Edgar Filing: MORGAN STANLEY

Form 10-Q

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 September 30, 2018

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

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)

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 October 31, 2018, there were 1,720,154,771 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended September 30, 2018


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				7
Supplemental Financial Information and Disclosures				17
Accounting Development Updates				17
Critical Accounting Policies				18
Liquidity and Capital Resources				18
Quantitative and Qualitative Disclosures about Risk	I	3		30
Market Risk				30
Credit Risk				32
Report of Independent Registered Public Accounting Firm				39
Consolidated Financial Statements and Notes	I	1		40
Consolidated Income Statements (Unaudited)				40
Consolidated Comprehensive Income Statements (Unaudited)				41
Consolidated Balance Sheets (Unaudited at September 30, 2018)				42
Consolidated Statements of Changes in Total Equity (Unaudited)				43
Consolidated Cash Flow Statements (Unaudited)				44
Notes to Consolidated Financial Statements (Unaudited)				45
1. Introduction and Basis of Presentation				45
2. Significant Accounting Policies				46
3. Fair Values				48
4. Derivative Instruments and Hedging Activities				58
5. Investment Securities				61
6. Collateralized Transactions				64
7. Loans, Lending Commitments and Allowance for Credit Losses				65
8. Equity Method Investments				67
9. Deposits				68
10. Borrowings and Other Secured Financings				68
11. Commitments, Guarantees and Contingencies				68
12. Variable Interest Entities and Securitization Activities				72
13. Regulatory Requirements				74
14. Total Equity				76
15. Earnings per Common Share				79
16. Interest Income and Interest Expense				79
17. Employee Benefit Plans				79
18. Income Taxes				80
19. Segment, Geographic and Revenue Information				80
20. Subsequent Events				83
Financial Data Supplement (Unaudited)				84
Glossary of Common Acronyms				87
Other Information	II			89
Legal Proceedings	II	1		89
Unregistered Sales of Equity Securities and Use of Proceeds	II	2		90
Controls and Procedures	I	4		91
Exhibits	II	6		91
Exhibit Index				E-1
Signatures				S-1


		i

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 Governance 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.


		ii

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 definitions 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 services include originating and/or purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending and financing extended to equities and commodities customers and municipalities. 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, credit 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 serviced 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 2017 Form 10-K, and “Liquidity and Capital Resources” herein.


		1		September 2018 Form 10-Q


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 $9,872 million in the quarter ended September 30, 2018 (“current quarter,” or “3Q 2018”), compared with $9,197 million in the quarter ended September 30, 2017 (“prior year quarter,” or “3Q 2017”). For the current quarter, net income applicable to Morgan Stanley was $2,112 million, or $1.17 per diluted common share, compared with $1,781 million, or $0.93 per diluted common share, in the prior year quarter.

•

We reported net revenues of $31,559 million in the nine months ended September 30, 2018 (“current year period,” or “YTD 2018”), compared with $28,445 million in the nine months ended September 30, 2017 (“prior year period,” or “YTD 2017”). For the current year period, net income applicable to Morgan Stanley was $7,217 million, or $3.92 per diluted common share, compared with $5,468 million, or $2.79 per diluted common share, in the prior year period.


September 2018 Form 10-Q		2


Management’s Discussion and Analysis

Non-interest Expenses¹

($ in millions)

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

•

Compensation and benefits expenses of $4,310 million in the current quarter and $13,845 million in the current year period increased 3% and 7%, respectively, from $4,169 million in the prior year quarter and $12,887 million in the prior year period. These results primarily reflected increases in discretionary incentive compensation mainly driven by higher revenues as well as salaries across all business segments. These increases were partially offset by a decrease in the fair value of investments to which certain deferred compensation plans are referenced.

•

Non-compensation expenses were $2,711 million in the current quarter and $8,334 million in the current year period compared with $2,546 million in the prior year quarter and $7,626 million in the prior year period, representing a 6% and a 9% increase, respectively. These increases were primarily as a result of higher volume-related expenses, the gross presentation of certain expenses due to the adoption of the accounting update Revenue from Contracts with Customers (see Notes 2 and 19 to the financial statements for further information) and increased investment in technology. In the current quarter, these increases were partially offset by lower litigation expenses.

Income Taxes

The current year period includes intermittent net discrete tax benefits of $92 million, primarily associated with new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters. The prior year quarter and prior year period included intermittent net discrete tax benefits of $83 million and $65 million, respectively, primarily resulting from the remeasurement of certain deferred taxes. In addition, the effective tax rate is lower in the current quarter and current year period compared with the corresponding prior periods primarily as a result of the enactment of the U.S. Tax Cuts and Jobs Act (“Tax Act”). For further information, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.


		3		September 2018 Form 10-Q


Management’s Discussion and Analysis

Selected Financial Information and Other Statistical Data


	Three Months Ended September 30,					Nine Months Ended September 30,
$ in millions	2018			2017		2018			2017
Income from continuing operations applicable to Morgan Stanley	$	2,113		$	1,775	$	7,222		$	5,489
Income (loss) from discontinued operations applicable to Morgan Stanley		(1	)		6		(5	)		(21)
Net income applicable to Morgan Stanley		2,112			1,781		7,217			5,468
Preferred stock dividends and other		93			93		356			353
Earnings applicable to Morgan Stanley common shareholders	$	2,019		$	1,688	$	6,861		$	5,115
Expense efficiency ratio¹		71.1%			73.0%		70.3%			72.1%
ROE²		11.5%			9.6%		13.1%			9.8%
ROTCE²		13.2%			11.0%		15.1%			11.3%


in millions, except per share and employee data	At September 30, 2018		At December 31, 2017
GLR³	$	214,848	$	192,660
Loans⁴	$	109,983	$	104,126
Total assets	$	865,517	$	851,733
Deposits	$	175,185	$	159,436
Borrowings	$	190,889	$	192,582
Common shares outstanding		1,726		1,788
Common shareholders’ equity	$	70,183	$	68,871
Tangible common shareholders’ equity²	$	61,265	$	59,829
Book value per common share⁵	$	40.67	$	38.52
Tangible book value per common share^{2, 5}	$	35.50	$	33.46
Worldwide employees		59,835		57,633

	At September 30, 2018		At December 31, 2017
Capital ratios⁶
Common Equity Tier 1 capital ratio		16.7%		16.5%
Tier 1 capital ratio		19.0%		18.9%
Total capital ratio		21.6%		21.7%
Tier 1 leverage ratio		8.2%		8.3%
SLR⁷		6.4%		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.

Beginning in 2018, our risk based capital ratios are based on the Standardized Approach fully phased-in rules. At December 31, 2017, our risk based capital ratios were based on the Standardized Approach transitional rules. For a discussion of our regulatory capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.

7.	The SLR became effective as a capital standard on January 1, 2018. For a discussion of the SLR, see “Liquidity and Capital Resources—Regulatory Requirements” herein.

Business Segment Results

Net Revenues by Segment^{1, 2}

($ in millions)

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September 2018 Form 10-Q		4


Management’s Discussion and Analysis

Net Income Applicable to Morgan Stanley by Segment^{1, 3}

($ in millions)

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1.	The percentages in the charts represent the contribution of each business segment to the total. Amounts do not necessarily total to 100% due to intersegment eliminations, where applicable.

2.	The total amount of Net Revenues by Segment includes intersegment eliminations of $(109) million and $(74) million in the current quarter and prior year quarter, respectively, and $(344) million and $(223) million in the current year period and prior year period, respectively.

The total amount of Net Income Applicable to Morgan Stanley by Segment includes intersegment eliminations of $(1) million and $(4) million in the current quarter and prior year quarter, respectively, and $(1) million and $(2) million in the current year period and the prior year period, respectively.

•	Institutional Securities net revenues of $4,929 million in the current quarter and $16,743 million in the current year period increased 13% from the prior year quarter and 17% from the prior year period primarily reflecting higher revenues from both sales and trading and Investment banking.

•	Wealth Management net revenues of $4,399 million in the current quarter and $13,098 million in the current year period increased 4% from the prior year quarter and 5% from the prior year period primarily reflecting growth in Asset management revenues.

•

Investment Management net revenues of $653 million in the current quarter and $2,062 million in the current year period decreased 3% from the prior year quarter and increased 6% from the prior year period. The current quarter results primarily reflected lower investment gains. The current year period reflected higher Asset management revenues, partially offset by lower investment gains.

Net Revenues by Region^{1, 2}

($ in millions)

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1.	For a discussion of how the geographic breakdown for net revenues is determined, see Note 19 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, investors and analysts 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


		5		September 2018 Form 10-Q


Management’s Discussion and Analysis

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 below.

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


$ in millions, except		Three Months Ended September 30,						Nine Months Ended September 30,
per share data		2018			2017			2018			2017
Net income applicable to Morgan Stanley	$	2,112		$	1,781		$	7,217		$	5,468
Impact of adjustments		(4	)		(83	)		(92	)		(65)
Adjusted net income applicable to Morgan Stanley—non-GAAP¹	$	2,108			1,698		$	7,125			5,403
Earnings per diluted common share	$	1.17		$	0.93		$	3.92		$	2.79
Impact of adjustments		—			(0.05	)		(0.05	)		(0.03)
Adjusted earnings per diluted common share—non-GAAP¹	$	1.17		$	0.88		$	3.87		$	2.76
Effective income tax rate		24.4%			28.1%			21.9%			29.7%
Impact of adjustments		0.2%			3.3%			0.9%			0.8%
Adjusted effective income tax rate—non-GAAP¹		24.6%			31.4%			22.8%			30.5%


$ in millions	At September 30, 2018			At December 31, 2017
Tangible Equity
U.S. GAAP
Morgan Stanley shareholders’ equity	$	78,703		$	77,391
Less: Goodwill and net intangible assets		(8,918	)		(9,042)
Morgan Stanley tangible shareholders’ equity—non-GAAP	$	69,785		$	68,349
U.S. GAAP
Common equity	$	70,183		$	68,871
Less: Goodwill and net intangible assets		(8,918	)		(9,042)
Tangible common equity—non-GAAP	$	61,265		$	59,829


$ in millions	Average Monthly Balance
	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Tangible Equity
U.S. GAAP
Morgan Stanley shareholders’ equity	$	78,760		$	79,007		$	78,165		$	78,206
Less: Goodwill and net intangible assets		(8,970	)		(9,120	)		(9,020	)		(9,192)
Morgan Stanley tangible shareholders’ equity—non-GAAP	$	69,790		$	69,887		$	69,145		$	69,014
U.S. GAAP
Common equity	$	70,240		$	70,487		$	69,645		$	69,786
Less: Goodwill and net intangible assets		(8,970	)		(9,120	)		(9,020	)		(9,192)
Tangible common equity—non-GAAP	$	61,270		$	61,367		$	60,625		$	60,594

Consolidated Non-GAAP Financial Measures


	Three Months Ended September 30,				Nine Months Ended September 30,
$ in billions	2018		2017		2018		2017
Average common equity
Unadjusted	$	70.2	$	70.5	$	69.6	$	69.8
Adjusted¹		70.2		70.5		69.6		69.8
ROE²
Unadjusted		11.5%		9.6%		13.1%		9.8%
Adjusted^1, 3		11.5%		9.1%		13.0%		9.6%
Average tangible common equity
Unadjusted	$	61.3	$	61.4	$	60.6	$	60.6
Adjusted¹		61.3		61.3		60.6		60.6
ROTCE²
Unadjusted		13.2%		11.0%		15.1%		11.3%
Adjusted^1, 3		13.2%		10.5%		14.9%		11.1%


September 2018 Form 10-Q		6


Management’s Discussion and Analysis

Non-GAAP Financial Measures by Business Segment


	Three Months Ended September 30,				Nine Months Ended September 30,
$ in billions		2018		2017		2018		2017
Pre-tax profit margin⁴
Institutional Securities		32%		28%		33%		31%
Wealth Management		27%		27%		27%		25%
Investment Management		16%		19%		19%		19%
Consolidated		29%		27%		30%		28%
Average common equity⁵
Institutional Securities	$	40.8	$	40.2	$	40.8	$	40.2
Wealth Management		16.8		17.2		16.8		17.2
Investment Management		2.6		2.4		2.6		2.4
Parent Company		10.0		10.7		9.4		10.0
Consolidated average common equity	$	70.2	$	70.5	$	69.6	$	69.8
Average tangible common equity⁵
Institutional Securities	$	40.1	$	39.6	$	40.1	$	39.6
Wealth Management		9.2		9.3		9.2		9.3
Investment Management		1.7		1.6		1.7		1.6
Parent Company		10.3		10.9		9.6		10.1
Consolidated average tangible common equity	$	61.3	$	61.4	$	60.6	$	60.6
ROE^{2, 6}
Institutional Securities		10.3%		8.9%		12.8%		9.6%
Wealth Management		21.3%		15.8%		20.9%		15.0%
Investment Management		12.0%		18.8%		15.7%		15.4%
Consolidated		11.5%		9.6%		13.1%		9.8%
ROTCE^{2, 6}
Institutional Securities		10.4%		9.1%		13.0%		9.8%
Wealth Management		38.9%		29.1%		38.1%		27.7%
Investment Management		18.8%		27.7%		24.5%		22.7%
Consolidated		13.2%		11.0%		15.1%		11.3%

Adjusted amounts exclude intermittent net discrete tax provisions (benefits). Income tax consequences associated with employee share-based awards are recognized in Provision for income taxes in the income statements but are excluded from the intermittent net discrete tax provisions (benefits) adjustment as we anticipate conversion activity each quarter. For further information on the net discrete tax provisions (benefits), see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

ROE and ROTCE equal annualized net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity and average tangible common equity, on a consolidated basis as indicated. When excluding intermittent net discrete tax provisions (benefits), both the numerator and 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 profit 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 the ROE and ROTCE by segment uses the annualized 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.

Return on Equity and Tangible Common Equity Targets

In January 2018, we established an ROE Target of 10% to 13% and an ROTCE Target of 11.5% to 14.5% for the medium term.

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; outsize 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 2017 Form 10-K.

Business Segments

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

As a result of treating certain intersegment transactions as transactions with external parties, we include an Intersegment Eliminations category to reconcile the business segment results to our consolidated results. See Note 19 to the financial statements for further information.

Net Revenues, Compensation Expense and Income Taxes

For an overview of the components of our net revenues, compensation expense and income taxes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments” in the 2017 Form 10-K.


		7		September 2018 Form 10-Q


Management’s Discussion and Analysis

Institutional Securities

Income Statement Information

Three Months Ended
September 30,

$ in millions

2018

2017

% Change

Revenues

Investment banking

1,459

1,270

15%

Trading

2,573

2,504

Investments

85%

Commissions and fees

589

561

Asset management

112

27%

Other

244

143

71%

Total non-interest revenues

5,073

4,618

10%

Interest income

2,425

1,421

71%

Interest expense

2,569

1,663

54%

Net interest

(144

)

(242

)

40%

Net revenues

4,929

4,376

13%

Compensation and benefits

1,626

1,532

Non-compensation expenses

1,747

1,608

Total non-interest expenses

3,373

3,140

Income from continuing operations before income taxes

1,556

1,236

26%

Provision for income taxes

397

260

53%

Income from continuing operations

1,159

976

19%

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

)

(150)%

Net income

1,156

982

18%

Net income applicable to noncontrolling interests

N/M

Net income applicable to Morgan Stanley

1,120

973

15%

Nine Months Ended
September 30,

$ in millions

2018

2017

% Change

Revenues

Investment banking

4,671

4,100

14%

Trading

9,344

8,241

13%

Investments

234

155

51%

Commissions and fees

2,007

1,811

11%

Asset management

324

268

21%

Other

548

442

24%

Total non-interest revenues

17,128

15,017

14%

Interest income

6,424

3,788

70%

Interest expense

6,809

4,515

51%

Net interest

(385

)

(727

)

47%

Net revenues

16,743

14,290

17%

Compensation and benefits

5,779

5,069

14%

Non-compensation expenses

5,484

4,812

14%

Total non-interest expenses

11,263

9,881

14%

Income from continuing operations before income taxes

5,480

4,409

24%

Provision for income taxes

1,169

1,132

Income from continuing operations

4,311

3,277

32%

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

)

(21

)

67%

Net income

4,304

3,256

32%

Net income applicable to noncontrolling interests

100

30%

Net income applicable to Morgan Stanley

4,204

3,179

32%


September 2018 Form 10-Q		8


Management’s Discussion and Analysis

Investment Banking

Investment Banking Revenues

Three Months Ended
September 30,

$ in millions

2018

2017

% Change

Advisory

510

555

(8)%

Underwriting:

Equity

441

273

62%

Fixed income

508

442

15%

Total underwriting

949

715

33%

Total investment banking

1,459

1,270

15%


	Nine Months Ended September 30,
$ in millions	2018		2017		% Change
Advisory	$	1,702	$	1,555		9%
Underwriting:
Equity		1,403		1,068		31%
Fixed income		1,566		1,477		6%
Total underwriting		2,969		2,545		17%
Total investment banking	$	4,671	$	4,100		14%

Investment Banking Volumes


	Three Months Ended September 30,				Nine Months Ended September 30,
$ in billions	2018		2017		2018		2017
Completed mergers and acquisitions¹	$	164	$	238	$	665	$	615
Equity and equity-related offerings^2, 3		14		17		52		46
Fixed income offerings^{2, 4}		66		65		183		210

Source: Thomson Reuters, data as of October 1, 2018. 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 or change in the value of a transaction.

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 are composed of fees from advisory services and revenues from the underwriting of securities offerings and syndication of loans, net of syndication expenses.

Investment banking revenues of $1,459 million in the current quarter and $4,671 million in the current year period increased 15% and 14% from the comparable prior year periods. The adoption of the accounting update Revenue from Contracts with Customers had the effect of increasing the revenues reported in investment banking by approximately $69 million in the current quarter and $230 million in the current year period compared with the prior year periods (see Notes 2 and

19 to the financial statements for further information). The drivers of the increase in our Investment banking revenues, other than the effect of this accounting update, were:

•

Advisory revenues decreased in the current quarter primarily reflecting lower volumes of completed M&A activity (see Investment Banking Volumes table), partially offset by higher fee realizations. In the current year period, advisory revenues increased primarily due to higher volumes of completed M&A activity.

•

Equity underwriting revenues increased in the current quarter and current year period primarily as a result of higher fee realizations. In both the current quarter and current year period, revenues increased in initial public offerings, convertibles and follow-ons.

•

Fixed income underwriting revenues increased in the current quarter and current year period primarily due to higher fee realizations. In the current quarter, revenues increased in investment grade bond fees and loan fees, which benefited from event-related financings, partially offset by lower non-investment grade bond fees. Fixed income underwriting revenues increased in the current year period primarily due to higher loan fees, partially offset by lower non-investment grade bond fees.

Sales and Trading Net Revenues

By Income Statement Line Item


	Three Months Ended September 30,
$ in millions	2018			2017			% Change
Trading	$	2,573		$	2,504			3%
Commissions and fees		589			561			5%
Asset management		112			88			27%
Net interest		(144	)		(242	)		40%
Total	$	3,130		$	2,911			8%

Nine Months Ended
September 30,

$ in millions

2018

2017

% Change

Trading

9,344

8,241

13%

Commissions and fees

2,007

1,811

11%

Asset management

324

268

21%

Net interest

(385

)

(727

)

47%

Total

11,290

9,593

18%

By Business


	Three Months Ended September 30,
$ in millions	2018			2017			% Change
Equity	$	2,019		$	1,891			7%
Fixed income		1,179			1,167			1%
Other		(68	)		(147	)		54%
Total	$	3,130		$	2,911			8%


		9		September 2018 Form 10-Q


Management’s Discussion and Analysis


	Nine Months Ended September 30,
$ in millions	2018			2017			% Change
Equity	$	7,047		$	6,062			16%
Fixed income		4,441			4,120			8%
Other		(198	)		(589	)		66%
Total	$	11,290		$	9,593			18%

Sales and Trading Revenues—Equity and Fixed Income


	Three Months Ended September 30, 2018
$ in millions	Trading		Fees¹		Net Interest²			Total
Financing	$	1,097	$	99	$	(141	)	$	1,055
Execution services		554		524		(114	)		964
Total Equity	$	1,651	$	623	$	(255	)	$	2,019
Total Fixed Income	$	1,189	$	78	$	(88	)	$	1,179


	Three Months Ended September 30, 2017
$ in millions	Trading		Fees¹		Net Interest²			Total
Financing	$	1,029	$	92	$	(206	)	$	915
Execution services		540		495		(59	)		976
Total Equity	$	1,569	$	587	$	(265	)	$	1,891
Total Fixed income	$	1,073	$	65	$	29		$	1,167


	Nine Months Ended September 30, 2018
$ in millions	Trading		Fees¹		Net Interest²			Total
Financing	$	3,704	$	295	$	(479	)	$	3,520
Execution services		2,006		1,793		(272	)		3,527
Total Equity	$	5,710	$	2,088	$	(751	)	$	7,047
Total Fixed Income	$	4,203	$	244	$	(6	)	$	4,441


	Nine Months Ended September 30, 2017
$ in millions	Trading		Fees¹		Net Interest²			Total
Financing	$	3,126	$	269	$	(621	)	$	2,774
Execution services		1,805		1,643		(160	)		3,288
Total Equity	$	4,931	$	1,912	$	(781	)	$	6,062
Total Fixed income	$	3,785	$	167	$	168		$	4,120

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 2017 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 19 to the financial statements.

Sales and Trading Net Revenues during the Current Quarter

Equity

Equity sales and trading net revenues of $2,019 million in the current quarter increased 7% from the prior year quarter, reflecting higher results in our financing businesses.

•

Financing revenues increased from the prior year quarter, primarily due to client positioning and higher average client balances, which resulted in both increased Trading and Net interest revenues.

•

Execution services remained relatively unchanged from the prior year quarter as higher commissions revenue was offset by increased funding costs.

Fixed Income

Fixed income net revenues of $1,179 million in the current quarter were 1% higher than the prior year quarter, driven by higher results in commodities products and other, partially offset by lower results in credit products and higher funding costs.

•

Global macro products revenues remained relatively unchanged from the prior year quarter as higher results in foreign exchange products were offset by lower results in interest rates products, both of which were primarily driven by levels of client activity.

•

Credit products revenues decreased primarily due to a decline in Trading revenue associated with unfavorable corporate credit products inventory management.

•

Commodities products and Other increased driven primarily by inventory management gains in power and natural gas products.

Other

Other sales and trading net losses of $68 million in the current quarter decreased from the prior year quarter, primarily from lower net funding costs reflecting changes in the balance sheet.

Sales and Trading Net Revenues during the Current Year Period

Equity

Equity sales and trading net revenues of $7,047 million in the current year period increased 16% from the prior year period, reflecting higher results in both our financing businesses and execution services.

•

Financing revenues increased from the prior year period, primarily due to higher average client balances and client positioning, which resulted in both increased Trading and Net interest revenues.


September 2018 Form 10-Q		10


Management’s Discussion and Analysis

•

Execution services increased from the prior year period, primarily reflecting higher Trading revenues driven by effective inventory management in derivative products. Commissions and fees also increased due to higher client activity in cash equities products, but were partially offset by increased funding costs.

Fixed Income

Fixed income net revenues of $4,441 million in the current year period were 8% higher than the prior year period, primarily driven by higher results in commodities products and other, partially offset by lower results in credit products and higher funding costs.

•

Global macro products revenues remained relatively unchanged from the prior year period as higher results in foreign exchange products were offset by lower results in interest rates products, both of which were primarily driven by levels of client activity.

•

Credit products revenues decreased as a decline in Trading revenues associated with unfavorable corporate credit products inventory management was partially offset by growth in lending products.

•

Commodities products and Other increased primarily due to increased Commodities structured transactions and client flow and higher Trading revenues principally from a reduction in counterparty credit risk.

Other

Other sales and trading net losses of $198 million in the current year period decreased from the prior year period, primarily reflecting lower net funding costs. In addition, losses associated with corporate loan hedging activity were lower in the current year period compared with the prior year period.

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

Investments

•

Net investment gains of $96 million in the current quarter and $234 million in the current year period increased from the prior year periods, primarily as a result of higher net gains on business-related investments, partially offset by lower results from real estate limited partnership investments.

Other Revenues

•

Other revenues of $244 million in the current quarter increased from the prior year quarter, primarily reflecting higher fees associated with corporate lending activity and

improved results from other equity method investments. Other revenues of $548 million in the current year period increased from the prior year period, primarily reflecting improved results from other equity method investments, the recovery of a previously charged off energy industry loan and higher fees associated with corporate lending activity, partially offset by lower gains associated with held-for-sale corporate loans.

Non-interest Expenses

Non-interest expenses of $3,373 million in the current quarter increased from the prior year quarter, reflecting a 6% increase in Compensation and benefits expenses and a 9% increase in Non-compensation expenses. Non-interest expenses of $11,263 million in the current year period increased from the prior year period reflecting a 14% increase in both Compensation and benefits expenses and Non-compensation expenses.

•

Compensation and benefits expenses increased in the current quarter and current year period, primarily due to an increase in discretionary incentive compensation driven by higher revenues, as well as salaries, partially offset by a decrease in the fair value of investments to which certain deferred compensation plans are referenced.

•

Non-compensation expenses increased in the current quarter and current year period, primarily due to higher volume-related expenses, and the gross presentation of certain expenses due to the adoption of the accounting update Revenue from Contracts with Customers (see Notes 2 and 19 to the financial statements for further information), partially offset by lower litigation expenses. In addition, in the current year period, the results were partially offset by the reversal of a portion of previously recorded provisions related to U.K. VAT matters.

Income Tax Items

The current year period includes intermittent net discrete tax benefits of $88 million, primarily associated with new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters. The prior year quarter and prior year period included intermittent net discrete tax benefits of $75 million and $60 million, respectively, primarily resulting from the remeasurement of certain deferred taxes. In addition, the effective tax rate in the current year period is lower compared with the prior year period primarily as a result of the enactment of the Tax Act. For a discussion of the Tax Act, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.


		11		September 2018 Form 10-Q


Management’s Discussion and Analysis

Wealth Management

Income Statement Information


	Three Months Ended September 30,
$ in millions	2018		2017		% Change
Revenues
Investment banking	$	129	$	125		3%
Trading		160		212		(25)%
Investments		—		1		(100)%
Commissions and fees		409		402		2%
Asset management		2,573		2,393		8%
Other		58		62		(6)%
Total non-interest revenues		3,329		3,195		4%
Interest income		1,412		1,155		22%
Interest expense		342		130		163%
Net interest		1,070		1,025		4%
Net revenues		4,399		4,220		4%
Compensation and benefits		2,415		2,326		4%
Non-compensation expenses		790		775		2%
Total non-interest expenses		3,205		3,101		3%
Income from continuing operations before income taxes		1,194		1,119		7%
Provision for income taxes		281		421		(33)%
Net income applicable to Morgan Stanley	$	913	$	698		31%


	Nine Months Ended September 30,
$ in millions	2018		2017		% Change
Revenues
Investment banking	$	383	$	405		(5)%
Trading		404		657		(39)%
Investments		3		3		—%
Commissions and fees		1,349		1,266		7%
Asset management		7,582		6,879		10%
Other		195		191		2%
Total non-interest revenues		9,916		9,401		5%
Interest income		4,012		3,348		20%
Interest expense		830		320		159%
Net interest		3,182		3,028		5%
Net revenues		13,098		12,429		5%
Compensation and benefits		7,221		6,940		4%
Non-compensation expenses		2,366		2,340		1%
Total non-interest expenses		9,587		9,280		3%
Income from continuing operations before income taxes		3,511		3,149		11%
Provision for income taxes		808		1,139		(29)%
Net income applicable to Morgan Stanley	$	2,703	$	2,010		34%

Financial Information and Statistical Data


$ in billions	At September 30, 2018		At December 31, 2017
Client assets	$	2,496	$	2,373
Fee-based client assets¹	$	1,120	$	1,045
Fee-based client assets as a percentage of total client assets		45%		44%
Client liabilities²	$	83	$	80
Investment securities portfolio	$	59.8	$	59.2
Loans and lending commitments	$	81.8	$	77.3
Wealth Management representatives		15,655		15,712


	Three Months Ended September 30,
	2018		2017
Per representative:
Annualized revenues ($ in thousands)³	$	1,125	$	1,071
Client assets ($ in millions)⁴	$	159	$	146
Fee-based asset flows ($ in billions)⁵	$	16.2	$	15.8


	Nine Months Ended September 30,
	2018		2017
Per representative:
Annualized revenues ($ in thousands)³	$	1,114	$	1,051
Client assets ($ in millions)⁴	$	159	$	146
Fee-based asset flows ($ in billions)⁵	$	49.7	$	54.5

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

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

3.	Annualized revenues per representative equal Wealth Management’s annualized revenues divided by the average representative headcount.

4.	Client assets per representative equal total period-end client assets divided by period-end representative headcount.

5.	Fee-based asset flows include net new fee-based assets, net account transfers, dividends, interest and client fees and exclude institutional cash management-related activity.


September 2018 Form 10-Q		12


Management’s Discussion and Analysis

Transactional Revenues


	Three Months Ended September 30,
$ in millions	2018			2017		% Change
Investment banking	$	129		$	125		3%
Trading		160			212		(25)%
Commissions and fees		409			402		2%
Total	$	698		$	739		(6)%
Transactional revenues as a % of Net revenues		16	%		18%

Nine Months Ended
September 30,

$ in millions

2018

2017

% Change

Investment banking

383

405

(5)%

Trading

404

657

(39)%

Commissions and fees

1,349

1,266

Total

2,136

2,328

(8)%

Transactional revenues as a % of
Net revenues

16%

19%

Net Revenues

Transactional Revenues

Transactional revenues of $698 million in the current quarter and $2,136 million in the current year period decreased 6% and 8%, respectively, from the prior year periods primarily as a result of lower Trading revenues, partially offset by higher Commissions and fees.

•

Investment banking revenues were relatively unchanged in the current quarter. In the current year period, Investment banking revenues decreased primarily due to lower revenues from equity issuances.

•

Trading revenues decreased in the current quarter primarily as a result of lower fixed income revenue driven by product mix. In addition to lower fixed income revenue, Trading revenues decreased in the current year period as a result of lower gains related to investments associated with certain employee deferred compensation plans.

•

Commissions and fees were relatively unchanged in the current quarter. In the current year period, Commissions and fees increased primarily as a result of increased client transactions in alternatives and annuities products, partially offset by decreased activity in mutual funds.

Asset Management

Asset management revenues of $2,573 million in the current quarter and $7,582 million in the current year period increased 8% and 10%, respectively, primarily due to the effect of market appreciation and net positive flows on the respective beginning of period fee-based client assets balances on which billings are generally based, partially offset by lower average fee rates.

See “Fee-Based Client Assets Rollforwards” herein.

Net Interest

Net interest of $1,070 million in the current quarter and $3,182 million in the current year period increased 4% and 5%, respectively, primarily as a result of higher interest rates and higher loan balances. In the current quarter and current year period, the effect of higher interest rates on loans was partially offset by higher average interest rates on Deposits, due to changes in our deposit mix.

Non-interest Expenses

Non-interest expenses of $3,205 million in the current quarter and $9,587 million in the current year period both increased 3% primarily as a result of higher Compensation and benefits expenses.

•

Compensation and benefits expenses increased in the current quarter and current year period primarily due to the formulaic payout to Wealth Management representatives linked to higher revenues and increases in salaries. In the current year period, these increases were partially offset by a decrease in the fair value of investments to which certain deferred compensation plans are referenced.

•

Non-compensation expenses were relatively unchanged in both the current quarter and current year period, with increased investment in technology offset by a decrease in litigation expenses.

Income Tax Items

The effective tax rate in the current quarter and current year period is lower compared with the prior year periods primarily as a result of the enactment of the Tax Act. For a discussion of the Tax Act, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.


		13		September 2018 Form 10-Q


Management’s Discussion and Analysis

Fee-Based Client Assets

For a description of fee-based client assets, including descriptions of the fee based client asset types and rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in the 2017 Form 10-K.

Fee-Based Client Assets Rollforwards


$ in billions	At June 30, 2018		Inflows		Outflows			Market Impact			At September 30, 2018
Separately managed¹	$	267	$	14	$	(6	)	$	(3	)	$	272
Unified managed		259		11		(8	)		5			267
Mutual fund advisory		20		1		(1	)		—			20
Advisor		149		7		(8	)		5			153
Portfolio manager		367		18		(12	)		13			386
Subtotal	$	1,062	$	51	$	(35	)	$	20		$	1,098
Cash management		22		4		(4	)		—			22
Total fee-based client assets	$	1,084	$	55	$	(39	)	$	20		$	1,120


$ in billions	At June 30, 2017		Inflows		Outflows			Market Impact		At September 30, 2017
Separately managed¹	$	237	$	8	$	(5	)	$	3	$	243
Unified managed		228		11		(7	)		7		239
Mutual fund advisory		21		1		(1	)		—		21
Advisor		138		9		(7	)		4		144
Portfolio manager		321		18		(11	)		10		338
Subtotal	$	945	$	47	$	(31	)	$	24	$	985
Cash management		17		3		(2	)		—		18
Total fee-based client assets	$	962	$	50	$	(33	)	$	24	$	1,003


$ in billions	At December 31, 2017		Inflows		Outflows			Market Impact		At September 30, 2018
Separately managed¹	$	252	$	30	$	(15	)	$	5	$	272
Unified managed		250		36		(23	)		4		267
Mutual fund advisory		21		—		(2	)		1		20
Advisor		149		22		(22	)		4		153
Portfolio manager		353		55		(31	)		9		386
Subtotal	$	1,025	$	143	$	(93	)	$	23	$	1,098
Cash management		20		14		(12	)		—		22
Total fee-based client assets	$	1,045	$	157	$	(105	)	$	23	$	1,120

$ in billions	At December 31, 2016		Inflows		Outflows			Market Impact		At September 30, 2017
Separately managed¹	$	222	$	24	$	(16	)	$	13	$	243
Unified managed		204		36		(22	)		21		239
Mutual fund advisory		21		1		(3	)		2		21
Advisor		125		27		(20	)		12		144
Portfolio manager		285		57		(29	)		25		338
Subtotal	$	857	$	145	$	(90	)	$	73	$	985
Cash management		20		9		(11	)		—		18
Total fee-based client assets	$	877	$	154	$	(101	)	$	73	$	1,003

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.

Average Fee Rates


	Three Months Ended September 30,				Nine Months Ended September 30,
Fee rate in bps	2018		2017		2018		2017
Separately managed		15		17		16		16
Unified managed		97		97		97		98
Mutual fund advisory		119		118		119		118
Advisor		84		84		84		84
Portfolio manager		95		94		95		96
Subtotal		75		76		76		76
Cash management		6		6		6		6
Total fee-based client assets		74		75		74		75


September 2018 Form 10-Q		14


Management’s Discussion and Analysis

Investment Management

Income Statement Information


	Three Months Ended September 30,
$ in millions	2018			2017			% Change
Revenues
Trading	$	2		$	(7	)		N/M
Investments		40			114			(65)%
Asset management		604			568			6%
Other		(3	)		1			N/M
Total non-interest revenues		643			676			(5)%
Interest income		19			1			N/M
Interest expense		9			2			N/M
Net interest		10			(1	)		N/M
Net revenues		653			675			(3)%
Compensation and benefits		269			311			(14)%
Non-compensation expenses		282			233			21%
Total non-interest expenses		551			544			1%
Income from continuing operations before income taxes		102			131			(22)%
Provision for income taxes		18			16			13%
Income from continuing operations		84			115			(27)%
Income from discontinued operations, net of income taxes		2			—			N/M
Net income		86			115			(25)%
Net income applicable to noncontrolling interests		6			1			N/M
Net income applicable to Morgan Stanley	$	80		$	114			(30)%


	Nine Months Ended September 30,
$ in millions	2018		2017			% Change
Revenues
Trading	$	23	$	(21	)		N/M
Investments		172		337			(49)%
Asset management		1,840		1,624			13%
Other		10		9			11%
Total non-interest revenues		2,045		1,949			5%
Interest income		37		3			N/M
Interest expense		20		3			N/M
Net interest		17		—			N/M
Net revenues		2,062		1,949			6%
Compensation and benefits		845		878			(4)%
Non-compensation expenses		827		695			19%
Total non-interest expenses		1,672		1,573			6%
Income from continuing operations before income taxes		390		376			4%
Provision for income taxes		73		87			(16)%
Income from continuing operations		317		289			10%
Income from discontinued operations, net of income taxes		2		—			N/M
Net income		319		289			10%
Net income applicable to noncontrolling interests		8		8			—%
Net income applicable to Morgan Stanley	$	311	$	281			11%

Net Revenues

Investments

Investments gains of $40 million in the current quarter compared with $114 million in the prior year quarter reflect lower carried interest in certain infrastructure and multi-manager private equity funds.

Investments gains of $172 million in the current year period compared with $337 million in the prior year period reflect lower carried interest in certain infrastructure funds and the reversal of previously accrued carried interest in certain Asia private equity funds, primarily due to losses associated with weakening Asia-Pacific currencies.

Asset Management

Asset management revenues of $604 million in the current quarter and $1,840 million in the current year period increased 6% and 13%, respectively, primarily as a result of higher average long-term AUM. See “AUM Rollforwards” herein.

The adoption of the accounting update Revenue from Contracts with Customers had the effect of increasing Asset management revenues due to the gross presentation of distribution fees. This increase (approximately $17 million in the current quarter and $61 million in the current year period) was partially offset by the delayed recognition of certain performance fees not in the form of carried interest until they are no longer probable of reversing. See Notes 2 and 19 to the financial statements for further details.

Non-interest Expenses

Non-interest expenses of $551 million in the current quarter and $1,672 million in the current year period increased 1% and 6%, respectively, primarily due to higher Non-compensation expenses.

•

Compensation and benefits expenses decreased in the current quarter and current year period due to decreases in deferred compensation associated with carried interest and the fair value of investments to which certain deferred compensation plans are referenced. In the current year period, these decreases were partially offset by increases in salaries and discretionary incentive compensation.

•

Non-compensation expenses increased in the current quarter and current year period primarily as a result of higher fee sharing on increased average AUM balances and the gross presentation of distribution fees due to the adoption of the accounting update Revenue from Contracts with Customers. See “Asset Management” above.


		15		September 2018 Form 10-Q


Management’s Discussion and Analysis

Income Tax Items

The effective tax rate in the current year period is lower compared with the prior year period primarily as a result of the enactment of the Tax Act. For a discussion of the Tax Act, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

Assets Under Management or Supervision

For a description of the asset classes and rollforward items in the following 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 2017 Form 10-K.

AUM Rollforwards


$ in billions	At June 30, 2018		Inflows		Outflows			Market Impact		Other¹			At September 30, 2018
Equity	$	114	$	10	$	(9	)	$	3	$	(1	)	$	117
Fixed income		69		6		(4	)		—		—			71
Alternative/Other		132		5		(4	)		1		(1	)		133
Long-term AUM subtotal		315		21		(17	)		4		(2	)		321
Liquidity²		159		313		(322	)		1		(1	)		150
Total AUM	$	474	$	334	$	(339	)	$	5	$	(3	)	$	471
Shares of minority stake assets		7												7

$ in billions	At June 30, 2017		Inflows		Outflows			Market Impact		Other¹			At September 30, 2017
Equity	$	94	$	5	$	(6	)	$	4	$	—		$	97
Fixed income		66		7		(5	)		1		—			69
Alternative/Other		121		5		(3	)		1		1			125
Long-term AUM subtotal		281		17		(14	)		6		1			291
Liquidity		154		279		(277	)		1		(1	)		156
Total AUM	$	435	$	296	$	(291	)	$	7	$	—		$	447
Shares of minority stake assets		8												7


$ in billions	At December 31, 2017		Inflows		Outflows			Market Impact			Other¹			At September 30, 2018
Equity	$	105	$	30	$	(23	)	$	6		$	(1	)	$	117
Fixed income		73		20		(20	)		(1	)		(1	)		71
Alternative/Other		128		16		(13	)		2			—			133
Long-term AUM subtotal		306		66		(56	)		7			(2	)		321
Liquidity²		176		1,013		(1,039	)		2			(2	)		150
Total AUM	$	482	$	1,079	$	(1,095	)	$	9		$	(4	)	$	471
Shares of minority stake assets		7													7

$ in billions	At December 31, 2016		Inflows		Outflows			Market Impact			Other¹			At September 30, 2017
Equity	$	79	$	16	$	(16	)	$	17		$	1		$	97
Fixed income		60		20		(16	)		3			2			69
Alternative/Other		115		18		(13	)		5			—			125
Long-term AUM subtotal		254		54		(45	)		25			3			291
Liquidity		163		915		(923	)		1			—			156
Total AUM	$	417	$	969	$	(968	)	$	26		$	3		$	447
Shares of minority stake assets		8													7

1.	Includes distributions and foreign currency impact for all periods and the impact of the Mesa West Capital, LLC acquisition in the current year period.

2.	Included in Liquidity products outflows in the current quarter and current year period are $(8) billion and $(18) billion, respectively, related to the redesign of our brokerage sweep deposits program. See “Liquidity and Capital Resources—Unsecured Financing” herein for more information.

Average AUM


	Three Months Ended September 30,				Nine Months Ended September 30,
$ in billions	2018		2017		2018		2017
Equity	$	116	$	96	$	112	$	90
Fixed income		70		68		72		65
Alternative/Other		133		123		131		120
Long-term AUM subtotal		319		287		315		275
Liquidity		153		156		159		155
Total AUM	$	472	$	443	$	474	$	430
Shares of minority stake assets		7		7		7		7

Average Fee Rate


	Three Months Ended September 30,				Nine Months Ended September 30,
Fee rate in bps	2018		2017		2018		2017
Equity		76		75		76		74
Fixed income		33		34		34		33
Alternative/Other		65		68		67		69
Long-term AUM		62		62		62		62
Liquidity		17		18		18		18
Total AUM		47		47		47		46


September 2018 Form 10-Q		16


Management’s Discussion and Analysis

Supplemental Financial Information and Disclosures

Income Tax Matters

Effective Tax Rate from Continuing Operations


	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
U.S. GAAP		24.4	%		28.1	%		21.9	%		29.7%
Adjusted effective income tax rate—non-GAAP¹		24.6	%		31.4	%		22.8	%		30.5%
Net discrete tax provisions/(benefits)
Intermittent²	$	(4	)	$	(83	)	$	(92	)	$	(65)
Recurring³	$	—		$	(11	)	$	(164	)	$	(139)

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

2.	Includes all tax provisions (benefits) which have been determined to be discrete, other than recurring-type items as defined below.

Recurring-type discrete tax benefits represent income tax consequences associated with employee share-based awards, which are recognized in Provision for income taxes in the income statements but are excluded from the intermittent net discrete tax provisions (benefits) adjustment as we anticipate conversion activity each quarter.

The current year period includes intermittent net discrete tax benefits primarily associated with new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters. The prior year quarter and prior year period included intermittent net discrete tax benefits primarily resulting from the remeasurement of certain deferred taxes.

The effective tax rate reflects our current assumptions, estimates and interpretations related to the Tax Act and other factors. The Tax Act, enacted on December 22, 2017, significantly revised U.S. corporate income tax law by, among other things, reducing the corporate income tax rate to 21%, and implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries; imposes a minimum tax on global intangible low-taxed income (“GILTI”) and an alternative base erosion and anti-abuse tax (“BEAT”) on U.S. corporations that make deductible payments to non-U.S. related persons in excess of specified amounts; and broadens the tax base by partially or wholly eliminating tax deductions for certain historically deductible expenses. Our income tax estimates may change as additional clarification and implementation guidance continue to be received from the U.S. Treasury Department and as the interpretation of the Tax Act evolves over time.

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 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 September 30, 2018		At December 31, 2017
Assets	$	203.2	$	185.3
Investment securities portfolio:
Investment securities—AFS		41.5		42.0
Investment securities—HTM		19.0		17.5
Total investment securities	$	60.5	$	59.5
Deposits²	$	174.4	$	159.1
Wealth Management
Securities-based lending and other loans³	$	44.4	$	41.2
Residential real estate loans		26.7		26.7
Total	$	71.1	$	67.9
Institutional Securities
Corporate loans	$	30.0	$	24.2
Wholesale real estate loans		10.9		12.2
Total	$	40.9	$	36.4

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.

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 updates are currently being evaluated to determine the potential impact of adoption:

•

Derivatives and Hedging (ASU 2018-16). The amendments in this update permit use of the Overnight Index Swap (“OIS”) rate based on the Secured Overnight Financing Rate (“SOFR”) as a U.S. benchmark interest rate for hedge accounting purposes. This update is effective for us as of


		17		September 2018 Form 10-Q


Management’s Discussion and Analysis

January 1, 2019, with early adoption permitted. This update does not impact our existing hedges.

•

Leases. This accounting update requires lessees to recognize in the balance sheet all leases with terms exceeding one year, which results in the recognition of a right of use asset and corresponding lease liability, including for those leases that we currently classify as operating leases. The accounting for leases where we are the lessor is largely unchanged.

The right of use asset and lease liability will initially be measured using the present value of the remaining rental payments. This change to the accounting for leases where we are lessee requires modifications to our lease accounting systems and determining the discount rate to use in calculating the present value of the remaining rental payments. We will adopt this accounting update as of the effective date, January 1, 2019. Based upon our current population of leases, we expect the right of use asset and corresponding lease liability to be less than 1% of our total assets.

•

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.

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.

Under the update, there may be an ability to determine there are no expected credit losses in certain circumstances, e.g., based on collateral arrangements for lending and financing transactions or based on the credit quality of the borrower or issuer.

Overall, the amendments in this update are expected to accelerate the recognition of credit losses for portfolios where the CECL models will be applied. 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 2017 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 2017 Form 10-K.

Liquidity and Capital Resources

Senior management, with oversight by the Asset and 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. The Treasury department, Firm Risk Committee, Asset and 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 or 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 September 30, 2018

$ in millions

Total

Assets

Cash and cash equivalents¹

73,425

18,972

92,481

Trading assets at fair value

279,579

3,538

283,188

Investment securities

22,742

59,826

—

82,568

Securities purchased under agreements to resell

57,663

11,423

—

69,086

Securities borrowed

142,177

312

—

142,489

Customer and other receivables

43,010

17,256

573

60,839

Loans, net of allowance²

38,878

71,100

109,983

Other assets³

14,034

9,206

1,643

24,883

Total assets

671,508

188,166

5,843

865,517


September 2018 Form 10-Q		18


Management’s Discussion and Analysis


	At December 31, 2017
$ in millions	IS		WM		IM		Total
Assets
Cash and cash equivalents¹	$	63,597	$	16,733	$	65	$	80,395
Trading assets at fair value		295,678		59		2,545		298,282
Investment securities		19,556		59,246		—		78,802
Securities purchased under agreements to resell		74,732		9,526		—		84,258
Securities borrowed		123,776		234		—		124,010
Customer and other receivables		36,803		18,763		621		56,187
Loans, net of allowance²		36,269		67,852		5		104,126
Other assets³		14,563		9,596		1,514		25,673
Total assets	$	664,974	$	182,009	$	4,750	$	851,733

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, 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 $865.5 billion at September 30, 2018 from $851.7 billion at December 31, 2017, primarily due to increases in loans across all segments, as well as a net increase to support client activity in secured financings as reflected in Securities borrowed and Securities purchased under agreements to resell in the Institutional Securities business segment. Trading assets within the Institutional Securities business segment declined due to reductions in Equities inventory to support changes in client positioning, which resulted in greater liquidity, as reflected by increases in Cash and cash equivalents and Investment securities.

Liquidity Risk Management Framework

The primary goal of our Liquidity Risk Management Framework is to ensure that we have access to adequate funding across a wide range of market conditions and time horizons. The framework is designed to enable us to fulfill our financial obligations and support the execution of our business strategies.

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 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 2017 Form 10-K.

At September 30, 2018 and December 31, 2017, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.

Global Liquidity Reserve

We maintain sufficient global liquidity reserves pursuant to our Required Liquidity Framework. For 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 2017 Form 10-K.

GLR by Type of Investment


$ in millions	At September 30, 2018		At December 31, 2017
Cash deposits with banks¹	$	10,647	$	7,167
Cash deposits with central banks¹		43,772		33,791
Unencumbered highly liquid securities:
U.S. government obligations		93,545		73,422
U.S. agency and agency mortgage-backed securities		32,422		55,750
Non-U.S. sovereign obligations²		32,019		19,424
Other investment grade securities		2,443		3,106
Total	$	214,848	$	192,660

1.	Included in Cash and due from banks and Interest bearing deposits with banks in the balance sheets.

2.	Non-U.S. sovereign obligations are primarily composed of unencumbered Japanese, U.K., German, Brazilian and French government obligations.

GLR Managed by Bank and Non-Bank Legal Entities

$ in millions

At
September 30,
2018

At
December 31,
2017

Average Daily Balance

Three Months Ended

September 30, 2018

Bank legal entities

Domestic

78,320

70,364

76,899

Foreign

4,628

4,756

4,343

Total Bank legal entities

82,948

75,120

81,242

Non-Bank legal entities

Domestic:

Parent Company

44,064

41,642

63,328

Non-Parent Company

31,992

35,264

31,208

Total Domestic

76,056

76,906

94,536

Foreign

55,844

40,634

53,195

Total Non-Bank legal entities

131,900

117,540

147,731

Total

214,848

192,660

228,973

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.


		19		September 2018 Form 10-Q


Management’s Discussion and Analysis

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	September 30, 2018		June 30, 2018
HQLA
Cash deposits with central banks	$	48,962	$	38,456
Securities¹		140,060		128,268
Total	$	189,022	$	166,724
LCR		135%		128%

1.	Primarily includes U.S. Treasuries, U.S. agency mortgage-backed securities, sovereign bonds, publicly traded common equities, and investment grade corporate bonds.

The increase in the LCR in the current quarter is due to increased HQLA, consistent with higher liquidity levels.

The Firm’s calculations are based on our current understanding of the LCR and other factors, which may be subject to change as we receive additional clarification and implementation guidance from regulators relating to the LCR, and as the interpretation of the LCR evolves over time.

Net Stable Funding Ratio

The objective of the NSFR is to reduce funding risk over a one-year horizon by requiring banking organizations to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress.

The Basel Committee on Banking Supervision (“Basel Committee”) 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., which would apply to us and our U.S. Bank Subsidiaries. Our preliminary estimates, based on the current proposal, indicate that actions will be necessary to meet the requirement, which we would expect to accomplish by the effective date of any final rule. Our preliminary estimates are subject to risks and uncertainties that may cause actual results based on the final rule to differ materially from estimates. 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 2017 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 may 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 Resources—Funding Management—Secured Financing” in the 2017 Form 10-K.

At September 30, 2018 and December 31, 2017, the weighted average maturity of our secured financing of less liquid assets was greater than 120 days.

Collateralized Financing Transactions


$ in millions	At September 30, 2018		At December 31, 2017
Securities purchased under agreements to resell and Securities borrowed	$	211,575	$	208,268
Securities sold under agreements to repurchase and Securities loaned	$	72,161	$	70,016
Securities received as collateral¹	$	8,865	$	13,749


	Average Daily Balance Three Months Ended
$ in millions	September 30, 2018		December 31, 2017
Securities purchased under agreements to resell and Securities borrowed	$	229,243	$	214,343
Securities sold under agreements to repurchase and Securities loaned	$	59,346	$	66,879

1.	Included in Trading assets in the balance sheets.

See Note 2 to the financial statements in the 2017 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 also 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 transac-


September 2018 Form 10-Q		20


Management’s Discussion and Analysis

tions, 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 2017 Form 10-K.

Deposits


$ in millions	At September 30, 2018		At December 31, 2017
Savings and demand deposits:
Brokerage sweep deposits¹	$	132,835	$	135,946
Savings and other		11,127		8,541
Total Savings and demand deposits		143,962		144,487
Time deposits²		31,223		14,949
Total	$	175,185	$	159,436

1.	Represents balances swept from client brokerage accounts.

2.	Certain time deposit accounts are carried at fair value under the fair value option (see Note 3 to the financial statements).

Deposits are primarily sourced from our Wealth Management clients and are considered to have stable, low-cost funding characteristics. Total deposits at September 30, 2018 increased compared with December 31, 2017, primarily driven by increases in Time deposits and Savings and other deposits, partially offset by a reduction in Brokerage sweep deposits due to client deployment of cash into investments and typical seasonal client tax payments. While Brokerage sweep deposits declined since December 31, 2017, the redesign of our brokerage sweep deposit program initiated in the second quarter of 2018 resulted in inflows of approximately $18 billion. These inflows corresponded with outflows from Liquidity products AUM in the Investment Management business segment (see “Business Segments—Investment Management—Assets Under Management or Supervision” herein for more information).

Borrowings

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.

Borrowings by Remaining Maturity at September 30, 2018¹

$ in millions

Parent
Company

Subsidiaries

Total

Original maturities of one year or less

938

940

Original maturities greater than one year

2018

2,673

1,380

4,053

2019

21,352

4,350

25,702

2020

18,705

2,713

21,418

2021

21,236

3,167

24,403

2022

14,935

1,961

16,896

Thereafter

80,300

17,177

97,477

Total

159,201

30,748

189,949

Total Borrowings

159,203

31,686

190,889

Maturities over next 12 months²

24,122

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 $190,889 million as of September 30, 2018 remained relatively unchanged compared with $192,582 million at December 31, 2017.

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.


		21		September 2018 Form 10-Q


Management’s Discussion and Analysis

Parent Company and MSBNA Senior Unsecured Ratings at October 31, 2018


	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-	Stable
S&P Global Ratings	A-2	BBB+	Stable


	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

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 others, 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 and, therefore, in the future may expand or contract our capital base to address the changing needs of our businesses. We attempt to maintain total capital, on a consolidated basis, at least equal to the sum of our operating subsidiaries’ required equity.

Common Stock


	Three Months Ended September 30,				Nine Months Ended September 30,
$ in millions	2018		2017		2018		2017
Repurchases of common stock under our share repurchase program	$	1,180	$	1,250	$	3,680	$	2,500

From time to time we repurchase our outstanding common stock, including as part of our share repurchase program. On April 18, 2018, we entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”) whereby MUFG sells 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 will have no impact on the strategic alliance between MUFG and us, including the 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		October 16, 2018
Amount per share		$0.30
Date to be paid		November 15, 2018
Shareholders of record as of		October 31, 2018

Preferred Stock

Preferred Stock Dividend Announcement


Announcement date		September 17, 2018
Date paid		October 15, 2018
Shareholders of record as of		September 28, 2018

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


September 2018 Form 10-Q		22


Management’s Discussion and Analysis

Regulatory Requirements

Regulatory Capital Framework

We are a financial holding company (“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 and leverage-based capital ratios under the regulatory capital requirements. For more information on our regulatory capital requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Capital Requirements” in the 2017 Form 10-K.

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, by 2019 we will be subject to the following buffers:

•

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 the buffers is 75% of the 2019 requirement noted above (during 2017, the buffers were 50%). 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 2017 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”). At September 30, 2018 and December 31, 2017, our ratios are based on the Standardized Approach rules.

Effective January 1, 2019, Common Equity Tier 1 capital, Tier 1 capital and Total capital requirements, inclusive of buffers, will increase to 10.0%, 11.5%, and 13.5%, respectively.

See “Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” herein for additional capital requirements effective January 1, 2019.

Leverage-based Regulatory Capital. Minimum leverage-based capital requirements include a Tier 1 leverage ratio and an SLR. The SLR became effective as a capital standard on January 1, 2018. We are required to maintain a Tier 1 SLR of 3% as well as an enhanced SLR capital buffer of at least 2% (for a total of at least 5%) in order to avoid potential limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers.


		23		September 2018 Form 10-Q


Management’s Discussion and Analysis

Regulatory Capital Ratios

At September 30, 2018

$ in millions

Required

Ratio

Fully Phased-In

Standardized

Advanced

Risk-based capital

Common Equity Tier 1 capital

61,758

Tier 1 capital

70,328

Total capital

79,899

79,649

Total RWA

370,714

357,055

Common Equity Tier 1 capital ratio

8.6%

16.7%

17.3%

Tier 1 capital ratio

10.1%

19.0%

19.7%

Total capital ratio

12.1%

21.6%

22.3%

Leverage-based capital

Adjusted average assets¹

858,944

N/A

Tier 1 leverage ratio

4.0%

8.2%

N/A

Supplementary leverage exposure²

N/A

1,101,263

SLR

5.0%

N/A

6.4%


	At December 31, 2017
	Required Ratio		Transitional³				Pro Forma Fully Phased-In
$ in millions	Required Ratio		Standardized		Advanced		Standardized		Advanced
Risk-based capital
Common Equity Tier 1 capital			$	61,134	$	61,134	$	60,564	$	60,564
Tier 1 capital				69,938		69,938		69,120		69,120
Total capital				80,275		80,046		79,470		79,240
Total RWA				369,578		350,212		377,241		358,324
Common Equity Tier 1 capital ratio		7.3%		16.5%		17.5%		16.1%		16.9%
Tier 1 capital ratio		8.8%		18.9%		20.0%		18.3%		19.3%
Total capital ratio		10.8%		21.7%		22.9%		21.1%		22.1%
Leverage-based capital
Adjusted average assets¹			$	842,270		N/A	$	841,756		N/A
Tier 1 leverage ratio		4.0%		8.3%		N/A		8.2%		N/A
Supplementary leverage exposure²				N/A <