Morgan Stanley reported net revenues of $9.9 billion 1 for the third quarter ended September 30, 2018 compared with $9.2 billion a year ago. For the current quarter, net income applicable to Morgan Stanley was $2.1 billion, or $1.17 per diluted share, 5 compared with net income of $1.8 billion, or $0.93 per diluted share, 5 for the same period a year ago.
Compensation expense of $4.3 billion increased from $4.2 billion a year ago on higher revenues. Non-compensation expenses of $2.7 billion increased from $2.5 billion a year ago primarily on higher volume driven expenses and investments in technology, partly offset by lower litigation costs.
The Firm’s expense efficiency ratio for the current quarter was 71% compared with 73% a year ago.
The annualized return on average common equity was 11.5% and the annualized return on average tangible common equity was 13.2% in the current quarter.
James P. Gorman , Chairman and Chief Executive Officer, said, “In the first half of the year, we produced strong results across the franchise. Despite the seasonal summer slowdown in the third quarter, we reported solid revenue and earnings growth demonstrating the stability of the franchise. Year to date, we have produced an ROE of 13% and ROTCE of 15%. We remain well positioned and optimistic for the remainder of the year.”
Business Highlights
Institutional Securities net revenues increased 13% reflecting strong results in underwriting and solid performance in M&A advisory and sales and trading. Wealth Management achieved a pre-tax margin of 27.1%, 7 reflecting continuing operating leverage. Results reflect growth in bank lending and positive fee-based flows. Investment Management AUM 8 of $471 billion reflect seven consecutive quarters of positive long-term net flows, 9 with asset management fees up 6%.
Institutional Securities
Institutional Securities reported pre-tax income from continuing operations of $1.6 billion compared with $1.2 billion a year ago. Net revenues for the current quarter were $4.9 billion compared with $4.4 billion a year ago. 1
Investment Banking revenues of $1.5 billion increased from $1.3 billion a year ago: Advisory revenues of $510 million decreased from $555 million a year ago on lower levels of completed M&A activity.Equity underwriting revenues of $441 million increased from $273 million a year ago primarily driven by higher revenues on IPOs and convertible offerings.Fixed income underwriting revenues of $508 million increased from $442 million a year ago on higher loan and bond fees which benefited from event-related financings. Sales and Trading net revenues of $3.1 billion increased from $2.9 billion a year ago: Equity sales and trading net revenues of $2.0 billion increased from $1.9 billion a year ago reflecting solid performance across products with notable strength in our financing business.Fixed Income sales and trading net revenues of $1.2 billion were relatively unchanged from a year ago reflecting higher revenues in foreign exchange and commodities offset by declines in rates.Other sales and trading net losses of $68 million compared with net losses of $147 million a year ago reflecting lower net funding costs.
Investment revenues of $96 million increased from $52 million a year ago.
Results for the current quarter included a gain from the disposition of a business related investment. Other revenues of $244 million increased from $143 million a year ago primarily reflecting higher revenues associated with corporate lending activity.
Compensation expense of $1.6 billion increased from $1.5 billion a year ago on higher revenues. Non-compensation expenses of $1.7 billion increased from $1.6 billion a year ago on higher volume driven expenses, partly offset by lower litigation costs. 1
Morgan Stanley’s average trading Value-at-Risk (VaR) measured at the 95% confidence level was $42 million compared with $44 million from the second quarter of 2018 and $43 million in the third quarter of the prior year. 10
Wealth Management
Wealth Management reported pre-tax income from continuing operations of $1.2 billion compared with $1.1 billion in the third quarter of last year. The quarter’s pre-tax margin was 27.1%. 7 Net revenues for the current quarter were $4.4 billion compared with $4.2 billion a year ago.
Asset management revenues of $2.6 billion increased from $2.4 billion a year ago reflecting higher asset levels and positive flows. Transactional revenues 11 of $698 million decreased from $739 million a year ago driven by lower fixed income revenues. Net interest income of $1.1 billion increased 4 percent compared with a year ago primarily driven by growth in bank lending.
Wealth Management client liabilities 12 were $83 billion at quarter end compared with $78 billion a year ago. Compensation expense for the current quarter of $2.4 billion increased from $2.3 billion a year ago on higher revenues. Non-compensation expenses of $790 million increased from $775 million a year ago reflecting continued investment in technology.
Total client assets were $2.5 trillion and client assets in fee-based accounts were $1.1 trillion at the end of the quarter. Fee-based asset flows for the quarter were a positive $16.2 billion.
Wealth Management representatives of 15,655 produced average annualized revenue per representative of $1.1 million in the current quarter. 13
Investment Management
Investment Management reported pre-tax income from continuing operations of $102 million compared with $131 million in the third quarter of last year. Net revenues of $653 million decreased from $675 million a year ago. 1
Asset management revenues of $604 million increased from $568 million a year ago on higher levels of assets under management. Investment revenues of $40 million decreased from $114 million a year ago. Results for the prior year reflected higher carried interest related to Infrastructure investments. Compensation expense for the current quarter of $269 million decreased from $311 million a year ago principally due to a decrease in deferred compensation associated with carried interest. Non-compensation expenses of $282 million increased from $233 million a year ago primarily driven by brokerage and clearing expenses. 1 Total assets under management or supervision at September 30, 2018 were $471 billion compared with $447 billion a year ago.
Capital
As of September 30, 2018, the Firm’s Common Equity Tier 1 and Tier 1 risk-based capital ratios under the fully phased-in Standardized Approach were approximately 16.7% and 19.0%, respectively; the fully phased-in Supplementary Leverage Ratio was approximately 6.4%. 14,15
At September 30, 2018, book value and tangible book value per common share were $40.67 16 and $35.50, 17 respectively, based on approximately 1.7 billion shares outstanding.
Other Matters
The effective tax rate from continuing operations for the quarter was 24.4%.
During the quarter ended September 30, 2018, the Firm repurchased approximately $1.2 billion of its common stock or approximately 24 million shares.
The Board of Directors declared a $0.30 quarterly dividend per share, payable on November 15, 2018 to common shareholders of record on October 31, 2018.
