Research: Rating Action: Moody’s affirms Morgan Stanley’s ratings (A1 senior debt); outlook remains stable

New York, February 22, 2023 — Moody’s Investors Service (Moody’s) has affirmed Morgan Stanley’s (MS, A1 senior) ratings and the ratings and assessments of subsidiaries Morgan Stanley Bank, N.A. (MSBNA, Aa3 deposits), Morgan Stanley Private Bank, N.A. (MSPBNA, Aa3 deposits), Morgan Stanley Europe SE (MSESE, Aa3 issuer), Morgan Stanley Bank AG (MSBAG, Aa3 deposits), Morgan Stanley Capital Group Inc. (MSCGI, Aa3 issuer), Morgan Stanley Capital Services LLC (MSCS, Aa3 issuer), Morgan Stanley Bank International Limited (MSBIL, Aa3 deposits), Morgan Stanley & Co. International plc (MSIP, Aa3 issuer), Morgan Stanley Finance LLC (MSFL, A1 issuer) and Morgan Stanley MUFG Securities Co., Ltd. (MSMS, A1 issuer). The outlooks remain stable.

RATINGS RATIONALE

The rating action reflects the continued benefits of MS’s improved profitability and earnings stability and its peer-leading capital ratios, offset by the firm’s increasing capital distributions to shareholders.

MS’s ratings continue to benefit from a notch of affiliate support from Mitsubishi UFJ Financial Group, Inc. (MUFG, senior A1 stable, a3 BCA at MUFG Bank, Ltd.), MS’s largest shareholder and strategic partner. Accordingly, MSBNA’s a3 adjusted baseline credit assessment (BCA) is a notch higher than its baa1 BCA. Moody’s said there is a sustained, strong and mutually-beneficial relationship between MS and MUFG, which supports the rating agency’s expectation of a moderate probability that MUFG would support MS in order to prevent MS’s failure.

Moody’s said that, as expected following MS’s acquisitions of E*TRADE Financial Holdings, LLC (closed in October 2020) and Eaton Vance (closed in March 2021), the firm’s revenue mix have shifted further away from its more volatile Institutional Securities business segment. Moody’s noted that in 2022, MS’s Wealth and Investment Management segments’ combined net revenue represented 55% of the firm’s total net revenue, compared to 51% in 2019. In addition to the increasingly diverse revenue profile, MS has widened and deepened its Wealth Management distribution network through advisor-led, self-directed and workplace channels.

Moody’s said that in 2020 and 2021, MS’s Institutional Securities segment benefited from an accommodating capital markets operating environment, elevated market liquidity and institutional client engagement. This resulted in 29% and 13% annual increases in Institutional Securities net revenues in 2020 and 2021, respectively. Moody’s said that in 2022 however, financial conditions tightened, resulting in an 18% annual decline in Institutional Securities net revenues, with significant reductions in investment banking activities.

Moody’s said that during 2022, MS’s shareholder payout ratio (measured by repurchases and dividends as a percent of net income to common shareholders) increased to 141% from 105% in 2021. Commencing in the third quarter of 2021, MS doubled its common share dividend and for the full year 2022 its dividend payments amounted to around $5 billion, representing 48% of MS’s net income to common shareholders. Moody’s said that an increasing mix of shareholder distributions in the form of dividends reduces financial flexibility because dividends are less discretionary than share repurchases, a credit negative for MS. While MS has maintained peer-leading capital ratios, Moody’s expects the firm will continue to return more capital to shareholders over the next few years. The rating agency expects this will lead to a moderate decline in MS’s capital ratios, although the firm’s capital ratios are still likely to remain above the median of its global investment bank peers.

US bank subsidiaries:

MSBNA and MSPBNA are US-based FDIC-insured indirect wholly owned subsidiaries of MS. Moody’s said it considers MSBNA’s and MSPBNA’s credit profiles to be aligned, and accordingly they each have the same ratings’ profile, derived from their a3 Adjusted BCAs.

The banks’ Aa3 deposit and issuer ratings benefit from three notches of uplift from their a3 Adjusted BCAs in Moody’s Advanced Loss Given Failure (LGF) analysis, because their deposits and senior unsecured obligations are likely to face extremely low loss-given-failure, due to the loss absorption provided by holding company obligations. MSBNA’s and MSPBNA’s long-term Aa2 counterparty risk ratings (CRR) and Aa2(cr) counterparty risk assessments (CRA) each incorporate one notch of incremental uplift for US government support. This reflects Moody’s view that MS’s systemic importance primarily derives from its high degree of interconnectedness with other global systemically important banks and its role as a significant derivatives counterparty. As such, there is a moderate likelihood that in resolution, the US government could take action to support the operational liabilities of MS’s systemically important subsidiaries (but not their debt or deposits), including MSBNA’s and MSPBNA’s, in order to limit systemic risk and contagion and facilitate an orderly unwind of such obligations.

Highly integrated and harmonized entities:

Moody’s considers the standalone credit profiles of MSESE, MSBAG, MSCGI, MSCS, MSBIL and MSMS to be highly integrated and harmonized with the rest of MS. Their management, operations and financial affairs are highly integrated with those of the group, they have extensive transactions and balances with other group companies, and they rely on other group entities to provide important treasury, risk management and other services. Moody’s believes that US regulators would likely use the group’s total loss-absorbing capacity (TLAC) to support MSESE, MSBAG, MSCGI, MSCS and MSBIL, and accordingly these entities’ ratings and assessments are aligned with those of MSBNA. MSMS’s A1 issuer rating is lower than the Aa3 issuer ratings assigned to MS’s other rated material operating entities because MSMS is a non-wholly-owned foreign investment, resulting in a less certain amount of internal loss absorption capital that would be available to it under a resolution overseen by US regulators.

Morgan Stanley & Co. International plc (MSIP):

MSIP is one of MS’s largest operating subsidiaries and its primary European broker-dealer. MSIP’s ratings reflect its stable liquidity, improved funding profile, weak and volatile earnings, and controlled risk appetite. Its ratings also reflect Moody’s expectation that there is a very high likelihood that MS would support MSIP, and in the event of a failure of the group, creditors at MSIP would benefit from the bail-in of MS’s holding company debt. The combination of a very high likelihood of support from the group and the benefit of a significantly lower loss-given-failure for MSIP creditors in the event of failure results in seven notches of uplift from MSIP’s Ba1 Standalone Assessment to its Aa3 senior unsecured debt rating.

Morgan Stanley Finance LLC (MSFL):

MSFL is a finance subsidiary and MS fully and unconditionally guarantees its securities. Its creditors are in effect pari passu with MS’s senior unsecured creditors, and accordingly its A1 senior rating is at the same level as MS’s.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

FACTORS THAT COULD LEAD TO AN UPGRADE

MS’s ratings could be upgraded should there be an upgrade of MSBNA’s BCA and an upgrade of support-provider MUFG.

MSBNA’s BCA could be upgraded should MS successfully shift its business mix further towards recurring revenue streams in Wealth Management and Investment Management, accompanied by lower earnings volatility, the absence of control or risk management failures and the maintenance of robust capital and liquidity.

Should MSBNA’s BCA be upgraded by one notch, the BCA would be at the same level as MUFG’s lead bank’s (MUFG Bank, Ltd.) BCA, at which point it would be unlikely that MS’s ratings would continue to benefit from a notch of affiliate support. Accordingly, an improvement in MSBNA’s BCA without an improvement in the creditworthiness of MUFG is less likely to result in MS’s ratings being upgraded.

FACTORS THAT COULD LEAD TO A DOWNGRADE

MS’s ratings could be downgraded should it suffer from a significant deterioration in counterparty credit exposures, loan credit quality or loan underwriting standards. The ratings could also be downgraded should there be evidence of an increase in portfolio concentrations, a deterioration in liquidity profile, a general increase in risk appetite, or if there are any indications of control or risk management failures.

MS’s ratings would likely be downgraded should support-provider MUFG be downgraded, or should there be a weakening in MS’s and MUFG’s operational and strategic relationship.

The principal methodology used in rating Morgan Stanley, E*Trade Financial Holdings, LLC, Morgan Stanley Bank International Limited, Morgan Stanley Bank, N.A., Morgan Stanley Bank AG, Morgan Stanley Finance LLC, and Morgan Stanley Private Bank, N.A. was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. The principal methodologies used in rating Morgan Stanley MUFG Securities Co., Ltd., Morgan Stanley & Co. International plc, Morgan Stanley Capital Group Inc., Morgan Stanley Capital Services LLC, and Morgan Stanley Europe SE were Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997, and Securities Industry Market Makers Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/65549. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.

LIST OF AFFECTED RATINGS

Issuer: Morgan Stanley

..Affirmations:

….LT Issuer Rating, Affirmed A1 STA

….Senior Unsecured Shelf (Local Currency), Affirmed (P)A1

….Senior Unsecured Medium-Term Note Program (Local Currency), Affirmed (P)A1

….Senior Unsecured Medium-Term Note Program (Foreign Currency), Affirmed (P)A1

….Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed A1 STA

….Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed A1 STA

….Subordinate Shelf (Local Currency), Affirmed (P)Baa1

….Subordinate Medium-Term Note Program (Local Currency), Affirmed (P)Baa1

….Subordinate Medium-Term Note Program (Foreign Currency), Affirmed (P)Baa1

….Subordinate Regular Bond/Debenture (Local Currency), Affirmed Baa1

….Pref. Shelf Non-cumulative (Local Currency), Affirmed (P)Baa3

….Pref. Stock Non-cumulative (Local Currency), Affirmed Baa3 (hyb)

….Other Short Term (Local Currency), Affirmed (P)P-1

….Commercial Paper (Local Currency), Affirmed P-1

….Backed Commercial Paper (Foreign Currency), Affirmed P-1

Outlook Actions:

….Outlook, Remains Stable

Issuer: E*Trade Financial Holdings, LLC

..Affirmations:

….Backed Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed A1 STA

Issuer: Morgan Stanley Bank AG

..Affirmations:

…. Adjusted Baseline Credit Assessment, Affirmed a3

…. Baseline Credit Assessment, Affirmed baa1

…. LT Counterparty Risk Assessment, Affirmed Aa2(cr)

…. ST Counterparty Risk Assessment, Affirmed P-1(cr)

…. ST Counterparty Risk Rating (Foreign Currency), Affirmed P-1

…. LT Counterparty Risk Rating (Foreign Currency), Affirmed Aa2

…. ST Counterparty Risk Rating (Local Currency), Affirmed P-1

…. LT Counterparty Risk Rating (Local Currency), Affirmed Aa2

…. LT Issuer Rating (Local Currency), Affirmed Aa3 STA

…. LT Bank Deposit (Local Currency), Affirmed Aa3 STA

…. ST Bank Deposit (Local Currency), Affirmed P-1

Outlook Actions:

….Outlook, Remains Stable

Issuer: Morgan Stanley Bank International Limited

..Affirmations:

…. Adjusted Baseline Credit Assessment, Affirmed a3

…. Baseline Credit Assessment, Affirmed baa1

…. LT Counterparty Risk Assessment, Affirmed Aa2(cr)

…. ST Counterparty Risk Assessment, Affirmed P-1(cr)

…. ST Counterparty Risk Rating (Foreign Currency), Affirmed P-1

…. LT Counterparty Risk Rating (Foreign Currency), Affirmed Aa2

…. ST Counterparty Risk Rating (Local Currency), Affirmed P-1

…. LT Counterparty Risk Rating (Local Currency), Affirmed Aa2

…. LT Issuer Rating (Foreign Currency), Affirmed Aa3 STA

…. LT Bank Deposit (Foreign Currency), Affirmed Aa3 STA

…. ST Bank Deposit (Foreign Currency), Affirmed P-1

Outlook Actions:

….Outlook, Remains Stable

Issuer: Morgan Stanley Bank, N.A.

..Affirmations:

…. Adjusted Baseline Credit Assessment, Affirmed a3

…. Baseline Credit Assessment, Affirmed baa1

…. LT Counterparty Risk Assessment, Affirmed Aa2(cr)

…. ST Counterparty Risk Assessment, Affirmed P-1(cr)

…. ST Counterparty Risk Rating (Local Currency), Affirmed P-1

…. LT Counterparty Risk Rating (Local Currency), Affirmed Aa2

…. ST Counterparty Risk Rating (Foreign Currency), Affirmed P-1

…. LT Counterparty Risk Rating (Foreign Currency), Affirmed Aa2

…. LT Issuer Rating, Affirmed Aa3 STA

…. ST Issuer Rating (Local Currency), Affirmed P-1

…. LT Bank Deposit (Local Currency), Affirmed Aa3 STA

…. ST Bank Deposit (Local Currency), Affirmed P-1

…. LT Deposit Note/CD Program (Local Currency), Affirmed Aa3 STA

Outlook Actions:

….Outlook, Remains Stable

Issuer: Morgan Stanley Finance LLC

..Affirmations:

….Backed LT Issuer Rating (Local Currency), Affirmed A1 STA

….Backed Senior Unsecured Medium-Term Note Program (Local Currency), Affirmed (P)A1

….Backed Senior Unsecured Shelf (Local Currency), Affirmed (P)A1

….Backed Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed A1 STA

….Backed Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed A1 STA

Outlook Actions:

….Outlook, Remains Stable

Issuer: Morgan Stanley Private Bank, N.A.

..Affirmations:

…. Adjusted Baseline Credit Assessment, Affirmed a3

…. Baseline Credit Assessment, Affirmed baa1

…. LT Counterparty Risk Assessment, Affirmed Aa2(cr)

…. ST Counterparty Risk Assessment, Affirmed P-1(cr)

…. LT Counterparty Risk Rating (Local Currency), Affirmed Aa2

…. ST Counterparty Risk Rating (Local Currency), Affirmed P-1

…. ST Counterparty Risk Rating (Foreign Currency), Affirmed P-1

…. LT Counterparty Risk Rating (Foreign Currency), Affirmed Aa2

…. LT Issuer Rating (Local Currency), Affirmed Aa3 STA

…. ST Issuer Rating (Local Currency), Affirmed P-1

…. LT Bank Deposit (Local Currency), Affirmed Aa3 STA

…. ST Bank Deposit (Local Currency), Affirmed P-1

Outlook Actions:

….Outlook, Remains Stable

Issuer: Morgan Stanley & Co. International plc

..Affirmations:

…. LT Counterparty Risk Assessment, Affirmed Aa2(cr)

…. ST Counterparty Risk Assessment, Affirmed P-1(cr)

…. LT Issuer Rating (Foreign Currency), Affirmed Aa3

…. ST Issuer Rating (Foreign Currency), Affirmed P-1

….Senior Secured Medium-Term Note Program (Foreign Currency), Affirmed (P)Aa3

….Senior Unsecured Medium-Term Note Program (Foreign Currency), Affirmed (P)Aa3

….Backed Senior Unsecured Medium-Term Note Program (Foreign Currency), Affirmed (P)Aa3

….Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Aa3

….Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed Aa3

….Other Short Term (Foreign Currency), Affirmed (P)P-1

Outlook Actions:

….Outlook, Remains Stable

Issuer: Morgan Stanley Capital Group Inc.

..Affirmations:

…. LT Counterparty Risk Assessment, Affirmed Aa2(cr)

…. ST Counterparty Risk Assessment, Affirmed P-1(cr)

…. LT Issuer Rating (Local Currency), Affirmed Aa3

…. ST Issuer Rating (Local Currency), Affirmed P-1

Outlook Actions:

….Outlook, Remains Stable

Issuer: Morgan Stanley Capital Services LLC

..Affirmations:

…. LT Counterparty Risk Assessment, Affirmed Aa2(cr)

…. ST Counterparty Risk Assessment, Affirmed P-1(cr)

…. LT Issuer Rating (Local Currency), Affirmed Aa3

…. ST Issuer Rating (Local Currency), Affirmed P-1

Outlook Actions:

….Outlook, Remains Stable

Issuer: Morgan Stanley Europe SE

..Affirmations:

…. LT Counterparty Risk Assessment, Affirmed Aa2(cr)

…. ST Counterparty Risk Assessment, Affirmed P-1(cr)

…. LT Issuer Rating (Local Currency), Affirmed Aa3

…. ST Issuer Rating (Local Currency), Affirmed P-1

Outlook Actions:

….Outlook, Remains Stable

Issuer: Morgan Stanley MUFG Securities Co., Ltd.

..Affirmations:

…. LT Issuer Rating (Foreign Currency), Affirmed A1 STA

…. LT Issuer Rating (Local Currency), Affirmed A1 STA

….Backed Commercial Paper (Local Currency), Affirmed P-1

Outlook Actions:

….Outlook, Remains Stable

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Fadi Abdel Massih
Vice President – Senior Analyst
Financial Institutions Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Donald Robertson
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653