensation and benefits expense.

Derivatives

Fair Value of OTC Derivative Assets

 

    Counterparty Credit Rating1        

$ in millions

  AAA     AA     A     BBB     NIG     Total  

At March 31, 2019

 

       

<1 year

  $ 353     $ 6,123     $ 38,006     $ 12,809     $ 5,577     $ 62,868  

1-3 years

    387       2,222       23,295       8,452       6,346       40,702  

3-5 years

    533       2,112       11,960       5,162       2,826       22,593  

Over 5 years

    3,662       11,190       79,733       34,492       12,249       141,326  

Total, gross

  $ 4,935     $ 21,647     $ 152,994     $ 60,915     $ 26,998     $ 267,489  

Counterparty netting

    (1,851     (13,737     (124,569     (44,232     (16,326     (200,715

Cash and securities collateral

    (2,889     (6,115     (22,866     (11,830     (7,691     (51,391

Total, net

  $ 195     $ 1,795     $ 5,559     $ 4,853     $ 2,981     $ 15,383  

 

    Counterparty Credit Rating1        

$ in millions

  AAA     AA     A     BBB     NIG     Total  

At December 31, 2018

 

       

<1 year

  $ 878     $ 7,430     $ 38,718     $ 15,009     $ 7,183     $ 69,218  

1-3 years

    664       2,362       22,239       10,255       7,097       42,617  

3-5 years

    621       2,096       11,673       6,014       2,751       23,155  

Over 5 years

    3,535       9,725       67,166       36,087       11,112       127,625  

Total, gross

  $ 5,698     $ 21,613     $ 139,796     $ 67,365     $ 28,143     $ 262,615  

Counterparty netting

    (2,325     (13,771     (113,045     (49,658     (16,681     (195,480

Cash and securities collateral

    (3,214     (5,766     (21,931     (12,702     (8,269     (51,882

Total, net

  $ 159     $ 2,076     $ 4,820     $ 5,005     $ 3,193     $ 15,253  

 

$ in millions   

At

March 31,
2019

     At
December 31,
2018
 

Industry

  

Utilities

   $ 4,472      $ 4,324  

Financials

     4,108        4,480  

Industrials

     1,110        1,335  

Healthcare

     916        787  

Regional governments

     916        779  

Information technology

     758        695  

Not-for-profit organizations

     630        583  

Communication services

     395        373  

Sovereign governments

     367        385  

Energy

     350        199  

Consumer discretionary

     311        188  

Real estate

     285        283  

Materials

     275        275  

Insurance

     181        235  

Consumer staples

     161        216  

Other

     148        116  

Total

     $            15,383      $             15,253  

 

1.

Obligor credit ratings are determined internally by CRM.

 

 

  29   March 2019 Form 10-Q


Table of Contents

LOGO

Risk Disclosures

 

We incur credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the possibility that a counterparty may fail to perform according to the terms of the contract. For more information on derivatives, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Derivatives” in the 2018 Form 10-K and Note 4 to the financial statements.

Country Risk

Country risk exposure is the risk that events in, or that affect, a foreign country (any country other than the U.S.) might adversely affect us. We actively manage country risk exposure through a comprehensive risk management framework that combines credit and market fundamentals and allows us to effectively identify, monitor and limit country risk. For a further discussion of our country risk exposure see, “Quantitative and Qualitative Disclosures about Risk—Country Risk” in the 2018 Form 10-K.

Our sovereign exposures consist of financial contracts and obligations entered into with sovereign and local governments. Our non-sovereign exposures consist of financial contracts and obligations entered into primarily with corporations and financial institutions. Index credit derivatives are included in the following country risk exposure table. Each reference entity within an index is allocated to that reference entity’s country of risk. Index exposures are allocated to the underlying reference entities in proportion to the notional weighting of each reference entity in the index, adjusted for any fair value receivable or payable for that reference entity. Where credit risk crosses multiple jurisdictions, for example, a CDS purchased from an issuer in a specific country that references bonds issued by an entity in a different country, the fair value of the CDS is reflected in the Net Counterparty Exposure row based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable or payable is reflected in the Net Inventory row based on the country of the underlying reference entity.

Top 10 Non-U.S. Country Exposures at March 31, 2019

 

United Kingdom

 

      
$ in millions    Sovereigns     Non-sovereigns     Total  

Net inventory1

   $ (719   $ 317     $ (402

Net counterparty exposure2

     1       9,526       9,527  

Loans

           2,840       2,840  

Lending commitments

           4,610       4,610  

Exposure before hedges

     (718     17,293       16,575  

Hedges3

     (312     (1,381     (1,693

Net exposure

   $ (1,030   $ 15,912     $ 14,882  

Japan

 

      
$ in millions    Sovereigns     Non-sovereigns     Total  

Net inventory1

   $ 4,533     $ 81     $ 4,614  

Net counterparty exposure2

     61       3,057       3,118  

Loans

           316       316  

Exposure before hedges

     4,594       3,454       8,048  

Hedges3

     (117     (115     (232

Net exposure

   $ 4,477     $ 3,339     $ 7,816  

Germany

 

      
$ in millions    Sovereigns     Non-sovereigns     Total  

Net inventory1

   $ 328     $ 160     $ 488  

Net counterparty exposure2

     170       1,938       2,108  

Loans

           1,063       1,063  

Lending commitments

           3,198       3,198  

Exposure before hedges

     498       6,359       6,857  

Hedges3

     (268     (1,051     (1,319

Net exposure

   $ 230     $ 5,308     $ 5,538  

Brazil

 

      
$ in millions    Sovereigns     Non-sovereigns     Total  

Net inventory1

   $ 4,846     $ 95     $ 4,941  

Net counterparty exposure2

           232       232  

Loans

           40       40  

Lending commitments

           269       269  

Exposure before hedges

     4,846       636       5,482  

Hedges3

     (12     (18     (30

Net exposure

   $ 4,834     $ 618     $ 5,452  

Spain

 

      
$ in millions    Sovereigns     Non-sovereigns     Total  

Net inventory1

   $ (857   $ (62   $ (919

Net counterparty exposure2

           204       204  

Loans

           3,675       3,675  

Lending commitments

           1,684       1,684  

Exposure before hedges

     (857     5,501       4,644  

Hedges3

           (128     (128

Net exposure

   $ (857   $ 5,373     $ 4,516  

Australia

 

      
$ in millions    Sovereigns     Non-sovereigns     Total  

Net inventory1

   $ 1,932     $ 495     $ 2,427  

Net counterparty exposure2

     4       451       455  

Loans

           95       95  

Lending commitments

           796       796  

Exposure before hedges

     1,936       1,837       3,773  

Hedges3

           (104     (104

Net exposure

   $ 1,936     $ 1,733     $ 3,669  

China

 

      
$ in millions    Sovereigns     Non-sovereigns     Total  

Net inventory1

   $ 200     $ 869     $ 1,069  

Net counterparty exposure2

     113       180       293  

Loans

           1,242       1,242  

Lending commitments

           1,150       1,150  

Exposure before hedges

     313       3,441       3,754  

Hedges3

     (112     (40     (152

Net exposure

   $ 201     $ 3,401     $     3,602  
 

 

March 2019 Form 10-Q   30  


Table of Contents

LOGO

Risk Disclosures

 

Canada

 

      
$ in millions    Sovereigns     Non-sovereigns     Total  

Net inventory1

   $ (367   $ 111     $ (256

Net counterparty exposure2

     41       1,811       1,852  

Loans

           91       91  

Lending commitments

           1,800       1,800  

Exposure before hedges

     (326     3,813       3,487  

Hedges3

           (171     (171

Net exposure

   $ (326   $ 3,642     $ 3,316  

Netherlands

 

      
$ in millions    Sovereigns     Non-sovereigns     Total  

Net inventory1

   $ (204   $ 156     $ (48

Net counterparty exposure2

           709       709  

Loans

           1,427       1,427  

Lending commitments

           1,385       1,385  

Exposure before hedges

     (204     3,677       3,473  

Hedges3

     (32     (229     (261

Net exposure

   $ (236   $ 3,448     $ 3,212  

India

 

      
$ in millions    Sovereigns     Non-sovereigns     Total  

Net inventory1

   $ 1,500     $ 633     $ 2,133  

Net counterparty exposure2

           599       599  

Lending commitments

           95       95  

Exposure before hedges

     1,500       1,327       2,827  

Net exposure

   $ 1,500     $ 1,327     $     2,827  

 

1.

Net inventory represents exposure to both long and short single-name and index positions (i.e., bonds and equities at fair value and CDS based on a notional amount assuming zero recovery adjusted for the fair value of any receivable or payable).

2.

Net counterparty exposure (e.g., repurchase transactions, securities lending and OTC derivatives) takes into consideration legally enforceable master netting agreements and collateral. Net counterparty exposure is net of the benefit of collateral received. For more information, see “Additional Information—Top 10 Non-U.S. Country Exposures” herein.

3.

Amounts represent CDS hedges (purchased and sold) on net counterparty exposure and lending executed by trading desks responsible for hedging counterparty and lending credit risk exposures. Amounts are based on the CDS notional amount assuming zero recovery adjusted for any fair value receivable or payable. For a further description of the contractual terms for purchased credit protection and whether they may limit the effectiveness of our hedges, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Derivatives” in the 2018 Form 10-K.

Additional Information—Top 10 Non-U.S. Country Exposures

Single-Name and Index Credit Derivatives Included in Net Inventory

 

$ in millions   

At

March 31,
2019

 

Gross purchased protection

   $ (61,098

Gross written protection

                  57,463  

Net exposure

   $ (3,635

Benefit of Collateral Received against Net Counterparty Exposure

 

$ in millions       

At

March 31,
2019

 

Counterparty credit exposure

  Collateral1  

Germany

  Germany and Italy   $             10,110  

United Kingdom

  U.K., U.S. and Italy     8,661  

Other

  France, Japan and U.S.     11,150  

 

1.

Collateral primarily consists of cash and government obligations.

Country Risk Exposures Related to the U.K.

At March 31, 2019, our country risk exposures in the U.K. included net exposures of $14,882 million as shown in the Top 10 Country Exposures table, and overnight deposits of $7,605 million. The $15,912 million of exposures to non-sovereigns were diversified across both names and sectors. Of these exposures, $6,377 million were to U.K.-focused counterparties that generate more than one-third of their revenues in the U.K., $3,586 million were to geographically diversified counterparties, and $5,671 million were to exchanges and clearinghouses.

Operational Risk

Operational risk refers to the risk of loss, or of damage to our reputation, resulting from inadequate or failed processes or systems, from human factors or from external events (e.g., fraud, theft, legal and compliance risks, cyber attacks or damage to physical assets). We may incur operational risk across the full scope of our business activities, including revenue-generating activities (e.g., sales and trading) and support and control groups (e.g., information technology and trade processing). For a further discussion about our operational risk, see “Quantitative and Qualitative Disclosures about Risk—Operational Risk” in the 2018 Form 10-K.

Model Risk

Model risk refers to the potential for adverse consequences from decisions based on incorrect or misused model outputs. Model risk can lead to financial loss, poor business and strategic decision making, or damage to a firm’s reputation. The risk inherent in a model is a function of the materiality, complexity and uncertainty around inputs and assumptions. Model risk is generated from the use of models impacting financial statements, regulatory filings, capital adequacy assessments and the formulation of strategy. For a further discussion about our model risk, see “Quantitative and Qualitative Disclosures about Risk––Model Risk” in the 2018 Form 10-K.

 

 

 

  31   March 2019 Form 10-Q


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Risk Disclosures

 

Liquidity Risk

Liquidity risk refers to the risk that we will be unable to finance our operations due to a loss of access to the capital markets or difficulty in liquidating our assets. Liquidity risk also encompasses our ability (or perceived ability) to meet our financial obligations without experiencing significant business disruption or reputational damage that may threaten our viability as a going concern. For a further discussion about our liquidity risk, see “Quantitative and Qualitative Disclosures about Risk—Liquidity Risk” in the 2018 Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” herein.

Legal and Compliance Risk

Legal and compliance risk includes the risk of legal or regulatory sanctions, material financial loss, including fines, penalties, judgments, damages and/or settlements, or loss to reputation that we may suffer as a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. This risk also includes contractual and commercial risk, such as the risk that a counterparty’s performance obligations will be unenforceable. It also includes compliance with AML, terrorist financing, and anti-corruption rules and regulations. For a further discussion about our legal and compliance risk, see “Quantitative and Qualitative Disclosures about Risk—Legal and Compliance Risk” in the 2018 Form 10-K.

 

 

March 2019 Form 10-Q   32  


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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Morgan Stanley:

 

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the “Firm”) as of March 31, 2019, and the related condensed consolidated income statements, comprehensive income statements, cash flow statements and statements of changes in total equity for the three-month periods ended March 31, 2019 and 2018, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Firm as of December 31, 2018, and the related consolidated income statement, comprehensive income statement, cash flow statement and statement of changes in total equity for the year then ended (not presented herein) included in the Firm’s Annual Report on Form 10-K; and in our report dated February 26, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2018 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Firm’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Firm in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

 

/s/ Deloitte & Touche LLP

 

New York, New York

May 3, 2019

 

  33   March 2019 Form 10-Q


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Consolidated Income Statements

(Unaudited)

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    Three Months Ended
March 31,
 
in millions, except per share data   2019      2018  

Revenues

    

Investment banking

  $ 1,242      $ 1,634  

Trading

    3,441        3,770  

Investments

    273        126  

Commissions and fees

    966        1,173  

Asset management

    3,049        3,192  

Other

    301        207  

Total non-interest revenues

    9,272        10,102  

Interest income

    4,290        2,860  

Interest expense

    3,276        1,885  

Net interest

    1,014        975  

Net revenues

                10,286                    11,077  

Non-interest expenses

    

Compensation and benefits

    4,651        4,914  

Occupancy and equipment

    347        336  

Brokerage, clearing and exchange fees

    593        627  

Information processing and communications

    532        478  

Marketing and business development

    141        140  

Professional services

    514        510  

Other

    553        652  

Total non-interest expenses

    7,331        7,657  

Income from continuing operations before income taxes

    2,955        3,420  

Provision for income taxes

    487        714  

Income from continuing operations

    2,468        2,706  

Income (loss) from discontinued operations, net of income taxes

           (2

Net income

  $ 2,468      $ 2,704  

Net income applicable to noncontrolling interests

    39        36  

Net income applicable to Morgan Stanley

  $ 2,429      $ 2,668  

Preferred stock dividends and other

    93        93  

Earnings applicable to Morgan Stanley common shareholders

  $ 2,336      $ 2,575  

Earnings per common share

    

Basic

  $ 1.41      $ 1.48  

Diluted

  $ 1.39      $ 1.45  

Average common shares outstanding

    

Basic

    1,658        1,740  

Diluted

    1,677        1,771  

 

March 2019 Form 10-Q   34   See Notes to Consolidated Financial Statements


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Consolidated Comprehensive Income Statements

(Unaudited)

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Three Months Ended

March 31,

 
$ in millions        2019             2018      

Net income

   $ 2,468     $ 2,704  

Other comprehensive income (loss), net of tax:

    

Foreign currency translation adjustments

   $ (22   $ 117  

Change in net unrealized gains (losses) on available-for-sale securities

     429       (410

Pension, postretirement and other

     1       5  

Change in net debt valuation adjustment

     (620     451  

Total other comprehensive income (loss)

   $ (212   $ 163  

Comprehensive income

   $ 2,256     $ 2,867  

Net income applicable to noncontrolling interests

     39       36  

Other comprehensive income (loss) applicable to noncontrolling interests

     (31     72  

Comprehensive income applicable to Morgan Stanley

   $             2,248     $             2,759  

 

See Notes to Consolidated Financial Statements   35   March 2019 Form 10-Q


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Consolidated Balance Sheets

 

$ in millions, except share data

   (Unaudited)
At
March 31,
2019
    At
December 31,
2018
 

Assets

    

Cash and cash equivalents:

    

Cash and due from banks

   $ 35,472     $ 30,541  

Interest bearing deposits with banks

     14,498       21,299  

Restricted cash

     30,712       35,356  

Trading assets at fair value ($103,750 and $120,437 were pledged to various parties)

     264,818       266,299  

Investment securities (includes $61,641 and $61,061 at fair value)

     97,944       91,832  

Securities purchased under agreements to resell (includes $5 and $ at fair value)

     96,570       98,522  

Securities borrowed

     138,891       116,313  

Customer and other receivables

     52,667       53,298  

Loans:

    

Held for investment (net of allowance of $259 and $238)

     101,266       99,815  

Held for sale

     14,931       15,764  

Goodwill

     6,686       6,688  

Intangible assets (net of accumulated amortization of $2,952 and $2,877)

     2,084       2,163  

Other assets

     19,425       15,641  

Total assets

   $ 875,964     $ 853,531  

Liabilities

    

Deposits (includes $692 and $442 at fair value)

   $ 179,731     $ 187,820  

Trading liabilities at fair value

     144,565       126,747  

Securities sold under agreements to repurchase (includes $622 and $812 at fair value)

     47,948       49,759  

Securities loaned

     12,508       11,908  

Other secured financings (includes $4,283 and $5,245 at fair value)

     8,043       9,466  

Customer and other payables

     193,092       179,559  

Other liabilities and accrued expenses

     17,494       17,204  

Borrowings (includes $56,464 and $51,184 at fair value)

     190,691       189,662  

Total liabilities

     794,072       772,125  

Commitments and contingent liabilities (see Note 11)

    

Equity

    

Morgan Stanley shareholders’ equity:

    

Preferred stock

     8,520       8,520  

Common stock, $0.01 par value:

    

Shares authorized: 3,500,000,000; Shares issued: 2,038,893,979; Shares outstanding: 1,685,996,391 and 1,699,828,943

     20       20  

Additional paid-in capital

     23,178       23,794  

Retained earnings

     66,061       64,175  

Employee stock trusts

     3,000       2,836  

Accumulated other comprehensive income (loss)

     (2,473     (2,292

Common stock held in treasury at cost, $0.01 par value (352,897,588 and 339,065,036 shares)

     (14,582     (13,971

Common stock issued to employee stock trusts

     (3,000     (2,836

Total Morgan Stanley shareholders’ equity

     80,724       80,246  

Noncontrolling interests

     1,168       1,160  

Total equity

     81,892       81,406  

Total liabilities and equity

   $             875,964     $             853,531  

 

March 2019 Form 10-Q   36   See Notes to Consolidated Financial Statements


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Consolidated Statements of Changes in Total Equity

(Unaudited)

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$ in millions   Preferred
Stock
    Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Employee
Stock
Trusts
    Accumulated
Other
Comprehensive
Income (Loss)
    Common
Stock
Held in
Treasury
at Cost
    Common
Stock
Issued to
Employee
Stock
Trusts
    Non-
controlling
Interests
    Total
Equity
 

Balance at December 31, 2018

  $ 8,520     $ 20     $ 23,794     $ 64,175     $ 2,836     $ (2,292   $ (13,971   $ (2,836   $ 1,160     $ 81,406  

Cumulative adjustments for accounting changes1

                      63                                     63  

Net income applicable to Morgan Stanley

                      2,429                                     2,429  

Net income applicable to noncontrolling interests

                                                    39       39  

Preferred stock dividends2

                      (93                                   (93

Common stock dividends ($0.30 per share)

                      (513                                   (513

Shares issued under employee plans

                (618           164             1,034       (164           416  

Repurchases of common stock and employee tax withholdings

                                        (1,645                 (1,645

Net change in Accumulated other comprehensive income (loss)

                                  (181                 (31     (212

Other net increases

                2                                           2  

Balance at March 31, 2019

  $ 8,520     $ 20     $ 23,178     $ 66,061     $ 3,000     $ (2,473   $ (14,582   $ (3,000   $ 1,168     $ 81,892  

Balance at December 31, 2017

  $ 8,520     $ 20     $ 23,545     $ 57,577     $ 2,907     $ (3,060   $ (9,211   $ (2,907   $ 1,075     $ 78,466  

Cumulative adjustments for accounting changes1

                      306             (437                       (131

Net income applicable to Morgan Stanley

                      2,668                                     2,668  

Net income applicable to noncontrolling interests

                                                    36       36  

Preferred stock dividends2

                      (93                                   (93

Common stock dividends ($0.25 per share)

                      (449                                   (449

Shares issued under employee plans

                (285                       710                   425  

Repurchases of common stock and employee tax withholdings

                                        (1,868                 (1,868

Net change in Accumulated other comprehensive income (loss)

                                  91                   72       163  

Other net increases

                                                      —             272       272  

Balance at March 31, 2018

  $ 8,520     $ 20     $ 23,260     $     60,009     $ 2,907     $ (3,406   $ (10,369   $ (2,907   $ 1,455     $     79,489  

 

1.

Cumulative adjustments for accounting changes relate to the adoption of certain accounting updates during the current and prior year quarters. See Notes 2 and 14 for further information.

2.

See Note 14 for information regarding dividends per share for each class of preferred stock.

 

See Notes to Consolidated Financial Statements   37   March 2019 Form 10-Q


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Consolidated Cash Flow Statements

(Unaudited)

 

     Three Months Ended
March 31,
 
$ in millions    2019     2018  

Cash flows from operating activities

    

Net income

   $ 2,468     $ 2,704  

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

    

Stock-based compensation expense

     293       321  

Depreciation and amortization

     658       390  

Provision for credit losses on lending activities

     36       26  

Other operating adjustments

     (92     (37

Changes in assets and liabilities:

    

Trading assets, net of Trading liabilities

     23,977       33,832  

Securities borrowed

     (22,578     (11,825

Securities loaned

     600       (36

Customer and other receivables and other assets

     1,567       (13,019

Customer and other payables and other liabilities

     9,971       1,129  

Securities purchased under agreements to resell

     1,952       4,012  

Securities sold under agreements to repurchase

     (1,811     (4,849

Net cash provided by (used for) operating activities

     17,041       12,648  

Cash flows from investing activities

    

Proceeds from (payments for):

    

Other assets—Premises, equipment and software, net

     (529     (410

Changes in loans, net

     (1,329     (3,801

Investment securities:

    

Purchases

     (15,895     (5,482

Proceeds from sales

     7,875       810  

Proceeds from paydowns and maturities

     2,663       2,125  

Other investing activities

     (12     (164

Net cash provided by (used for) investing activities

     (7,227     (6,922

Cash flows from financing activities

    

Net proceeds from (payments for):

    

Other secured financings

     (1,575     (2,101

Deposits

     (8,089     988  

Proceeds from:

    

Issuance of Borrowings

     8,091       15,370  

Payments for:

    

Borrowings

     (11,927     (11,377

Repurchases of common stock and employee tax withholdings

     (1,645     (1,868

Cash dividends

     (663     (599

Other financing activities

     (56     (50

Net cash provided by (used for) financing activities

     (15,864     363  

Effect of exchange rate changes on cash and cash equivalents

     (464     860  

Net increase (decrease) in cash and cash equivalents

     (6,514     6,949  

Cash and cash equivalents, at beginning of period

     87,196       80,395  

Cash and cash equivalents, at end of period

   $ 80,682     $ 87,344  

Cash and cash equivalents:

    

Cash and due from banks

   $ 35,472     $ 29,073  

Interest bearing deposits with banks

     14,498       22,980  

Restricted cash

     30,712       35,291  

Cash and cash equivalents, at end of period

   $ 80,682       $87,344  

Supplemental Disclosure of Cash Flow Information

    

Cash payments for:

    

Interest

   $ 2,896     $ 1,407  

Income taxes, net of refunds

     245       250  

 

March 2019 Form 10-Q   38   See Notes to Consolidated Financial Statements


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Notes to Consolidated Financial Statements

(Unaudited)

 

1. Introduction and Basis of Presentation

The Firm

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” or the “Firm” mean Morgan Stanley (the “Parent Company”) together with its consolidated subsidiaries. See the “Glossary of Common Acronyms” for definitions of certain acronyms used throughout this Form 10-Q.

A description of the clients and principal products and services of each of the Firm’s business segments is as follows:

Institutional Securities provides 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 activities include originating corporate loans, commercial mortgage lending, providing secured lending facilities and extending financing to sales and trading customers. Other activities include investments and research.

Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses and institutions covering brokerage and investment advisory services; financial and wealth planning services; annuity and insurance products; securities-based lending, residential real estate loans and other lending products; banking and retirement plan services.

Investment Management provides 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 served through intermediaries, including affiliated and non-affiliated distributors.

Basis of Financial Information

The unaudited consolidated financial statements (“financial statements”) are prepared in accordance with U.S. GAAP, which requires the Firm to make estimates and assumptions regarding the valuations of certain financial instruments, the valuation of goodwill and intangible assets, compensation, deferred tax assets, the outcome of legal and tax matters, allowance for credit losses and other matters that affect its financial statements and related disclosures. The Firm believes that the estimates utilized in the preparation of its financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior periods to conform to the current presentation.

The accompanying financial statements should be read in conjunction with the Firm’s financial statements and notes thereto included in the 2018 Form 10-K. Certain footnote disclosures included in the 2018 Form 10-K have been condensed or omitted from these financial statements as they are not required for interim reporting under U.S. GAAP. The financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Consolidation

The financial statements include the accounts of the Firm, its wholly owned subsidiaries and other entities in which the Firm has a controlling financial interest, including certain VIEs (see Note 12). For consolidated subsidiaries that are not wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income attributable to noncontrolling interests for such subsidiaries is presented as Net income applicable to noncontrolling interests in the consolidated income statements (“income statements”). The portion of shareholders’ equity that is attributable to noncontrolling interests for such subsidiaries is presented as noncontrolling interests, a component of total equity, in the consolidated balance sheets (“balance sheets”).

For a discussion of the Firm’s involvement with VIEs and its significant regulated U.S. and international subsidiaries, see Note 1 to the financial statements in the 2018 Form 10-K.

 

 

  39   March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

 

2. Significant Accounting Policies

For a detailed discussion about the Firm’s significant accounting policies, see Note 2 to the financial statements in the 2018 Form 10-K.

During the three months ended March 31, 2019 (“current quarter”), there were no significant revisions to the Firm’s significant accounting policies, other than for the accounting updates adopted.

Accounting Updates Adopted

The Firm adopted the following accounting updates on January 1, 2019. Prior periods are presented under previous policies.

Leases

The Firm adopted Leases, and recognized leases with terms exceeding one year in the March 31, 2019 balance sheet as right-of-use (“ROU”) assets and corresponding liabilities. The adoption resulted in an increase to Retained earnings of approximately $63 million, net of tax, related to deferred revenue from previously recorded sale-leaseback transactions. At transition on January 1, 2019, the adoption also resulted in a balance sheet gross-up of approximately $4 billion reflected in Other assets and Other liabilities and accrued expenses. See Note 11 for lease disclosures, including amounts reflected in the March 31, 2019 balance sheet. Prior period amounts were not restated.

As allowed by the guidance, the Firm elected not to reassess the following at transition: whether existing contracts are or contain leases, and for existing leases, lease classification and initial direct costs. In addition, the Firm continues to account for existing land easements as service contracts.

Both at transition and for new leases thereafter, ROU assets and lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term, including non-lease components such as fixed common area maintenance costs and other fixed costs such as real estate taxes and insurance.

The discount rates used in determining the present value of leases are the Firm’s incremental borrowing rates, developed based upon each lease’s term and currency of payment. The lease term includes options to extend or terminate the lease when it is reasonably certain that the Firm will exercise that option. For operating leases, the ROU assets also include any

prepaid lease payments and initial direct costs incurred and are reduced by lease incentives. For these leases, lease expense is recognized on a straight-line basis over the lease term if the ROU asset has not been impaired or abandoned.

Derivatives and Hedging (ASU 2018-16)

The amendments in this update permit use of the OIS rate based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes. The Firm adopted this update on a prospective basis for qualifying new or redesignated hedging relationships. This update did not impact the Firm’s pre-existing hedges.

3. Fair Values

Recurring Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

    At March 31, 2019  
$ in millions   Level 1     Level 2     Level 3     Netting1     Total  

Assets at fair value

         

Trading assets:

         

U.S. Treasury and agency securities

  $ 47,877     $ 22,821     $ 7     $     $ 70,705  

Other sovereign government obligations

    29,063       4,890       5             33,958  

State and municipal securities

          3,175       12             3,187  

MABS

          1,864       301             2,165  

Loans and lending commitments2

          5,012       6,343             11,355  

Corporate and other debt

          20,014       1,061             21,075  

Corporate equities3

    88,020       527       152             88,699  

Derivative and other contracts:

         

Interest rate

    3,238       166,248       998             170,484  

Credit

          5,696       485             6,181  

Foreign exchange

    22       60,900       59             60,981  

Equity

    1,621       38,006       1,293             40,920  

Commodity and other

    593       7,002       2,902             10,497  

Netting1

    (3,633     (212,585     (873     (43,036     (260,127

Total derivative and other contracts

    1,841       65,267       4,864       (43,036     28,936  

Investments4

    369       149       974             1,492  

Physical commodities

          441                   441  

Total trading assets4

    167,170       124,160       13,719       (43,036     262,013  

Investment securities—AFS

    32,527       29,114                   61,641  

Securities purchased under agreements to resell

          5                   5  

Total assets at fair value

  $     199,697     $     153,279     $     13,719     $   (43,036)     $   323,659  
 

 

March 2019 Form 10-Q   40  


Table of Contents

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Notes to Consolidated Financial Statements

(Unaudited)

 

    At March 31, 2019  
$ in millions   Level 1     Level 2     Level 3     Netting1     Total  

Liabilities at fair value

         

Deposits

  $     $ 593     $ 99     $     $ 692  

Trading liabilities:

         

U.S. Treasury and agency securities

    13,169       251                   13,420  

Other sovereign government obligations

    25,301       1,970                   27,271  

Corporate and other debt

          9,030       23             9,053  

Corporate equities3

    64,961       94       20             65,075  

Derivative and other contracts:

 

       

Interest rate

    3,271       155,949       447             159,667  

Credit

          6,019       746             6,765  

Foreign exchange

    11       59,864       54             59,929  

Equity

    1,393       40,912       3,053             45,358  

Commodity and other

    732       5,444       796             6,972  

Netting1

    (3,633     (212,585     (873     (31,854     (248,945

Total derivative and other contracts

    1,774       55,603       4,223       (31,854     29,746  

Total trading liabilities

    105,205       66,948       4,266       (31,854     144,565  

Securities sold under agreements to repurchase

          622                   622  

Other secured financings

          4,130       153             4,283  

Borrowings

          52,689       3,775             56,464  

Total liabilities at fair value

  $ 105,205     $ 124,982     $ 8,293     $ (31,854   $ 206,626  

 

    At December 31, 2018  
$ in millions   Level 1     Level 2     Level 3     Netting1     Total  

Assets at fair value

         

Trading assets:

         

U.S. Treasury and agency securities

  $ 38,767     $ 29,594     $ 54     $     $ 68,415  

Other sovereign government obligations

    28,395       5,529       17             33,941  

State and municipal securities

          3,161       148             3,309  

MABS

          2,154       354             2,508  

Loans and lending commitments2

          4,055       6,870             10,925  

Corporate and other debt

          18,129       1,076             19,205  

Corporate equities3

    93,626       522       95             94,243  

Derivative and other contracts:

 

       

Interest rate

    2,793       155,027       1,045             158,865  

Credit

          5,707       421             6,128  

Foreign exchange

    62       63,023       161             63,246  

Equity

    1,256       45,596       1,022             47,874  

Commodity and other

    963       8,517       2,992             12,472  

Netting1

    (4,151     (210,190     (896     (44,175     (259,412

Total derivative and other contracts

    923       67,680       4,745       (44,175     29,173  

Investments4

    412       293       757             1,462  

Physical commodities

          536                   536  

Total trading assets4

    162,123       131,653       14,116       (44,175     263,717  

Investment securities—AFS

    36,399       24,662                   61,061  

Intangible assets

          5                   5  

Total assets at fair value

  $ 198,522     $ 156,320     $ 14,116     $ (44,175   $ 324,783  
    At December 31, 2018  
$ in millions   Level 1     Level 2     Level 3     Netting1     Total  

Liabilities at fair value

 

       

Deposits

  $     $ 415     $ 27     $     $ 442  

Trading liabilities:

         

U.S. Treasury and agency securities

    11,272       543                   11,815  

Other sovereign government obligations

    21,391       1,454                   22,845  

Corporate and other debt

          8,550       1             8,551  

Corporate equities3

    56,064       199       15             56,278  

Derivative and other contracts:

 

       

Interest rate

    2,927       142,746       427             146,100  

Credit

          5,772       381             6,153  

Foreign exchange

    41       63,379       86             63,506  

Equity

    1,042       47,091       2,507             50,640  

Commodity and other

    1,228       6,872       940             9,040  

Netting1

    (4,151     (210,190     (896     (32,944     (248,181

Total derivative and other contracts

    1,087       55,670       3,445       (32,944     27,258  

Total trading liabilities

    89,814       66,416       3,461       (32,944     126,747  

Securities sold under agreements to repurchase

          812                   812  

Other secured financings

          5,037       208             5,245  

Borrowings

          47,378       3,806             51,184  

Total liabilities at fair value

  $ 89,814     $ 120,058     $ 7,502     $ (32,944   $ 184,430  

 

MABS—Mortgage-

and asset-backed securities

1.

For positions with the same counterparty classified in different levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled “Netting.” Positions classified within the same level that are with the same counterparty are netted within the column for that level. For further information on derivative instruments and hedging activities, see Note 4.

2.

For a further breakdown by type, see the following Loans and Lending Commitments at Fair Value table.

3.

For trading purposes, the Firm holds or sells short equity securities issued by entities in diverse industries and of varying sizes.

4.

Amounts exclude certain investments that are measured based on NAV per share, which are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Net Asset Value Measurements—Fund Interests” herein.

 

Breakdown of Loans and Lending Commitments at Fair Value

 

 
$ in millions    At
March 31,
2019
     At
December 31,
2018
 

Corporate

   $ 8,307      $ 9,171  

Residential real estate

     1,282        1,153  

Commercial real estate

     1,766        601  

Total

   $ 11,355      $ 10,925  

 

Unsettled Fair Value of Futures Contracts1         
$ in millions    At
March 31,
2019
     At
December 31,
2018
 

Customer and other receivables, net

   $ 727      $ 615  

 

1.

These contracts are primarily Level 1, actively traded, valued based on quoted prices from the exchange and are excluded from the previous recurring fair value tables.

For a description of the valuation techniques applied to the Firm’s major categories of assets and liabilities measured at fair value on a recurring basis, see Note 3 to the financial statements in the 2018 Form 10-K. During the current quarter, there were no significant revisions made to the Firm’s valuation techniques.

 

 

  41   March 2019 Form 10-Q


Table of Contents

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Notes to Consolidated Financial Statements

(Unaudited)

 

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

 

    

Three Months Ended

March 31,

 
$ in millions            2019                     2018          

Assets at Fair value

    

U.S. Treasury and agency securities

    

Beginning balance

   $                 54     $                 —  

Sales

     (50      

Net transfers

     3        

Ending balance

   $ 7     $  

Unrealized gains (losses)

   $     $  

Other sovereign government obligations

    

Beginning balance

   $ 17     $ 1  

Purchases

     2       7  

Sales

     (2      

Net transfers

     (12     (1

Ending balance

   $ 5     $ 7  

Unrealized gains (losses)

   $     $  

State and municipal securities

    

Beginning balance

   $ 148     $ 8  

Realized and unrealized gains (losses)

     1        

Purchases

     10       1  

Sales

     (44     (7

Net transfers

     (103      

Ending balance

   $ 12     $ 2  

Unrealized gains (losses)

   $ 1     $  

MABS

    

Beginning balance

   $ 354     $ 423  

Realized and unrealized gains (losses)

     (7     77  

Purchases

     19       64  

Sales

     (83     (238

Settlements

     (3     (16

Net transfers

     21       32  

Ending balance

   $ 301     $ 342  

Unrealized gains (losses)

   $ (14   $ 2  

Loans and lending commitments

    

Beginning balance

   $ 6,870     $ 5,945  

Realized and unrealized gains (losses)

           28  

Purchases and originations

     1,255       3,740  

Sales

     (108     (283

Settlements

     (820     (1,218

Net transfers

     (854     (84

Ending balance

   $ 6,343     $ 8,128  

Unrealized gains (losses)

   $ (7   $ (9

Corporate and other debt

    

Beginning balance

   $ 1,076     $ 701  

Realized and unrealized gains (losses)

     43       1  

Purchases

     204       350  

Sales

     (127     (243

Settlements

     (3      

Net transfers

     (132     5  

Ending balance

   $ 1,061     $ 814  

Unrealized gains (losses)

   $ 41     $ (1
    

Three Months Ended

March 31,

 
$ in millions            2019                     2018          

Corporate equities

    

Beginning balance

   $                 95     $ 166  

Realized and unrealized gains (losses)

     6                   —  

Purchases

     51       166  

Sales

     (9     (132

Net transfers

     9       33  

Ending balance

   $ 152     $ 233  

Unrealized gains (losses)

   $ 7     $ (9

Investments

    

Beginning balance

   $ 757     $ 1,020  

Realized and unrealized gains (losses)

     10       44  

Purchases

     10       21  

Sales

     (4     (78

Net transfers

     201       5  

Ending balance

   $ 974     $ 1,012  

Unrealized gains (losses)

   $ 14     $ 22  

Net derivative and other contracts:

 

Interest rate

 

Beginning balance

   $ 618     $             1,218  

Realized and unrealized gains (losses)

     (48     52  

Purchases

     24       32  

Issuances

     (19     (41

Settlements

     (12     (81

Net transfers

     (12     (510

Ending balance

   $ 551     $ 670  

Unrealized gains (losses)

   $ (43   $ 75  

Credit

 

Beginning balance

   $ 40     $ 41  

Realized and unrealized gains (losses)

     162       (107

Purchases

     26        

Issuances

     (442      

Settlements

     (33     38  

Net transfers

     (14     (2

Ending balance

   $ (261   $ (30

Unrealized gains (losses)

   $ 167     $ (109

Foreign exchange

 

Beginning balance

   $ 75     $ (112

Realized and unrealized gains (losses)

     (113     57  

Purchases

     1        

Issuances

           (31

Settlements

     8       33  

Net transfers

     34       20  

Ending balance

   $ 5     $ (33

Unrealized gains (losses)

   $ 3     $ (9

Equity

 

Beginning balance

   $ (1,485   $ 1,208  

Realized and unrealized gains (losses)

     (191     356  

Purchases

     34       142  

Issuances

     (193     (799

Settlements

     139       159  

Net transfers

     (64     (51

Ending balance

   $ (1,760   $ 1,015  

Unrealized gains (losses)

   $ (203   $ 315  
 

 

March 2019 Form 10-Q   42  


Table of Contents

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Notes to Consolidated Financial Statements

(Unaudited)

 

    Three Months Ended March 31,  
$ in millions   2019     2018  

Commodity and other

   

Beginning balance

  $ 2,052     $ 1,446  

Realized and unrealized gains (losses)

    43       217  

Purchases

    5       13  

Issuances

    (1     (6

Settlements

    (81     (57

Net transfers

    88       47  

Ending balance

  $ 2,106     $ 1,660  

Unrealized gains (losses)

  $ (25   $ 149  

Liabilities at Fair Value

   

Deposits

   

Beginning balance

  $ 27     $ 47  

Realized and unrealized losses (gains)

    6       (1

Issuances

    24       9  

Settlements

    (1     (1

Net transfers

    43       (10

Ending balance

  $ 99     $ 44  

Unrealized losses (gains)

  $ 6     $ (1

Nonderivative trading liabilities

   

Beginning balance

  $ 16     $ 25  

Realized and unrealized losses (gains)

    (1     (4

Purchases

    (6     (7

Sales

    23       15  

Net transfers

    11       10  

Ending balance

  $ 43     $ 39  

Unrealized losses (gains)

  $ (1   $ (4

Securities sold under agreements to repurchase

 

Beginning balance

  $     $ 150  

Net transfers

          (150

Ending balance

  $     $  

Unrealized losses (gains)

  $     $  

Other secured financings

 

Beginning balance

  $ 208     $ 239  

Realized and unrealized losses (gains)

    4       (13

Issuances

          4  

Settlements

    (7     (10

Net transfers

    (52      

Ending balance

  $ 153     $ 220  

Unrealized losses (gains)

  $ 4     $ (13

Borrowings

   

Beginning balance

  $ 3,806     $ 2,984  

Realized and unrealized losses (gains)

    287       (102

Issuances

    264       640  

Settlements

    (115     (83

Net transfers

    (467     187  

Ending balance

  $ 3,775     $ 3,626  

Unrealized losses (gains)

  $ 276     $ (99

Portion of Unrealized losses (gains) recorded in OCI—Change in net DVA

    59       (44

Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. The realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the previous tables do not reflect the

related realized and unrealized gains (losses) on hedging instruments that have been classified by the Firm within the Level 1 and/or Level 2 categories.

The unrealized gains (losses) during the period for assets and liabilities within the Level 3 category may include changes in fair value during the period that were attributable to both observable and unobservable inputs. Total realized and unrealized gains (losses) are primarily included in Trading revenues in the income statements.

Additionally, in the previous tables, consolidations of VIEs are included in Purchases and deconsolidations of VIEs are included in Settlements.

Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements

 

Valuation Techniques and Unobservable Inputs

 

    Balance / Range (Average1)  

$ in millions, except inputs

    At March 31, 2019       At December 31, 2018  

Assets Measured at Fair Value on a Recurring Basis

 

MABS

  $ 301     $ 354  

Comparable pricing:

   

Bond price

    1 to 91 points (37 points)       0 to 97 points (38 points)  

Loans and lending commitments

  $ 6,343     $ 6,870  

Margin loan model:

               

Discount rate

    1% to 6% (2%)       1% to 7% (2%)  

Volatility skew

    18% to 57% (25%)       19% to 56% (28%)  

Credit Spread

    11 to 62 bps (27 bps)       14 to 90 bps (36 bps)  

Comparable pricing:

   

Loan price

    85 to 104 points (98 points)       60 to 101 points (95 points)  

Corporate and other debt

  $ 1,061     $ 1,076  

Comparable pricing:

   

Bond price

    12 to 100 points (72 points)       12 to 100 points (72 points)  

Discounted cash flow:

   

Recovery rate

    27%       20%  

Discount rate

    N/M       15% to 21% (16%)  

Option model:

   

At the money volatility

    24% to 70% (56%)       24% to 78% (50%)  

Corporate equities

  $ 152       $95  

Comparable pricing:

   

Equity price

    100%       100%  

Investments

  $ 974     $ 757  

Discounted cash flow:

   

WACC

    9% to 16% (11%)       9% to 15% (10%)  

Exit multiple

    9 to 10 times (10 times)       7 to 10 times (10 times)  

Market approach:

   

EBITDA multiple

    5 to 24 times (10 times)       6 to 24 times (12 times)  

Comparable pricing:

   

Equity price

    75% to 100% (99%)       75% to 100% (96%)  

Net derivative and other contracts:

   

Interest rate

  $ 551     $ 618  

Option model:

   

IR volatility skew

    23% to 98% (59% / 61%)       22% to 95% (48% / 51%)  

Inflation volatility

    22% to 62% (42% / 39%)       23% to 65% (44% / 40%)  

IR curve

    1%       1%  
 

 

 

  43   March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

 

    Balance / Range (Average1)  
$ in millions, except inputs   At March 31, 2019     At December 31, 2018  

Credit

  $ (261   $ 40  

Comparable pricing:

   

Cash-synthetic basis

    12 points       8 to 9 points (9 points

Bond price

    0 to 83 points (38 points     0 to 75 points (26 points

Credit spread

    227 to 584 bps (307 bps     246 to 499 bps (380 bps

Funding spread

    42 to 112 bps (91 bps     47 to 98 bps (93 bps

Correlation model:

   

Credit correlation

    36% to 68% (42%     36% to 69% (44%

Foreign exchange2

  $ 5     $ 75  

Option model:

   

IR FX correlation

    5% to 57% (36% / 36%     53% to 56% (55% / 55%

IR volatility skew

    23% to 98% (59% / 61%     22% to 95% (48% / 51%

Contingency probability

    80% to 95% (90% / 90%     90% to 95% (93% / 95%

Equity2

  $ (1,760   $ (1,485

Option model:

   

At the money volatility

    6% to 69% (36%     17% to 63% (38%

Volatility skew

    -2% to 0% (-1%     -2% to 0% (-1%

Equity correlation

    5% to 96% (65%     5% to 96% (71%

FX correlation

    -60% to 55% (-21%     -60% to 55% (-26%

IR correlation

    -7% to 45% (16% / 13%     -7% to 45% (15% / 12%

Commodity and other

  $ 2,106     $ 2,052  

Option model:

   

Forward power price

  $ 4 to $172 ($30) per MWh     $ 3 to $185 ($31) per MWh

Commodity volatility

    7% to 130% (16%     7% to 187% (17%

Cross-commodity correlation

    5% to 99% (93%     5% to 99% (93%

Liabilities Measured at Fair Value on a Recurring Basis

 

Deposits

  $ 99     $ 27  

Option Model

   

At the money volatility

    15% to 42% (21%     N/M  

Other secured financings

  $ 153     $ 208  

Discounted cash flow:

   

Funding spread

    112 to 205 bps (158 bps     103 to 193 bps (148 bps

Option model:

   

Volatility skew

    N/M       -1%  

At the money volatility

    10% to 40% (26%     10% to 40% (25%

Borrowings

  $ 3,775     $ 3,806  

Option model:

   

At the money volatility

    6% to 34% (21%     5% to 35% (22%

Volatility skew

    -2% to 0% (0%     -2% to 0% (0%

Equity correlation

    38% to 98% (81%     45% to 98% (85%

Equity - FX correlation

    -55% to 30% (-27%     -75% to 50% (-27%

IR Correlation

    N/M       58% to 97% (85% / 91%

IR FX Correlation

    27% to 58% (39% / 34%     28% to 58% (44% / 44%

Nonrecurring Fair Value Measurement

 

Loans

  $ 1,166     $ 1,380  

Corporate loan model:

   

Credit spread

    72 to 366 bps (150 bps     97 to 434 bps (181 bps

Warehouse model:

   

Credit spread

    262 to 309 bps (299 bps     223 to 313 bps (247 bps

Points—Percentage of par

IR—Interest rate

FX—Foreign exchange

1.

Amounts represent weighted averages except where simple averages and the median of the inputs are more relevant.

2.

Includes derivative contracts with multiple risks (i.e., hybrid products).

The previous tables provide information for each major category of assets and liabilities measured at fair value on a recurring and nonrecurring basis with a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed across the inventory. Further, the range of unobservable inputs may differ across firms in the financial services industry because of diversity in the types of products included in each firm’s inventory. There are no predictable relationships between multiple significant unobservable inputs attributable to a given valuation technique. A single amount is disclosed when there is no significant difference between the minimum, maximum and average.

For a description of the Firm’s significant unobservable inputs and qualitative information about the effect of hypothetical changes in the values of those inputs, see Note 3 to the financial statements in the 2018 Form 10-K. During the current quarter, there were no significant revisions made to the descriptions of the Firm’s significant unobservable inputs.

Net Asset Value Measurements

 

Fund Interests

 
     At March 31, 2019      At December 31, 2018  
$ in millions    Carrying
Value
     Commitment      Carrying
Value
     Commitment  

Private equity

   $ 1,455      $ 314      $ 1,374      $ 316  

Real estate

     1,248        149        1,105        161  

Hedge1

     102        4        103        4  

Total

   $ 2,805      $ 467      $ 2,582      $ 481  

 

1.

Investments in hedge funds may be subject to initial period lock-up or gate provisions, which restrict an investor from withdrawing from the fund during a certain initial period or restrict the redemption amount on any redemption date, respectively.

For a description of the Firm’s investments in private equity funds, real estate funds and hedge funds, which are measured based on NAV, see Note 3 to the financial statements in the 2018 Form 10-K.

Amounts in the previous table represent the Firm’s carrying value of general and limited partnership interests in fund investments, as well as any carried interest. The carrying amounts are measured based on the NAV of the fund taking into account the distribution terms applicable to the interest held. This same measurement applies whether the fund investments are accounted for under the equity method or fair value.

See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance-based fees in the form of carried interest previously received. See Note 18 for information regarding carried interest at risk of reversal.

 

 

March 2019 Form 10-Q   44  


Table of Contents

LOGO

Notes to Consolidated Financial Statements

(Unaudited)

 

Nonredeemable Funds by Contractual Maturity

 

 
     Carrying Value at March 31, 2019  
$ in millions    Private Equity      Real Estate  

Less than 5 years

   $ 705      $ 634  

5-10 years

     723        555  

Over 10 years

     27        59  

Total

   $ 1,455      $ 1,248  

Fair Value Option

The Firm elected the fair value option for certain eligible instruments that are risk managed on a fair value basis to mitigate income statement volatility caused by measurement basis differences between the elected instruments and their associated risk management transactions or to eliminate the complexities of applying certain accounting models.

Borrowings Measured at Fair Value on a Recurring Basis

 

$ in millions   

At

March 31,

2019

     At
December 31,
2018
 

Business Unit Responsible for Risk Management

 

Equity

   $ 27,807      $ 24,494  

Interest rates

     23,945        22,343  

Commodities

     3,209        2,735  

Credit

     981        856  

Foreign exchange

     522        756  

Total

   $ 56,464      $ 51,184  

Earnings Impact of Borrowings under the Fair Value Option

 

     Three Months Ended March 31,  
$ in millions    2019     2018  

Trading revenues

   $ (2,903   $ 26  

Interest expense

     (93     (102

Net revenues1

   $ (2,996   $ (76

 

1.

Amounts do not reflect any gains or losses from related economic hedges.

Gains (losses) are mainly attributable to movements in the reference price or index, interest rates or foreign exchange rates.

Gains (Losses) Due to Changes in Instrument-Specific Credit Risk

 

     Three Months Ended March 31,  
     2019     2018  
$ in millions    Trading
Revenues
    OCI     Trading
Revenues
    OCI  

Borrowings

   $ (4   $     (816   $ (15   $     593  

Loans and other debt1

     93             81        

Lending commitments

     (1           2        

Other

           (4           2  

 

$ in millions   

At

March 31,

2019

   

At

December 31,

2018

 

Cumulative pre-tax DVA gain (loss) recognized in AOCI

   $ (648   $ 172  

 

1.

Loans and other debt instrument-specific credit gains (losses) were determined by excluding the non-credit components of gains and losses.

Excess of Contractual Principal Amount Over Fair Value

 

$ in millions

   At
March 31,
2019
     At
December 31,
2018
 

Loans and other debt1

   $ 13,031      $ 13,094  

Nonaccrual loans1

     10,677        10,831  

Borrowings2

     730        2,657  

 

1.

The majority of the difference between principal and fair value amounts for loans and other debt relates to distressed debt positions purchased at amounts well below par.

2.

Borrowings in this table do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in a reference price or index.

The previous tables exclude non-recourse debt from consolidated VIEs, liabilities related to failed sales of financial assets, pledged commodities and other liabilities that have specified assets attributable to them.

Fair Value Loans on Nonaccrual Status

 

$ in millions    At
March 31,
2019
     At
December 31,
2018
 

Nonaccrual loans

   $ 1,198      $ 1,497  

Nonaccrual loans 90 or more
days past due

   $ 769      $ 812  
 

 

  45   March 2019 Form 10-Q


Table of Contents

LOGO

Notes to Consolidated Financial Statements

(Unaudited)

 

Nonrecurring Fair Value Measurements    

Carrying and Fair Values

 

     At March 31, 2019  
     Fair Value  

$ in millions

   Level 2      Level 31      Total  

Assets

        

Loans

   $         2,160      $         1,166      $         3,326  

Other assets—Other investments

            30        30  

Other assets—Premises, equipment and software

                    

Total

   $ 2,160      $ 1,196      $ 3,356  

Liabilities

        

Other liabilities and accrued expenses—Lending commitments

   $ 186      $ 49      $ 235  

Total

   $ 186      $ 49      $ 235  

 

     At December 31, 2018  
     Fair Value  

$ in millions

   Level 2      Level 31      Total  

Assets

        

Loans

   $         2,307      $         1,380      $         3,687  

Other assets—Other investments

     14        100        114  

Other assets—Premises, equipment and software

                    

Total

   $ 2,321      $ 1,480      $ 3,801  

Liabilities

        

Other liabilities and accrued expenses—Lending commitments

   $ 292      $ 65      $ 357  

Total

   $ 292      $ 65      $ 357  

 

1.

For significant Level 3 balances, refer to “Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements” section herein for details of the significant unobservable inputs used for nonrecurring fair value measurement.

Gains (Losses) from Fair Value Remeasurements1

 

     Three Months Ended
March 31,
 
$ in millions    2019     2018  

Assets

    

Loans2

   $         36     $ 8  

Other assets—Other investments

     (5      

Other assets—Premises, equipment and software

     (2     (8

Total

   $ 29     $  

Liabilities

    

Other liabilities and accrued expenses—Lending commitments2

   $ 67     $ 6  

Total

   $ 67     $         6  

 

1.

Gains and losses for Loans and Other assets—Other investments are classified in Other revenues. For other items, gains and losses are recorded in Other revenues if the item is held for sale; otherwise they are recorded in Other expenses.

2.

Nonrecurring changes in the fair value of loans and lending commitments were calculated as follows: for the held-for-investment category, based on the value of the underlying collateral; and for the held-for-sale category, based on recently executed transactions, market price quotations, valuation models that incorporate market observable inputs where possible, such as comparable loan or debt prices and CDS spread levels adjusted for any basis difference between cash and derivative instruments, or default recovery analysis where such transactions and quotations are unobservable.

 

 

March 2019 Form 10-Q   46  


Table of Contents

LOGO

Notes to Consolidated Financial Statements

(Unaudited)

 

Financial Instruments Not Measured at Fair Value

Carrying and Fair Values

 

    At March 31, 2019  
   

Carrying

Value

    Fair Value  
$ in millions   Level 1     Level 2     Level 3     Total  

Financial assets

 

       

Cash and cash equivalents:

         

Cash and due from banks

  $ 35,472     $     35,472     $     $     $ 35,472  

Interest bearing deposits with banks

    14,498       14,498                   14,498  

Restricted cash

    30,712       30,712                   30,712  

Investment securities—HTM

    36,303       21,270       14,218       536       36,024  

Securities purchased under agreements to resell

    96,565             95,841       714       96,555  

Securities borrowed

    138,891             138,891             138,891  

Customer and other receivables1

    47,854             44,907       2,836       47,743  

Loans2

    116,197             24,888       91,610       116,498  

Other assets

    461             461             461  

Financial liabilities

 

     

Deposits

  $ 179,039     $     $ 179,168     $     $ 179,168  

Securities sold under agreements to repurchase

    47,326             46,765       550       47,315  

Securities loaned

    12,508             12,508             12,508  

Other secured financings

    3,760             3,539       226       3,765  

Customer and other payables1

    189,712             189,712             189,712  

Borrowings

    134,227             137,906       30       137,936  
     
Commitment
Amount
 
 
                               

Lending commitments3

  $ 113,418     $     $ 947     $ 294     $ 1,241  

 

    At December 31, 2018  
   

Carrying

Value

    Fair Value  
$ in millions   Level 1     Level 2     Level 3     Total  

Financial assets

 

       

Cash and cash equivalents:

         

Cash and due from banks

  $ 30,541     $     30,541     $     $     $ 30,541  

Interest bearing deposits with banks

    21,299       21,299                   21,299  

Restricted cash

    35,356       35,356                   35,356  

Investment securities—HTM

    30,771       17,473       12,018       474       29,965  

Securities purchased under agreements to resell

    98,522             97,611       866       98,477  

Securities borrowed

    116,313             116,312             116,312  

Customer and other receivables1

    47,972             44,620       3,219       47,839  

Loans2

    115,579             25,604       90,121       115,725  

Other assets

    461             461             461  

Financial liabilities

 

     

Deposits

  $ 187,378     $     $ 187,372     $     $ 187,372  

Securities sold under agreements to repurchase

    48,947             48,385       525       48,910  

Securities loaned

    11,908             11,906             11,906  

Other secured financings

    4,221             3,233       994       4,227  

Customer and other payables1

    176,561             176,561             176,561  

Borrowings

    138,478             140,085       30       140,115  
     
Commitment
Amount
 
 
                               

Lending commitments3

  $ 104,844     $     $ 1,249     $ 321     $ 1,570  

 

1.

Accrued interest and dividend receivables and payables where carrying value approximates fair value have been excluded.

2.

Amounts include loans measured at fair value on a nonrecurring basis.

3.

Represents Lending Commitments accounted for as Held for Investment and Held for Sale. For a further discussion on lending commitments, see Note 11.

The previous tables exclude certain financial instruments such as equity method investments and all non-financial assets and liabilities such as the value of the long-term relationships with the Firm’s deposit customers.

 

 

  47   March 2019 Form 10-Q


Table of Contents

LOGO

Notes to Consolidated Financial Statements

(Unaudited)

 

4. Derivative Instruments and Hedging Activities

Fair Values of Derivative Contracts

At March 31, 2019

 

     Assets  

$ in millions

   Bilateral
OTC
    Cleared
OTC
    Exchange-
Traded
    Total  

Designated as accounting hedges

 

     

Interest rate

   $ 489     $ 1     $     $ 490  

Foreign exchange

     107       14             121  

Total

     596       15             611  

Not designated as accounting hedges

 

     

Interest rate

     164,693       4,602       699       169,994  

Credit

     4,327       1,854             6,181  

Foreign exchange

     59,462       1,336       62       60,860  

Equity

     21,593             19,327       40,920  

Commodity and other

     9,011             1,486       10,497  

Total

     259,086       7,792       21,574       288,452  

Total gross derivatives

   $ 259,682     $ 7,807     $ 21,574     $ 289,063  

Amounts offset

        

Counterparty netting

     (194,262     (6,453     (20,683     (221,398

Cash collateral netting

     (37,487     (1,242           (38,729

Total in Trading assets

   $ 27,933     $ 112     $ 891     $ 28,936  

Amounts not offset1

        

Financial instruments collateral

     (12,603                 (12,603

Other cash collateral

     (59                 (59

Net amounts

   $ 15,271     $ 112     $ 891     $ 16,274  

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable

 

  $ 2,118  

 

     Liabilities  

$ in millions

   Bilateral
OTC
    Cleared
OTC
    Exchange-
Traded
    Total  

Designated as accounting hedges

 

     

Interest rate

   $ 88     $ 3     $     $ 91  

Foreign exchange

     17       32             49  

Total

     105       35             140  

Not designated as accounting hedges

 

     

Interest rate

     155,653       3,395       528       159,576  

Credit

     4,631       2,134             6,765  

Foreign exchange

     58,577       1,302       1       59,880  

Equity

     25,681             19,677       45,358  

Commodity and other

     5,514             1,458       6,972  

Total

     250,056       6,831       21,664       278,551  

Total gross derivatives

   $ 250,161     $ 6,866     $ 21,664     $ 278,691  

Amounts offset

        

Counterparty netting

     (194,262     (6,453     (20,683     (221,398

Cash collateral netting

     (27,167     (380           (27,547

Total in Trading liabilities

   $ 28,732     $ 33     $ 981     $ 29,746  

Amounts not offset1

        

Financial instruments collateral

     (8,466           (392     (8,858

Other cash collateral

     (48     (30           (78

Net amounts

   $ 20,218     $ 3     $ 589     $ 20,810  

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable

 

  $ 3,116  

At December 31, 2018

 

     Assets  

$ in millions

   Bilateral
OTC
    Cleared
OTC
    Exchange-
Traded
    Total  

Designated as accounting hedges

 

   

Interest rate

   $ 512     $ 1     $     $ 513  

Foreign exchange

     27       8             35  

Total

     539       9             548  

Not designated as accounting hedges

 

   

Interest rate

     153,768       3,887       697       158,352  

Credit

     4,630       1,498             6,128  

Foreign exchange

     61,846       1,310       55       63,211  

Equity

     24,590             23,284       47,874  

Commodity and other

     10,538             1,934       12,472  

Total

     255,372       6,695       25,970       288,037  

Total gross derivatives

   $ 255,911     $ 6,704     $ 25,970     $ 288,585  

Amounts offset

        

Counterparty netting

     (190,220     (5,260     (24,548     (220,028

Cash collateral netting

     (38,204     (1,180           (39,384

Total in Trading assets

   $ 27,487     $ 264     $ 1,422     $ 29,173  

Amounts not offset1

        

Financial instruments collateral

     (12,467                 (12,467

Other cash collateral

     (31                 (31

Net amounts

   $ 14,989     $ 264     $ 1,422     $ 16,675  

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable

 

  $ 2,206  

 

     Liabilities  

$ in millions

   Bilateral
OTC
    Cleared
OTC
    Exchange-
Traded
    Total  

Designated as accounting hedges

 

   

Interest rate

   $ 176     $     $     $ 176  

Foreign exchange

     62       24             86  

Total

     238       24             262  

Not designated as accounting hedges

 

   

Interest rate

     142,592       2,669       663       145,924  

Credit

     4,545       1,608             6,153  

Foreign exchange

     62,099       1,302       19       63,420  

Equity

     27,119             23,521       50,640  

Commodity and other

     6,983             2,057       9,040  

Total

     243,338       5,579       26,260       275,177  

Total gross derivatives

   $ 243,576     $ 5,603     $ 26,260     $ 275,439  

Amounts offset

        

Counterparty netting

     (190,220     (5,260     (24,548     (220,028

Cash collateral netting

     (27,860     (293           (28,153

Total in Trading liabilities

   $ 25,496     $ 50     $ 1,712     $ 27,258  

Amounts not offset1

        

Financial instruments collateral

     (4,709           (766     (5,475

Other cash collateral

     (53     (1           (54

Net amounts

   $ 20,734     $ 49     $ 946     $ 21,729  

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable

 

  $ 4,773  

 

1.

Amounts relate to master netting agreements and collateral agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.

See Note 3 for information related to the unsettled fair value of futures contracts not designated as accounting hedges, which are excluded from the previous tables.

 

 

March 2019 Form 10-Q   48  


Table of Contents

LOGO

Notes to Consolidated Financial Statements

(Unaudited)

 

Notionals of Derivative Contracts

At March 31, 2019

 

     Assets  

$ in billions

   Bilateral
OTC
     Cleared
OTC
     Exchange-
Traded
     Total  

Designated as accounting hedges

 

Interest rate

   $ 15      $ 83      $      $ 98  

Foreign exchange

     10        1               11  

Total

     25        84               109  

Not designated as accounting hedges

 

Interest rate

     4,785        7,900        1,042        13,727  

Credit

     139        74               213  

Foreign exchange

     2,731        104        13        2,848  

Equity

     455               367        822  

Commodity and other

     98               68        166  

Total

     8,208        8,078        1,490        17,776  

Total gross derivatives

   $ 8,233      $ 8,162      $ 1,490      $ 17,885  

 

     Liabilities  

$ in billions

   Bilateral
OTC
     Cleared
OTC
     Exchange-
Traded
     Total  

Designated as accounting hedges

 

Interest rate

   $ 2      $ 75      $      $ 77  

Foreign exchange

     2        1               3  

Total

     4        76               80  

Not designated as accounting hedges

 

Interest rate

     4,956        7,059        880        12,895  

Credit

     156        84               240  

Foreign exchange

     2,748        102        12        2,862  

Equity

     410               558        968  

Commodity and other

     80               64        144  

Total

     8,350        7,245        1,514        17,109  

Total gross derivatives

   $ 8,354      $ 7,321      $ 1,514      $ 17,189  

At December 31, 2018

 

     Assets  

$ in billions

   Bilateral
OTC
     Cleared
OTC
     Exchange-
Traded
     Total  

Designated as accounting hedges

 

Interest rate

   $ 15      $ 52      $      $ 67  

Foreign exchange

     5        1               6  

Total

     20        53               73  

Not designated as accounting hedges

 

Interest rate

     4,807        6,708        1,157        12,672  

Credit

     162        74               236  

Foreign exchange

     2,436        118        14        2,568  

Equity

     373               371        744  

Commodity and other

     97               67        164  

Total

     7,875        6,900        1,609        16,384  

Total gross derivatives

   $ 7,895      $ 6,953      $ 1,609      $ 16,457  
     Liabilities  

$ in billions

   Bilateral
OTC
     Cleared
OTC
     Exchange-
Traded
     Total  

Designated as accounting hedges

 

Interest rate

   $ 2      $ 107      $      $ 109  

Foreign exchange

     5        1               6  

Total

     7        108               115  

Not designated as accounting hedges

 

Interest rate

     4,946        5,735        781        11,462  

Credit

     162        73               235  

Foreign exchange

     2,451        114        17        2,582  

Equity

     389               602        991  

Commodity and other

     72               65        137  

Total

     8,020        5,922        1,465        15,407  

Total gross derivatives

   $ 8,027      $ 6,030      $ 1,465      $ 15,522  

The Firm believes that the notional amounts of derivative contracts generally overstate its exposure. In most circumstances notional amounts are only used as a reference point from which to calculate amounts owed between the parties to the contract. Furthermore, notional amounts do not reflect the benefit of legally enforceable netting arrangements or risk mitigating transactions.

For a discussion of the Firm’s derivative instruments and hedging activities, see Note 4 to the financial statements in the 2018 Form 10-K.

Gains (Losses) on Accounting Hedges

 

     Three Months Ended
March 31,
 
$ in millions    2019     2018  

Fair Value Hedges—Recognized in Interest Expense

    

Interest rate contracts

   $ 1,577     $ (1,841

Borrowings

     (1,621     1,852  

Net Investment Hedges—Foreign exchange contracts

    

Recognized in OCI, net of tax

   $ 64     $ (148

Forward points excluded from hedge effectiveness testing—Recognized in Interest income

     35       7  

Fair Value Hedges—Hedged Items

 

$ in millions    At March 31,
2019
    At December 31,
2018
 

Investment Securities—AFS1

    

Carrying amount2 currently or
previously hedged

   $ 413     $ 201  

Borrowings

    

Carrying amount2 currently or
previously hedged

   $ 103,460     $ 102,899  

Basis adjustments included in
carrying amount3

   $ (74   $ (1,689

 

1.

Amounts recognized in interest income and basis adjustments related to AFS securities were not material.

2.

Carrying amount represents amortized cost basis.

3.

Hedge accounting basis adjustments for Borrowings are primarily related to outstanding hedges.

 

 

  49   March 2019 Form 10-Q


Table of Contents

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Notes to Consolidated Financial Statements

(Unaudited)

 

Net Derivative Liabilities and Collateral Posted

 

$ in millions    At
March 31,
2019
     At
December 31,
2018
 

Net derivative liabilities with credit risk-related contingent features

   $ 18,373      $ 16,403  

Collateral posted

     14,473        11,981  

The previous table presents the aggregate fair value of certain derivative contracts that contain credit risk-related contingent features that are in a net liability position for which the Firm has posted collateral in the normal course of business.

Incremental Collateral and Termination Payments upon Potential Future Ratings Downgrade

 

$ in millions    At
March 31,
2019
 

One-notch downgrade

   $ 452  

Two-notch downgrade

     277  

Bilateral downgrade agreements included in the amounts above1

   $ 685  

 

1.

Amount represents arrangements between the Firm and other parties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral downgrade arrangements are used by the Firm to manage the risk of counterparty downgrades.

The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and S&P Global Ratings. The previous table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevant contractual downgrade triggers.

Maximum Potential Payout/Notional of Credit Protection Sold1

 

    Years to Maturity at March 31, 2019  
$ in millions   < 1     1-3     3-5     Over 5     Total  

Single-name CDS

         

Investment grade

  $ 19,721     $ 21,800     $ 20,305     $ 11,743     $ 73,569  

Non-investment grade

    9,173       12,154       8,908       3,159       33,394  

Total

  $ 28,894     $ 33,954     $ 29,213     $ 14,902     $ 106,963  

Index and basket CDS

 

     

Investment grade

  $ 4,886     $ 9,022     $ 36,038     $ 22,143     $ 72,089  

Non-investment grade

    5,608       5,482       10,281       14,131       35,502  

Total

  $ 10,494     $ 14,504     $ 46,319     $ 36,274     $ 107,591  

Total CDS sold

  $ 39,388     $ 48,458     $ 75,532     $ 51,176     $ 214,554  

Other credit contracts

                      105       105  

Total credit protection sold

  $ 39,388     $ 48,458     $ 75,532     $ 51,281     $ 214,659  

CDS protection sold with identical protection purchased

 

  $ 199,507  
    Years to Maturity at December 31, 2018  
$ in millions   < 1     1-3     3-5     Over 5     Total  

Single-name CDS

         

Investment grade

  $ 22,297     $ 23,876     $ 19,469     $ 7,844     $ 73,486  

Non-investment grade

    10,135       11,061       9,020       861       31,077  

Total

  $ 32,432     $ 34,937     $ 28,489     $ 8,705     $ 104,563  

Index and basket CDS

 

       

Investment grade

  $ 5,341     $ 9,901     $ 60,887     $ 6,816     $ 82,945  

Non-investment grade

    4,574       5,820       12,855       13,272       36,521  

Total

  $ 9,915     $ 15,721     $ 73,742     $ 20,088     $ 119,466  

Total CDS sold

  $ 42,347     $ 50,658     $ 102,231     $ 28,793     $ 224,029  

Other credit contracts

                      116       116  

Total credit protection sold

  $ 42,347     $ 50,658     $ 102,231     $ 28,909     $ 224,145  

CDS protection sold with identical protection purchased

 

          $ 209,972  

Fair Value Asset (Liability) of Credit Protection Sold1

 

$ in millions    At
March 31,
2019
    At
December 31,
2018
 

Single-name CDS

    

Investment grade

   $ 401     $ 118  

Non-investment grade

     (440     (403

Total

   $ (39   $ (285

Index and basket CDS

    

Investment grade

   $ 708     $ 314  

Non-investment grade

     (460     (1,413

Total

   $ 248     $ (1,099

Total CDS sold

   $ 209     $ (1,384

Other credit contracts

     (8     (14

Total credit protection sold

   $ 201     $ (1,398

 

1.

Investment grade/non-investment grade determination is based on the internal credit rating of the reference obligation. Internal credit ratings serve as the Credit Risk Management Department’s assessment of credit risk and the basis for a comprehensive credit limits framework used to control credit risk. The Firm uses quantitative models and judgement to estimate the various risk parameters related to each obligor.

Protection Purchased with CDS

 

     At March 31, 2019  
$ in millions    Fair Value Asset (Liability)     Notional  

Single name

   $ (148   $ 116,753  

Index and basket

     (170     105,819  

Tranched index and basket

     (475     15,677  

Total

   $ (793   $ 238,249  

 

     At December 31, 2018  
$ in millions    Fair Value Asset (Liability)     Notional  

Single name

   $ 277     $ 116,333  

Index and basket

     1,333       117,022  

Tranched index and basket

     (251     13,524  

Total

   $ 1,359     $ 246,879  
 

 

March 2019 Form 10-Q   50  


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Notes to Consolidated Financial Statements

(Unaudited)

 

The Firm enters into credit derivatives, principally CDS, under which it receives or provides protection against the risk of default on a set of debt obligations issued by a specified reference entity or entities. A majority of the Firm’s counterparties for these derivatives are banks, broker-dealers, and insurance and other financial institutions.

The fair value amounts as shown in the previous tables are prior to cash collateral or counterparty netting. For further information on credit derivatives and other contracts, see Note 4 to the financial statements in the 2018 Form 10-K.

5. Investment Securities

 

AFS and HTM Securities  
    At March 31, 2019  

$ in millions

  Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value  

AFS securities

       

U.S. government and agency securities:

 

   

U.S. Treasury securities

  $ 32,144     $ 83     $ 448     $ 31,779  

U.S. agency securities1

    23,857       82       318       23,621  

Total U.S. government and agency securities

    56,001       165       766       55,400  

Corporate and other debt:

       

Agency CMBS

    1,965       18       54       1,929  

Non-agency CMBS

    343             7       336  

Corporate bonds

    1,724       4       10       1,718  

State and municipal securities

    394       6             400  

FFELP student loan ABS2

    1,868       6       16       1,858  

Total corporate and other debt

    6,294       34       87       6,241  

Total AFS securities

    62,295       199       853       61,641  

HTM securities

       

U.S. government and agency securities:

 

   

U.S. Treasury securities

    21,349       172       251       21,270  

U.S. agency securities1

    14,424       46       252       14,218  

Total U.S. government and agency securities

    35,773       218       503       35,488  

Corporate and other debt:

       

Non-agency CMBS

    530       7       1       536  

Total HTM securities

    36,303       225       504       36,024  

Total investment securities

  $ 98,598     $ 424     $ 1,357     $ 97,665  
    At December 31, 2018  
$ in millions   Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value  

AFS securities

       

U.S. government and agency securities:

 

   

U.S. Treasury securities

  $ 36,268     $ 40     $ 656     $ 35,652  

U.S. agency securities1

    20,740       10       497       20,253  

Total U.S. government and agency securities

    57,008       50       1,153       55,905  

Corporate and other debt:

       

Agency CMBS

    1,054             62       992  

Non-agency CMBS

    461             14       447  

Corporate bonds

    1,585             32       1,553  

State and municipal securities

    200       2             202  

FFELP student loan ABS2

    1,967       10       15       1,962  

Total corporate and other debt

    5,267       12       123       5,156  

Total AFS securities

    62,275       62       1,276       61,061  

HTM securities

       

U.S. government and agency securities:

 

   

U.S. Treasury securities

    17,832       44       403       17,473  

U.S. agency securities1

    12,456       8       446       12,018  

Total U.S. government and agency securities

    30,288       52       849       29,491  

Corporate and other debt:

       

Non-agency CMBS

    483             9       474  

Total HTM securities

    30,771       52       858       29,965  

Total investment securities

  $ 93,046     $ 114     $ 2,134     $ 91,026  

 

1.

U.S. agency securities consist mainly of agency-issued debt, agency mortgage pass-through pool securities and CMOs.

2.

Underlying loans are backed by a guarantee, ultimately from the U.S. Department of Education, of at least 95% of the principal balance and interest outstanding.

 

 

  51   March 2019 Form 10-Q


Table of Contents

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Notes to Consolidated Financial Statements

(Unaudited)

 

Investment Securities in an Unrealized Loss Position

 

    At March 31, 2019  
    Less than 12 Months           12 Months or Longer           Total  
$ in millions   Fair Value      Gross
Unrealized
Losses
          Fair Value      Gross
Unrealized
Losses
          Fair Value      Gross
Unrealized
Losses
 

AFS securities

                  

U.S. government and agency securities:

                  

U.S. Treasury securities

  $ 124      $             $ 22,670      $ 448             $ 22,794      $ 448  

U.S. agency securities

    3,641        29               13,307        289               16,948        318  

Total U.S. government and agency securities

    3,765        29               35,977        737               39,742        766  

Corporate and other debt:

                  

Agency CMBS

    64                      802        54               866        54  

Non-agency CMBS

                         336        7               336        7  

Corporate bonds

    276        1               818        9               1,094        10  

FFELP student loan ABS

    615        5               702        11               1,317        16  

Total corporate and other debt

    955        6               2,658        81               3,613        87  

Total AFS securities

    4,720        35               38,635        818               43,355        853  

HTM securities

                  

U.S. government and agency securities:

                  

U.S. Treasury securities

    99                      9,495        251               9,594        251  

U.S. agency securities

    303        2               9,505        250               9,808        252  

Total U.S. government and agency securities

    402        2               19,000        501               19,402        503  

Corporate and other debt:

                  

Non-agency CMBS

    66        1               110                      176        1  

Total HTM securities

    468        3               19,110        501               19,578        504  

Total investment securities

  $             5,188      $ 38             $         57,745      $ 1,319             $         62,933      $ 1,357  

 

    At December 31, 2018  
    Less than 12 Months           12 Months or Longer           Total  
$ in millions   Fair Value      Gross
Unrealized
Losses
          Fair Value      Gross
Unrealized
Losses
          Fair Value      Gross
Unrealized
Losses
 

AFS securities

                  

U.S. government and agency securities:

                  

U.S. Treasury securities

  $ 19,937      $ 541             $ 5,994      $ 115             $ 25,931      $ 656  

U.S. agency securities

    12,904        383               4,142        114               17,046        497  

Total U.S. government and agency securities

    32,841        924               10,136        229               42,977        1,153  

Corporate and other debt:

                  

Agency CMBS

    808        62                                    808        62  

Non-agency CMBS

                         446        14               446        14  

Corporate bonds

    470        7               1,010        25               1,480        32  

FFELP student loan ABS

    1,366        15                                    1,366        15  

Total corporate and other debt

    2,644        84               1,456        39               4,100        123  

Total AFS securities

    35,485        1,008               11,592        268               47,077        1,276  

HTM securities

                  

U.S. government and agency securities:

                  

U.S. Treasury securities

                         11,161        403               11,161        403  

U.S. agency securities

    410        1               10,004        445               10,414        446  

Total U.S. government and agency securities

    410        1               21,165        848               21,575        849  

Corporate and other debt:

                  

Non-agency CMBS

    206        1               216        8               422        9  

Total HTM securities

    616        2               21,381        856               21,997        858  

Total investment securities

  $         36,101      $ 1,010             $         32,973      $ 1,124             $         69,074      $ 2,134  

 

March 2019 Form 10-Q   52  


Table of Contents

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Notes to Consolidated Financial Statements

(Unaudited)

 

The Firm believes there are no securities in an unrealized loss position that are other-than-temporarily impaired after performing the analysis described in Note 2 to the financial statements in the 2018 Form 10-K. For AFS securities, the Firm does not intend to sell the securities and is not likely to be required to sell the securities prior to recovery of the amortized cost basis. Furthermore, for both AFS and HTM securities, the securities have not experienced credit losses as the unrealized losses reported in the previous table are primarily due to higher interest rates since those securities were purchased.

See Note 12 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities, non-agency CMBS and FFELP student loan ABS.

Investment Securities by Contractual Maturity

 

     At March 31, 2019  
$ in millions    Amortized
Cost
     Fair
Value
     Annualized
Average
Yield
 

AFS securities

        

U.S. government and agency securities:

 

U.S. Treasury securities:

        

Due within 1 year

   $ 4,665      $ 4,647        1.7

After 1 year through 5 years

     22,997        22,730        1.9

After 5 years through 10 years

     4,482        4,402        2.1

Total

     32,144        31,779           

U.S. agency securities:

        

Due within 1 year

     498        496        1.1

After 1 year through 5 years

     699        691        1.1

After 5 years through 10 years

     1,584        1,554        1.8

After 10 years

     21,076        20,880        2.4

Total

     23,857        23,621           

Total U.S. government and agency securities

     56,001        55,400        2.1

Corporate and other debt:

        

Agency CMBS:

        

After 1 year through 5 years

     228        227        1.4

After 5 years through 10 years

     994        1,011        3.2

After 10 years

     743        691        1.6

Total

     1,965        1,929           

Non-agency CMBS:

        

After 1 year through 5 years

     36        35        2.5

After 10 years

     307        301        2.3

Total

     343        336           

Corporate bonds:

        

Due within 1 year

     23        23        1.4

After 1 year through 5 years

     1,427        1,421        2.6

After 5 years through 10 years

     274        274        3.3

Total

     1,724        1,718           
     At March 31, 2019  
$ in millions    Amortized
Cost
     Fair
Value
     Annualized
Average
Yield
 

State and municipal securities:

        

After 5 years through 10 years

   $ 209      $ 209        3.5

After 10 Years

     185        191        4.7

Total

     394        400           

FFELP student loan ABS:

 

After 1 year through 5 years

     78        77        0.8

After 5 years through 10 years

     418        411        0.8

After 10 years

     1,372        1,370        1.2

Total

     1,868        1,858           

Total corporate and other debt

     6,294        6,241        2.2

Total AFS securities

     62,295        61,641        2.1

HTM securities

        

U.S. government and agency securities:

        

U.S. Treasury securities:

        

Due within 1 year

     774        771        1.4

After 1 year through 5 years

     9,504        9,525        2.4

After 5 years through 10 years

     9,987        9,953        2.3

After 10 years

     1,084        1,021        2.5

Total

     21,349        21,270           

U.S. agency securities:

                          

After 5 years through 10 years

     28        28        1.9

After 10 years

     14,396        14,190        2.7

Total

     14,424        14,218           

Total U.S. government and agency securities

     35,773        35,488        2.5

Corporate and other debt:

        

Non-agency CMBS:

        

Due within 1 year

     61        61        4.4

After 1 year through 5 years

     86        86        4.8

After 5 years through 10 years

     344        350        4.1

After 10 years

     39        39        4.4

Total corporate and other debt

     530        536        4.3

Total HTM securities

     36,303        36,024        2.5

Total investment securities

   $ 98,598      $   97,665        2.3

Gross Realized Gains (Losses) on Sales of AFS Securities

 

     Three Months Ended
March 31,
 
$ in millions    2019     2018  

Gross realized gains

   $ 19     $ 1  

Gross realized (losses)

     (9     (1

Total1

   $ 10     $  

 

1.

Realized gains and losses are recognized in Other revenues in the income statements.

 

 

  53   March 2019 Form 10-Q


Table of Contents

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Notes to Consolidated Financial Statements

(Unaudited)

 

6. Collateralized Transactions

 

Offsetting of Certain Collateralized Transactions  
    At March 31, 2019  
$ in millions   Gross
Amounts
   

Amounts

Offset

   

Net

Amounts
Presented

   

Amounts

Not Offset1

    Net
Amounts
 

Assets

         

Securities purchased under agreements to resell

  $ 254,681     $ (158,111   $ 96,570     $ (93,718   $ 2,852  

Securities borrowed

    161,154       (22,263     138,891       (134,107     4,784  

Liabilities

         

Securities sold under agreements to repurchase

  $   206,059     $ (158,111   $ 47,948     $ (41,675   $ 6,273  

Securities loaned

    34,771       (22,263     12,508       (12,382     126  

Net amounts for which master netting agreements are not in place or may not be legally enforceable

 

Securities purchased under agreements to resell

 

  $ 2,419  

Securities borrowed

                                    773  

Securities sold under agreements to repurchase

 

    5,148  

Securities loaned

                                    107  

 

    At December 31, 2018  

$ in millions

  Gross
Amounts
    Amounts
Offset
    Net
Amounts
Presented
   

Amounts

Not Offset1

    Net
Amounts
 

Assets

         

Securities purchased under agreements to resell

  $ 262,976     $ (164,454   $ 98,522     $ (95,610   $ 2,912  

Securities borrowed

    134,711       (18,398     116,313       (112,551     3,762  

Liabilities

         

Securities sold under agreements to repurchase

  $   214,213     $ (164,454   $ 49,759     $ (41,095   $ 8,664  

Securities loaned

    30,306       (18,398     11,908       (11,677     231  

Net amounts for which master netting agreements are not in place or may not be legally enforceable

 

Securities purchased under agreements to resell

 

  $ 2,579  

Securities borrowed

                                    724  

Securities sold under agreements to repurchase

 

    6,762  

Securities loaned

                                    191  

 

1.

Amounts relate to master netting agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.

For further discussion of the Firm’s collateralized transactions, see Note 6 to the financial statements in the 2018 Form 10-K. For information related to offsetting of derivatives, see Note 4.

Gross Secured Financing Balances by Remaining Contractual
Maturity
 
    At March 31, 2019  

$ in millions

 

Overnight

and Open

   

Less than

30 Days

    30-90
Days
   

Over

90 Days

    Total  

Securities sold under agreements to repurchase

  $ 72,663     $ 53,332     $   42,658     $ 37,406     $ 206,059  

Securities loaned

    19,131       6,858       2,715       6,067       34,771  

Total included in the offsetting disclosure

  $ 91,794     $ 60,190     $ 45,373     $   43,473     $ 240,830  

Trading liabilities— Obligation to return securities received as collateral

    19,861                         19,861  

Total

  $   111,655     $ 60,190     $ 45,373     $ 43,473     $   260,691  

 

    At December 31, 2018  

$ in millions

 

Overnight

and Open

   

Less than

30 Days

    30-90
Days
   

Over

90 Days

    Total  

Securities sold under agreements to repurchase

  $ 56,503     $ 93,427     $ 35,692     $ 28,591     $ 214,213  

Securities loaned

    18,397       3,609       1,985       6,315       30,306  

Total included in the offsetting disclosure

  $ 74,900     $ 97,036     $ 37,677     $ 34,906     $ 244,519  

Trading liabilities— Obligation to return securities received as collateral

    17,594                         17,594  

Total

  $ 92,494     $ 97,036     $  37,677     $   34,906     $   262,113  

 

Gross Secured Financing Balances by Class of Collateral
Pledged

 
$ in millions   

At

March 31,

2019

    

At

December 31,
2018

 

Securities sold under agreements to repurchase

 

U.S. Treasury and agency securities

   $ 59,851      $ 68,487  

State and municipal securities

     1,633        925  

Other sovereign government obligations

     123,089        120,432  

ABS

     2,112        3,017  

Corporate and other debt

     7,327        8,719  

Corporate equities

     11,624        12,079  

Other

     423        554  

Total

   $ 206,059      $ 214,213  

Securities loaned

     

Other sovereign government obligations

   $ 22,656      $ 19,021  

Corporate equities

     11,736        10,800  

Other

     379        485  

Total

   $ 34,771      $ 30,306  

Total included in the offsetting disclosure

   $ 240,830      $ 244,519  

Trading liabilities—Obligation to return securities received as collateral

 

Corporate equities

   $ 19,861      $ 17,594  

Total

   $ 260,691      $ 262,113  
 

 

March 2019 Form 10-Q   54  


Table of Contents

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Notes to Consolidated Financial Statements

(Unaudited)

 

Carrying Value of Assets Loaned or Pledged without
Counterparty Right to Sell or Repledge

 

 
$ in millions   

At

March 31,

2019

     At
December 31,
2018
 

Trading assets

     $                35,543        $                39,430  

The Firm pledges its trading assets to collateralize securities sold under agreements to repurchase, securities loaned, other secured financings and derivatives and to cover customer short sales. Counterparties may or may not have the right to sell or repledge the collateral.

Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets (pledged to various parties) in the balance sheets.

Fair Value of Collateral Received with Right to Sell or Repledge

 

$ in millions   

At

March 31,

2019

    

At

December 31,
2018

 

Collateral received with right to sell
or repledge

     $                697,669        $                639,610  

Collateral that was sold or repledged1

     553,625        487,983  

 

1.

Does not include securities used to meet federal regulations for the Firm’s U.S. broker-dealers.

Restricted Cash and Segregated Securities

 

$ in millions   

At

March 31,
2019

     At
December 31,
2018
 

Restricted cash

     $            30,712        $            35,356  

Segregated securities1

     24,752        26,877  

Total

     $            55,464        $            62,233  

 

1.

Securities segregated under federal regulations for the Firm’s U.S. broker-dealers are sourced from Securities purchased under agreements to resell and Trading assets in the balance sheets.

The Firm receives collateral in the form of securities in connection with securities purchased under agreements to resell, securities borrowed, securities-for-securities transactions, derivative transactions, customer margin loans and securities-based lending. In many cases, the Firm is permitted to sell or repledge these securities held as collateral and use the securities to secure securities sold under agreements to repurchase, to enter into securities lending and derivative transactions or for delivery to counterparties to cover short positions.

Customer Margin Lending

 

$ in millions  

At

March 31,
2019

    At
December 31,
2018
 

Customer receivables representing margin loans

    $        27,427       $        26,225  

The Firm provides margin lending arrangements which allow customers to borrow against the value of qualifying securities. Receivables under margin lending arrangements are included within Customer and other receivables in the balance sheets. Under these agreements and transactions, the Firm receives collateral, including U.S. government and agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. Customer receivables generated from margin lending activities are collateralized by customer-owned securities held by the Firm. The Firm monitors required margin levels and established credit terms daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or reduce positions, when necessary.

For a further discussion of the Firm’s margin lending activities, see Note 6 to the financial statements in the 2018 Form 10-K.

The Firm has additional secured liabilities. For a further discussion of other secured financings, see Notes 10 and 12.

7. Loans, Lending Commitments and Allowance for Credit Losses

Loans by Type

 

     At March 31, 2019  
$ in millions    Loans Held
for Investment
    Loans Held
for Sale
     Total Loans  

Corporate

   $ 38,424     $ 12,469      $ 50,893  

Consumer

     27,300              27,300  

Residential real estate

     28,037       22        28,059  

Commercial real estate

     7,764       2,440        10,204  

Total loans, gross

     101,525       14,931        116,456  

Allowance for loan losses

     (259            (259

Total loans, net

   $ 101,266     $ 14,931      $ 116,197  

Fixed rate loans, net

                    $ 16,450  

Floating or adjustable rate loans, net

 

             99,747  

Loans to non-U.S. borrowers, net

 

             18,072  

 

     At December 31, 2018  
$ in millions    Loans Held
for Investment
    Loans Held
for Sale
     Total Loans  

Corporate

   $ 36,909     $ 13,886      $ 50,795  

Consumer

     27,868              27,868  

Residential real estate

     27,466       22        27,488  

Commercial real estate1

     7,810       1,856        9,666  

Total loans, gross

     100,053       15,764        115,817  

Allowance for loan losses

     (238            (238

Total loans, net

   $ 99,815     $ 15,764      $ 115,579  

Fixed rate loans, net

                    $ 15,632  

Floating or adjustable rate loans, net

 

             99,947  

Loans to non-U.S. borrowers, net

 

             17,568  

 

1.

Beginning in 2019, loans previously referred to as Wholesale real estate are referred to as Commercial real estate.

 

 

  55   March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

 

Loans Held for Investment before Allowance by Credit Quality

 

    At March 31, 2019  

$ in millions

    Corporate       Consumer      

Residential

Real Estate

 

 

   

Commercial

Real Estate

 

 

    Total  

Pass

  $      37,806     $      27,294     $        27,954     $           7,332     $ 100,386  

Special mention

    171             9       312       492  

Substandard

    447       6       74       120       647  

Doubtful

                             

Loss

                             

Total

  $ 38,424     $ 27,300     $ 28,037     $ 7,764     $ 101,525  

 

    At December 31, 2018  

$ in millions

    Corporate       Consumer      

Residential

Real Estate

 

 

   

Commercial

Real Estate

 

 

    Total  

Pass

  $     36,217     $      27,863     $         27,387     $           7,378     $ 98,845  

Special mention

    492       5             312       809  

Substandard

    200             79       120       399  

Doubtful

                             

Loss

                             

Total

  $ 36,909     $ 27,868     $ 27,466     $ 7,810     $ 100,053  

Impaired Loans and Lending Commitments before Allowance

 

    At March 31, 2019  
$ in millions   Corporate     Consumer     Residential
Real Estate
    Total  

Loans

       

With allowance

  $ 265     $     $     $ 265  

Without allowance1

    20       5       65       90  

Total impaired loans

  $ 285     $ 5     $ 65     $ 355  

UPB

    292       5       66       363  

Lending commitments

       

With allowance

  $ 17     $     $     $ 17  

Without allowance1

    45                   45  

Total impaired lending commitments

    62                   62  
    At December 31, 2018  
$ in millions   Corporate     Consumer     Residential
Real Estate
    Total  

Loans

       

With allowance

  $ 24     $     $     $ 24  

Without allowance1

    32             69       101  

Total impaired loans

  $ 56     $     $ 69     $ 125  

UPB

    63             70       133  

Lending commitments

       

With allowance

  $ 19     $     $     $ 19  

Without allowance1

    34                   34  

Total impaired lending commitments

    53                   53  

 

1.

No allowance was recorded for these loans and lending commitments as the present value of the expected future cash flows or value of the collateral equaled or exceeded the carrying value.

Loans and lending commitments in the previous table have been evaluated for a specific allowance. All remaining loans and lending commitments are assessed under the inherent allowance methodology.

Impaired Loans and Total Allowance by Region

 

     At March 31, 2019  
$ in millions    Americas      EMEA      Asia      Total  

Impaired loans

   $ 355      $      $      $ 355  

Total Allowance for loan losses

     211        46        2        259  
     At December 31, 2018  

$ in millions

     Americas        EMEA        Asia        Total  

Impaired loans

   $ 125      $      $      $ 125  

Total Allowance for loan losses

     193        42        3        238  

Troubled Debt Restructurings

 

$ in millions

    

At
March 31,
2019
 
 
 
    

At
December 31,
2018
 
 
 

Loans

   $ 93      $ 38  

Lending commitments

     68        45  

Allowance for loan losses and lending commitments

     5        4  

Impaired loans and lending commitments classified as held for investment within corporate loans include TDRs as shown in the previous table. These restructurings typically include modifications of interest rates, collateral requirements, other loan covenants and payment extensions.

Allowance for Loan Losses Rollforward

 

$ in millions

    Corporate       Consumer      
Residential
Real Estate
 
 
   
Commercial
Real Estate
 
 
    Total  

December 31, 2018

  $          144     $               7     $               20     $               67     $ 238  

Provision (release)

    26       (1     2             27  

Other

    (6                       (6

March 31, 2019

  $ 164     $ 6     $ 22     $ 67     $ 259  

Inherent

  $ 150     $ 6     $ 22     $ 67     $ 245  

Specific

    14                         14  

$ in millions

    Corporate       Consumer      
Residential
Real Estate
 
 
   
Commercial
Real Estate
 
 
    Total  

December 31, 2017

  $ 126     $ 4     $ 24     $ 70     $ 224  

Provision (release)

    6             (1     14       19  

Other

    (1                 1        

March 31, 2018

  $ 131     $ 4     $ 23     $ 85     $ 243  

Inherent

  $ 126     $ 4     $ 23     $ 85     $ 238  

Specific

    5                         5  
 

 

March 2019 Form 10-Q   56  


Table of Contents

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Notes to Consolidated Financial Statements

(Unaudited)

 

Allowance for Lending Commitments Rollforward

 

$ in millions

    Corporate       Consumer      
Residential
Real Estate
 
 
   
Commercial
Real Estate
 
 
    Total  

December 31, 2018

  $ 198     $ 2     $     $ 3     $ 203  

Provision (release)

    8                   1       9  

Other

          (1)                   (1)  

March 31, 2019

  $ 206     $ 1     $     $ 4     $ 211  

Inherent

  $ 202     $ 1     $     $ 4     $ 207  

Specific

    4                         4  

$ in millions

    Corporate       Consumer      
Residential
Real Estate
 
 
   
Commercial
Real Estate
 
 
    Total  

December 31, 2017

  $ 194     $ 1     $     $ 3     $ 198  

Provision (release)

    7                         7  

Other

                             

March 31, 2018

  $ 201     $ 1     $     $ 3     $ 205  

Inherent

  $ 200     $ 1     $     $ 3     $ 204  

Specific

    1                         1  

For a further discussion of the Firm’s loans, including loan types and categories, as well as the Firm’s allowance methodology, refer to Notes 2 and 7 to the financial statements in the 2018 Form 10-K. See Note 3 for further information regarding Loans and lending commitments held at fair value. See Note 11 for details of current commitments to lend in the future.

Employee Loans

 

$ in millions

    

At
March 31,
2019
 
 
 
    

At
December 31,
2018
 
 
 

Balance

   $ 3,011      $ 3,415  

Allowance for loan losses

     (64)        (63)  

Balance, net

   $ 2,947      $ 3,352  

Repayment term range, in years

     1 to 20        1 to 20  

Employee loans are granted in conjunction with a program established primarily to recruit certain Wealth Management representatives, are full recourse and generally require periodic repayments. These loans are recorded in Customer and other receivables in the balance sheets. The Firm establishes an allowance for loan amounts it does not consider recoverable, and the related provision is recorded in Compensation and benefits expense.

8. Equity Method Investments

Equity Method Investment Balances

 

$ in millions

    

At
March 31,
2019
 
 
 
   

At
December 31,
2018
 
 
 

Investments

   $ 2,391     $ 2,432  
     Three Months Ended
March 31,
 

$ in millions

     2019       2018  

Income (loss)

   $ (10   $ 50  

Equity method investments, other than certain investments in funds, are summarized above and are included in Other assets in the balance sheets with related income or loss included in Other revenues in the income statements. See “Net Asset Value Measurements—Fund Interests” in Note 3 for the carrying value of the Firm’s fund interests, which are comprised of general and limited partnership interests, as well as any related carried interest.

Japanese Securities Joint Venture

 

     Three Months Ended
March 31,
 

$ in millions

     2019        2018  

Income from investment in MUMSS

   $ 3      $ 56  

The Firm and Mitsubishi UFJ Financial Group, Inc. (“MUFG”) formed a joint venture in Japan comprising their respective investment banking and securities businesses by forming two joint venture companies, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”) and Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”) (the “Joint Venture”). The Firm owns a 40% economic interest in the Joint Venture and MUFG owns the other 60%.

The Firm’s 40% voting interest in MUMSS is accounted for under the equity method within the Institutional Securities business segment, and is included in the equity method investment balances above. The Firm consolidates MSMS into the Institutional Securities business segment, based on its 51% voting interest.

The Firm engages in transactions in the ordinary course of business with MUFG and its affiliates, for example investment banking, financial advisory, sales and trading, derivatives, investment management, lending, securitization and other financial services transactions. Such transactions are on substantially the same terms as those that would be available to unrelated third parties for comparable transactions.

 

 

  57   March 2019 Form 10-Q


Table of Contents

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Notes to Consolidated Financial Statements

(Unaudited)

 

9. Deposits

Deposits

 

$ in millions

  At
March 31,
2019
    At
December 31,
2018
 

Savings and demand deposits

  $ 143,201     $ 154,897  

Time deposits

    36,530       32,923  

Total

  $             179,731     $             187,820  

Deposits subject to FDIC insurance

  $ 141,737     $ 144,515  

Time deposits that equal or exceed the FDIC insurance limit

  $ 22     $ 11  

Time Deposit Maturities

 

$ in millions    At
March 31,
2019
 

2019

   $ 14,100  

2020

     13,381  

2021

     4,272  

2022

     1,866  

2023

     2,069  

Thereafter

     842  

Total

   $                 36,530  

10. Borrowings and Other Secured Financings

Borrowings

 

$ in millions

  At
March 31,
2019
    At
December 31,
2018
 

Original maturities of one year or less

  $ 1,498     $ 1,545  

Original maturities greater than one year

 

Senior

  $ 178,926     $ 178,027  

Subordinated

    10,267       10,090  

Total

  $ 189,193     $ 188,117  

Total borrowings

  $         190,691     $         189,662  

Weighted average stated maturity, in years1

    6.7       6.5  

 

1.

Only includes borrowings with original maturities greater than one year.

Other Secured Financings

 

$ in millions

   At
March 31,
2019
     At
December 31,
2018
 

Original maturities:

     

Greater than one year

   $             5,254      $             6,772  

One year or less

     2,074        2,036  

Failed sales

     715        658  

Total

   $ 8,043      $ 9,466  

Other secured financings include the liabilities related to certain ELNs, transfers of financial assets that are accounted for as financings rather than sales, pledged commodities, consolidated VIEs where the Firm is deemed to be the primary beneficiary and other secured borrowings. These liabilities are generally payable from the cash flows of the related assets accounted for as Trading assets. See Note 12 for further information on other secured financings related to VIEs and securitization activities.

For transfers that fail to meet the accounting criteria for a sale, the Firm continues to recognize the assets in Trading assets at fair value, and the Firm recognizes the associated liabilities in Other secured financings at fair value in the balance sheets.

The assets transferred to certain unconsolidated VIEs in transactions accounted for as failed sales cannot be removed unilaterally by the Firm and are not generally available to the Firm. The related liabilities are also non-recourse to the Firm. In certain other failed sale transactions, the Firm has the right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

11. Commitments, Leases, Guarantees and Contingencies

Commitments

 

    Years to Maturity at
March 31, 2019
       
$ in millions   Less
than 1
    1-3     3-5     Over 5     Total  

Lending:

 

       

Corporate

  $ 19,594     $ 30,583     $ 49,944     $ 5,286     $ 105,407  

Consumer

    7,442       1       11             7,454  

Residential and commercial
real estate

    66       751       89       554       1,460  

Forward-starting
secured financing receivables

    121,612                   8,322       129,934  

Underwriting

    2,299                         2,299  

Investment activities

    513       93       49       243       898  

Letters of credit and other financial guarantees

    187       1             2       190  

Total

  $  151,713     $  31,429     $  50,093     $  14,407     $  247,642  

Corporate lending commitments participated to third parties

 

  $ 8,674  

Forward-starting secured financing receivables settled within three business days

 

  $ 110,917  

Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

 

 

March 2019 Form 10-Q   58  


Table of Contents

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Notes to Consolidated Financial Statements

(Unaudited)

 

For a further description of these commitments, refer to Note 12 to the financial statements in the 2018 Form 10-K.

Leases

Balance Sheet Amounts Related to Leases

 

$ in millions   

At

March 31,

2019

 

Other assets—ROU assets

   $                              3,886  

Other liabilities and accrued expenses—

  

Lease liabilities

     4,653  

Weighted average:

  

Remaining lease term, in years

     10.0  

Discount rate

     3.7%  

Lease Liabilities

 

$ in millions   

At

March 31,

2019

 

Remainder of 2019

   $                                  552  

2020

     687  

2021

     634  

2022

     583  

2023

     532  

Thereafter

     2,766  

Total undiscounted cash flows

   $ 5,754  

Difference between undiscounted and discounted cash flows

     1,101  

Amount on balance sheet

   $ 4,653  

Lease Costs

 

$ in millions    Three Months Ended
March 31, 2019
 

Fixed costs

   $                                  170  

Variable costs1

     34  

Less: Sublease income

     (1

Total lease cost, net

     203  

 

1.

Includes common area maintenance charges and other variable costs not included in the measurement of ROU assets and lease liabilities.

Cash Flows Statement Supplemental Information

 

$ in millions    Three Months Ended
March 31, 2019
 

Cash outflows—Lease liabilities

   $                              165  

Non-cash—ROU assets recorded for new and modified leases

     40  

Minimum Future Lease Commitments (under Previous GAAP)

 

$ in millions   

At

December 31,

2018

 

2019

   $                              677  

2020

     657  

2021

     602  

2022

     555  

2023

     507  

Thereafter

     2,639  

Total undiscounted cash flows

   $ 5,637  

Minimum rental income to be received in the future under non-cancelable operating subleases

   $ 7  

The Firm’s leases are principally non-cancelable operating real estate leases.

Guarantees

Obligations under Guarantee Arrangements at March 31, 2019

 

    Maximum Potential Payout/Notional  
    Years to Maturity        
$ in millions   Less than 1     1-3     3-5     Over 5     Total  

Credit derivatives

  $ 39,388     $ 48,458     $     75,532     $     51,176     $ 214,554  

Other credit contracts

                      105       105  

Non-credit derivatives

    1,585,096       1,425,027       450,368       791,729       4,252,220  

Standby letters of credit and other financial guarantees issued1

    1,015       1,037       1,302       4,174       7,528  

Market value guarantees

    104       103       4             211  

Liquidity facilities

    4,478                         4,478  

Whole loan sales guarantees

          1             23,175       23,176  

Securitization representations and warranties

                      64,939       64,939  

General partner guarantees

    9       112       162       50       333  

 

$ in millions

    


Carrying
Amount
Asset
(Liability)
 
 
 
 
   
Collateral/
Recourse
 
 

Credit derivatives2

   $ 209     $  

Other credit contracts

     (8      

Non-credit derivatives2

     (41,254      

Standby letters of credit and other financial guarantees issued1

     222       6,350  

Market value guarantees

           107  

Liquidity facilities

     6       7,620  

Whole loan sales guarantees

     (9      

Securitization representations and warranties3

     (42      

General partner guarantees

     (71      

 

1.

These amounts include certain issued standby letters of credit participated to third parties, totaling $0.6 billion of notional and collateral/recourse, due to the nature of the Firm’s obligations under these arrangements.

2.

Carrying amounts of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting. For further information on derivative contracts, see Note 4.

3.

Primarily related to residential mortgage securitizations.

 

 

  59   March 2019 Form 10-Q


Table of Contents

LOGO

Notes to Consolidated Financial Statements

(Unaudited)

 

The Firm has obligations under certain guarantee arrangements, including contracts and indemnification agreements, that contingently require the Firm to make payments to the guaranteed party based on changes in an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index, or the occurrence or non-occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Also included as guarantees are contracts that contingently require the Firm to make payments to the guaranteed party based on another entity’s failure to perform under an agreement, as well as indirect guarantees of the indebtedness of others.

In certain situations, collateral may be held by the Firm for those contracts that meet the definition of a guarantee. Generally, the Firm sets collateral requirements by counterparty so that the collateral covers various transactions and products and is not allocated specifically to individual contracts. Also, the Firm may recover amounts related to the underlying asset delivered to the Firm under a derivative contract.

For more information on the nature of the obligation and related business activity for market value guarantees, liquidity facilities, whole loan sales guarantees and general partner guarantees related to certain investment management funds, as well as the other products in the previous table, see Note 12 to the financial statements in the 2018 Form 10-K.

Other Guarantees and Indemnities

In the normal course of business, the Firm provides guarantees and indemnifications in a variety of transactions. These provisions generally are standard contractual terms. Certain of these guarantees and indemnifications related to indemnities, exchange and clearinghouse member guarantees and merger and acquisition guarantees are described in Note 12 to the financial statements in the 2018 Form 10-K.

In addition, in the ordinary course of business, the Firm guarantees the debt and/or certain trading obligations (including obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or trading counterparties. The activities of the Firm’s subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the financial statements.

Finance Subsidiary

The Parent Company fully and unconditionally guarantees the securities issued by Morgan Stanley Finance LLC, a 100%-owned finance subsidiary.

Contingencies

Legal. In addition to the matters described below, in the normal course of business, the Firm has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress. These actions have included, but are not limited to, residential mortgage and credit crisis-related matters.

While the Firm has identified below any individual proceedings where the Firm believes a material loss to be reasonably possible and reasonably estimable, there can be no assurance that material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be probable or possible and reasonably estimable losses.

The Firm contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the financial statements and the Firm can reasonably estimate the amount of that loss, the Firm accrues the estimated loss by a charge to income.

In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where a loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.

For certain legal proceedings and investigations, the Firm cannot reasonably estimate such losses, particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or government entities seek substantial or indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to the proceedings or investigations in question, before a loss or additional loss or range of loss or additional range of loss can be reasonably estimated for a proceeding or investigation.

 

 

March 2019 Form 10-Q   60  


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For certain other legal proceedings and investigations, the Firm can estimate reasonably possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued but does not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on the Firm’s financial statements as a whole, other than the matters referred to in the following paragraphs.

On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Firm, styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million CDS referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Firm misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Firm knew that the assets backing the CDO were of poor quality when it entered into the CDS with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the CDS, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Firm’s motion to dismiss the complaint. On December 21, 2018, the court denied the Firm’s motion for summary judgment and granted in part the Firm’s motion for sanctions relating to spoliation of evidence. On January 24, 2019, CDIB filed a notice of appeal from the court’s December 21, 2018 order, and on January 25, 2019, the Firm filed a notice of appeal from the same order. On March 7, 2019, the court denied the relief that CDIB sought in a motion to clarify and resettle the portion of the court’s December 21, 2018 order granting spoliation sanctions. Based on currently available information, the Firm believes it could incur a loss in this action of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.

On July 8, 2013, U.S. Bank National Association, in its capacity as trustee, filed a complaint against the Firm styled U.S. Bank National Association, solely in its capacity as Trustee of the Morgan Stanley Mortgage Loan Trust 2007-2AX (MSM 2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC, Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. and GreenPoint Mortgage Funding, Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $650 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of

the loan breach remedy procedures in the transaction documents, unspecified damages and interest. On November 24, 2014, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On April 4, 2019, the court denied the Firm’s motion to renew its motion to dismiss. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $240 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On September 19, 2014, Financial Guaranty Insurance Company (“FGIC”) filed a complaint against the Firm in the Supreme Court of NY, styled Financial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al. relating to a securitization issued by Basket of Aggregated Residential NIMS 2007-1 Ltd. The complaint asserts claims for breach of contract and alleges, among other things, that the net interest margin securities (“NIMS”) in the trust breached various representations and warranties. FGIC issued a financial guaranty policy with respect to certain notes that had an original balance of approximately $475 million. The complaint seeks, among other relief, specific performance of the NIMS breach remedy procedures in the transaction documents, unspecified damages, reimbursement of certain payments made pursuant to the transaction documents, attorneys’ fees and interest. On November 24, 2014, the Firm filed a motion to dismiss the complaint, which the court denied on January 19, 2017. On September 13, 2018, the Appellate Division, First Department, affirmed the lower court’s order denying the Firm’s motion to dismiss. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $126 million, the unpaid balance of these notes, plus pre- and post-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future.

On September 23, 2014, FGIC filed a complaint against the Firm in the Supreme Court of NY styled Financial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al. relating to the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4. The complaint asserts claims for breach of contract and fraudulent inducement and alleges, among other things, that the loans in the trust breached various representations and warranties and defendants made untrue statements and material omissions to induce FGIC to issue a financial guaranty policy on certain classes of certificates that had an original balance of approximately $876 million. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction

 

 

  61   March 2019 Form 10-Q


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documents, compensatory, consequential and punitive damages, attorneys’ fees and interest. On January 23, 2017, the court denied the Firm’s motion to dismiss the complaint. On September 13, 2018, the Appellate Division, First Department, affirmed in part and reversed in part the lower court’s order denying the Firm’s motion to dismiss. On December 20, 2018, the Appellate Division denied plaintiff’s motion for leave to appeal the decision of the Appellate Division, First Department, to the New York Court of Appeals or, in the alternative, for re-argument. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and FGIC that the Firm did not repurchase, plus pre- and post-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future. In addition, plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On January 23, 2015, Deutsche Bank National Trust Company, in its capacity as trustee, filed a complaint against the Firm styled Deutsche Bank National Trust Company solely in its capacity as Trustee of the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 v. Morgan Stanley Mortgage Capital Holdings LLC as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.05 billion, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential, rescissory, equitable and punitive damages, attorneys’ fees, costs and other related expenses, and interest. On December 11, 2015, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On October 19, 2018, the court granted the Firm’s motion for leave to amend its answer and to stay the case pending resolution of Deutsche Bank National Trust Company’s appeal to the New York Court of Appeals in another case. On January 17, 2019, the First Department reversed the trial court’s order to the extent that it had granted in part the Firm’s motion to dismiss the complaint. On February 15, 2019, the Firm filed a motion for leave to appeal, or in the alternative, for the re-argument of the First

Department’s decision. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and a monoline insurer that the Firm did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

In matters styled Case number 15/3637 and Case number 15/4353, the Dutch Tax Authority (“Dutch Authority”) has challenged, in the District Court in Amsterdam, the prior set-off by the Firm of approximately €124 million (approximately $139 million) plus accrued interest of withholding tax credits against the Firm’s corporation tax liabilities for the tax years 2007 to 2013. The Dutch Authority alleges that the Firm was not entitled to receive the withholding tax credits on the basis, inter alia, that a Firm subsidiary did not hold legal title to certain securities subject to withholding tax on the relevant dates. The Dutch Authority has also alleged that the Firm failed to provide certain information to the Dutch Authority and keep adequate books and records. A hearing took place in this matter on September 19, 2017. On April 26, 2018, the District Court in Amsterdam issued a decision dismissing the Dutch Authority’s claims. On June 4, 2018, the Dutch Authority filed an appeal before the Court of Appeal in Amsterdam in matters re-styled Case number 18/00318 and Case number 18/00319. A hearing of the Dutch Authority’s appeal has been scheduled for June 26, 2019. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately €124 million (approximately $139 million) plus accrued interest.

Matters settled. On April 1, 2016, the California Attorney General’s Office filed an action against the Firm in California state court styled California v. Morgan Stanley, et al., on behalf of California investors, including the California Public Employees’ Retirement System and the California Teachers’ Retirement System. The complaint alleges that the Firm made misrepresentations and omissions regarding RMBS and notes issued by the Cheyne SIV, and asserts violations of the California False Claims Act and other state laws and seeks treble damages, civil penalties, disgorgement, and injunctive relief. On April 24, 2019, the parties reached an agreement to settle the litigation.

 

 

March 2019 Form 10-Q   62  


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Notes to Consolidated Financial Statements

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12. Variable Interest Entities and Securitization Activities

Consolidated VIEs

Assets and Liabilities by Type of Activity

 

     At March 31, 2019      At December 31, 2018  
$ in millions    VIE Assets      VIE Liabilities      VIE Assets      VIE Liabilities   

OSF

   $ 260      $      $ 267      $ —   

MABS1

     37        18        59        38   

Other2

     842        63        809        48   

Total

   $ 1,139      $ 81      $ 1,135      $ 86   

OSF—Other structured financings

1.

Amounts include transactions backed by residential mortgage loans, commercial mortgage loans and other types of assets, including consumer or commercial assets. The value of assets is determined based on the fair value of the liabilities and the interests owned by the Firm in such VIEs as the fair values for the liabilities and interests owned are more observable.

2.

Other primarily includes certain operating entities, investment funds and structured transactions.

Assets and Liabilities by Balance Sheet Caption

 

$ in millions   

At

March 31,
2019

     At
December 31, 
2018
 

Assets

     

Cash and cash equivalents:

     

Cash and due from banks

   $ 92      $ 77   

Restricted cash

     171        171   

Trading assets at fair value

     311        314   

Customer and other receivables

     21        25   

Goodwill

     18        18   

Intangible assets

     104        128   

Other assets

     422        402   

Total

   $                 1,139      $ 1,135   

Liabilities

           

Other secured financings

   $ 49      $ 64   

Other liabilities and accrued expenses

     32        22   

Total

   $ 81      $ 86   

Noncontrolling interests

   $ 115      $ 106   

Consolidated VIE assets and liabilities are presented in the previous tables after intercompany eliminations. Most assets owned by consolidated VIEs cannot be removed unilaterally by the Firm and are not generally available to the Firm. Most related liabilities issued by consolidated VIEs are non-recourse to the Firm. In certain other consolidated VIEs, the Firm either has the unilateral right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

In general, the Firm’s exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE net assets

recognized in its financial statements, net of amounts absorbed by third-party variable interest holders.

Non-consolidated VIEs

 

    At March 31, 2019  

$ in millions

  MABS     CDO     MTOB     OSF     Other  

VIE assets (UPB)

  $     75,970     $     9,766     $     7,110     $     3,302     $     19,512  

Maximum exposure to loss1

 

   

Debt and equity interests

  $ 8,080     $ 938     $ 3     $ 1,613     $ 5,261  

Derivative and other contracts

                4,478             1,966  

Commitments, guarantees and other

    735                   211       327  

Total

  $ 8,815     $ 938     $ 4,481     $ 1,824     $ 7,554  

Carrying value of exposure to loss—Assets

 

   

Debt and equity interests

  $ 8,080     $ 938     $ 3     $ 1,194     $ 5,261  

Derivative and other contracts

                6             228  

Total

  $ 8,080     $ 938     $ 9     $ 1,194     $ 5,489  

Additional VIE assets owned2

 

                          $ 11,144  

Carrying value of exposure to loss—Liabilities

 

   

Derivative and other contracts

  $     $     $     $     $ 205  

 

    At December 31, 2018  

$ in millions

  MABS     CDO     MTOB     OSF     Other  

VIE assets (UPB)

  $     71,287     $     10,848     $     7,014     $     3,314     $     19,682  

Maximum exposure to loss1

 

   

Debt and equity interests

  $ 8,234     $ 1,169     $     $ 1,622     $ 4,645  

Derivative and other contracts

                4,449             1,768  

Commitments, guarantees and other

    397       3             235       327  

Total

  $ 8,631     $ 1,172     $ 4,449     $ 1,857     $ 6,740  

Carrying value of exposure to loss—Assets

 

   

Debt and equity interests

  $ 8,234     $ 1,169     $     $ 1,205     $ 4,645  

Derivative and other contracts

                6             87  

Total

  $ 8,234     $ 1,169     $ 6     $ 1,205     $ 4,732  

Additional VIE assets owned2

 

                          $ 11,969  

Carrying value of exposure to loss—Liabilities

 

   

Derivative and other contracts

  $     $     $     $     $ 185  

MTOB—Municipal tender option bonds

1.

Where notional amounts are utilized in quantifying the maximum exposure related to derivatives, such amounts do not reflect changes in fair value recorded by the Firm.

2.

Additional VIE assets owned represents the carrying value of total exposure to non-consolidated VIEs for which the maximum exposure to loss is less than specific thresholds, primarily interests issued by securitization SPEs. The Firm’s primary risk exposure is to the most subordinate class of beneficial interest and maximum exposure to loss generally equals the fair value of the assets owned. These assets are primarily included in Trading assets and Investment securities and are measured at fair value (see Note 3). The Firm does not provide additional support in these transactions through contractual facilities, guarantees or similar derivatives.

 

 

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Notes to Consolidated Financial Statements

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The majority of the VIEs included in the previous tables are sponsored by unrelated parties; the Firm’s involvement generally is the result of its secondary market-making activities and securities held in its Investment securities portfolio (see Note 5).

The Firm’s maximum exposure to loss is dependent on the nature of the Firm’s variable interest in the VIE and is limited to:

 

 

notional amounts of certain liquidity facilities;

 

other credit support;

 

total return swaps;

 

written put options; and

 

fair value of certain other derivatives and investments the Firm has made in the VIE.

The Firm’s maximum exposure to loss in the previous tables does not include the offsetting benefit of hedges or any reductions associated with the amount of collateral held as part of a transaction with the VIE or any party to the VIE directly against a specific exposure to loss.

Liabilities issued by VIEs generally are non-recourse to the Firm.

Mortgage- and Asset-Backed Securitization Assets

 

    At March 31, 2019     At December 31, 2018  
$ in millions   UPB     Debt and
Equity
Interests
    UPB     Debt and
Equity
Interests
 

Residential mortgages

  $ 6,590     $ 628     $ 6,954     $ 745   

Commercial mortgages

    41,021       1,754       42,974       1,237   

U.S. agency collateralized mortgage obligations

    15,072       2,640       14,969       3,443   

Other consumer or commercial loans

    13,287       3,058       6,390       2,809   

Total

  $         75,970     $         8,080     $         71,287     $         8,234   

Transfers of Assets with Continuing Involvement

 

    At March 31, 2019  
$ in millions  

RML

    CML     U.S. Agency
CMO
   

CLN and

Other1

 

SPE assets (UPB)2

  $     13,937     $     73,268     $     22,907     $     15,068   

Retained interests

 

Investment grade

  $ 17     $ 525     $ 349     $  

Non-investment grade 

    4       166             90   

Total 

  $ 21     $ 691     $ 349     $ 92   

Interests purchased in the secondary market (fair value) 

 

Investment grade

  $ 9     $ 72     $ 246     $ —   

Non-investment grade

    14       100             —   

Total

  $ 23     $ 172     $ 246     $ —   

Derivative assets (fair value)

  $     $     $     $ 129   

Derivative liabilities (fair value)

                      106   
    At December 31, 2018  
$ in millions  

RML

    CML     U.S. Agency
CMO
   

CLN and

Other1

 

SPE assets (UPB)2

  $     14,376     $     68,593     $     16,594     $     14,608   

Retained interests

 

Investment grade

  $ 17     $ 483     $ 1,573     $  

Non-investment grade
(fair value)

    4       212             210   

Total 

  $ 21     $ 695     $ 1,573     $ 213   

Interests purchased in the secondary market (fair value) 

 

Investment grade

  $ 7     $ 91     $ 102     $ —   

Non-investment grade

    28       71             —   

Total

  $ 35     $ 162     $ 102     $ —   

Derivative assets (fair value)

  $     $     $     $ 216   

Derivative liabilities (fair value)

                      178   

RML—Residential mortgage loans

CML—Commercial mortgage loans

1.

Amounts include CLO transactions managed by unrelated third parties.

2.

Amounts include assets transferred by unrelated transferors.

 

     Fair Value at March 31, 2019  

$ in millions

       Level 2              Level 3              Total      

Retained interests

        

Investment grade

   $ 356      $ 24      $ 380   

Non-investment grade

     7        94        101   

Total

   $ 363      $ 118      $ 481   

Interests purchased in the secondary market 

 

Investment grade

   $ 320      $ 7      $ 327   

Non-investment grade

     101        13        114   

Total

   $ 421      $ 20      $ 441   

Derivative assets

   $ 47      $ 82      $ 129   

Derivative liabilities

     104        2        106   

 

     Fair Value at December 31,2018  

$ in millions

       Level 2              Level 3              Total      

Retained interests

        

Investment grade

   $ 1,580      $ 13      $ 1,593   

Non-investment grade 

     174        252        426   

Total 

   $ 1,754      $ 265      $ 2,019   

Interests purchased in the secondary market 

 

Investment grade

   $ 193      $ 7      $ 200   

Non-investment grade

     83        16        99   

Total

   $ 276      $ 23      $ 299   

Derivative assets

   $ 121      $ 95      $ 216   

Derivative liabilities

     175        3        178   

The transfers of assets with continuing involvement tables include transactions with SPEs in which the Firm, acting as principal, transferred financial assets with continuing involvement and received sales treatment.

Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the income statements. The Firm may act as underwriter of the beneficial interests issued by these securitization vehicles,

 

 

March 2019 Form 10-Q   64  


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Notes to Consolidated Financial Statements

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for which Investment banking revenues are recognized. The Firm may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are generally carried at fair value in the balance sheets with changes in fair value recognized in the income statements.

Proceeds from New Securitization Transactions and Sales of Loans

 

    

    Three Months Ended    

March 31,

 
$ in millions    2019      2018  

New transactions1

   $             4,733      $             6,134   

Retained interests

     2,887        481   

Sales of corporate loans to CLO SPEs1, 2

            94   

 

1.

Net gains on new transactions and sales of corporate loans to CLO entities at the time of the sale were not material for all periods presented.

2.

Sponsored by non-affiliates.

The Firm has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Firm (see Note 11).

Assets Sold with Retained Exposure

 

$ in millions   

At

March 31,

2019

    

At

December 31,
2018

 

Gross cash proceeds from sale of assets1

   $             27,444      $             27,121   

Fair value

           

Assets sold

   $ 27,560      $ 26,524   

Derivative assets recognized
in the balance sheets

     264        164   

Derivative liabilities recognized
in the balance sheets

     73        763   

 

1.

The carrying value of assets derecognized at the time of sale approximates gross cash proceeds.

The Firm enters into transactions in which it sells securities, primarily equities and contemporaneously enters into bilateral OTC derivatives with the purchasers of the securities, through which it retains exposure to the sold securities.

For a discussion of the Firm’s VIEs, the determination and structure of VIEs and securitization activities, see Note 13 to the financial statements in the 2018 Form 10-K.

 

13.

Regulatory Requirements

Regulatory Capital Framework and Requirements    

For a discussion of the Firm’s regulatory capital framework, see Note 14 to the financial statements in the 2018 Form 10-K.

The Firm is required to maintain minimum risk-based and leverage-based capital ratios under regulatory capital requirements. A summary of the calculations of regulatory capital, RWA and transition provisions follows.

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, the Firm is subject to the following buffers in 2019:

 

 

A greater than 2.5% Common Equity Tier 1 capital conservation buffer;

 

 

The Common Equity Tier 1 G-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 fully phased-in 2019 requirement noted above. Failure to maintain the buffers would result in restrictions on the Firm’s ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.

The Firm’s Regulatory Capital and Capital Ratios

 

    At March 31, 2019  
$ in millions   Required
Ratio1
    Amount         Ratio      

Risk-based capital

     

Common Equity Tier 1 capital

    10.0   $         63,344       16.7

Tier 1 capital

    11.5     71,910       19.0

Total capital

    13.5     81,570       21.6

Total RWA

            378,420          

Leverage-based capital

     

Tier 1 leverage

    4.0   $ 71,910       8.4

Adjusted average assets2

            855,192          

SLR

    5.0     71,910       6.5

Supplementary leverage exposure3

                    1,104,264          
 

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

    At December 31, 2018  
$ in millions   Required
Ratio1
    Amount          Ratio      

Risk-based capital

      

Common Equity Tier 1 capital

    8.6   $ 62,086        16.9

Tier 1 capital

    10.1     70,619        19.2

Total capital

    12.1     80,052        21.8

Total RWA

            367,309           

Leverage-based capital

      

Tier 1 leverage

    4.0   $ 70,619        8.4

Adjusted average assets2

            843,074           

SLR

    5.0     70,619        6.5

Supplementary leverage exposure3

                    1,092,672           

 

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 consolidated on-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 adjustments.

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 for off-balance sheet exposures.

At March 31, 2019 and December 31, 2018, the Firm’ risk-based capital ratios are based on the Standardized Approach rules.

U.S. Bank Subsidiaries’ Regulatory Capital and Capital Ratios    

The OCC establishes capital requirements for the Firm’s U.S. Bank Subsidiaries and evaluates their compliance with such capital requirements. Regulatory capital requirements for the U.S. Bank Subsidiaries are calculated in a similar manner to the Firm’s regulatory capital requirements, although G-SIB capital surcharge requirements do not apply to the U.S. Bank Subsidiaries.

The OCC’s regulatory capital framework includes Prompt Corrective Action (“PCA”) standards, including “well-capitalized” PCA standards that are based on specified regulatory capital ratio minimums. For the Firm to remain an FHC, the U.S. Bank Subsidiaries must remain well-capitalized in accordance with the OCC’s PCA standards. In addition, failure by the U.S. Bank Subsidiaries to meet minimum capital requirements may result in certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the U.S. Bank Subsidiaries’ and the Firm’s financial statements.

At March 31, 2019 and December 31, 2018, the U.S. Bank Subsidiaries’ risk-based capital ratios are based on the Standardized Approach rules, and in each period, the ratios exceeded well-capitalized requirements.

 

MSBNA’s Regulatory Capital  
     At March 31, 2019  

$ in millions

   Required
Ratio1
    Amount        Ratio      

Risk-based capital

       

Common Equity Tier 1 capital

               6.5   $ 16,285        19.9

Tier 1 capital

     8.0     16,285        19.9

Total capital

     10.0     16,569        20.2

Leverage-based capital

       

Tier 1 leverage

     5.0   $ 16,285        11.1

SLR

     6.0     16,285        8.7
     At December 31, 2018  

$ in millions

   Required
Ratio1
    Amount      Ratio  

Risk-based capital

       

Common Equity Tier 1 capital

     6.5   $ 15,221        19.5

Tier 1 capital

     8.0     15,221        19.5

Total capital

     10.0     15,484        19.8

Leverage-based capital

       

Tier 1 leverage

     5.0   $         15,221        10.5

SLR

     6.0     15,221        8.2

 

MSPBNA’s Regulatory Capital  
     At March 31, 2019  

$ in millions

   Required
Ratio1
    Amount      Ratio      

Risk-based capital

       

Common Equity Tier 1 capital

               6.5   $         7,545        26.4

Tier 1 capital

     8.0     7,545        26.4

Total capital

     10.0     7,590        26.6

Leverage-based capital

       

Tier 1 leverage

     5.0   $ 7,545        10.1

SLR

     6.0     7,545        9.7

 

     At December 31, 2018  
$ in millions    Required
Ratio1
    Amount      Ratio  

Risk-based capital

       

Common Equity Tier 1 capital

     6.5   $         7,183        25.2%  

Tier 1 capital

     8.0     7,183        25.2%  

Total capital

     10.0     7,229        25.4%  

Leverage-based capital

       

Tier 1 leverage

     5.0   $ 7,183        10.0%  

SLR

     6.0     7,183        9.6%  

 

1.

Ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes.

 

 

March 2019 Form 10-Q   66  


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Notes to Consolidated Financial Statements

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U.S. Broker-Dealer Regulatory Capital Requirements  
MS&Co. Regulatory Capital  
$ in millions    At March 31, 2019          At December 31, 2018      

Net capital

   $ 13,925      $ 13,797   

Excess net capital

     11,403        11,333   

MS&Co. is a registered U.S. broker-dealer and registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the SEC and the CFTC. MS&Co. has consistently operated with capital in excess of its regulatory capital requirements.

As an Alternative Net Capital broker-dealer, and in accordance with the market and credit risk standards of Appendix E of SEC Rule 15c3-1, MS&Co. is subject to minimum net capital and tentative net capital requirements. In addition, MS&Co. must notify the SEC if its tentative net capital falls below certain levels. At March 31, 2019 and December 31, 2018, MS&Co. has exceeded its net capital requirement and has tentative net capital in excess of the minimum and notification requirements.

 

MSSB LLC Regulatory Capital  
$ in millions    At March 31, 2019          At December 31, 2018      

Net capital

   $ 3,041      $ 3,455   

Excess net capital

     2,901        3,313   

MSSB LLC is a registered U.S. broker-dealer and introducing broker for the futures business and, accordingly, is subject to the minimum net capital requirements of the SEC. MSSB LLC has consistently operated with capital in excess of its regulatory capital requirements.

Other Regulated Subsidiaries

MSIP, a London-based broker-dealer subsidiary, is subject to the capital requirements of the PRA, and MSMS, a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Agency. MSIP and MSMS have consistently operated with capital in excess of their respective regulatory capital requirements.

Certain other U.S. and non-U.S. subsidiaries of the Firm are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated with capital in excess of their local capital adequacy requirements.    

14. Total Equity

Share Repurchases

 

             Three Months Ended        
March 31,
 
$ in millions    2019      2018  

Repurchases of common stock under our Share Repurchase Program

   $ 1,180      $ 1,250  

The Firm’s 2018 Capital Plan (“Capital Plan”) includes the share repurchase of up to $4.7 billion of outstanding common stock for the period beginning July 1, 2018 through June 30, 2019. Additionally, the Capital Plan includes quarterly common stock dividends of up to $0.30 per share.

A portion of common stock repurchases in the current quarter was conducted under a sales plan with MUFG, whereby MUFG sold shares of the Firm’s common stock to the Firm, as part of the Firm’s Share Repurchase Program. The sales plan 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 and has no impact on the strategic alliance between MUFG and the Firm, including the joint ventures in Japan.

Preferred Stock Outstanding

 

    Shares
Outstanding
          Carrying Value  

$ in millions, except

per share data

  At
March 31,
2019
    Liquidation
Preference
per Share
    At
March 31,
2019
    At
December 31,
2018
 

Series

     

A

    44,000     $ 25,000     $ 1,100     $ 1,100  

C1

    519,882       1,000       408       408  

E

    34,500       25,000       862       862  

F

    34,000       25,000       850       850  

G

    20,000       25,000       500       500  

H

    52,000       25,000       1,300       1,300  

I

    40,000       25,000       1,000       1,000  

J

    60,000       25,000       1,500       1,500  

K

    40,000       25,000       1,000       1,000  

Total

 

  $ 8,520     $ 8,520  

 

1.

Series C is composed of the issuance of 1,160,791 shares of Series C Preferred Stock to MUFG for an aggregate purchase price of $911 million, less the redemption of 640,909 shares of Series C Preferred Stock of $503 million, which were converted to common shares of approximately $705 million.

For a description of Series A through Series K preferred stock issuances, see Note 15 to the financial statements in the 2018 Form 10-K. The Firm is authorized to issue 30 million shares of preferred stock. The preferred stock has a preference over the common stock upon liquidation. The Firm’s preferred stock qualifies as Tier 1 capital in accordance with regulatory capital requirements (see Note 13).

 

 

  67   March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

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Preferred Stock Dividends

 

$ in millions, except per

share data

   Three Months Ended
March 31, 2019
     Three Months Ended
March 31, 2018
 
   Per Share1      Total      Per Share1      Total  

Series

           

A

   $ 250      $ 11      $ 250      $ 11  

C

     25        13        25        13  

E

     445        15        445        15  

F

     430        15        430        15  

G

     414        8        414        8  

I

     398        16        398        16  

K

     366        15        366        15  

Total

            $ 93               $ 93  

 

1.

In addition to the dividends on the series of preferred stock included above, which are payable quarterly, Series H and J are payable semiannually until July 15, 2019 and July 15, 2020, respectively, and quarterly thereafter.

 

Accumulated Other Comprehensive Income (Loss)1

 

 

$ in millions

  Foreign
Currency
Translation
Adjustments
    AFS
Securities
    Pension,
Postretirement
and Other
    DVA     Total  

December 31, 2018

  $ (889)     $ (930)     $           (578)     $ 105      $ (2,292)  

OCI during the period

    (12)       429              (599)       (181)  

March 31, 2019

  $ (901)     $ (501)     $ (577)     $ (494)     $ (2,473)  

December 31, 2017

  $ (767)     $ (547)     $ (591)     $   (1,155)     $ (3,060)  

Cumulative adjustment for accounting changes2

    (8)       (111)       (124)       (194)       (437)  

OCI during the period

    60        (410)             436        91   

March 31, 2018

  $       (715)     $     (1,068)     $ (710)     $ (913)     $     (3,406)  

 

1.

Amounts are net of tax and exclude noncontrolling interests.

2.

The cumulative adjustment for accounting changes is primarily the effect of the adoption of the accounting update Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This adjustment was recorded as of January 1, 2018 to reclassify certain income tax effects related to enactment of the Tax Act from AOCI to Retained earnings, primarily related to the remeasurement of deferred tax assets and liabilities resulting from the reduction in the corporate income tax rate to 21%. See Note 2 for further information.

 

Components of Period Changes in OCI

 

 
    Three Months Ended

 

March 31, 20191

 
$ in millions  

Pre-tax

Gain

(Loss)

    Income
Tax Benefit
(Provision)
   

After-tax
Gain

(Loss)

    Non-
controlling
Interests
    Net  

Foreign currency translation adjustments

 

OCI activity

  $ (4)     $ (18)     $ (22)     $ (10)     $ (12)   

Reclassified to earnings

    —        —        —        —        —    

Net OCI

  $ (4)     $ (18)     $ (22)     $ (10)     $ (12)   

Change in net unrealized gains (losses) on AFS securities

 

OCI activity

  $ 570      $ (133)     $ 437      $ —      $ 437    

Reclassified to earnings

    (10)             (8)       —        (8)   

Net OCI

  $ 560      $ (131)     $ 429      $ —      $ 429    

Pension, postretirement and other

 

OCI activity

  $ —      $ (1)     $ (1)     $ —      $ (1)   

Reclassified to earnings

          (1)             —        2    

Net OCI

  $     $ (2)     $     $ —      $ 1     

Change in net DVA

 

OCI activity

  $ (824)     $ 201      $ (623)     $ (21)     $ (602)   

Reclassified to earnings

          (1)             —        3    

Net OCI

  $           (820)     $           200     $         (620)     $           (21)     $         (599)   
    Three Months Ended
March 31, 20181
 
$ in millions  

Pre-tax

Gain

(Loss)

    Income
Tax Benefit
(Provision)
   

After-tax
Gain

(Loss)

    Non-
controlling
Interests
    Net  

Foreign currency translation adjustments

 

OCI activity

  $ 78      $ 39      $ 117      $ 57      $ 60    

Reclassified to earnings

    —        —        —        —        —    

Net OCI

  $ 78      $ 39      $ 117      $ 57      $ 60    

Change in net unrealized gains (losses) on AFS securities

 

OCI activity

  $ (535)     $ 125      $ (410)     $ —      $ (410)   

Reclassified to earnings

    —        —        —        —        —    

Net OCI

  $ (535)     $ 125      $ (410)     $ —      $ (410)   

Pension, postretirement and other

 

OCI activity

  $ —      $ —      $ —      $ —      $ —    

Reclassified to earnings

          (1)             —        5    

Net OCI

  $     $ (1)     $     $ —      $ 5    

Change in net DVA

 

OCI activity

  $ 580      $ (140)     $ 440      $ 15      $ 425    

Reclassified to earnings

    15        (4)       11        —        11    

Net OCI

  $           595      $           (144)     $           451      $           15      $           436    

 

1.

Exclusive of cumulative adjustments related to the adoption of certain accounting updates. Refer to the table below and Note 2 for further information.

 

Cumulative Adjustments to Retained Earnings Related to
Adoption of Accounting Updates

 

 
     Three Months Ended  
$ in millions    March 31, 2019  

Leases

         $ 63   
     Three Months Ended  
$ in millions    March 31, 2018  

Revenues from contracts with customers1

     (32)  

Derivatives and hedging—targeted improvements to accounting for hedging activities1

     (99)  

Reclassification of certain tax effects from AOCI1

         $ 443   

Other2

     (6)  

Total

         $ 306   

 

1.

See Note 2 to the 2018 Form 10-K for further information.

2.

Other includes the adoption of accounting updates related to Recognition and Measurement of Financial Assets and Financial Liabilities (other than the provision around presenting unrealized DVA in OCI, which the Firm early adopted in 2016) and Derecognition of Nonfinancial Assets. The impact of these adoptions on Retained earnings was not significant.

 

 

March 2019 Form 10-Q   68  


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15.

Earnings per Common Share

 

    Three Months Ended

 

March 31,

 
in millions, except for per share data   2019      2018  

Earnings applicable to Morgan
Stanley common shareholders

      $                 2,336      $                 2,575   

Basic EPS

    

Weighted average common shares outstanding

    1,658        1,740   

Earnings per basic common share

      $ 1.41      $ 1.48   

Diluted EPS

    

Weighted average common shares outstanding

    1,658        1,740   

Effect of dilutive RSUs and PSUs

    19        31   

Weighted average common
shares outstanding and
common stock equivalents

    1,677        1,771   

Earnings per diluted common share

      $ 1.39      $ 1.45   

Weighted average antidilutive RSUs
(excluded from the computation of diluted EPS)

    6         

 

16.

Interest Income and Interest Expense

 

     Three Months Ended
March 31,
 
$ in millions    2019      2018  

Interest income

     

Investment securities

       $ 475      $ 424   

Loans

     1,195        938   

Securities purchased under agreements to resell and Securities borrowed1

     947        215   

Trading assets, net of Trading liabilities

     713        540   

Customer receivables and Other2

     960        743   

Total interest income

       $ 4,290      $ 2,860   

Interest expense

     

Deposits

       $ 462      $ 159   

Borrowings

     1,380        1,138   

Securities sold under agreements to repurchase and Securities loaned3

     600        402   

Customer payables and Other4

     834        186   

Total interest expense

       $ 3,276      $             1,885   

Net interest

       $             1,014      $ 975   

 

1.

Includes fees paid on Securities borrowed.

2.

Includes interest from Customer receivables and Cash and cash equivalents.

3.

Includes fees received on Securities loaned.

4.

Includes fees received from prime brokerage customers for stock loan transactions entered into to cover customers’ short positions.

Interest income and Interest expense are classified in the income statements based on the nature of the instrument and related market conventions. When included as a component of the instrument’s fair value, interest is included within Trading revenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense.

17. Income Taxes

The Firm is under continuous examination by the IRS and other tax authorities in certain countries, such as Japan and the U.K., and in states and localities in which it has significant business operations, such as New York. The Firm has established a liability for unrecognized tax benefits, and associated interest, if applicable (“tax liabilities”), that it believes is adequate in relation to the potential for additional assessments. Once established, the Firm adjusts such tax liabilities only when new information is available or when an event occurs necessitating a change.

The Firm believes that the resolution of the above tax examinations will not have a material effect on the annual financial statements, although a resolution could have a material impact in the income statements and on the effective tax rate for any period in which such resolution occurs.

See Note 11 regarding the Dutch Tax Authority’s challenge, in the District Court in Amsterdam (matters styled Case number 15/3637 and Case number 15/4353), of the Firm’s entitlement to certain withholding tax credits which may impact the balance of unrecognized tax benefits.

It is reasonably possible that significant changes in the balance of unrecognized tax benefits occur within the next 12 months. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the Firm’s effective tax rate over the next 12 months.

The Firm’s effective tax rate for the current quarter included recurring-type discrete tax benefits associated with employee share-based payments of $107 million. The Firm’s effective tax rate for the current quarter included an intermittent net discrete tax benefit of $101 million primarily associated with the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations.

 

 

  69   March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

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18. Segment, Geographic and Revenue

Information

 

Segment

Information

 

Selected Financial Information by Business Segment

 

 

    Three Months Ended March 31, 2019  
$ in millions   IS     WM     IM     I/E     Total  

Investment banking1, 2

  $ 1,151     $ 109     $     $ (18   $ 1,242  

Trading

    3,130       302       (3     12       3,441  

Investments

    81       1       191             273  

Commissions and fees1

    621       406             (61     966  

Asset management1

    107       2,361       617       (36     3,049  

Other

    222       80       3       (4     301  

Total non-interest revenues3, 4

    5,312       3,259       808       (107     9,272  

Interest income

    3,056       1,413       4       (183     4,290  

Interest expense

    3,172       283       8       (187     3,276  

Net interest

    (116     1,130       (4     4       1,014  

Net revenues

  $     5,196     $   4,389     $     804     $   (103   $   10,286  

Income from continuing operations before income taxes

  $ 1,595     $ 1,188     $ 174     $ (2   $ 2,955  

Provision for income taxes

    190       264       33             487  

Income from continuing operations

    1,405       924       141       (2     2,468  

Income (loss) from discontinued operations, net of income taxes

                             

Net income

    1,405       924       141       (2     2,468  

Net income applicable to noncontrolling interests

    34             5             39  

Net income applicable to Morgan Stanley

  $ 1,371     $ 924     $ 136     $ (2   $ 2,429  
    Three Months Ended March 31, 2018  
$ in millions   IS     WM     IM     I/E     Total  

Investment banking1, 2

  $     1,513     $     140     $     —     $     (19   $     1,634  

Trading

    3,643       109       5       13       3,770  

Investments

    49             77             126  

Commissions and fees1

    744       498             (69     1,173  

Asset management1

    110       2,495       626       (39     3,192  

Other

    136       63       10       (2     207  

Total non-interest
revenues3, 4

    6,195       3,305       718       (116     10,102  

Interest income

    1,804       1,280       1       (225     2,860  

Interest expense

    1,899       211       1       (226     1,885  

Net interest

    (95     1,069             1       975  

Net revenues

  $ 6,100     $   4,374     $     718     $ (115   $ 11,077  

Income from continuing operations before income taxes

  $ 2,112     $ 1,160     $ 148     $     $ 3,420  

Provision for income taxes

    449       246       19             714  

Income from continuing operations

    1,663       914       129             2,706  

Income (loss) from discontinued operations, net of income taxes

    (2                       (2

Net income

    1,661       914       129             2,704  

Net income applicable to noncontrolling interests

    34             2             36  

Net income applicable to Morgan Stanley

  $ 1,627     $ 914     $ 127     $     $ 2,668  
 

 

I/E–Intersegment Eliminations

1.

Approximately 85% of Investment banking revenues and substantially all of Commissions and fees and Asset management revenues in the current quarter and prior year quarter were accounted for under the Revenues from Contracts with Customers accounting update.

2.

Current quarter Institutional Securities Investment banking revenues are composed of $406 million of Advisory and $745 million of Underwriting revenues. Prior year quarter Institutional Securities Investment banking revenues are composed of $574 million of Advisory and $939 million of Underwriting revenues.

3.

The Firm enters into certain contracts which contain a current obligation to perform services in the future. Excluding contracts where billing is commensurate with the value of the services performed at each stage of the contract, contracts with variable consideration that is subject to reversal, and contracts with less than one year duration, we expect to record the following approximate revenues in the future: $105 million in the remainder of 2019 and $105 million in 2020; between $40 million and $70 million per year in 2021 through 2025; and $10 million per year thereafter through 2035. These revenues are primarily related to certain commodities contracts with customers.

4.

Includes $671 million and $902 million in revenue recognized in the current quarter and prior year quarter, respectively, where some or all services were performed in prior periods. This amount is primarily composed of investment banking advisory fees and distribution fees.

For a discussion about the Firm’s business segments, see Note 21 to the financial statements in the 2018 Form 10-K.

 

 

March 2019 Form 10-Q   70  


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Notes to Consolidated Financial Statements

(Unaudited)

 

Total Assets by Business Segment

 

 
$ in millions    At    
March 31,    
2019    
     At  
December 31,  
2018  
 

Institutional Securities

   $ 675,770      $ 646,427  

Wealth Management

     194,897        202,392  

Investment Management

     5,297        4,712  

Total1

   $         875,964      $ 853,531  

 

1.

Parent assets have been fully allocated to the business segments.

 

Additional

Segment Information—Investment Management

 

Net Unrealized Carried Interest

 

 
     At      At  
     March 31,      December 31,  
$ in millions    2019      2018  

Net cumulative unrealized carried interest at risk of reversing

   $ 469      $ 434  

The Firm’s portion of net cumulative unrealized carried interest (for which the Firm is not obligated to pay compensation) are at risk of reversing if the fund performance falls below the stated investment management agreement benchmarks. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance-based fees in the form of carried interest previously received.

 

Reduction of Fees due to Fee Waivers

 

 
     Three Months Ended March 31,  
$ in millions    2019              2018          

Fee waivers

   $ 11      $ 18   

The Firm waives a portion of its fees in the Investment Management business segment from certain registered money market funds that comply with the requirements of Rule 2a-7 of the Investment Company Act of 1940.

Separately, the Firm’s employees, including its senior officers, may participate on the same terms and conditions as other investors in certain funds that the Firm sponsors primarily for client investment, and the Firm may waive or lower applicable fees and charges for its employees.

Geographic Information

 

Net Revenues by Region

 

 
     Three Months Ended March 31,  
$ in millions    2019      2018  

Americas

       $ 7,321          $ 8,018   

EMEA

     1,702        1,708   

Asia

     1,263        1,351   

Total

       $         10,286          $         11,077   

For a discussion about the Firm’s geographic net revenues, see Note 21 to the financial statements in the 2018 Form 10-K.

Revenue Information

Trading Revenues by Product Type

 

     Three Months Ended March 31,  
$ in millions    2019      2018  

Interest rate

       $ 785          $ 871  

Foreign exchange

     241        261  

Equity security and index1

     1,451        1,877  

Commodity and other

     422        435  

Credit

     542        326  

Total

       $         3,441          $     3,770  

 

1.

Dividend income is included within equity security and index contracts.

The previous table summarizes gains and losses included in Trading revenues in the income statements. These activities include revenues related to derivative and non-derivative financial instruments. The Firm generally utilizes financial instruments across a variety of product types in connection with its market-making and related risk management strategies. The trading revenues presented in the table are not representative of the manner in which the Firm manages its business activities and are prepared in a manner similar to the presentation of trading revenues for regulatory reporting purposes.

 

Receivables related to Revenues from Contracts with Customers

 

 
     At      At  
     March 31,      December 31,  
$ in millions    2019      2018  

Customer and other receivables

   $           2,206      $           2,308  

Receivables from contracts with customers, which are included within Customer and other receivables in the balance sheets, arise when the Firm has both recorded revenues and has the right per the contract to bill the customer.

19. Subsequent Events

The Firm has evaluated subsequent events for adjustment to or disclosure in the financial statements through the date of this report and has not identified any recordable or disclosable events not otherwise reported in these financial statements or the notes thereto.

 

 

  71   March 2019 Form 10-Q


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Financial Data Supplement (Unaudited)

 

Average Balances and Interest Rates and Net Interest Income

 

     Three Months Ended March 31,  
     2019      2018  

$ in millions

    

Average

Daily Balance

 

 

     Interest       


Annualized

Average
Rate

 

 
 

    


Average

Daily
Balance

 

 
 

     Interest      

Annualized
Average
Rate
 
 
 

Interest earning assets

                                                    

Investment securities1

       $ 94,906      $ 475        2.0     $ 80,532      $ 424       2.1 %  

Loans1

     116,698        1,195        4.2         104,407        938       3.6      

Securities purchased under agreements to resell and Securities borrowed2:

                                                    

U.S.

     141,806        934        2.7         124,172        309       1.0      

Non-U.S.

     77,256        13        0.1         87,581        (94     (0.4)     

Trading assets, net of Trading liabilities3:

                                                    

U.S.

     74,152        631        3.5         53,488        487       3.7      

Non-U.S.

     11,861        82        2.8         5,059        53       4.2      

Customer receivables and Other4:

                                                    

U.S.

     63,649        697        4.4         74,118        542       3.0      

Non-U.S.

     55,142        263        1.9         50,080        201       1.6      

Total

       $ 635,470      $ 4,290        2.7     $ 579,437      $ 2,860       2.0 %  

Interest bearing liabilities

                                                    

Deposits1

       $ 181,017      $ 462        1.0     $ 159,948      $ 159       0.4 %  

Borrowings1, 5

     189,181        1,380        3.0         194,558        1,138       2.4      

Securities sold under agreements to repurchase and Securities loaned6:

                                                    

U.S.

     26,615        450        6.9         25,009        286       4.6      

Non-U.S.

     32,350        150        1.9         40,675        116       1.2      

Customer payables and Other7:

                                                    

U.S.

     117,932        554        1.9         121,438        49       0.2      

Non-U.S.

     65,498        280        1.7         69,646        137       0.8      

Total

       $     612,593      $   3,276        2.2     $     611,274      $   1,885       1.3 %  

Net interest income and net interest rate spread

            $ 1,014        0.5              $ 975       0.7 %  

 

1.

Amounts include primarily U.S. balances.

2.

Includes fees paid on Securities borrowed.

3.

Excludes non-interest earning assets and non-interest bearing liabilities, such as equity securities.

4.

Includes interest from Customer receivables and Cash and cash equivalents. Prior period amounts have been revised to conform to the current presentation.

5.

Includes structured notes, whose interest expense is considered part of its value and therefore is recorded within Trading revenues.

6.

Includes fees received on Securities loaned. The annualized average rate was calculated using (a) interest expense incurred on all securities sold under agreements to repurchase and securities loaned transactions, whether or not such transactions were reported in the balance sheets and (b) net average on-balance sheet balances, which exclude certain securities-for-securities transactions.

7.

Includes fees received from prime brokerage customers for stock loan transactions entered into to cover customers’ short positions.

 

March 2019 Form 10-Q   72  


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Glossary of Common Acronyms

 

2018 Form 10-K

  

Annual Report on Form 10-K for year ended December 31, 2018 filed with the SEC

ABS

  

Asset-backed securities

AFS

  

Available-for-sale

AML

  

Anti-money laundering

AOCI

  

Accumulated other comprehensive income (loss)

AUM

  

Assets under management or supervision

BEAT

  

Base erosion and anti-abuse tax

BHC

  

Bank holding company

bps

  

Basis points; one basis point equals 1/100th of 1%

CCAR

  

Comprehensive Capital Analysis and Review

CCyB

  

Countercyclical capital buffer

CDO

  

Collateralized debt obligation(s), including Collateralized loan obligation(s)

CDS

  

Credit default swaps

CECL

  

Current expected credit loss

CFTC

  

U.S. Commodity Futures Trading Commission

CLN

  

Credit-linked note(s)

CLO

  

Collateralized loan obligation(s)

CMBS

  

Commercial mortgage-backed securities

CMO

  

Collateralized mortgage obligation(s)

CVA

  

Credit valuation adjustment

DVA

  

Debt valuation adjustment

EBITDA

  

Earnings before interest, taxes, depreciation and amortization

ELN

  

Equity-linked note(s)

EMEA

  

Europe, Middle East and Africa

EPS

  

Earnings per common share

E.U.

  

European Union

FDIC

  

Federal Deposit Insurance Corporation

FFELP

  

Federal Family Education Loan Program

FFIEC

  

Federal Financial Institutions Examination Council

FHC

  

Financial Holding Company

FICO

  

Fair Isaac Corporation

FVA

  

Funding valuation adjustment

GILTI

  

Global Intangible Low-Taxed Income

GLR

  

Global liquidity reserve

G-SIB

  

Global systemically important banks

HELOC

  

Home Equity Line of Credit

HQLA

  

High-quality liquid assets

HTM

  

Held-to-maturity

I/E

  

Intersegment eliminations

IHC

  

Intermediate holding company

IM

  

Investment Management

IRS

  

Internal Revenue Service

IS

  

Institutional Securities

LCR

  

Liquidity coverage ratio, as adopted by the U.S. banking agencies

LIBOR

  

London Interbank Offered Rate

M&A

  

Merger, acquisition and restructuring transaction

MSBNA

  

Morgan Stanley Bank, N.A.

 

 

  73   March 2019 Form 10-Q


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Glossary of Common Acronyms

 

MS&Co.

  

Morgan Stanley & Co. LLC

MSIP

  

Morgan Stanley & Co. International plc

MSMS

  

Morgan Stanley MUFG Securities Co., Ltd.

MSPBNA

  

Morgan Stanley Private Bank, National Association

MSSB LLC

  

Morgan Stanley Smith Barney LLC

MUFG

  

Mitsubishi UFJ Financial Group, Inc.

MUMSS

  

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

MWh

  

Megawatt hour

N/A

  

Not Applicable

NAV

  

Net asset value

N/M

  

Not Meaningful

Non-GAAP

  

Non-generally accepted accounting principles

NSFR

  

Net stable funding ratio, as proposed by the U.S. banking agencies

OCC

  

Office of the Comptroller of the Currency

OCI

  

Other comprehensive income (loss)

OIS

  

Overnight index swap

OTC

  

Over-the-counter

PRA

  

Prudential Regulation Authority

PSU

  

Performance-based stock unit

RMBS

  

Residential mortgage-backed securities

ROE

  

Return on average common equity

ROTCE

  

Return on average tangible common equity

ROU

  

Right-of-use

RSU

  

Restricted stock unit

RWA

  

Risk-weighted assets

SEC

  

U.S. Securities and Exchange Commission

SLR

  

Supplementary leverage ratio

S&P

  

Standard & Poor’s

SPE

  

Special purpose entity

SPOE

  

Single point of entry

TDR

  

Troubled debt restructuring

TLAC

  

Total loss-absorbing capacity

U.K.

  

United Kingdom

UPB

  

Unpaid principal balance

U.S.

  

United States of America

U.S. DOL

  

U.S. Department of Labor

U.S. GAAP

  

Accounting principles generally accepted in the United States of America

VaR

  

Value-at-Risk

VAT

  

Value-added tax

VIE

  

Variable interest entity

WACC

  

Implied weighted average cost of capital

WM

  

Wealth Management

 

 

March 2019 Form 10-Q   74  


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Other Information

Legal Proceedings

 

The following new matters and developments have occurred since previously reporting certain matters in the Firm’s 2018 Form 10-K. See also the disclosures set forth under “Legal Proceedings” in the 2018 Form 10-K.

Residential Mortgage and Credit Crisis Related Matters

On February 15, 2019, the Firm filed a motion for leave to appeal, or in the alternative, for the re-argument of the First Department’s January 17, 2019 decision in Deutsche Bank National Trust Company solely in its capacity as Trustee of the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 v. Morgan Stanley Mortgage Capital Holdings LLC as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc.

On March 7, 2019, in the matter styled China Development Industrial Bank v. Morgan Stanley & Co, Incorporated, et al, the court denied the relief that CDIB sought in a motion to clarify and resettle the portion of the court’s December 21, 2018 order granting spoliation sanctions.

On April 4, 2019, the court denied the Firm’s motion to renew its motion to dismiss in U.S. Bank National Association, solely in its capacity as Trustee of the Morgan Stanley Mortgage Loan Trust 2007-2AX (MSM 2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC, Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. and GreenPoint Mortgage Funding, Inc.

On April 24, 2019, the parties in California v. Morgan Stanley, et al., reached an agreement to settle the litigation.

Antitrust Related Matter

Beginning on March 25, 2019, the Firm was named as a defendant in a series of putative class action complaints filed in the Southern District of New York, the first of which is styled Alaska Electrical Pension Fund v. BofA Secs., Inc., et al. Each complaint alleges a conspiracy to fix prices and restrain competition in the market for unsecured bonds issued by the following Government-Sponsored Enterprises: the Federal National Mortgage Associate; the Federal Home Loan Mortgage Corporation; the Federal Farm Credit Banks Funding Corporation; and the Federal Home Loan Banks. The purported class period for each suit is from January 1, 2012 to June 1, 2018. Each complaint raises a claim under Section 1 of the Sherman Act and seeks, among other things, injunctive relief and treble compensatory damages.

European Matters

On March 7, 2019, the Appellate Division of the Court of Accounts for the Republic of Italy issued a decision in the matter styled Case No. 2012/00406/MNV affirming the decision below declining jurisdiction and dismissing the claim against the Firm. On April 19, 2019, the public prosecutor filed an appeal with the Italian Supreme Court seeking to overturn this decision.

On March 11, 2019, the plaintiff in the matter styled Banco Popolare Societá Cooperativa v Morgan Stanley & Co. International plc & others filed an appeal in the Court of Appeal of Milan against the lower Milan court’s decision dated September 11, 2018 dismissing the claim against the Firm.

 

 

  75   March 2019 Form 10-Q


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Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth the information with respect to purchases made by or on behalf of the Firm of its common stock during the current quarter ended March 31, 2019.

 

Issuer Purchases of Equity Securities

 

 
$ in millions, except per share data    Total Number of
Shares
Purchased
    

Average Price

Paid Per Share

     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs1
     Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans or
Programs
 

Month #1 (January 1, 2019—January 31, 2019)

           

Share Repurchase Program2

     4,408,695      $ 42.54        4,408,695      $ 2,172  

Employee transactions3

     10,089,356      $ 42.52                

Month #2 (February 1, 2019—February 28, 2019)

           

Share Repurchase Program2

     8,886,000      $ 41.83        8,886,000      $ 1,801  

Employee transactions3

     709,539      $ 42.18                

Month #3 (March 1, 2019—March 31, 2019)

           

Share Repurchase Program2

     14,672,111      $ 42.31        14,672,111      $ 1,180  

Employee transactions3

     156,953      $ 42.01                

Quarter ended at March 31, 2019

           

Share Repurchase Program2

     27,966,806      $ 42.19        27,966,806      $ 1,180  

Employee transactions3

     10,955,848      $ 42.49                

 

1.

Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule 10b5-1 plans or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Firm deems appropriate and may be suspended at any time. On April 18, 2018, the Firm entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”) and Morgan Stanley & Co. LLC (“MS&Co.”) whereby MUFG sold shares of the Firm’s common stock to the Firm, through the Firm’s agent MS&Co., as part of the Company’s Share Repurchase Program (as defined below). The sales plan 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 (the “Federal Reserve”) and has no impact on the strategic alliance between MUFG and the Firm, including the joint ventures in Japan.

2.

The Firm’s Board of Directors has authorized the repurchase of the Firm’s outstanding stock under a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program is a program for capital management purposes that considers, among other things, business segment capital needs, as well as equity-based compensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date. Share repurchases by the Firm are subject to regulatory approval. On June 28, 2018, the Federal Reserve published summary results of CCAR and the Firm received a conditional non-objection to its 2018 Capital Plan, where the only condition was that the Firm’s capital distributions not exceed the greater of the actual distributions it made over the previous four calendar quarters or the annualized average of actual distributions over the previous eight calendar quarters. As a result, the Firm’s 2018 Capital Plan includes a share repurchase of up to $4.7 billion of its outstanding common stock during the period beginning July 1, 2018 through June 30, 2019. During the quarter ended March 31, 2019, the Firm repurchased approximately $1.2 billion of the Firm’s outstanding common stock as part of its Share Repurchase Program. For further information, see “Liquidity and Capital Resources—Capital Management.”

3.

Includes shares acquired by the Firm in satisfaction of the tax withholding obligations on stock-based awards granted under the Firm’s stock-based compensation plans.

 

March 2019 Form 10-Q   76  


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Controls and Procedures

Under the supervision and with the participation of the Firm’s management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the Firm’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

No change in the Firm’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.

 

Exhibits

An exhibit index has been filed as part of this Report on page E-1.

    

 

 

  77   March 2019 Form 10-Q


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Exhibit Index

Morgan Stanley

Quarter Ended March 31, 2019

 

Exhibit No.        Description
15     

Letter of awareness from Deloitte  & Touche LLP, dated May 3, 2019, concerning unaudited interim financial information.

23     

Consent of Shearman  & Sterling LLP, as Special Tax Counsel for Certain Structured Product Issuances.

31.1     

Rule 13a-14(a) Certification of Chief Executive Officer.

31.2     

Rule 13a-14(a) Certification of Chief Financial Officer.

32.1     

Section 1350 Certification of Chief Executive Officer.

32.2     

Section 1350 Certification of Chief Financial Officer.

101     

Interactive data files pursuant to Rule 405 of Regulation S-T (unaudited): (i) the Consolidated Income Statements—Three Months Ended March 31, 2019 and 2018, (ii) the Consolidated Comprehensive Income Statements—Three Months Ended March 31, 2019 and 2018, (iii) the Consolidated Balance Sheets—Unaudited at March 31, 2019 and at December 31, 2018, (iv) the Consolidated Statements of Changes in Total Equity—Three Months Ended March 31, 2019 and 2018, (v) the Consolidated Cash Flow Statements—Three Months Ended March 31, 2019 and 2018, and (vi) Notes to Consolidated Financial Statements.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

MORGAN STANLEY

(Registrant)

By:

  /S/ JONATHAN PRUZAN
 

Jonathan Pruzan

Executive Vice President and

Chief Financial Officer

By:

  /S/ PAUL C. WIRTH
 

Paul C. Wirth

Deputy Chief Financial Officer

Date: May 3, 2019

 

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