Morgan Stanley's (MS) stated fourth quarter earnings of $1.08 billion were down relative to the sequential quarter and comparatively flat relative to the year-ago quarter, according to Fitch Ratings. There were a number of items in the quarter which impacted results including a tax benefit for $1.4 billion and a DVA charge of $223 million which positively impact results and $1.1 billion of accelerated compensation expenses and $468 million charge related to the implementation of a Funding Valuation Adjustment (FVA) related to uncollateralized derivatives both of which negatively impacted results.
Fitch calculated pre-tax profits, which exclude CVA/DVA adjustments, this quarter's FVA charge, and various other minor gains/losses amounted to $110 million, or a 0.06% pre-tax adjusted return on ending assets (ROA). Fitch notes that this calculation is on a pre-tax basis includes the company's compensation charge, but not the somewhat offsetting tax benefit. For sensitivity purposes, excluding the compensation charge yields pre-tax earnings of $1.5 billion, or an adjusted pre-tax ROA of 0.75%.
Overall, Fitch considers the company's results to be comparatively weaker than some larger peers this quarter amid the challenging revenue environment for MS's institutional securities (IS) businesses.
Within IS advisory revenues remained good relative to both the sequential and year-ago quarters, though both equity and fixed income underwriting revenues were down leading to overall lower investment banking revenue relative to third quarter 2014 (3Q'14) and 4Q'13. Both equity and fixed income & commodities (FICC) revenue were down relative to the sequential quarter. Relative to the year-ago quarter equities revenue was higher, but FICC was still lower although this was partially impacted by the FVA charge noted above.
Despite what Fitch views as some weakness in the IS business, the agency notes that MS's wealth management business continues to comparatively improve and become a larger component of the company's overall revenue mix. Additionally, the pre-tax margin in MS's wealth management business remained satisfactory at 19% in 4Q'14, though still below the wealth management profit margin of some larger peers and MS's stated targets. That said, Fitch continues to view MS's revenue and business mix change positively from a credit perspective, and notes that it could lead to some upwards momentum in the company's Viability Rating (VR) over time.
MS's transitionally phased-in Basel 3 Common Equity Tier 1 (CET1) ratio under the advanced approaches was 14.2% at 4Q'14, down just modestly from 14.4% in the sequential quarter, but up from 12.8% in the year-ago quarter. As the company continues to move towards fully phased-in Basel 3 CET1 capital ratios Fitch would expect continued risk-weighted asset (RWA) optimization to support the company's capital position over time.
Fitch continues to note that MS's liquidity position remains good. The company's deposits grew to $134 billion in 4Q'14, up 7% from the sequential quarter, and 19% from the year-ago quarter. The company's long-term debt outstanding remained relatively constant at $152 billion. Additionally, MS's Global liquidity reserve remained good, and modestly ticked up to $193 billion at 4Q'14.
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