New York, February 21, 2020 -- Moody's Investors Service ("Moody's") has placed on review for upgrade
Morgan Stanley's (MS) short- and long-term ratings (A3 senior/Prime-2).
Moody's has also placed on review for upgrade the long-term
ratings and assessments of subsidiaries Morgan Stanley Bank, N.A.
(MSBNA, A1 deposits), Morgan Stanley Private Bank, N.A.
(MSPBNA, A1 deposits), Morgan Stanley Bank AG (MSBAG,
A1 deposits), Morgan Stanley Bank International Limited (MSBIL,
A1 deposits), Morgan Stanley Europe SE (MSESE, A1 issuer),
Morgan Stanley Capital Group Inc. (MSCGI, A1 issuer),
Morgan Stanley Capital Services LLC (MSCS, A1 issuer), Morgan
Stanley & Co. International plc (MSIP, A1 issuer),
and Morgan Stanley Finance LLC (MSFL, A3 issuer). Moody's
affirmed the subsidiaries' Prime-1 short-term ratings
and Prime-1(cr) short-term assessments. Morgan Stanley
and its subsidiaries had previously been on positive outlook, said
Moody's.
The rating actions follow Morgan Stanley's announcement that it
plans to acquire E*TRADE Financial Corp. (ETFC, Baa2
review for upgrade) for $13 billion in an all-stock transaction.
Morgan Stanley expects to acquire ETFC in the fourth quarter of 2020,
subject to receiving regulators' and ETFC's shareholders'
approvals.
A complete list of affected ratings and entities can be found at the end
of this press release.
RATINGS RATIONALE
Moody's said Morgan Stanley's agreement to acquire ETFC is
credit positive. It will tilt Morgan Stanley's business mix
towards wealth management, a more stable and lower-risk source
of profitability than its inherently more volatile capital markets'
activities, that nevertheless has a strong franchise and has performed
well in the face of industry-wide revenue pressure.
Following the integration of ETFC into Morgan Stanley's wealth management
business, Morgan Stanley's wealth and investment management
segments would account for approximately 57% of its total pretax
income (excluding potential acquisition-related synergies) compared
with 51% in 2019, said Moody's.
By seeking to expand and enhance its wealth management franchise,
Morgan Stanley has once again strongly demonstrated its commitment to
its core long-held strategic priorities, said Moody's.
The careful stewardship of its senior leadership team has strengthened
its financial performance, evidenced by a trend of improved profitability
and favorable capital and liquidity positions that substantially offset
challenges posed by its heavy reliance on market funding. The on-boarding
of ETFC's approximately $56 billion of customer deposits
would improve Morgan Stanley's funding structure, said Moody's.
Moody's said there are attractive business development opportunities
in combining Morgan Stanley's and ETFC's services across the
broad spectrum of their respective financial advisory and self-directed
investor categories, and in their workplace stock plan management
activities. Morgan Stanley did not model specific revenue synergies
in its announcement, but nevertheless expects to grow revenue and
improve its wealth management profit margins above 30%, said
Moody's. There are also substantial cost-saving opportunities
available in combining and consolidating personnel, systems and
physical locations.
Moody's said that corporate governance is highly relevant for Morgan Stanley
as it is for all banks. Its Baseline Credit Assessment (BCA) incorporates
a one-notch downward adjustment to reflect the credit risk associated
with the opacity and complexity of its global operations. Like
its global investment bank peers, it has a complex legal structure,
and its global footprint and extensive capital market activities increases
management and governance challenges. However, Morgan Stanley's
governance frameworks and related controls and processes have materially
improved since the financial crisis. Nonetheless, corporate
governance remains a key credit consideration given new emerging risks
and continues to be a subject of Moody's ongoing monitoring.
Moody's said its review for upgrade would focus on Morgan Stanley's
plans for the acquisition and integration of ETFC and would also include
a broader assessment of the strengths of its wealth management and investment
management businesses, as well as the effectiveness of its risk
management practices in its higher-risk Institutional Securities
unit. Moody's said it would also monitor and assess the results
of Morgan Stanley's regulatory stress testing.
Moody's said Morgan Stanley's A3 senior unsecured debt and issuer
ratings are derived from its lead bank's (MSBNA) baa2 BCA and a notch
of affiliate support from its largest shareholder and strategic partner,
Mitsubishi UFJ Financial Group, Inc. (A1 senior with stable
outlook, a3 BCA at MUFG Bank, Ltd.), resulting
in a baa1 Adjusted BCA. The application of Moody's Advanced Loss
Given Failure (LGF) analysis results in an assumption of a low loss-given
failure resulting in a further notch of uplift to arrive at the A3 ratings,
reflecting the benefit senior debt holders are likely to achieve from
the substantial amount of holding company senior debt outstanding as well
as the amount of debt subordinated to it.
Morgan Stanley's Baa2 subordinated holding company debt and Ba1(hyb) non-cumulative
preferred stock ratings reflect the juniority of these obligations,
with a high loss-given-failure, given the small volume
of securities outstanding and the limited protection from more subordinated
instruments and residual equity, said Moody's.
Morgan Stanley's Prime-2 short-term ratings, and the
various types of Prime-1 short-term ratings and Prime-1(cr)
short-term assessments assigned to its relevant subsidiaries,
are based on Moody's approach for determining short-term ratings
on its Global Short-Term Rating Scale.
US banks:
MSBNA and MSPBNA are US-based FDIC-insured indirect wholly
owned subsidiaries of Morgan Stanley. Moody's said it considers
MSBNA's and MSPBNA's credit profiles to be aligned, and accordingly
they each have the same ratings' profile, derived from their baa1
Adjusted BCA's (which include a notch of affiliate support).
The banks' baa2 BCAs are supported by Morgan Stanley's adherence
to broadly consistent strategic objectives and financial goals during
the past several years under the stewardship of a long-tenured
senior leadership team. It has maintained its competitive strength
among the leaders in global capital markets activities and has enlarged
and strengthened its wealth management business, notably by improving
this unit's pretax margin to 27% in 2019 from 20% in 2014.
These factors have contributed to an overall improvement in the firms
profitability, with Moody's-adjusted net income reaching
approximately 1.0% of tangible assets. Firm-wide
pretax earnings volatility has also improved, and now closely matches
peers'. In addition, the firm has significant positive structural
liquidity and comprehensive liquidity management that substantially offset
challenges posed by its heavy reliance on market funding. Morgan
Stanley continues to maintain a peer-leading risk-based
capital position, with 16.4% standardized and 17.0%
advanced-approach Basel III Common Equity Tier 1 ratios at December
2019. Although Morgan Stanley had a greater decline in capital
than its closest peer under the severely adverse scenario of the Federal
Reserve's 2019 Dodd-Frank Act stress test (DFAST), this worse
outcome appears to be the result of stress assumptions pertaining to cost
management and, possibly, operational losses, rather
than revenue- or market risk-related stresses that could
be harder to control. One of Morgan Stanley's core strengths since
the financial crisis has been its willingness and ability to engage in
and effectively manage periodic cost reductions. It's loan
growth remains a key ongoing credit risk, especially for its more
volatile Institutional Securities business.
The banks' A1 deposit and issuer ratings benefit from three notches of
uplift from the baa1 Adjusted BCAs in Moody's Advanced Loss Given Failure
(LGF) analysis, because their deposits and senior unsecured obligations
are likely to face extremely low loss-given-failure,
due to the loss absorption provided by holding company obligations.
MSBNA's and MSPBNA's Aa3 counterparty risk ratings (CRR) and Aa3(cr) counterparty
risk assessments (CRA) each incorporate one notch of incremental uplift
for US government support. This reflects Moody's view that Morgan
Stanley's systemic importance primarily derives from its high degree of
interconnectedness with other global systemically important banks and
its role as a significant derivatives counterparty. As such,
there is a moderate likelihood that in resolution, the US government
could act to support the operational liabilities of Morgan Stanley's systemically
important subsidiaries (but not their debt or deposits), including
MSBNA's and MSPBNA's, in order to limit systemic risk and contagion
and facilitate an orderly unwind of such obligations.
Highly integrated and harmonized entities:
Moody's considers the standalone credit profiles of MSESE, MSBAG,
MSBIL, MSCGI and MSCS to be highly integrated and harmonized with
the rest of Morgan Stanley. Their management, operations
and financial affairs are highly integrated with those of the group,
they have extensive transactions and balances with other group companies,
and they rely on other group entities to provide important treasury,
risk management and other services. Moody's believes that US regulators
would likely use the group's total loss-absorbing capacity (TLAC)
to support these entities, and their ratings and assessments are
aligned with those of MSBNA.
Morgan Stanley & Co. International plc (MSIP):
MSIP is one of Morgan Stanley's largest operating subsidiaries and its
primary European broker-dealer. MSIP's ratings reflect its
stable liquidity, improved funding profile, weak and volatile
earnings, and controlled risk appetite. Its ratings also
reflect Moody's expectation that there is a very high likelihood that
Morgan Stanley would support MSIP, and in the event of a failure
of the group, creditors at MSIP would benefit from the bail-in
of Morgan Stanley's holding company debt. The combination of a
very high likelihood of support from the group and the benefit of a significantly
lower loss-given-failure for MSIP creditors in the event
of failure results in seven notches of uplift from MSIP's Ba2 Standalone
Assessment to its A1 senior unsecured debt rating.
Morgan Stanley Finance LLC (MSFL):
MSFL is a finance subsidiary and Morgan Stanley fully and unconditionally
guarantees its securities. Its creditors are in effect pari passu
with Morgan Stanley's senior unsecured creditors, and accordingly
its A3 senior rating is at the same level as Morgan Stanley's.
FACTORS THAT COULD LEAD TO AN UPGRADE
MS's ratings could be upgraded should it complete the ETFC acquisition
as planned and/or maintain its trend of improving the quality and stability
of its profitability, with favorable capital and liquidity,
and with no significant weaknesses in controls and risk management practices.
Additionally, Moody's will assess Morgan Stanley's resilience
to stress events by examining the results of the Federal Reserve's 2020
Dodd-Frank Act stress test.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Since Morgan Stanley is on review for upgrade, there is currently
no downward pressure on its ratings. Its existing ratings could
be confirmed rather than upgraded should the ETFC acquisition not proceed
as planned or Morgan Stanley's results show evidence of weakening.
The ratings could be downgraded with evidence of a prolonged weakening
of results, a significant deterioration in loan credit quality or
loan underwriting standards, an increase in portfolio concentrations,
a deterioration in the firm's liquidity profile, a general increase
in risk appetite, or if there is evidence of a controls, risk
management or governance failure that is not promptly identified and fully
remediated.
Issuer: Morgan Stanley
Review for upgrade:
....Issuer Rating, placed on Review
for Upgrade, currently A3, outlook changed to Rating Under
Review from Positive
....Senior Unsecured Regular Bond/Debenture,
placed on Review for Upgrade, currently A3, outlook changed
to Rating Under Review from Positive
....Subordinate Regular Bond/Debenture,
placed on Review for Upgrade, currently Baa2
....Non-cumulative Preferred Stock,
placed on Review for Upgrade, currently Ba1(hyb)
....Senior Unsecured Medium-Term Note
Program, placed on Review for Upgrade, currently (P)A3
....Other Short Term, placed on Review
for Upgrade, currently (P)P-2
....Subordinate Medium-Term Note Program,
placed on Review for Upgrade, currently (P)Baa2
....Senior Unsecured Shelf, placed on
Review for Upgrade, currently (P)A3
....Subordinate Shelf, placed on Review
for Upgrade, currently (P)Baa2
....Non-cumulative Preferred Stock
Shelf, placed on Review for Upgrade, currently (P)Ba1
....Backed Commercial Paper, placed
on Review for Upgrade, currently P-2
....Commercial Paper, placed on Review
for Upgrade, currently P-2
..Outlook Actions:
....Outlook, Changed to Rating Under
Review from Positive
Issuer: Morgan Stanley Bank, N.A.
..Affirmations:
....Short Term Deposit Rating, Affirmed
P-1
....Short Term Issuer Rating, Affirmed
P-1
....Short Term Counterparty Risk Assessment,
Affirmed P-1(cr)
....Short Term Counterparty Risk Rating,
Affirmed P-1
..Review for upgrade:
....Long Term Deposit Rating, placed
on Review for Upgrade, currently A1, outlook changed to Rating
Under Review from Positive
....Long Term Issuer Rating, placed
on Review for Upgrade, currently A1, outlook changed to Rating
Under Review from Positive
....Baseline Credit Assessment, placed
on Review for Upgrade, currently baa2
....Adjusted Baseline Credit Assessment,
placed on Review for Upgrade, currently baa1
....Long Term Counterparty Risk Assessment,
placed on Review for Upgrade, currently Aa3(cr)
....Long Term Counterparty Risk Rating,
placed on Review for Upgrade, currently Aa3
LT Deposit Note/CD Program notes, placed on Review for Upgrade,
currently A1, outlook changed to Rating Under Review from Positive
..Outlook Actions:
....Outlook, Changed to Rating Under
Review from Positive
Issuer: Morgan Stanley & Co. International plc
..Affirmations:
....Short Term Issuer Rating, Affirmed
P-1
....Short Term Counterparty Risk Assessment,
Affirmed P-1(cr)
....Other Short Term, Affirmed (P)P-1
..Review for upgrade:
....Long Term Issuer Rating, placed
on Review for Upgrade, currently A1
....Long Term Counterparty Risk Assessment,
placed on Review for Upgrade, currently Aa3(cr)
....Senior Secured Regular Bond/Debenture,
placed on Review for Upgrade, currently A1
....Senior Unsecured Regular Bond/Debenture,
placed on Review for Upgrade, currently A1
....Senior Unsecured Medium-Term Note
Program, placed on Review for Upgrade, currently (P)A1
....Backed Senior Unsecured Medium-Term
Note Program, placed on Review for Upgrade, currently (P)A1
....Senior Secured Medium-Term Note
Program, placed on Review for Upgrade, currently (P)A1
..Outlook Actions:
....Outlook, Changed to Rating Under
Review from Positive
Issuer: Morgan Stanley Bank International Limited
..Affirmations:
....Short Term Deposit Rating, Affirmed
P-1
....Short Term Counterparty Risk Assessment,
Affirmed P-1(cr)
....Short Term Counterparty Risk Rating,
Affirmed P-1
..Review for upgrade:
....Long Term Deposit Rating, placed
on Review for Upgrade, currently A1, outlook changed to Rating
Under Review from Positive
....Issuer Rating, placed on Review
for Upgrade, currently A1, outlook changed to Rating Under
Review from Positive
....Baseline Credit Assessment, placed
on Review for Upgrade, currently baa2
....Adjusted Baseline Credit Assessment,
placed on Review for Upgrade, currently baa1
....Long Term Counterparty Risk Assessment,
placed on Review for Upgrade, currently Aa3(cr)
....Long Term Counterparty Risk Rating,
placed on Review for Upgrade, currently Aa3
..Outlook Actions:
....Outlook, Changed to Rating Under
Review from Positive
Issuer: Morgan Stanley Capital Group Inc.
..Affirmations:
....Short Term Issuer Rating, Affirmed
P-1
....Short Term Counterparty Risk Assessment,
Affirmed P-1(cr)
..Review for upgrade:
....Long Term Issuer Rating, placed
on Review for Upgrade, currently A1
....Long Term Counterparty Risk Assessment,
placed on Review for Upgrade, currently Aa3(cr)
..Outlook Actions:
....Outlook, Changed to Rating Under
Review from Positive
Issuer: Morgan Stanley Capital Services LLC
..Affirmations:
....Short Term Issuer Rating, Affirmed
P-1
....Short Term Counterparty Risk Assessment,
Affirmed P-1(cr)
..Review for upgrade:
....Long Term Issuer Rating, placed
on Review for Upgrade, currently A1
....Long Term Counterparty Risk Assessment,
placed on Review for Upgrade, currently Aa3(cr)
..Outlook Actions:
....Outlook, Changed to Rating Under
Review from Positive
Issuer: Morgan Stanley Europe SE
..Affirmations:
....Short Term Issuer Rating, Affirmed
P-1
....Short Term Counterparty Risk Assessment,
Affirmed P-1(cr)
..Review for upgrade:
....Long Term Issuer Rating, placed
on Review for Upgrade, currently A1
....Long Term Counterparty Risk Assessment,
placed on Review for Upgrade, currently Aa3(cr)
..Outlook Actions:
....Outlook, Changed to Rating Under
Review from Positive
Issuer: Morgan Stanley Bank AG
..Affirmations:
....Short Term Deposit Rating, Affirmed
P-1
....Short Term Counterparty Risk Assessment,
Affirmed P-1(cr)
....Short Term Counterparty Risk Rating,
Affirmed P-1
..Review for upgrade:
....Long Term Deposit Rating, placed
on Review for Upgrade, currently A1, Changed to Rating Under
Review from Positive
....Issuer Rating, placed on Review
for Upgrade, currently A1, Changed to Rating Under Review
from Positive
....Baseline Credit Assessment, placed
on Review for Upgrade, currently baa2
....Adjusted Baseline Credit Assessment,
placed on Review for Upgrade, currently baa1
....Long Term Counterparty Risk Assessment,
placed on Review for Upgrade, currently Aa3(cr)
....Long Term Counterparty Risk Rating,
placed on Review for Upgrade, currently Aa3
..Outlook Actions:
....Outlook, Changed to Rating Under
Review from Positive
Issuer: Morgan Stanley Finance LLC
..Review for upgrade:
....Backed Issuer Rating, placed on
Review for Upgrade, currently A3, outlook changed to Rating
Under Review from Positive
....Backed Senior Unsecured Medium Term Note
Program, placed on Review for Upgrade, currently (P)A3
....Backed Senior Unsecured Shelf, placed
on Review for Upgrade, currently (P)A3
....Backed Senior Unsecured Regular Bond/Debenture,
placed on Review for Upgrade, currently A3, outlook changed
to Rating Under Review from Positive
..Outlook Actions:
....Outlook, Changed to Rating Under
Review from Positive
Issuer: Morgan Stanley Private Bank, N.A.
..Affirmations:
....Short Term Deposit Rating, Affirmed
P-1
....Short Term Issuer Rating, Affirmed
P-1
....Short Term Counterparty Risk Assessment,
Affirmed P-1(cr)
....Short Term Counterparty Risk Rating,
Affirmed P-1
..Review for upgrade:
....Long Term Deposit Rating, placed
on Review for Upgrade, currently A1, outlook changed to Rating
Under Review from Positive
....Long Term Issuer Rating, placed
on Review for Upgrade, currently A1, outlook changed to Rating
Under Review from Positive
....Baseline Credit Assessment, placed
on Review for Upgrade, currently baa2
....Adjusted Baseline Credit Assessment,
placed on Review for Upgrade, currently baa1
....Long Term Counterparty Risk Assessment,
placed on Review for Upgrade, currently Aa3(cr)
....Long Term Counterparty Risk Rating,
placed on Review for Upgrade, currently Aa3
..Outlook Actions:
....Outlook, Changed to Rating Under
Review from Positive
The principal methodology used in rating Morgan Stanley, Morgan
Stanley Bank, N.A., Morgan Stanley Private Bank,
N.A., Morgan Stanley Bank International Limited,
Morgan Stanley Bank AG and Morgan Stanley Finance LLC was Banks Methodology
published in November 2019. The principal methodologies used in
rating Morgan Stanley & Co. International plc, Morgan
Stanley Europe SE, Morgan Stanley Capital Services LLC and Morgan
Stanley Capital Group Inc. were Securities Industry Market Makers
Methodology published in November 2019 and Banks Methodology published
in November 2019. Please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Donald Robertson
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
