Fitch Affirms Morgan Stanley's IDRs at 'A/F1'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed Morgan Stanley's ratings including its Issuer Default Ratings (IDRs) at 'A/F1', support rating at '1', support rating floor (SRF) at 'A' and viability rating (VR) at 'a-'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this press release.

The rating actions on Morgan Stanley have been taken in conjunction with Fitch's Global Trading and Universal Bank (GTUB) periodic review. Fitch's outlook for the industry is stable. Positive rating drivers include improved liquidity, funding, capitalization and more streamlined businesses, all partly driven by regulation. Offsetting these positive drivers are substantial earnings pressure, regulatory uncertainty and heightened legal and operational risk.

KEY RATING DRIVERS - IDRs, SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR

Morgan Stanley's IDR is at its SRF and therefore based on support from the U.S. authorities. The affirmation of the IDR, Support Rating and SRF reflect Fitch's unchanged view that there is an extremely high probability that Morgan Stanley would receive support from the authorities if required because of the bank's systemic importance domestically and internationally. The Stable Outlook on Morgan Stanley's long-term IDR reflects Fitch's view that sovereign support for the bank will continue to be available.

RATING SENSITIVITIES - IDRs, SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR

Morgan Stanley's IDRs, Support Rating, SRF and senior debt ratings are sensitive to a change in Fitch's assumptions about the availability of sovereign support for the bank. There is a clear political intention to ultimately reduce the implicit state support for systemically important banks in Europe and the U.S., as demonstrated by a series of policy and regulatory initiatives aimed at curbing systemic risk posed by the banking industry. This might result in Fitch revising SRFs downward in the medium term, although the timing and degree of any change would depend on developments with respect to specific jurisdictions. In this context, Fitch is paying close attention to ongoing policy discussions around support and 'bail in' for U.S. and Eurozone banks. Until now, senior creditors in major global banks have been supported in full, but resolution legislation is developing quickly and the implementation of creditor 'bail-in' is starting to make it look more feasible for taxpayers and creditors to share the burden of supporting large, complex banks.

Any downgrade of Morgan Stanley's SRF would lead to a downgrade of the bank's IDRs. In line with Fitch's criteria, the bank's long-term IDR is the higher of the VR and the SRF.

KEY RATING DRIVERS - VR

Morgan Stanley's VR is supported by improving operating profitability, a solid liquidity position, sound risk management, and higher-than-average capital position. The VR remains constrained by wholesale funding risks and challenging industry prospects given the impact of new regulations and continued global economic uncertainty.

The VR reflects an expectation that the earnings contribution from the global wealth management (GWM) business will continue to increase, based on higher ownership of Morgan Stanley Smith Barney (MSSB) and an improving operating margin. GWM is a more stable business versus the institutional securities segment.

The gap in operating performance between Morgan Stanley and higher-rated U.S. peers continues to narrow. To further improve consolidated performance, Morgan Stanley will likely increase the operating margin in GWM (a gradual process) and achieve additional operational efficiencies in both GWM and the institutional securities business.

Morgan Stanley has a comparatively higher reliance on capital market operations than many GTUBs reflecting its focus on the institutional securities business. However, if Morgan Stanley achieves continued margin expansion in GWM and attains full ownership of MSSB, earnings will become more balanced. Nevertheless, Morgan Stanley's future earnings will not be as diverse as large universal banks.

Morgan Stanley's capital position continues to improve and remains a relative strength. Under Basel III, Morgan Stanley's Tier I common ratio was 9.7% at end-1Q'13 (above the average of the U.S. GTUBs). This higher capital is considered necessary given a potentially more volatile and concentrated business mix versus many more diversified banks.

Liquidity remains at conservative levels. Cash and unencumbered highly liquid securities totaled $186 billion (23% of total assets). The Basel III liquidity coverage ratio is estimated by Morgan Stanley to be well in excess of 100%. This prudent level of liquidity remains instrumental in reducing Fitch's concerns regarding wholesale funding risks.

Morgan Stanley is primarily wholesale funded, which Fitch believes makes it more vulnerable to funding and rollover risks than a number of GTUB peers. To reduce wholesale funding risk, Morgan Stanley has reduced reliance on unsecured short-term to minimal levels with no reliance on 2a-7 funds or commercial paper. The firm has strong governance of secured funding, including maturity targets and limits set for each tier of collateral. Deposit funding is increasing at the subsidiary bank, but deposits remain a relatively moderate portion of the overall funding mix.

Regulatory and legal issues appear manageable. Morgan Stanley and peers face new capital markets regulations such as the pending Volcker Rule and implementation of Basel III capital and liquidity standards. Morgan Stanley is projected to meet new requirements well within allowable time frames.

RATING SENSITIVITIES - VR

The VR factors in Fitch core capital in line with current levels and the management of capital comfortably above Basel III capital minimums. The VR could be positively affected if Morgan Stanley further improves operating performance and diversifies the earnings mix, while maintaining prudent levels of liquidity and capital. Reductions in economic, financial and regulatory uncertainties would be contributing factors towards any upward momentum.

Downward pressure on the VR would result from a material loss, reduction in capital ratios and/or significant deterioration in liquidity levels. Likewise, any unforeseen outsized fines, settlements or other charges could also have adverse rating implications.

RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT & OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by Morgan Stanley and by various issuing vehicles are all notched down from Morgan Stanley's VR in accordance with Fitch's assessment of each instrument's respective nonperformance and relative Loss Severity risk profiles. Their ratings are primarily sensitive to any change in the VRs of Morgan Stanley.

RATING DRIVERS & SENSITIVITIES - HOLDING COMPANY

Morgan Stanley's IDRs are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries, as well as the use of the holding company to fund subsidiary operations.

RATING DRIVERS AND SENSITIVITIES - SUBSIDIARY & AFFILIATED COMPANIES

The IDRs of Morgan Stanley's major rated operating subsidiaries are equalized with Morgan Stanley's IDR reflecting Fitch's view that these entities are core to Morgan Stanley's business strategy and financial profile.

Morgan Stanley is a leading global bank with three business segments: institutional securities, global wealth management, and asset management. In September 2008, Morgan Stanley converted to a bank holding company (BHC) regulated by the Federal Reserve. Morgan Stanley is currently the sixth largest bank by assets in the U.S. and designated as a G-SIFI by the Financial Stability Board.

Fitch has affirmed the following ratings with a Stable Outlook:

Morgan Stanley

--Long-term IDR at 'A';

--Long-term senior debt at 'A';

--Short-term IDR at 'F1';

--Short-term debt at 'F1';

--Commercial paper at 'F1';

--Market linked securities at 'Aemr';

--VR at 'a-';

--Subordinated debt at 'BBB+';

--Preferred stock 'BB';

--Support at '1';

--Support floor at 'A'.

Morgan Stanley Bank N.A.

--Long-term IDR at 'A';

--Long-term Deposits at 'A+';

--Short-term IDR at 'F1';

--Short-term deposits at 'F1';

--Support at '1'.

Morgan Stanley Australia Finance Ltd

--Long-term IDR at 'A';

--Long-term senior debt at 'A';

--Short-term IDR at 'F1';

--Short-term debt at 'F1'.

Morgan Stanley Canada Ltd

--Short-term IDR at 'F1';

--Short-term debt at 'F1'.

--Commercial paper at 'F1'.

Morgan Stanley International Finance SA

--Short-term debt at 'F1'.

Bank Morgan Stanley AG

--Long-term IDR at 'A';

--Short-term IDR at 'F1';

--Support at '1'.

Morgan Stanley Secured Financing

--Long-term senior debt at 'A';

--Short-term debt at 'F1'.

Morgan Stanley Capital Trust III-VIII

--Preferred stock at 'BB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' dated Aug. 15, 2012;

--'Securities Firms Criteria' dated Aug. 15, 2012;

--'Assessing and Rating Bank Subordinated and Hybrid Securities' dated Dec. 5, 2012;

--'Rating FI Subsidiaries and Holding Companies' dated Aug. 10, 2012.

Applicable Criteria and Related Research

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Securities Firms Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686137

Assessing and Rating Bank Subordinated and Hybrid Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695542

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791357

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