UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
x☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016March 31, 2017
OR
¨☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number1-11758
(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 x☒ No ¨☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer | Accelerated Filer | |
Non-Accelerated Filer | Smaller reporting company | |
(Do not check if a 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 Rule12b-2 of the Exchange Act). Yes ¨☐ No x☒
As of October 31, 2016,May 1, 2017, there were 1,872,821,2891,849,782,135 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.
QUARTERLY REPORT ON FORM10-Q
For the quarter ended September 30, 2016March 31, 2017
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| Table of Contents | Part | Item | Page | |||||||||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 2 | 1 | ||||||||||
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Consolidated Statements of Changes in Total Equity (Unaudited) | 44 | |||||||||||
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12. Variable Interest Entities and Securitization Activities | 79 | |||||||||||
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| II | 91 | |||||||||||
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| 6 | 92 | |||||||||||
| S-1 | ||||||||||||
| E-1 | ||||||||||||
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Available Information
We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including us) file electronically with the SEC. Our electronic SEC filings are available to the public at the SEC’s internet site,www.sec.gov.
Our internet site iswww.morganstanley.com. You can access our Investor Relations webpage atwww.morganstanley.com/about-us-ir. We make available free of charge, on or through our Investor Relations webpage, our proxy statements, Annual Reports on Form10-K, Quarterly Reports onForm 10-Q, Current Reports on Form8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “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 atwww.morganstanley.com/about-us-governance. Our Corporate Governance webpage includes:
Amended and Restated Certificate of Incorporation;
Amended and Restated Bylaws;
Charters for itsour Audit Committee, Compensation, Management Development and Succession Committee, Nominating and Governance Committee, Operations and Technology Committee, and Risk Committee;
Corporate Governance Policies;
Policy Regarding Communication with the Board of Directors;
Policy Regarding Director Candidates Recommended by Shareholders;
Policy Regarding Corporate Political Activities;
Policy Regarding Shareholder Rights Plan;
Equity Ownership Commitment;
Code of Ethics and Business Conduct;
Code of Conduct; and
Integrity Hotline Information.Information; and
Environmental and Social Policies.
Morgan Stanley’sOur 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.
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Consolidated Statements of Income
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| in millions, except per share data | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenues | ||||||||||||||||
Investment banking | $ | 1,225 | $ | 1,313 | $ | 3,556 | $ | 4,284 | ||||||||
Trading | 2,609 | 2,026 | 7,420 | 8,649 | ||||||||||||
Investments | 87 | (119 | ) | 179 | 408 | |||||||||||
Commissions and fees | 991 | 1,115 | 3,066 | 3,459 | ||||||||||||
Asset management, distribution and administration fees | 2,686 | 2,732 | 7,943 | 8,155 | ||||||||||||
Other | 308 | (62 | ) | 631 | 406 | |||||||||||
Total non-interest revenues | 7,906 | 7,005 | 22,795 | 25,361 | ||||||||||||
Interest income | 1,734 | 1,451 | 5,148 | 4,321 | ||||||||||||
Interest expense | 731 | 689 | 2,333 | 2,265 | ||||||||||||
Net interest | 1,003 | 762 | 2,815 | 2,056 | ||||||||||||
Net revenues | 8,909 | 7,767 | 25,610 | 27,417 | ||||||||||||
Non-interest expenses | ||||||||||||||||
Compensation and benefits | 4,097 | 3,437 | 11,795 | 12,366 | ||||||||||||
Occupancy and equipment | 339 | 341 | 997 | 1,034 | ||||||||||||
Brokerage, clearing and exchange fees | 491 | 485 | 1,440 | 1,435 | ||||||||||||
Information processing and communications | 456 | 447 | 1,327 | 1,300 | ||||||||||||
Marketing and business development | 130 | 158 | 418 | 487 | ||||||||||||
Professional services | 489 | 576 | 1,550 | 1,660 | ||||||||||||
Other | 526 | 849 | 1,481 | 2,079 | ||||||||||||
Total non-interest expenses | 6,528 | 6,293 | 19,008 | 20,361 | ||||||||||||
Income from continuing operations before income taxes | 2,381 | 1,474 | 6,602 | 7,056 | ||||||||||||
Provision for income taxes | 749 | 423 | 2,160 | 1,704 | ||||||||||||
Income from continuing operations | 1,632 | 1,051 | 4,442 | 5,352 | ||||||||||||
Income (loss) from discontinued operations, net of income taxes | 8 | (2 | ) | 1 | (9 | ) | ||||||||||
Net income | $ | 1,640 | $ | 1,049 | $ | 4,443 | $ | 5,343 | ||||||||
Net income applicable to noncontrolling interests | 43 | 31 | 130 | 124 | ||||||||||||
Net income applicable to Morgan Stanley | $ | 1,597 | $ | 1,018 | $ | 4,313 | $ | 5,219 | ||||||||
Preferred stock dividends and other | 79 | 79 | 314 | 301 | ||||||||||||
Earnings applicable to Morgan Stanley common shareholders | $ | 1,518 | $ | 939 | $ | 3,999 | $ | 4,918 | ||||||||
Earnings per basic common share | ||||||||||||||||
Income from continuing operations | $ | 0.82 | $ | 0.49 | $ | 2.15 | $ | 2.57 | ||||||||
Income (loss) from discontinued operations | 0.01 | — | — | — | ||||||||||||
Earnings per basic common share | $ | 0.83 | $ | 0.49 | $ | 2.15 | $ | 2.57 | ||||||||
Earnings per diluted common share | ||||||||||||||||
Income from continuing operations | $ | 0.80 | $ | 0.48 | $ | 2.11 | $ | 2.52 | ||||||||
Income (loss) from discontinued operations | 0.01 | — | — | (0.01 | ) | |||||||||||
Earnings per diluted common share | $ | 0.81 | $ | 0.48 | $ | 2.11 | $ | 2.51 | ||||||||
Dividends declared per common share | $ | 0.20 | $ | 0.15 | $ | 0.50 | $ | 0.40 | ||||||||
Average common shares outstanding | ||||||||||||||||
Basic | 1,838 | 1,904 | 1,863 | 1,916 | ||||||||||||
Diluted | 1,879 | 1,949 | 1,898 | 1,958 | ||||||||||||
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Net income | $ | 1,640 | $ | 1,049 | $ | 4,443 | $ | 5,343 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation adjustments1 | $ | 43 | $ | (61 | ) | $ | 360 | $ | (249 | ) | ||||||
Change in net unrealized gains (losses) on available for sale securities2 | (99 | ) | 100 | 439 | 72 | |||||||||||
Pension, postretirement and other | (1 | ) | 4 | (5 | ) | 3 | ||||||||||
Change in net debt valuation adjustments3 | (93 | ) | — | 255 | — | |||||||||||
Total other comprehensive income (loss) | $ | (150 | ) | $ | 43 | $ | 1,049 | $ | (174 | ) | ||||||
Comprehensive income | $ | 1,490 | $ | 1,092 | $ | 5,492 | $ | 5,169 | ||||||||
Net income applicable to noncontrolling interests | 43 | 31 | 130 | 124 | ||||||||||||
Other comprehensive income (loss) applicable to noncontrolling interests | 15 | 15 | 151 | (3 | ) | |||||||||||
Comprehensive income applicable to Morgan Stanley | $ | 1,432 | $ | 1,046 | $ | 5,211 | $ | 5,048 | ||||||||
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(Unaudited)
| $ in millions, except share data | At September 30, | At December 31, | ||||||
Assets | ||||||||
Cash and due from banks | $ | 26,899 | $ | 19,827 | ||||
Interest bearing deposits with banks | 15,653 | 34,256 | ||||||
Trading assets, at fair value ($156,351 and $127,627 were pledged to various parties) | 273,151 | 239,505 | ||||||
Investment securities (includes$65,732 and $66,759 at fair value) | 78,956 | 71,983 | ||||||
Securities purchased under agreements to resell (includes$554 and $806 at fair value) | 90,579 | 87,657 | ||||||
Securities borrowed | 126,280 | 142,416 | ||||||
Customer and other receivables | 51,411 | 45,407 | ||||||
Loans:
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Held for investment (net of allowance of$287 and $225) | 80,400 | 72,559 | ||||||
Held for sale | 12,108 | 13,200 | ||||||
Goodwill | 6,584 | 6,584 | ||||||
Intangible assets (net of accumulated amortization of$2,354 and $2,130) | 2,747 | 2,984 | ||||||
Other assets | 49,123 | 51,087 | ||||||
Total assets | $ | 813,891 | $ | 787,465 | ||||
Liabilities | ||||||||
Deposits (includes$60 and $125 at fair value) | $ | 151,843 | $ | 156,034 | ||||
Short-term borrowings (includes$408 and $1,648 at fair value) | 914 | 2,173 | ||||||
Trading liabilities, at fair value | 136,299 | 128,455 | ||||||
Securities sold under agreements to repurchase (includes$745 and $683 at fair value) | 46,936 | 36,692 | ||||||
Securities loaned | 16,515 | 19,358 | ||||||
Other secured financings (includes$3,746 and $2,854 at fair value) | 9,812 | 9,464 | ||||||
Customer and other payables | 194,007 | 186,626 | ||||||
Other liabilities and accrued expenses | 15,176 | 18,711 | ||||||
Long-term borrowings (includes$38,747 and $33,045 at fair value) | 163,927 | 153,768 | ||||||
Total liabilities | 735,429 | 711,281 | ||||||
Commitments and contingent liabilities (see Note 11) | ||||||||
Equity | ||||||||
Morgan Stanley shareholders’ equity: | ||||||||
Preferred stock (see Note 14) | 7,520 | 7,520 | ||||||
Common stock, $0.01 par value: | ||||||||
Shares authorized:3,500,000,000; Shares issued:2,038,893,979; Shares outstanding:1,876,466,446 and 1,920,024,027 | 20 | 20 | ||||||
Additional paid-in capital | 22,995 | 24,153 | ||||||
Retained earnings | 52,545 | 49,204 | ||||||
Employee stock trusts | 2,839 | 2,409 | ||||||
Accumulated other comprehensive income (loss) | (1,070 | ) | (1,656 | ) | ||||
Common stock held in treasury, at cost, $0.01 par value (162,427,533 and 118,869,952 shares) | (4,861 | ) | (4,059 | ) | ||||
Common stock issued to employee stock trusts | (2,839 | ) | (2,409 | ) | ||||
Total Morgan Stanley shareholders’ equity | 77,149 | 75,182 | ||||||
Noncontrolling interests | 1,313 | 1,002 | ||||||
Total equity | 78,462 | 76,184 | ||||||
Total liabilities and equity | $ | 813,891 | $ | 787,465 | ||||
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Nine Months Ended September 30, 2016 and 2015
(Unaudited)
| $ in millions | Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Employee Stock Trusts | Accumulated Other Comprehensive Income (Loss) | Common Stock Held in Treasury at Cost | Common Stock Issued to Employee Stock Trusts | Non- controlling Interests | Total Equity | ||||||||||||||||||||||||||||||
Balance at December 31, 2015 | $ | 7,520 | $ | 20 | $ | 24,153 | $ | 49,204 | $ | 2,409 | $ | (1,656 | ) | $ | (4,059 | ) | $ | (2,409 | ) | $ | 1,002 | $ | 76,184 | |||||||||||||||||
Cumulative adjustment for accounting change related to DVA1 | — | — | — | 312 | — | (312 | ) | — | — | — | — | |||||||||||||||||||||||||||||
Net adjustment for accounting change related to consolidation2 | — | — | — | — | — | — | — | — | 106 | 106 | ||||||||||||||||||||||||||||||
Net income applicable to Morgan Stanley | — | — | — | 4,313 | — | — | — | — | — | 4,313 | ||||||||||||||||||||||||||||||
Net income applicable to noncontrolling interests | — | — | — | — | — | — | — | — | 130 | 130 | ||||||||||||||||||||||||||||||
Dividends | — | — | — | (1,284 | ) | — | — | — | — | — | (1,284 | ) | ||||||||||||||||||||||||||||
Shares issued under employee plans and related tax effects | — | — | (1,168 | ) | — | 430 | — | 2,106 | (430 | ) | — | 938 | ||||||||||||||||||||||||||||
Repurchases of common stock and employee tax withholdings | — | — | — | — | — | — | (2,908 | ) | — | — | (2,908 | ) | ||||||||||||||||||||||||||||
Net change in Accumulated other comprehensive income (loss) | — | — | — | — | — | 898 | — | — | 151 | 1,049 | ||||||||||||||||||||||||||||||
Other net increase (decreases) | — | — | 10 | — | — | — | — | — | (76 | ) | (66 | ) | ||||||||||||||||||||||||||||
Balance at September 30, 2016 | $ | 7,520 | $ | 20 | $ | 22,995 | $ | 52,545 | $ | 2,839 | $ | (1,070 | ) | $ | (4,861 | ) | $ | (2,839 | ) | $ | 1,313 | $ | 78,462 | |||||||||||||||||
Balance at December 31, 2014 | $ | 6,020 | $ | 20 | $ | 24,249 | $ | 44,625 | $ | 2,127 | $ | (1,248 | ) | $ | (2,766 | ) | $ | (2,127 | ) | $ | 1,204 | $ | 72,104 | |||||||||||||||||
Net income applicable to Morgan Stanley | — | — | — | 5,219 | — | — | — | — | — | 5,219 | ||||||||||||||||||||||||||||||
Net income applicable to noncontrolling interests | — | — | — | — | — | — | — | — | 124 | 124 | ||||||||||||||||||||||||||||||
Dividends | — | — | — | (1,098 | ) | — | — | — | — | — | (1,098 | ) | ||||||||||||||||||||||||||||
Shares issued under employee plans and related tax effects | — | — | (356 | ) | — | 272 | — | 1,445 | (272 | ) | — | 1,089 | ||||||||||||||||||||||||||||
Repurchases of common stock and employee tax withholdings | — | — | — | — | — | — | (2,135 | ) | — | — | (2,135 | ) | ||||||||||||||||||||||||||||
Net change in Accumulated other comprehensive income (loss) | — | — | — | — | — | (171 | ) | — | — | (3 | ) | (174 | ) | |||||||||||||||||||||||||||
Issuance of preferred stock | 1,500 | — | (7 | ) | — | — | — | — | — | — | 1,493 | |||||||||||||||||||||||||||||
Deconsolidation of certain legal entities associated with a real estate fund | — | — | — | — | — | — | — | — | (191 | ) | (191 | ) | ||||||||||||||||||||||||||||
Other net decreases | — | — | (10 | ) | — | — | — | — | — | (1 | ) | (11 | ) | |||||||||||||||||||||||||||
Balance at September 30, 2015 | $ | 7,520 | $ | 20 | $ | 23,876 | $ | 48,746 | $ | 2,399 | $ | (1,419 | ) | $ | (3,456 | ) | $ | (2,399 | ) | $ | 1,133 | $ | 76,420 | |||||||||||||||||
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(Unaudited)
Nine Months Ended September 30, | ||||||||
| $ in millions | 2016 | 2015 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 4,443 | $ | 5,343 | ||||
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | ||||||||
(Income) loss from equity method investments | 39 | (118 | ) | |||||
Compensation payable in common stock and options | 794 | 836 | ||||||
Depreciation and amortization | 1,357 | 1,023 | ||||||
Net gain on sale of available for sale securities | (127 | ) | (74 | ) | ||||
Impairment charges | 102 | 91 | ||||||
Provision for credit losses on lending activities | 138 | 47 | ||||||
Other operating adjustments | (36 | ) | 264 | |||||
Changes in assets and liabilities: | ||||||||
Trading assets, net of Trading liabilities | (20,509 | ) | 39,775 | |||||
Securities borrowed | 16,136 | (11,537 | ) | |||||
Securities loaned | (2,843 | ) | (4,575 | ) | ||||
Customer and other receivables and other assets | (2,800 | ) | 5,842 | |||||
Customer and other payables and other liabilities | 3,798 | 10,351 | ||||||
Securities purchased under agreements to resell | (2,922 | ) | (43,918 | ) | ||||
Securities sold under agreements to repurchase | 10,244 | (11,313 | ) | |||||
Net cash provided by (used for) operating activities | 7,814 | (7,963 | ) | |||||
Cash flows from investing activities | ||||||||
Proceeds from (payments for): | ||||||||
Other assets—Premises, equipment and software, net | (941 | ) | (964 | ) | ||||
Changes in loans, net | (7,709 | ) | (11,313 | ) | ||||
Investment securities: | ||||||||
Purchases | (41,230 | ) | (32,133 | ) | ||||
Proceeds from sales | 28,960 | 32,788 | ||||||
Proceeds from paydowns and maturities | 5,956 | 4,285 | ||||||
Other investing activities | (24 | ) | (61 | ) | ||||
Net cash used for investing activities | (14,988 | ) | (7,398 | ) | ||||
Cash flows from financing activities | ||||||||
Net proceeds from (payments for): | ||||||||
Short-term borrowings | (1,233 | ) | (279 | ) | ||||
Noncontrolling interests | (47 | ) | (70 | ) | ||||
Other secured financings | (278 | ) | (1,677 | ) | ||||
Deposits | (4,191 | ) | 13,682 | |||||
Proceeds from: | ||||||||
Excess tax benefits associated with stock-based awards | 51 | 180 | ||||||
Derivatives financing activities | — | 392 | ||||||
Issuance of preferred stock, net of issuance costs | — | 1,493 | ||||||
Issuance of long-term borrowings | 27,528 | 30,159 | ||||||
Payments for: | ||||||||
Long-term borrowings | (22,902 | ) | (17,615 | ) | ||||
Derivatives financing activities | (120 | ) | (372 | ) | ||||
Repurchases of common stock and employee tax withholdings | (2,908 | ) | (2,135 | ) | ||||
Cash dividends | (1,311 | ) | (1,096 | ) | ||||
Net cash provided by (used for) financing activities | (5,411 | ) | 22,662 | |||||
Effect of exchange rate changes on cash and cash equivalents | 1,054 | (767 | ) | |||||
Net increase (decrease) in cash and cash equivalents | (11,531 | ) | 6,534 | |||||
Cash and cash equivalents, at beginning of period | 54,083 | 46,984 | ||||||
Cash and cash equivalents, at end of period | $ | 42,552 | $ | 53,518 | ||||
Cash and cash equivalents include: | ||||||||
Cash and due from banks | $ | 26,899 | $ | 19,244 | ||||
Interest bearing deposits with banks | 15,653 | 34,274 | ||||||
Cash and cash equivalents, at end of period | $ | 42,552 | $ | 53,518 | ||||
Supplemental Disclosure of Cash Flow Information
Cash payments for interest were$1,784 million and $1,456 million.
Cash payments for income taxes, net of refunds, were$504 million and $541 million.
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1. Introduction and Basis of Presentation
The Firm
Morgan Stanley, a financial holding company, 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” or the “Firm” mean Morgan Stanley (the “Parent”) together with its consolidated subsidiaries.
For a description of the clients and principal products and services of each of the Firm’s business segments, see Note 1 to the consolidated financial statements in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”).
Basis of Financial Information
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require the Firm to make estimates and assumptions regarding the valuations of certain financial instruments, the valuation of goodwill and intangible assets, compensation, deferred tax assets, the outcome of legal and tax matters, allowance for credit losses and other matters that affect its consolidated financial statements and related disclosures. The Firm believes that the estimates utilized in the preparation of its consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Intercompany balances and transactions have been eliminated.
The accompanying consolidated financial statements should be read in conjunction with the Firm’s consolidated financial statements and notes thereto included in the 2015 Form 10-K. Certain footnote disclosures included in the 2015 Form 10-K have been condensed or omitted from the consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The consolidated financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of opera-
tions for interim periods are not necessarily indicative of results for the entire year.
Consolidation
The consolidated financial statements include the accounts of the Firm, its wholly owned subsidiaries and other entities in which the Firm has a controlling financial interest, including certain variable interest entities (“VIE”) (see Note 12). For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income attributable to noncontrolling interests for such subsidiaries is presented as Net income (loss) applicable to noncontrolling interests in the consolidated statements of income. The portion of shareholders’ equity of such subsidiaries that is attributable to noncontrolling interests for such subsidiaries is presented as noncontrolling interests, a component of total equity, in the consolidated balance sheets.
For a discussion of the Firm’s VIEs and its significant regulated U.S. and international subsidiaries, see Notes 1 and 2 to the consolidated financial statements in the 2015 Form 10-K. See also Note 2 herein.
Consolidated Statements of Cash Flows Presentation
The adoption of the accounting update,Amendments to the Consolidation Analysis (see Note 2) on January 1, 2016, resulted in a net noncash increase in total assets of $126 million. In the prior year period, the Firm deconsolidated approximately $191 million in net assets previously attributable to noncontrolling interests that were related to a real estate fund sponsored by the Firm. The deconsolidation resulted in a non-cash reduction of assets of $169 million.
Global Oil Merchanting Business
As a result of entering into a definitive agreement to sell the global oil merchanting unit of the commodities division to Castleton Commodities International LLC, on May 11, 2015, the Firm recognized an impairment charge of $10 million in the prior year quarter and $69 million in the prior year period in Other revenues to reduce the carrying amount of the unit to its estimated fair value less costs to sell. The Firm closed the transaction on November 1, 2015. The transaction did not meet the criteria for discontinued operations and did not have a material impact on the Firm’s financial results.
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2. Significant Accounting Policies
For a detailed discussion about the Firm’s significant accounting policies, see Note 2 to the consolidated financial statements in the 2015 Form 10-K.
During the current year period, other than the following, there were no significant updates made to the Firm’s significant accounting policies.
Accounting Standards Adopted
The Firm adopted the following accounting updates as of January 1, 2016.
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Other provisions of this rule may not be early adopted and will be effective January 1, 2018, and are not expected to have a material impact on the consolidated financial statements.
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Goodwill
The Firm completed its annual goodwill impairment testing at July 1, 2016. The Firm’s impairment testing did not indicate any goodwill impairment, as each of the Firm’s reporting units with goodwill had a fair value that was substantially in excess of its carrying value.
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Fair Value Measurement
Assets and Liabilities Measured at Fair Value on a Recurring Basis
| $ in millions | Level 1 | Level 2 | Level 3 | Counterparty and Cash Collateral Netting | At September 30, 2016 | |||||||||||||||
Assets at Fair Value | ||||||||||||||||||||
Trading assets: | ||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||
U.S. Treasury securities | $ | 23,199 | $ | — | $ | — | $ | — | $ | 23,199 | ||||||||||
U.S. agency securities | 2,020 | 25,398 | 8 | — | 27,426 | |||||||||||||||
Total U.S. government and agency securities | 25,219 | 25,398 | 8 | — | 50,625 | |||||||||||||||
Other sovereign government obligations | 21,437 | 6,975 | 12 | — | 28,424 | |||||||||||||||
Corporate and other debt: | ||||||||||||||||||||
State and municipal securities | — | 2,247 | 4 | — | 2,251 | |||||||||||||||
Residential mortgage-backed securities | — | 811 | 188 | — | 999 | |||||||||||||||
Commercial mortgage-backed securities | — | 1,427 | 64 | — | 1,491 | |||||||||||||||
Asset-backed securities | — | 115 | 12 | — | 127 | |||||||||||||||
Corporate bonds | — | 12,896 | 199 | — | 13,095 | |||||||||||||||
Collateralized debt and loan obligations | — | 403 | 85 | — | 488 | |||||||||||||||
Loans and lending commitments1 | — | 5,057 | 4,155 | — | 9,212 | |||||||||||||||
Other debt | — | 892 | 246 | — | 1,138 | |||||||||||||||
Total corporate and other debt | — | 23,848 | 4,953 | — | 28,801 | |||||||||||||||
Corporate equities2 | 113,805 | 338 | 336 | — | 114,479 | |||||||||||||||
Securities received as collateral | 12,535 | 4 | 1 | — | 12,540 | |||||||||||||||
Derivative and other contracts: | ||||||||||||||||||||
Interest rate contracts | 648 | 417,114 | 1,116 | — | 418,878 | |||||||||||||||
Credit contracts | — | 14,208 | 516 | — | 14,724 | |||||||||||||||
Foreign exchange contracts | 124 | 51,072 | 6 | — | 51,202 | |||||||||||||||
Equity contracts | 1,363 | 40,194 | 1,864 | — | 43,421 | |||||||||||||||
Commodity contracts | 2,225 | 7,279 | 4,098 | — | 13,602 | |||||||||||||||
Other | — | 25 | — | — | 25 | |||||||||||||||
Netting3 | (3,758 | ) | (444,890 | ) | (2,172 | ) | (57,947 | ) | (508,767 | ) | ||||||||||
Total derivative and other contracts | 602 | 85,002 | 5,428 | (57,947 | ) | 33,085 | ||||||||||||||
Investments4: | ||||||||||||||||||||
Principal investments | 33 | 19 | 726 | — | 778 | |||||||||||||||
Other | 609 | 276 | 210 | — | 1,095 | |||||||||||||||
Total investments | 642 | 295 | 936 | — | 1,873 | |||||||||||||||
Physical commodities | — | 179 | — | — | 179 | |||||||||||||||
Total trading assets4 | 174,240 | 142,039 | 11,674 | (57,947 | ) | 270,006 | ||||||||||||||
Investment securities—AFS securities | 28,997 | 36,735 | — | — | 65,732 | |||||||||||||||
Securities purchased under agreements to resell | — | 554 | — | — | 554 | |||||||||||||||
Intangible assets | — | 3 | — | — | 3 | |||||||||||||||
Total assets measured at fair value | $ | 203,237 | $ | 179,331 | $ | 11,674 | $ | (57,947 | ) | $ | 336,295 | |||||||||
Liabilities at Fair Value | ||||||||||||||||||||
Deposits | $ | — | $ | 29 | $ | 31 | $ | — | $ | 60 | ||||||||||
Short-term borrowings | — | 406 | 2 | — | 408 | |||||||||||||||
Trading liabilities: | ||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||
U.S. Treasury securities | 9,500 | — | — | — | 9,500 | |||||||||||||||
U.S. agency securities | 786 | 96 | — | — | 882 | |||||||||||||||
Total U.S. government and agency securities | 10,286 | 96 | — | — | 10,382 | |||||||||||||||
Other sovereign government obligations | 18,685 | 2,110 | — | — | 20,795 | |||||||||||||||
Corporate and other debt: | ||||||||||||||||||||
State and municipal securities | — | 230 | — | — | 230 | |||||||||||||||
Asset-backed securities | — | 477 | — | — | 477 | |||||||||||||||
Corporate bonds | — | 5,873 | 13 | — | 5,886 | |||||||||||||||
Other debt | — | 17 | 3 | — | 20 | |||||||||||||||
Total corporate and other debt | — | 6,597 | 16 | — | 6,613 | |||||||||||||||
Corporate equities2 | 44,980 | 50 | 19 | — | 45,049 | |||||||||||||||
Obligation to return securities received as collateral | 20,929 | 5 | 1 | — | 20,935 | |||||||||||||||
Derivative and other contracts: | ||||||||||||||||||||
Interest rate contracts | 690 | 396,224 | 1,075 | — | 397,989 | |||||||||||||||
Credit contracts | — | 14,765 | 1,399 | — | 16,164 | |||||||||||||||
Foreign exchange contracts | 22 | 56,108 | 113 | — | 56,243 | |||||||||||||||
Equity contracts | 1,305 | 43,623 | 1,724 | — | 46,652 | |||||||||||||||
Commodity contracts | 2,002 | 5,860 | 2,804 | — | 10,666 | |||||||||||||||
Other | — | 76 | — | — | 76 | |||||||||||||||
Netting3 | (3,758 | ) | (444,890 | ) | (2,172 | ) | (44,449 | ) | (495,269 | ) | ||||||||||
Total derivative and other contracts | 261 | 71,766 | 4,943 | (44,449 | ) | 32,521 | ||||||||||||||
Physical commodities | — | 4 | — | — | 4 | |||||||||||||||
Total trading liabilities | 95,141 | 80,628 | 4,979 | (44,449 | ) | 136,299 | ||||||||||||||
Securities sold under agreements to repurchase | — | 596 | 149 | — | 745 | |||||||||||||||
Other secured financings | — | 3,296 | 450 | — | 3,746 | |||||||||||||||
Long-term borrowings | 43 | 36,662 | 2,042 | — | 38,747 | |||||||||||||||
Total liabilities measured at fair value | $ | 95,184 | $ | 121,617 | $ | 7,653 | $ | (44,449 | ) | $ | 180,005 | |||||||||
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| $ in millions | Level 1 | Level 2 | Level 3 | Counterparty and Cash Collateral Netting | At December 31, 2015 | |||||||||||||||
Assets at Fair Value | ||||||||||||||||||||
Trading assets: | ||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||
U.S. Treasury securities | $ | 17,658 | $ | — | $ | — | $ | — | $ | 17,658 | ||||||||||
U.S. agency securities | 797 | 17,886 | — | — | 18,683 | |||||||||||||||
Total U.S. government and agency securities | 18,455 | 17,886 | — | — | 36,341 | |||||||||||||||
Other sovereign government obligations | 13,559 | 7,400 | 4 | — | 20,963 | |||||||||||||||
Corporate and other debt: | ||||||||||||||||||||
State and municipal securities | — | 1,651 | 19 | — | 1,670 | |||||||||||||||
Residential mortgage-backed securities | — | 1,456 | 341 | — | 1,797 | |||||||||||||||
Commercial mortgage-backed securities | — | 1,520 | 72 | — | 1,592 | |||||||||||||||
Asset-backed securities | — | 494 | 25 | — | 519 | |||||||||||||||
Corporate bonds | — | 9,959 | 267 | — | 10,226 | |||||||||||||||
Collateralized debt and loan obligations | — | 284 | 430 | — | 714 | |||||||||||||||
Loans and lending commitments1 | — | 4,682 | 5,936 | — | 10,618 | |||||||||||||||
Other debt | — | 2,263 | 448 | — | 2,711 | |||||||||||||||
Total corporate and other debt | — | 22,309 | 7,538 | — | 29,847 | |||||||||||||||
Corporate equities2 | 106,296 | 379 | 433 | — | 107,108 | |||||||||||||||
Securities received as collateral | 11,221 | 3 | 1 | — | 11,225 | |||||||||||||||
Derivative and other contracts: | ||||||||||||||||||||
Interest rate contracts | 406 | 323,586 | 2,052 | — | 326,044 | |||||||||||||||
Credit contracts | — | 22,258 | 661 | — | 22,919 | |||||||||||||||
Foreign exchange contracts | 55 | 64,608 | 292 | — | 64,955 | |||||||||||||||
Equity contracts | 653 | 38,552 | 1,084 | — | 40,289 | |||||||||||||||
Commodity contracts | 3,140 | 10,654 | 3,358 | — | 17,152 | |||||||||||||||
Other | — | 219 | — | — | 219 | |||||||||||||||
Netting3 | (3,840 | ) | (380,443 | ) | (3,120 | ) | (55,562 | ) | (442,965 | ) | ||||||||||
Total derivative and other contracts | 414 | 79,434 | 4,327 | (55,562 | ) | 28,613 | ||||||||||||||
Investments4: | ||||||||||||||||||||
Principal investments | 20 | 44 | 486 | — | 550 | |||||||||||||||
Other | 163 | 310 | 221 | — | 694 | |||||||||||||||
Total investments | 183 | 354 | 707 | — | 1,244 | |||||||||||||||
Physical commodities | — | 321 | — | — | 321 | |||||||||||||||
Total trading assets4 | 150,128 | 128,086 | 13,010 | (55,562 | ) | 235,662 | ||||||||||||||
Investment securities—AFS securities | 34,351 | 32,408 | — | — | 66,759 | |||||||||||||||
Securities purchased under agreements to resell | — | 806 | — | — | 806 | |||||||||||||||
Intangible assets | — | — | 5 | — | 5 | |||||||||||||||
Total assets measured at fair value | $ | 184,479 | $ | 161,300 | $ | 13,015 | $ | (55,562 | ) | $ | 303,232 | |||||||||
Liabilities at Fair Value | ||||||||||||||||||||
Deposits | $ | — | $ | 106 | $ | 19 | $ | — | $ | 125 | ||||||||||
Short-term borrowings | — | 1,647 | 1 | — | 1,648 | |||||||||||||||
Trading liabilities: | ||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||
U.S. Treasury securities | 12,932 | — | — | — | 12,932 | |||||||||||||||
U.S. agency securities | 854 | 127 | — | — | 981 | |||||||||||||||
Total U.S. government and agency securities | 13,786 | 127 | — | — | 13,913 | |||||||||||||||
Other sovereign government obligations | 10,970 | 2,558 | — | — | 13,528 | |||||||||||||||
Corporate and other debt: | ||||||||||||||||||||
Commercial mortgage-backed securities | — | 2 | — | — | 2 | |||||||||||||||
Corporate bonds | — | 5,035 | — | — | 5,035 | |||||||||||||||
Lending commitments | — | 3 | — | — | 3 | |||||||||||||||
Other debt | — | 5 | 4 | — | 9 | |||||||||||||||
Total corporate and other debt | — | 5,045 | 4 | — | 5,049 | |||||||||||||||
Corporate equities2 | 47,123 | 35 | 17 | — | 47,175 | |||||||||||||||
Obligation to return securities received as collateral | 19,312 | 3 | 1 | — | 19,316 | |||||||||||||||
Derivative and other contracts: | ||||||||||||||||||||
Interest rate contracts | 466 | 305,151 | 1,792 | — | 307,409 | |||||||||||||||
Credit contracts | — | 22,160 | 1,505 | — | 23,665 | |||||||||||||||
Foreign exchange contracts | 22 | 65,177 | 151 | — | 65,350 | |||||||||||||||
Equity contracts | 570 | 42,447 | 3,115 | — | 46,132 | |||||||||||||||
Commodity contracts | 3,012 | 9,431 | 2,308 | — | 14,751 | |||||||||||||||
Other | — | 43 | — | — | 43 | |||||||||||||||
Netting3 | (3,840 | ) | (380,443 | ) | (3,120 | ) | (40,473 | ) | (427,876 | ) | ||||||||||
Total derivative and other contracts | 230 | 63,966 | 5,751 | (40,473 | ) | 29,474 | ||||||||||||||
Total trading liabilities | 91,421 | 71,734 | 5,773 | (40,473 | ) | 128,455 | ||||||||||||||
Securities sold under agreements to repurchase | — | 532 | 151 | — | 683 | |||||||||||||||
Other secured financings | — | 2,393 | 461 | — | 2,854 | |||||||||||||||
Long-term borrowings | — | 31,058 | 1,987 | — | 33,045 | |||||||||||||||
Total liabilities measured at fair value | $ | 91,421 | $ | 107,470 | $ | 8,392 | $ | (40,473 | ) | $ | 166,810 | |||||||||
AFS—Availablefor sale | ||||||||||||||||||||
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For a description of the valuation techniques applied to the Firm’s major categories of assets and liabilities measured at fair value on a recurring basis, see Note 3 to the consolidated financial statements in the 2015 Form 10-K. During the current quarter and current year period, there were no significant updates made to the Firm’s valuation techniques.
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for all periods presented. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the following tables do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Firm within the Level 1 and/or Level 2 categories.
Additionally, both observable and unobservable inputs may be used to determine the fair value of positions that the Firm has classified within the Level 3 category. As a result, the unrealized gains (losses) during the period for assets and liabilities within the Level 3 category presented in the following tables herein may include changes in fair value during the period that were attributable to both observable and unobservable inputs.
Roll-forward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
| $ in millions | Beginning Balance at June 30, 2016 | Realized and Unrealized Gains (Losses) | Purchases1 | Sales | Issuances | Settlements | Net Transfers | Ending Balance at September 30, 2016 | Unrealized Gains (Losses) at September 30, 2016 | |||||||||||||||||||||||||||
Assets at Fair Value | ||||||||||||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||
U.S. agency securities | $ | 20 | $ | — | $ | — | $ | (18 | ) | $ | — | $ | — | $ | 6 | $ | 8 | $ | — | |||||||||||||||||
Other sovereign government obligations | 2 | — | 6 | (1 | ) | — | — | 5 | 12 | — | ||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
State and municipal securities | 10 | 1 | — | (7 | ) | — | — | — | 4 | — | ||||||||||||||||||||||||||
Residential mortgage-backed securities | 216 | 1 | 56 | (76 | ) | — | — | (9 | ) | 188 | (12 | ) | ||||||||||||||||||||||||
Commercial mortgage-backed securities | 51 | (5 | ) | 12 | (1 | ) | — | — | 7 | 64 | (3 | ) | ||||||||||||||||||||||||
Asset-backed securities | 88 | (3 | ) | 6 | (79 | ) | — | — | — | 12 | — | |||||||||||||||||||||||||
Corporate bonds | 276 | (55 | ) | 20 | (23 | ) | — | — | (19 | ) | 199 | (55 | ) | |||||||||||||||||||||||
Collateralized debt and loan obligations | 109 | 6 | 9 | (38 | ) | — | — | (1 | ) | 85 | 10 | |||||||||||||||||||||||||
Loans and lending commitments | 5,418 | (12 | ) | 501 | (206 | ) | — | (733 | ) | (813 | ) | 4,155 | (12 | ) | ||||||||||||||||||||||
Other debt | 528 | — | 191 | (212 | ) | — | — | (261 | ) | 246 | — | |||||||||||||||||||||||||
Total corporate and other debt | 6,696 | (67 | ) | 795 | (642 | ) | — | (733 | ) | (1,096 | ) | 4,953 | (72 | ) | ||||||||||||||||||||||
Corporate equities | 572 | (28 | ) | 42 | (36 | ) | — | — | (214 | ) | 336 | (26 | ) | |||||||||||||||||||||||
Securities received as collateral | — | — | 1 | — | — | — | — | 1 | — | |||||||||||||||||||||||||||
Net derivative and other contracts2: | ||||||||||||||||||||||||||||||||||||
Interest rate contracts | (235 | ) | (60 | ) | 3 | — | (15 | ) | 11 | 337 | 41 | (45 | ) | |||||||||||||||||||||||
Credit contracts | (1,114 | ) | 147 | — | — | — | 2 | 82 | (883 | ) | 147 | |||||||||||||||||||||||||
Foreign exchange contracts | (1 | ) | (27 | ) | — | — | — | (42 | ) | (37 | ) | (107 | ) | (27 | ) | |||||||||||||||||||||
Equity contracts | (1,473 | ) | 220 | 31 | (2 | ) | (37 | ) | 567 | 834 | 140 | 239 | ||||||||||||||||||||||||
Commodity contracts | 1,298 | 269 | — | — | (14 | ) | (170 | ) | (89 | ) | 1,294 | 104 | ||||||||||||||||||||||||
Other | (11 | ) | — | — | — | — | — | 11 | — | — | ||||||||||||||||||||||||||
Total net derivative and other contracts | (1,536 | ) | 549 | 34 | (2 | ) | (66 | ) | 368 | 1,138 | 485 | 418 | ||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||
Principal investments | 769 | (29 | ) | 2 | (8 | ) | — | (27 | ) | 19 | 726 | (30 | ) | |||||||||||||||||||||||
Other | 205 | (12 | ) | — | — | — | — | 17 | 210 | (6 | ) | |||||||||||||||||||||||||
Total investments | 974 | (41 | ) | 2 | (8 | ) | — | (27 | ) | 36 | 936 | (36 | ) | |||||||||||||||||||||||
Liabilities at Fair Value | ||||||||||||||||||||||||||||||||||||
Deposits | $ | 30 | $ | 1 | $ | — | $ | — | $ | 5 | $ | — | $ | (3 | ) | $ | 31 | $ | 1 | |||||||||||||||||
Short-term borrowings | — | — | — | — | — | — | 2 | 2 | — | |||||||||||||||||||||||||||
Trading liabilities: | ||||||||||||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
Corporate bonds | 6 | (1 | ) | (3 | ) | 2 | — | — | 7 | 13 | (1 | ) | ||||||||||||||||||||||||
Other debt | 3 | — | — | — | — | — | — | 3 | — | |||||||||||||||||||||||||||
Total corporate and other debt | 9 | (1 | ) | (3 | ) | 2 | — | — | 7 | 16 | (1 | ) | ||||||||||||||||||||||||
Corporate equities | 26 | 2 | (2 | ) | 2 | — | — | (5 | ) | 19 | — | |||||||||||||||||||||||||
Obligation to return securities received as collateral | — | — | — | 1 | — | — | — | 1 | — | |||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 150 | 1 | — | — | — | — | — | 149 | 2 | |||||||||||||||||||||||||||
Other secured financings | 441 | (11 | ) | — | — | — | (2 | ) | — | 450 | (11 | ) | ||||||||||||||||||||||||
Long-term borrowings | 1,929 | (88 | ) | — | — | 193 | (147 | ) | (21 | ) | 2,042 | (87 | ) | |||||||||||||||||||||||
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| $ in millions | Beginning Balance at December 31, 2015 | Realized and Unrealized Gains (Losses) | Purchases1 | Sales | Issuances | Settlements | Net Transfers | Ending Balance at September 30, 2016 | Unrealized Gains (Losses) at September 30, 2016 | |||||||||||||||||||||||||||
Assets at Fair Value | ||||||||||||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||
U.S. agency securities | $ | — | $ | — | $ | 3 | $ | (37 | ) | $ | — | $ | — | $ | 42 | $ | 8 | $ | — | |||||||||||||||||
Other sovereign government obligations | 4 | — | 10 | (6 | ) | — | — | 4 | 12 | — | ||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
State and municipal securities | 19 | — | — | (16 | ) | — | — | 1 | 4 | — | ||||||||||||||||||||||||||
Residential mortgage-backed securities | 341 | (14 | ) | 64 | (201 | ) | — | — | (2 | ) | 188 | (13 | ) | |||||||||||||||||||||||
Commercial mortgage-backed securities | 72 | (17 | ) | 19 | (18 | ) | — | — | 8 | 64 | (15 | ) | ||||||||||||||||||||||||
Asset-backed securities | 25 | (4 | ) | 5 | (95 | ) | — | — | 81 | 12 | (3 | ) | ||||||||||||||||||||||||
Corporate bonds | 267 | (4 | ) | 146 | (276 | ) | — | — | 66 | 199 | (17 | ) | ||||||||||||||||||||||||
Collateralized debt and loan obligations | 430 | 9 | 13 | (295 | ) | — | — | (72 | ) | 85 | 16 | |||||||||||||||||||||||||
Loans and lending commitments | 5,936 | (65 | ) | 921 | (860 | ) | — | (986 | ) | (791 | ) | 4,155 | (51 | ) | ||||||||||||||||||||||
Other debt | 448 | 1 | 92 | (35 | ) | — | — | (260 | ) | 246 | 65 | |||||||||||||||||||||||||
Total corporate and other debt | 7,538 | (94 | ) | 1,260 | (1,796 | ) | — | (986 | ) | (969 | ) | 4,953 | (18 | ) | ||||||||||||||||||||||
Corporate equities | 433 | (57 | ) | 62 | (324 | ) | — | — | 222 | 336 | (80 | ) | ||||||||||||||||||||||||
Securities received as collateral | 1 | — | — | — | — | — | — | 1 | — | |||||||||||||||||||||||||||
Net derivative and other contracts2: | ||||||||||||||||||||||||||||||||||||
Interest rate contracts | 260 | 257 | 3 | — | (15 | ) | (59 | ) | (405 | ) | 41 | (156 | ) | |||||||||||||||||||||||
Credit contracts | (844 | ) | (255 | ) | 1 | — | — | 155 | 60 | (883 | ) | (277 | ) | |||||||||||||||||||||||
Foreign exchange contracts | 141 | (104 | ) | — | — | — | (224 | ) | 80 | (107 | ) | (102 | ) | |||||||||||||||||||||||
Equity contracts | (2,031 | ) | 334 | 816 | (2 | ) | (166 | ) | 1,083 | 106 | 140 | 172 | ||||||||||||||||||||||||
Commodity contracts | 1,050 | 377 | 33 | — | (20 | ) | (312 | ) | 166 | 1,294 | 162 | |||||||||||||||||||||||||
Total net derivative and other contracts | (1,424 | ) | 609 | 853 | (2 | ) | (201 | ) | 643 | 7 | 485 | (201 | ) | |||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||
Principal investments | 486 | (57 | ) | 374 | (29 | ) | — | (67 | ) | 19 | 726 | (58 | ) | |||||||||||||||||||||||
Other | 221 | (3 | ) | — | (8 | ) | — | — | — | 210 | (5 | ) | ||||||||||||||||||||||||
Total investments | 707 | (60 | ) | 374 | (37 | ) | — | (67 | ) | 19 | 936 | (63 | ) | |||||||||||||||||||||||
Intangible assets | 5 | — | — | — | — | — | (5 | ) | — | — | ||||||||||||||||||||||||||
Liabilities at Fair Value | ||||||||||||||||||||||||||||||||||||
Deposits | $ | 19 | $ | (1 | ) | $ | — | $ | — | $ | 15 | $ | — | $ | (4 | ) | $ | 31 | $ | (1 | ) | |||||||||||||||
Short-term borrowings | 1 | — | — | — | — | (1 | ) | 2 | 2 | — | ||||||||||||||||||||||||||
Trading liabilities: | ||||||||||||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
Corporate bonds | — | (3 | ) | (7 | ) | 32 | — | — | (15 | ) | 13 | (3 | ) | |||||||||||||||||||||||
Other debt | 4 | — | (1 | ) | — | — | — | — | 3 | — | ||||||||||||||||||||||||||
Total corporate and other debt | 4 | (3 | ) | (8 | ) | 32 | — | — | (15 | ) | 16 | (3 | ) | |||||||||||||||||||||||
Corporate equities | 17 | 4 | (37 | ) | 14 | — | — | 29 | 19 | 32 | ||||||||||||||||||||||||||
Obligation to return securities received as collateral | 1 | — | — | — | — | — | — | 1 | — | |||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 151 | 2 | — | — | — | — | — | 149 | 3 | |||||||||||||||||||||||||||
Other secured financings | 461 | (42 | ) | — | — | 69 | (44 | ) | (78 | ) | 450 | (42 | ) | |||||||||||||||||||||||
Long-term borrowings | 1,987 | (103 | ) | — | — | 366 | (262 | ) | (152 | ) | 2,042 | 91 | ||||||||||||||||||||||||
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| $ in millions | Beginning Balance at June 30, 2015 | Realized and Unrealized Gains (Losses) | Purchases1 | Sales | Issuances | Settlements | Net Transfers | Ending Balance at September 30, 2015 | Unrealized Gains (Losses) at September 30, 2015 | |||||||||||||||||||||||||||
Assets at Fair Value | ||||||||||||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||
U.S. agency securities | $ | 3 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (3 | ) | $ | — | $ | — | |||||||||||||||||
Other sovereign government obligations | 12 | — | 5 | (4 | ) | — | — | (2 | ) | 11 | — | |||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
State and municipal securities | 7 | 5 | 12 | (5 | ) | — | — | 14 | 33 | 5 | ||||||||||||||||||||||||||
Residential mortgage-backed securities | 378 | 3 | 59 | (55 | ) | — | — | 19 | 404 | 4 | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 84 | (12 | ) | 17 | (6 | ) | — | — | (4 | ) | 79 | (12 | ) | |||||||||||||||||||||||
Asset-backed securities | 19 | — | 13 | (7 | ) | — | — | 6 | 31 | — | ||||||||||||||||||||||||||
Corporate bonds | 479 | (25 | ) | 78 | (228 | ) | — | (50 | ) | (28 | ) | 226 | (6 | ) | ||||||||||||||||||||||
Collateralized debt and loan obligations | 660 | (7 | ) | 80 | (188 | ) | — | — | — | 545 | (11 | ) | ||||||||||||||||||||||||
Loans and lending commitments | 5,512 | (78 | ) | 939 | (156 | ) | — | (1,229 | ) | 176 | 5,164 | (53 | ) | |||||||||||||||||||||||
Other debt | 564 | (22 | ) | 9 | (4 | ) | — | (1 | ) | (16 | ) | 530 | (23 | ) | ||||||||||||||||||||||
Total corporate and other debt | 7,703 | (136 | ) | 1,207 | (649 | ) | — | (1,280 | ) | 167 | 7,012 | (96 | ) | |||||||||||||||||||||||
Corporate equities | 486 | 10 | 150 | (80 | ) | — | — | 9 | 575 | 4 | ||||||||||||||||||||||||||
Securities received as collateral | 3 | — | — | (2 | ) | — | — | — | 1 | — | ||||||||||||||||||||||||||
Net derivative and other contracts2: | ||||||||||||||||||||||||||||||||||||
Interest rate contracts | (236 | ) | (137 | ) | 12 | — | (7 | ) | 74 | 383 | 89 | (66 | ) | |||||||||||||||||||||||
Credit contracts | (989 | ) | 210 | — | — | (74 | ) | 86 | (38 | ) | (805 | ) | 219 | |||||||||||||||||||||||
Foreign exchange contracts | 446 | 42 | 3 | — | — | (327 | ) | (98 | ) | 66 | 45 | |||||||||||||||||||||||||
Equity contracts | (2,102 | ) | 309 | 16 | — | (50 | ) | (187 | ) | (27 | ) | (2,041 | ) | 296 | ||||||||||||||||||||||
Commodity contracts | 1,205 | 238 | — | — | — | (11 | ) | — | 1,432 | 179 | ||||||||||||||||||||||||||
Total net derivative and other contracts | (1,676 | ) | 662 | 31 | — | (131 | ) | (365 | ) | 220 | (1,259 | ) | 673 | |||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||
Principal investments | 581 | 26 | 8 | (50 | ) | — | — | (24 | ) | 541 | 26 | |||||||||||||||||||||||||
Other | 300 | 11 | 1 | — | — | — | — | 312 | 11 | |||||||||||||||||||||||||||
Total investments | 881 | 37 | 9 | (50 | ) | — | — | (24 | ) | 853 | 37 | |||||||||||||||||||||||||
Intangible assets | 6 | (1 | ) | — | — | — | — | — | 5 | (1 | ) | |||||||||||||||||||||||||
Liabilities at Fair Value | ||||||||||||||||||||||||||||||||||||
Short-term borrowings | $ | — | $ | (2 | ) | $ | — | $ | — | $ | 4 | $ | — | $ | 63 | $ | 69 | $ | (2 | ) | ||||||||||||||||
Trading liabilities: | ||||||||||||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
Corporate bonds | 15 | 9 | (10 | ) | 23 | — | — | — | 19 | 7 | ||||||||||||||||||||||||||
Other debt | 4 | — | — | — | — | — | — | 4 | — | |||||||||||||||||||||||||||
Total corporate and other debt | 19 | 9 | (10 | ) | 23 | — | — | — | 23 | 7 | ||||||||||||||||||||||||||
Corporate equities | 112 | 72 | (50 | ) | 99 | — | — | 8 | 97 | 73 | ||||||||||||||||||||||||||
Obligation to return securities received as collateral | 3 | — | (2 | ) | — | — | — | — | 1 | — | ||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 154 | — | — | — | — | — | — | 154 | — | |||||||||||||||||||||||||||
Other secured financings | 168 | 2 | — | — | 187 | (12 | ) | — | 341 | 2 | ||||||||||||||||||||||||||
Long-term borrowings | 2,221 | 61 | — | — | 237 | (81 | ) | 146 | 2,462 | 64 | ||||||||||||||||||||||||||
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| $ in millions | Beginning Balance at December 31, 2014 | Realized and Unrealized Gains (Losses) | Purchases1 | Sales | Issuances | Settlements | Net Transfers | Ending Balance at September 30, 2015 | Unrealized Gains (Losses) at September 30, 2015 | |||||||||||||||||||||||||||
Assets at Fair Value | ||||||||||||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||
Other sovereign government obligations | $ | 41 | $ | (1 | ) | $ | 7 | $ | (31 | ) | $ | — | $ | — | $ | (5 | ) | $ | 11 | $ | — | |||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
State and municipal securities | — | 5 | 14 | (1 | ) | — | — | 15 | 33 | 5 | ||||||||||||||||||||||||||
Residential mortgage-backed securities | 175 | 28 | 172 | (57 | ) | — | — | 86 | 404 | 19 | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 96 | (17 | ) | 23 | (23 | ) | — | — | — | 79 | (19 | ) | ||||||||||||||||||||||||
Asset-backed securities | 76 | (1 | ) | 22 | (31 | ) | — | — | (35 | ) | 31 | 4 | ||||||||||||||||||||||||
Corporate bonds | 386 | (19 | ) | 155 | (218 | ) | — | (53 | ) | (25 | ) | 226 | (16 | ) | ||||||||||||||||||||||
Collateralized debt and loan obligations | 1,152 | 141 | 320 | (709 | ) | — | (331 | ) | (28 | ) | 545 | (7 | ) | |||||||||||||||||||||||
Loans and lending commitments | 5,874 | (34 | ) | 1,860 | (95 | ) | — | (2,461 | ) | 20 | 5,164 | (62 | ) | |||||||||||||||||||||||
Other debt | 285 | (13 | ) | 30 | (14 | ) | — | (25 | ) | 267 | 530 | — | ||||||||||||||||||||||||
Total corporate and other debt | 8,044 | 90 | 2,596 | (1,148 | ) | — | (2,870 | ) | 300 | 7,012 | (76 | ) | ||||||||||||||||||||||||
Corporate equities | 272 | 57 | 437 | (199 | ) | — | — | 8 | 575 | 67 | ||||||||||||||||||||||||||
Securities received as collateral | — | — | 1 | — | — | — | — | 1 | — | |||||||||||||||||||||||||||
Net derivative and other contracts2: | ||||||||||||||||||||||||||||||||||||
Interest rate contracts | (173 | ) | (37 | ) | 16 | — | (22 | ) | 277 | 28 | 89 | 20 | ||||||||||||||||||||||||
Credit contracts | (743 | ) | (69 | ) | 6 | — | (94 | ) | 86 | 9 | (805 | ) | (89 | ) | ||||||||||||||||||||||
Foreign exchange contracts | 151 | 133 | 4 | — | (1 | ) | (197 | ) | (24 | ) | 66 | 133 | ||||||||||||||||||||||||
Equity contracts | (2,165 | ) | (76 | ) | 115 | — | (279 | ) | 252 | 112 | (2,041 | ) | (237 | ) | ||||||||||||||||||||||
Commodity contracts | 1,146 | 345 | 2 | — | (112 | ) | 111 | (60 | ) | 1,432 | 420 | |||||||||||||||||||||||||
Total net derivative and other contracts | (1,784 | ) | 296 | 143 | — | (508 | ) | 529 | 65 | (1,259 | ) | 247 | ||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||
Principal investments | 835 | 22 | 20 | (109 | ) | — | (187 | ) | (40 | ) | 541 | — | ||||||||||||||||||||||||
Other | 323 | (5 | ) | 2 | (6 | ) | — | — | (2 | ) | 312 | — | ||||||||||||||||||||||||
Total investments | 1,158 | 17 | 22 | (115 | ) | — | (187 | ) | (42 | ) | 853 | — | ||||||||||||||||||||||||
Intangible assets | 6 | — | — | — | — | (1 | ) | — | 5 | — | ||||||||||||||||||||||||||
Liabilities at Fair Value | ||||||||||||||||||||||||||||||||||||
Short-term borrowings | $ | — | $ | (2 | ) | $ | — | $ | — | $ | 60 | $ | — | $ | 7 | $ | 69 | $ | (2 | ) | ||||||||||||||||
Trading liabilities: | ||||||||||||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
Corporate bonds | 78 | 6 | (25 | ) | 37 | — | — | (65 | ) | 19 | 6 | |||||||||||||||||||||||||
Lending commitments | 5 | 5 | — | — | — | — | — | — | 5 | |||||||||||||||||||||||||||
Other debt | 38 | — | (1 | ) | 7 | — | (39 | ) | (1 | ) | 4 | — | ||||||||||||||||||||||||
Total corporate and other debt | 121 | 11 | (26 | ) | 44 | — | (39 | ) | (66 | ) | 23 | 11 | ||||||||||||||||||||||||
Corporate equities | 45 | 90 | (88 | ) | 128 | — | — | 102 | 97 | 90 | ||||||||||||||||||||||||||
Obligation to return securities received as collateral | — | — | — | 1 | — | — | — | 1 | — | |||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 153 | (1 | ) | — | — | — | — | — | 154 | — | ||||||||||||||||||||||||||
Other secured financings | 149 | (5 | ) | — | — | 223 | (36 | ) | — | 341 | 4 | |||||||||||||||||||||||||
Long-term borrowings | 1,934 | 159 | — | — | 853 | (213 | ) | 47 | 2,462 | 157 | ||||||||||||||||||||||||||
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Significant Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements
The following disclosures provide information on the valuation techniques, significant unobservable inputs, and their ranges and averages for each major category of assets and liabilities measured at fair value on a recurring basis with a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed across the inventory. Further, the range of unobservable inputs may differ across firms in the financial services industry because of diversity in the types of products included in each firm’s inventory. The following disclosures also include qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs.
Valuation Techniques and Sensitivity of Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements
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bps—Basis points. A basis point equals 1/100th of 1%.
Points—Percentage of par
MWh—Megawatt hours.
EBITDA—Earnings before interest, taxes, depreciation and amortization
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Sensitivity of the fair value to changes in the unobservable inputs:
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For a description of the Firm’s significant unobservable inputs for all major categories of assets and liabilities, see Note 3 to the consolidated financial statements in the 2015 Form 10-K. Following are the updates to significant unobservable inputs disclosed in the 2015 Form 10-K.
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Fair Value of Investments Measured at Net Asset Value
For a description of the Firm’s investments in private equity funds, real estate funds and hedge funds measured at fair value based on NAV, see Note 3 to the consolidated financial statements in the 2015 Form 10-K.
Investments in Certain Funds Measured at NAV per Share
| At September 30, 2016 | At December 31, 2015 | |||||||||||||||
| $ in millions | Fair Value | Commitment | Fair Value | Commitment | ||||||||||||
Private equity funds | $ | 1,650 | $ | 384 | $ | 1,917 | $ | 538 | ||||||||
Real estate funds | 1,218 | 105 | 1,337 | 128 | ||||||||||||
Hedge funds | 277 | 4 | 589 | 4 | ||||||||||||
Total | $ | 3,145 | $ | 493 | $ | 3,843 | $ | 670 | ||||||||
Non-Redeemable Funds by Projected Distribution
| Fair Value at September 30, 2016 | ||||||||
| $ in millions | Private Equity Funds | Real Estate Funds | ||||||
Less than 5 years | $ | 124 | $ | 91 | ||||
5-10 years | 890 | 678 | ||||||
Over 10 years | 636 | 449 | ||||||
Total | $ | 1,650 | $ | 1,218 | ||||
Restrictions
Investments in hedge funds may be subject to lock-up or gate provisions. A lock-up provision is a provision which provides that during a certain initial period an investor may not make a withdrawal from the fund. A gate provision restricts the amount of redemption that an investor can demand on any redemption date.
Hedge Funds Fair Value by Redemption Frequency
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The redemption notice periods for hedge funds were primarily greater than six months. Hedge fund investments representing approximately 28% of the fair value cannot be redeemed as of September 30, 2016 because a gate provision has been imposed by the hedge fund manager, primarily for indefinite periods.
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Fair Value Option
The Firm elected the fair value option for certain eligible instruments that are risk managed on a fair value basis to mitigate income statement volatility caused by measurement basis differences between the elected instruments and their associated risk management transactions or to eliminate complexities of applying certain accounting models.
Earnings Impact of Instruments under the Fair Value Option
| $ in millions | Trading Revenues | Interest Income (Expense) | Gains (Losses) Net Revenues | |||||||||
Three Months Ended September 30, 2016 | ||||||||||||
Securities purchased under agreements to resell | $ | (1 | ) | $ | 2 | $ | 1 | |||||
Deposits1 | 2 | — | 2 | |||||||||
Short-term borrowings1 | (39 | ) | — | (39) | ||||||||
Securities sold under agreements to repurchase1 | 7 | (4 | ) | 3 | ||||||||
Long-term borrowings1 | (1,068 | ) | (116 | ) | (1,184) | |||||||
Nine Months Ended September 30, 2016 | ||||||||||||
Securities purchased under agreements to resell | $ | (2 | ) | $ | 6 | $ | 4 | |||||
Deposits1 | (1 | ) | (1 | ) | (2) | |||||||
Short-term borrowings1 | (3 | ) | — | (3) | ||||||||
Securities sold under agreements to repurchase1 | (5 | ) | (9 | ) | (14) | |||||||
Long-term borrowings1 | (3,322 | ) | (385 | ) | (3,707) | |||||||
Three Months Ended September 30, 2015 | ||||||||||||
Securities purchased under agreements to resell | $ | (1 | ) | $ | 2 | $ | 1 | |||||
Short-term borrowings2 | (85 | ) | — | (85) | ||||||||
Securities sold under agreements to repurchase2 | — | (2 | ) | (2) | ||||||||
Long-term borrowings2 | 1,137 | (129 | ) | 1,008 | ||||||||
Nine Months Ended September 30, 2015 | ||||||||||||
Securities purchased under agreements to resell | $ | (4 | ) | $ | 7 | $ | 3 | |||||
Short-term borrowings2 | (127 | ) | — | (127) | ||||||||
Securities sold under agreements to repurchase2 | 4 | (5 | ) | (1) | ||||||||
Long-term borrowings2 | 2,226 | (399 | ) | 1,827 | ||||||||
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The amounts in the previous table are included within Net revenues and do not reflect gains or losses on related hedging instruments, if any. In addition to the amounts in the previous table, as discussed in Note 2 to the consolidated financial statements in the 2015 Form 10-K, instruments within Trading assets or Trading liabilities are measured at fair value.
Gains (Losses) due to Changes in Instrument-Specific Credit Risk
| Three Months Ended September 30, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| $ in millions | Trading Revenues | OCI | Trading Revenues | OCI | ||||||||||||
Short-term and long-term borrowings1 | $ | (5 | ) | $ | (140 | ) | $ | 435 | $ | — | ||||||
Securities sold under agreements to repurchase1 | — | (3 | ) | — | — | |||||||||||
Loans and other debt2 | 26 | — | (32 | ) | — | |||||||||||
Lending commitments3 | — | — | 5 | — | ||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| $ in millions | Trading Revenues | OCI | Trading Revenues | OCI | ||||||||||||
Short-term and long-term borrowings1 | $ | 36 | $ | 405 | $ | 742 | $ | — | ||||||||
Securities sold under agreements to repurchase1 | — | — | — | — | ||||||||||||
Loans and other debt2 | (88 | ) | — | 39 | — | |||||||||||
Lending commitments3 | 3 | — | 13 | — | ||||||||||||
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Contractual Principal Amount In Excess of Fair Value
| $ in millions | At September 30, 2016 | At December 31, 2015 | ||||||
Loans and other debt1 | $ | 15,408 | $ | 14,095 | ||||
Loans 90 or more days past due and/or on nonaccrual status1 | 13,409 | 11,651 | ||||||
Short-term and long-term borrowings2 | 202 | 508 | ||||||
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Short-Term and Long-Term Borrowings Measured at Fair Value on a Recurring Basis
| $ in millions | At September 30, | At December 31, | ||||||
| Business Unit Responsible for Risk Management | ||||||||
Equity | $ | 20,692 | $ | 17,789 | ||||
Interest rates | 16,519 | 14,255 | ||||||
Credit and foreign exchange | 1,659 | 2,266 | ||||||
Commodities | 285 | 383 | ||||||
Total | $ | 39,155 | $ | 34,693 | ||||
Loans carried at Fair Value which are in Nonaccrual Status
| $ in millions | At September 30, | At December 31, | ||||||
Aggregate fair value of loans in nonaccrual status1 | $ | 1,530 | $ | 1,853 | ||||
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The previous tables exclude non-recourse debt from consolidated VIEs, liabilities related to failed sales of financial assets, pledged commodities and other liabilities that have specified assets attributable to them.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
| September 30, 2016 | Gains (Losses) for the | |||||||||||||||||||||||||
| Carrying Value1 | Fair Value by Level | Three Months Ended | Nine Months Ended | Income Statement Classification | ||||||||||||||||||||||
| $ in millions | Level 1 | Level 2 | Level 3 | September 30, 2016 | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Loans2 | $ | 6,303 | $ | — | $ | 3,296 | $ | 3,007 | $ | 111 | $ | 41 | Other revenues | |||||||||||||
Other assets—Other investments3,4 | 86 | — | — | 86 | (3) | (44) | Other revenues | |||||||||||||||||||
Other assets—Premises, equipment and software costs5,6 | 22 | — | 22 | — | (29) | (56) | Other revenues if held for sale, otherwise Other expenses | |||||||||||||||||||
Intangible assets3,6 | — | — | — | — | (2) | (2) | Other expenses | |||||||||||||||||||
Total assets | $ | 6,411 | $ | — | $ | 3,318 | $ | 3,093 | $ | 77 | $ | (61) | ||||||||||||||
Liabilities | ||||||||||||||||||||||||||
Other liabilities and | $ | 302 | $ | — | $ | 236 | $ | 66 | $ | 52 | $ | 98 | Other revenues if held for sale, otherwise Other expenses | |||||||||||||
Total liabilities | $ | 302 | $ | — | $ | 236 | $ | 66 | $ | 52 | $ | 98 | ||||||||||||||
| September 30, 2015 | Gains (Losses) for the | |||||||||||||||||||||||||
Carrying Value1 | Fair Value by Level | Three Months Ended | Nine Months Ended | Income Statement Classification | ||||||||||||||||||||||
| $ in millions | Level 1 | Level 2 | Level 3 | September 30, 2015 | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Loans2 | $ | 5,089 | $ | — | $ | 3,060 | $ | 2,029 | $ | 12 | $ | (201) | Other revenues | |||||||||||||
Other assets—Other investments3 | — | — | — | — | — | (2) | Other revenues | |||||||||||||||||||
Other assets—Premises, equipment and software costs5 | — | — | — | — | (2) | (24) | Other revenues if held for sale, otherwise Other expenses | |||||||||||||||||||
Total assets | $ | 5,089 | $ | — | $ | 3,060 | $ | 2,029 | $ | 10 | $ | (227) | ||||||||||||||
Liabilities | ||||||||||||||||||||||||||
Other liabilities and accrued expenses2 | $ | 427 | $ | — | $ | 365 | $ | 62 | $ | 144 | $ | 171 | Other revenues if held for sale, otherwise Other expenses | |||||||||||||
Total liabilities | $ | 427 | $ | — | $ | 365 | $ | 62 | $ | 144 | $ | 171 | ||||||||||||||
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Financial Instruments Not Measured at Fair Value
| At September 30, 2016 | Fair Value by Level | |||||||||||||||||||
| $ in millions | Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial Assets | ||||||||||||||||||||
Cash and due from banks | $ | 26,899 | $ | 26,899 | $ | 26,899 | $ | — | $ | — | ||||||||||
Interest bearing deposits with banks | 15,653 | 15,653 | 15,653 | — | — | |||||||||||||||
Investment securities—HTM securities | 13,224 | 13,329 | 4,544 | 8,785 | — | |||||||||||||||
Securities purchased under agreements to resell | 90,025 | 90,030 | — | 87,033 | 2,997 | |||||||||||||||
Securities borrowed | 126,280 | 126,282 | — | 126,147 | 135 | |||||||||||||||
Customer and other receivables1 | 47,203 | 47,108 | — | 42,382 | 4,726 | |||||||||||||||
Loans2 | 92,508 | 93,806 | — | 19,969 | 73,837 | |||||||||||||||
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements | 30,784 | 30,784 | 30,784 | — | — | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Deposits | $ | 151,783 | $ | 151,903 | $ | — | $ | 151,903 | $ | — | ||||||||||
Short-term borrowings | 506 | 506 | — | 506 | — | |||||||||||||||
Securities sold under agreements to repurchase | 46,191 | 46,251 | — | 43,243 | 3,008 | |||||||||||||||
Securities loaned | 16,515 | 16,525 | — | 16,525 | — | |||||||||||||||
Other secured financings | 6,066 | 6,071 | — | 4,665 | 1,406 | |||||||||||||||
Customer and other payables1 | 190,743 | 190,743 | — | 190,743 | — | |||||||||||||||
Long-term borrowings | 125,180 | 127,326 | — | 127,268 | 58 | |||||||||||||||
| At December 31, 2015 | Fair Value by Level | |||||||||||||||||||
| $ in millions | Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial Assets | ||||||||||||||||||||
Cash and due from banks | $ | 19,827 | $ | 19,827 | $ | 19,827 | $ | — | $ | — | ||||||||||
Interest bearing deposits with banks | 34,256 | 34,256 | 34,256 | — | — | |||||||||||||||
Investment securities—HTM securities | 5,224 | 5,188 | 998 | 4,190 | — | |||||||||||||||
Securities purchased under agreements to resell | 86,851 | 86,837 | — | 86,186 | 651 | |||||||||||||||
Securities borrowed | 142,416 | 142,414 | — | 142,266 | 148 | |||||||||||||||
Customer and other receivables1 | 41,676 | 41,576 | — | 36,752 | 4,824 | |||||||||||||||
Loans2 | 85,759 | 86,423 | — | 19,241 | 67,182 | |||||||||||||||
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements | 31,469 | 31,469 | 31,469 | — | — | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Deposits | $ | 155,909 | $ | 156,163 | $ | — | $ | 156,163 | $ | — | ||||||||||
Short-term borrowings | 525 | 525 | — | 525 | — | |||||||||||||||
Securities sold under agreements to repurchase | 36,009 | 36,060 | — | 34,150 | 1,910 | |||||||||||||||
Securities loaned | 19,358 | 19,382 | — | 19,192 | 190 | |||||||||||||||
Other secured financings | 6,610 | 6,610 | — | 5,333 | 1,277 | |||||||||||||||
Customer and other payables1 | 183,895 | 183,895 | — | 183,895 | — | |||||||||||||||
Long-term borrowings | 120,723 | 123,219 | — | 123,219 | — | |||||||||||||||
HTM—Held to maturity
|
|
| |
At September 30, 2016 and December 31, 2015, notional amounts of approximately $92.1 billion and $99.5 billion, respectively, of the Firm’s lending commitments were held for investment and held for sale, which are not included in the previous table. The estimated fair value of such lending commitments was a liability of $1,410 million and $2,172 million, respectively, at September 30, 2016 and December 31, 2015. Had these commitments been accounted for at fair value, $1,073 million would have been categorized in Level 2 and $337 million in Level 3 at September 30, 2016, and $1,791 million would have been categorized in Level 2 and $381 million in Level 3 at December 31, 2015.
The carrying values of the remaining assets and liabilities not measured at fair value in the following tables approximate fair value due to their short-term nature. The previous tables exclude certain financial instruments such as equity method investments and all non-financial assets and liabilities such as the value of the long-term relationships with the Firm’s deposit customers. For a further discussion of financial instruments not measured at fair value, see Note 3 to the consolidated financial statements in the 2015 Form 10-K.
4. Derivative Instruments and Hedging ActivitiesInformation
Fair Value, Notional and Offsetting of Derivative Assets and Liabilities
| Derivative Assets at September 30, 2016 | ||||||||||||||||||||||||||||||||
| Fair Value | Notional | |||||||||||||||||||||||||||||||
| $ in millions | Bilateral OTC | Cleared OTC | Exchange Traded | Total | Bilateral OTC | Cleared OTC | Exchange Traded | Total | ||||||||||||||||||||||||
Derivatives designated as accounting hedges |
| |||||||||||||||||||||||||||||||
Interest rate contracts | $ | 2,971 | $ | 3,471 | $ | — | $ | 6,442 | $ | 33,772 | $ | 69,219 | $ | — | $ | 102,991 | ||||||||||||||||
Foreign exchange contracts | 24 | — | — | 24 | 3,355 | 127 | — | 3,482 | ||||||||||||||||||||||||
Total derivatives designated as accounting hedges | 2,995 | 3,471 | — | 6,466 | 37,127 | 69,346 | — | 106,473 | ||||||||||||||||||||||||
Derivatives not designated as accounting hedges1 |
| |||||||||||||||||||||||||||||||
Interest rate contracts | 268,198 | 144,030 | 208 | 412,436 | 3,696,991 | 5,940,043 | 2,054,389 | 11,691,423 | ||||||||||||||||||||||||
Credit contracts | 11,977 | 2,747 | — | 14,724 | 389,167 | 132,408 | — | 521,575 | ||||||||||||||||||||||||
Foreign exchange contracts | 50,749 | 305 | 124 | 51,178 | 1,753,186 | 29,605 | 18,706 | 1,801,497 | ||||||||||||||||||||||||
Equity contracts | 22,739 | — | 20,682 | 43,421 | 358,008 | — | 291,873 | 649,881 | ||||||||||||||||||||||||
Commodity contracts | 10,543 | — | 3,059 | 13,602 | 66,102 | — | 87,714 | 153,816 | ||||||||||||||||||||||||
Other | 25 | — | — | 25 | 1,548 | — | — | 1,548 | ||||||||||||||||||||||||
Total derivatives not designated as accounting hedges | 364,231 | 147,082 | 24,073 | 535,386 | 6,265,002 | 6,102,056 | 2,452,682 | 14,819,740 | ||||||||||||||||||||||||
Total gross derivatives2 | $ | 367,226 | $ | 150,553 | $ | 24,073 | $ | 541,852 | $ | 6,302,129 | $ | 6,171,402 | $ | 2,452,682 | $ | 14,926,213 | ||||||||||||||||
Amounts offset | ||||||||||||||||||||||||||||||||
Counterparty netting | (285,971 | ) | (146,721 | ) | (21,035 | ) | (453,727 | ) | ||||||||||||||||||||||||
Cash collateral netting | (52,879 | ) | (2,161 | ) | — | (55,040 | ) | |||||||||||||||||||||||||
Total derivative assets at fair value included in Trading assets | $ | 28,376 | $ | 1,671 | $ | 3,038 | $ | 33,085 | ||||||||||||||||||||||||
Amounts not offset3 | ||||||||||||||||||||||||||||||||
Financial instruments collateral | (10,464 | ) | — | — | (10,464 | ) | ||||||||||||||||||||||||||
Other cash collateral | (174 | ) | — | — | (174 | ) | ||||||||||||||||||||||||||
Net exposure | $ | 17,738 | $ | 1,671 | $ | 3,038 | $ | 22,447 | ||||||||||||||||||||||||
| |
| Derivative Liabilities at September 30, 2016 | ||||||||||||||||||||||||||||||||
| Fair Value | Notional | |||||||||||||||||||||||||||||||
| $ in millions | Bilateral OTC | Cleared OTC | Exchange Traded | Total | Bilateral OTC | Cleared OTC | Exchange Traded | Total | ||||||||||||||||||||||||
Derivatives designated as accounting hedges |
| |||||||||||||||||||||||||||||||
Interest rate contracts | $ | — | $ | — | $ | — | $ | — | $ | 7 | $ | 27 | $ | — | $ | 34 | ||||||||||||||||
Foreign exchange contracts | 309 | 23 | — | 332 | 5,494 | 694 | — | 6,188 | ||||||||||||||||||||||||
Total derivatives designated as accounting hedges | 309 | 23 | — | 332 | 5,501 | 721 | — | 6,222 | ||||||||||||||||||||||||
Derivatives not designated as accounting hedges1 |
| |||||||||||||||||||||||||||||||
Interest rate contracts | 251,071 | 146,712 | 206 | 397,989 | 3,634,398 | 5,741,556 | 876,249 | 10,252,203 | ||||||||||||||||||||||||
Credit contracts | 13,461 | 2,703 | — | 16,164 | 453,893 | 118,266 | — | 572,159 | ||||||||||||||||||||||||
Foreign exchange contracts | 55,515 | 374 | 22 | 55,911 | 1,826,734 | 33,421 | 13,943 | 1,874,098 | ||||||||||||||||||||||||
Equity contracts | 25,299 | — | 21,353 | 46,652 | 374,098 | — | 295,580 | 669,678 | ||||||||||||||||||||||||
Commodity contracts | 7,723 | — | 2,943 | 10,666 | 69,764 | — | 65,585 | 135,349 | ||||||||||||||||||||||||
Other | 76 | — | — | 76 | 4,429 | — | — | 4,429 | ||||||||||||||||||||||||
Total derivatives not designated as accounting hedges | 353,145 | 149,789 | 24,524 | 527,458 | 6,363,316 | 5,893,243 | 1,251,357 | 13,507,916 | ||||||||||||||||||||||||
Total gross derivatives2 | $ | 353,454 | $ | 149,812 | $ | 24,524 | $ | 527,790 | $ | 6,368,817 | $ | 5,893,964 | $ | 1,251,357 | $ | 13,514,138 | ||||||||||||||||
Amounts offset | ||||||||||||||||||||||||||||||||
Counterparty netting | (285,971 | ) | (146,721 | ) | (21,035 | ) | (453,727 | ) | ||||||||||||||||||||||||
Cash collateral netting | (38,445 | ) | (3,097 | ) | — | (41,542 | ) | |||||||||||||||||||||||||
Total derivative liabilities at fair value included in Trading liabilities | $ | 29,038 | $ | (6 | ) | $ | 3,489 | $ | 32,521 | |||||||||||||||||||||||
Amounts not offset3 | ||||||||||||||||||||||||||||||||
Financial instruments collateral | (11,922 | ) | — | (649 | ) | (12,571 | ) | |||||||||||||||||||||||||
Other cash collateral | (13 | ) | (3 | ) | — | (16 | ) | |||||||||||||||||||||||||
Net exposure | $ | 17,103 | $ | (9 | ) | $ | 2,840 | $ | 19,934 | |||||||||||||||||||||||
| |
| Derivative Assets at December 31, 2015 | ||||||||||||||||||||||||||||||||
| Fair Value | Notional | |||||||||||||||||||||||||||||||
| $ in millions | Bilateral OTC | Cleared OTC | Exchange Traded | Total | Bilateral OTC | Cleared OTC | Exchange Traded | Total | ||||||||||||||||||||||||
Derivatives designated as accounting hedges |
| |||||||||||||||||||||||||||||||
Interest rate contracts | $ | 2,825 | $ | 1,442 | $ | — | $ | 4,267 | $ | 36,999 | $ | 35,362 | $ | — | $ | 72,361 | ||||||||||||||||
Foreign exchange contracts | 166 | 1 | — | 167 | 5,996 | 167 | — | 6,163 | ||||||||||||||||||||||||
Total derivatives designated as accounting hedges | 2,991 | 1,443 | — | 4,434 | 42,995 | 35,529 | — | 78,524 | ||||||||||||||||||||||||
Derivatives not designated as accounting hedges4 |
| |||||||||||||||||||||||||||||||
Interest rate contracts | 220,289 | 101,276 | 212 | 321,777 | 4,348,002 | 5,748,525 | 1,218,645 | 11,315,172 | ||||||||||||||||||||||||
Credit contracts | 19,310 | 3,609 | — | 22,919 | 585,731 | 139,301 | — | 725,032 | ||||||||||||||||||||||||
Foreign exchange contracts | 64,438 | 295 | 55 | 64,788 | 1,907,290 | 13,402 | 7,715 | 1,928,407 | ||||||||||||||||||||||||
Equity contracts | 20,212 | — | 20,077 | 40,289 | 316,770 | — | 229,859 | 546,629 | ||||||||||||||||||||||||
Commodity contracts | 13,114 | — | 4,038 | 17,152 | 67,449 | — | 82,313 | 149,762 | ||||||||||||||||||||||||
Other | 219 | — | — | 219 | 5,684 | — | — | 5,684 | ||||||||||||||||||||||||
Total derivatives not designated as accounting hedges | 337,582 | 105,180 | 24,382 | 467,144 | 7,230,926 | 5,901,228 | 1,538,532 | 14,670,686 | ||||||||||||||||||||||||
Total gross derivatives2 | $ | 340,573 | $ | 106,623 | $ | 24,382 | $ | 471,578 | $ | 7,273,921 | $ | 5,936,757 | $ | 1,538,532 | $ | 14,749,210 | ||||||||||||||||
Amounts offset | ||||||||||||||||||||||||||||||||
Counterparty netting | (265,707 | ) | (104,294 | ) | (21,592 | ) | (391,593 | ) | ||||||||||||||||||||||||
Cash collateral netting | (50,335 | ) | (1,037 | ) | — | (51,372 | ) | |||||||||||||||||||||||||
Total derivative assets at fair value included in Trading assets | $ | 24,531 | $ | 1,292 | $ | 2,790 | $ | 28,613 | ||||||||||||||||||||||||
Amounts not offset3 | ||||||||||||||||||||||||||||||||
Financial instruments collateral | (9,190 | ) | — | — | (9,190 | ) | ||||||||||||||||||||||||||
Other cash collateral | (9 | ) | — | — | (9 | ) | ||||||||||||||||||||||||||
Net exposure | $ | 15,332 | $ | 1,292 | $ | 2,790 | $ | 19,414 | ||||||||||||||||||||||||
| |
| Derivative Liabilities at December 31, 2015 | ||||||||||||||||||||||||||||||||
| Fair Value | Notional | |||||||||||||||||||||||||||||||
| $ in millions | Bilateral OTC | Cleared OTC | Exchange Traded | Total | Bilateral OTC | Cleared OTC | Exchange Traded | Total | ||||||||||||||||||||||||
Derivatives designated as accounting hedges |
| |||||||||||||||||||||||||||||||
Interest rate contracts | $ | 20 | $ | 250 | $ | — | $ | 270 | $ | 3,560 | $ | 9,869 | $ | — | $ | 13,429 | ||||||||||||||||
Foreign exchange contracts | 56 | 6 | — | 62 | 4,604 | 455 | — | 5,059 | ||||||||||||||||||||||||
Total derivatives designated as accounting hedges | 76 | 256 | — | 332 | 8,164 | 10,324 | — | 18,488 | ||||||||||||||||||||||||
Derivatives not designated as accounting hedges4 |
| |||||||||||||||||||||||||||||||
Interest rate contracts | 203,004 | 103,852 | 283 | 307,139 | 4,030,039 | 5,682,322 | 1,077,710 | 10,790,071 | ||||||||||||||||||||||||
Credit contracts | 19,942 | 3,723 | — | 23,665 | 562,027 | 131,388 | — | 693,415 | ||||||||||||||||||||||||
Foreign exchange contracts | 65,034 | 232 | 22 | 65,288 | 1,868,015 | 13,322 | 2,655 | 1,883,992 | ||||||||||||||||||||||||
Equity contracts | 25,708 | — | 20,424 | 46,132 | 332,734 | — | 229,266 | 562,000 | ||||||||||||||||||||||||
Commodity contracts | 10,864 | — | 3,887 | 14,751 | 59,169 | — | 62,974 | 122,143 | ||||||||||||||||||||||||
Other | 43 | — | — | 43 | 4,114 | — | — | 4,114 | ||||||||||||||||||||||||
Total derivatives not designated as accounting hedges | 324,595 | 107,807 | 24,616 | 457,018 | 6,856,098 | 5,827,032 | 1,372,605 | 14,055,735 | ||||||||||||||||||||||||
Total gross derivatives2 | $ | 324,671 | $ | 108,063 | $ | 24,616 | $ | 457,350 | $ | 6,864,262 | $ | 5,837,356 | $ | 1,372,605 | $ | 14,074,223 | ||||||||||||||||
Amounts offset | ||||||||||||||||||||||||||||||||
Counterparty netting | (265,707 | ) | (104,294 | ) | (21,592 | ) | (391,593 | ) | ||||||||||||||||||||||||
Cash collateral netting | (33,332 | ) | (2,951 | ) | — | (36,283 | ) | |||||||||||||||||||||||||
Total derivative liabilities at fair value included in Trading liabilities | $ | 25,632 | $ | 818 | $ | 3,024 | $ | 29,474 | ||||||||||||||||||||||||
Amounts not offset3 | ||||||||||||||||||||||||||||||||
Financial instruments collateral | (5,384 | ) | — | (405 | ) | (5,789 | ) | |||||||||||||||||||||||||
Other cash collateral | (5 | ) | — | — | (5 | ) | ||||||||||||||||||||||||||
Net exposure | $ | 20,243 | $ | 818 | $ | 2,619 | $ | 23,680 | ||||||||||||||||||||||||
OTC—Over-the-counter
|
|
|
|
For information related to offsetting of certain collateralized transactions, see Note 6. For a discussion of the Firm’s derivative instruments and hedging activities, see Note 4 to the consolidated financial statements in the 2015 Form 10-K.
Gains (Losses) on Fair Value Hedges
| Gains (Losses) Recognized in Interest Expense | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Derivatives | $ | (733 | ) | $ | 1,531 | $ | 2,386 | $ | 390 | |||||||
Borrowings | 790 | (1,696 | ) | (2,492 | ) | (678 | ) | |||||||||
Total | $ | 57 | $ | (165 | ) | $ | (106 | ) | $ | (288 | ) | |||||
Gains (Losses) on Net Investment Hedges
| Gains (Losses) Recognized in OCI (effective portion) | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Foreign exchange contracts1 | $ | (60 | ) | $ | 210 | $ | (396 | ) | $ | 391 | ||||||
|
| |
Gains (Losses) on Trading Instruments
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Interest rate contracts | $ | 357 | $ | 216 | $ | 983 | $ | 1,141 | ||||||||
Foreign exchange contracts | 170 | 91 | 769 | 606 | ||||||||||||
Equity security and index contracts1 | 1,415 | 968 | 4,360 | 4,309 | ||||||||||||
Commodity and other contracts2 | 63 | 164 | (61 | ) | 980 | |||||||||||
Credit contracts | 604 | 152 | 1,369 | 871 | ||||||||||||
Subtotal | $ | 2,609 | $ | 1,591 | $ | 7,420 | $ | 7,907 | ||||||||
Debt valuation adjustments3 | — | 435 | — | 742 | ||||||||||||
Total trading revenue | $ | 2,609 | $ | 2,026 | $ | 7,420 | $ | 8,649 | ||||||||
|
|
|
The previous table summarizes gains and losses included in Trading revenues in the consolidated statements of income from trading activities. These activities include revenues related to derivative and non-derivative financial instruments. The Firm generally utilizes financial instruments across a variety of product types in connection with their market-making and related risk management strategies. Accordingly, the trading revenues presented in the following table are not representative of the manner in which the Firm manages its business activities and are prepared in a manner similar to the presentation of trading revenues for regulatory reporting purposes.
OTC Derivative Products—Trading Assets
Counterparty Credit Rating and Remaining Maturity of OTC Derivative Assets
| Fair Value at September 30, 20161 | ||||||||||||||||||||||||||||
| Contractual Years to Maturity | Cross-Maturity and Cash Collateral Netting2 | Net Exposure Post-cash Collateral | Net Exposure Post- | |||||||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | ||||||||||||||||||||||||
Credit Rating4 | ||||||||||||||||||||||||||||
AAA | $ | 167 | $ | 383 | $ | 991 | $ | 4,603 | $ | (5,361 | ) | $ | 783 | $ | 705 | |||||||||||||
AA | 2,095 | 1,847 | 1,913 | 13,532 | (13,963 | ) | 5,424 | 3,252 | ||||||||||||||||||||
A | 7,940 | 7,561 | 4,958 | 28,357 | (37,040 | ) | 11,776 | 6,345 | ||||||||||||||||||||
BBB | 3,764 | 3,895 | 2,825 | 14,720 | (16,747 | ) | 8,457 | 6,386 | ||||||||||||||||||||
Non-investment grade | 2,760 | 2,102 | 746 | 3,433 | (5,608 | ) | 3,433 | 2,721 | ||||||||||||||||||||
Total | $ | 16,726 | $ | 15,788 | $ | 11,433 | $ | 64,645 | $ | (78,719 | ) | $ | 29,873 | $ | 19,409 | |||||||||||||
| Fair Value at December 31, 20151 | ||||||||||||||||||||||||||||
$ in millions | Contractual Years to Maturity | Cross-Maturity and Cash Collateral | Net Exposure Post-cash Collateral | Net Exposure Post- collateral3 | ||||||||||||||||||||||||
| Less than 1 | 1-3 | 3-5 | Over 5 | |||||||||||||||||||||||||
Credit Rating4 | ||||||||||||||||||||||||||||
AAA | $ | 203 | $ | 453 | $ | 827 | $ | 3,665 | $ | (4,319 | ) | $ | 829 | $ | 715 | |||||||||||||
AA | 2,689 | 2,000 | 1,876 | 9,223 | (10,981 | ) | 4,807 | 2,361 | ||||||||||||||||||||
A | 9,748 | 8,191 | 4,774 | 20,918 | (34,916 | ) | 8,715 | 5,448 | ||||||||||||||||||||
BBB | 3,614 | 4,863 | 1,948 | 11,801 | (15,086 | ) | 7,140 | 4,934 | ||||||||||||||||||||
Non-investment grade | 3,982 | 2,333 | 1,157 | 3,567 | (6,716 | ) | 4,323 | 3,166 | ||||||||||||||||||||
Total | $ | 20,236 | $ | 17,840 | $ | 10,582 | $ | 49,174 | $ | (72,018 | ) | $ | 25,814 | $ | 16,624 | |||||||||||||
|
|
|
|
| |
Credit Risk-Related Contingencies
In connection with certain OTC trading agreements, the Firm may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating downgrade of the Firm.
The following table presents the aggregate fair value of certain derivative contracts that contain credit risk-related contingent features that are in a net liability position for which the Firm has posted collateral in the normal course of business.
Net Derivative Liabilities and Collateral Posted
| ||||
| ||||
The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Global Ratings (“S&P”). The following table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevant contractual downgrade triggers.
Incremental Collateral or Termination Payments upon Potential Future Ratings Downgrade
| ||||
| ||||
|
Credit Derivatives and Other Credit Contracts
The Firm enters into credit derivatives, principally through credit default swaps, under which it receives or provides protection against the risk of default on a set of debt obligations issued by a specified reference entity or entities. A majority of the Firm’s counterparties are banks, broker-dealers and insurance and other financial institutions.
For further information on credit derivatives and other credit contracts, see Note 4 to the consolidated financial statements in the 2015 Form 10-K.
Protection Sold and Purchased with Credit Default Swaps
| At September 30, 2016 | ||||||||||||||||
| Protection Sold | Protection Purchased | |||||||||||||||
| $ in millions | Notional | Fair Value Liability | Notional | Fair Value Liability | ||||||||||||
Single name credit default swaps | $ | 318,840 | $ | (1,188 | ) | $ | 312,236 | $ | 1,139 | |||||||
Index and basket credit default swaps | 169,147 | 286 | 142,842 | (510 | ) | |||||||||||
Tranched index and basket credit default swaps | 38,157 | (971 | ) | 112,512 | 2,684 | |||||||||||
Total | $ | 526,144 | $ | (1,873 | ) | $ | 567,590 | $ | 3,313 | |||||||
| At December 31, 2015 | ||||||||||||||||
| Protection Sold | Protection Purchased | |||||||||||||||
| $ in millions | Notional | Fair Value Liability | Notional | Fair Value Liability | ||||||||||||
Single name credit default swaps | $ | 420,806 | $ | 1,980 | $ | 405,361 | $ | (2,079 | ) | |||||||
Index and basket credit default swaps | 199,688 | (102 | ) | 173,936 | (82 | ) | ||||||||||
Tranched index and basket credit default swaps | 69,025 | (1,093 | ) | 149,631 | 2,122 | |||||||||||
Total | $ | 689,519 | $ | 785 | $ | 728,928 | $ | (39 | ) | |||||||
For single name and non-tranched index and basket credit default swaps, the Firm has purchased protection with a notional amount of approximately $452.2 billion and $577.7 billion at September 30, 2016 and December 31, 2015, respectively, compared with a notional amount of approximately $485.9 billion and $619.5 billion (included in the following tables) at September 30, 2016 and December 31, 2015, respectively, of credit protection sold with identical underlying reference obligations.
| |
Credit Ratings of Reference Obligation and Maturities of Credit Protection Sold
| At September 30, 2016 | ||||||||||||||||||||||||
| Maximum Potential Payout/Notional | Fair Value (Asset)/ Liability1 | |||||||||||||||||||||||
| Years to Maturity | ||||||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | Total | |||||||||||||||||||
Single name credit default swaps2 | ||||||||||||||||||||||||
Investment grade | $ | 92,473 | $ | 81,544 | $ | 41,534 | $ | 12,856 | $ | 228,407 | $ | (1,438 | ) | |||||||||||
Non-investment grade | 40,204 | 34,089 | 14,633 | 1,507 | 90,433 | 250 | ||||||||||||||||||
Total single name credit default swaps | 132,677 | 115,633 | 56,167 | 14,363 | 318,840 | (1,188 | ) | |||||||||||||||||
Index and basket credit default swaps2 | ||||||||||||||||||||||||
Investment grade | 22,936 | 35,780 | 25,744 | 16,044 | 100,504 | (1,003 | ) | |||||||||||||||||
Non-investment grade | 52,148 | 27,175 | 14,979 | 12,498 | 106,800 | 318 | ||||||||||||||||||
Total index and basket credit default swaps | 75,084 | 62,955 | 40,723 | 28,542 | 207,304 | (685 | ) | |||||||||||||||||
Total credit default swaps sold | $ | 207,761 | $ | 178,588 | $ | 96,890 | $ | 42,905 | $ | 526,144 | $ | (1,873 | ) | |||||||||||
Other credit contracts | 55 | 18 | — | 260 | 333 | (9 | ) | |||||||||||||||||
Total credit derivatives and other credit contracts | $ | 207,816 | $ | 178,606 | $ | 96,890 | $ | 43,165 | $ | 526,477 | $ | (1,882 | ) | |||||||||||
| At December 31, 2015 | ||||||||||||||||||||||||
| Maximum Potential Payout/Notional | Fair Value (Asset)/ Liability1 | |||||||||||||||||||||||
| Years to Maturity | ||||||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | Total | |||||||||||||||||||
Single name credit default swaps2 | ||||||||||||||||||||||||
Investment grade | $ | 84,543 | $ | 138,467 | $ | 63,754 | $ | 12,906 | $ | 299,670 | $ | (1,831 | ) | |||||||||||
Non-investment grade | 38,054 | 56,261 | 24,432 | 2,389 | 121,136 | 3,811 | ||||||||||||||||||
Total single name credit default swaps | $ | 122,597 | $ | 194,728 | $ | 88,186 | $ | 15,295 | $ | 420,806 | $ | 1,980 | ||||||||||||
Index and basket credit default swaps2 | ||||||||||||||||||||||||
Investment grade | $ | 33,507 | $ | 59,403 | $ | 45,505 | $ | 5,327 | $ | 143,742 | $ | (1,977 | ) | |||||||||||
Non-investment grade | 52,590 | 43,899 | 15,480 | 13,002 | 124,971 | 782 | ||||||||||||||||||
Total index and basket credit default swaps | $ | 86,097 | $ | 103,302 | $ | 60,985 | $ | 18,329 | $ | 268,713 | $ | (1,195 | ) | |||||||||||
Total credit default swaps sold | $ | 208,694 | $ | 298,030 | $ | 149,171 | $ | 33,624 | $ | 689,519 | $ | 785 | ||||||||||||
Other credit contracts | 19 | 107 | 2 | 332 | 460 | (24 | ) | |||||||||||||||||
Total credit derivatives and other credit contracts | $ | 208,713 | $ | 298,137 | $ | 149,173 | $ | 33,956 | $ | 689,979 | $ | 761 | ||||||||||||
|
|
| |
The following tables present information about the Firm’s AFS securities, which are carried at fair value, and HTM securities, which are carried at amortized cost. The net unrealized gains or losses on AFS securities are reported on an after-tax basis as a component of AOCI.
AFS and HTM Securities
| At September 30, 2016 | ||||||||||||||||
| $ in millions | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
AFS debt securities | ||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||
U.S. Treasury securities | $ | 27,669 | $ | 98 | $ | 54 | $ | 27,713 | ||||||||
U.S. agency securities1 | 24,179 | 183 | 18 | 24,344 | ||||||||||||
Total U.S. government and agency securities | 51,848 | 281 | 72 | 52,057 | ||||||||||||
Corporate and other debt: | ||||||||||||||||
Commercialmortgage-backed securities: | ||||||||||||||||
Agency | 1,991 | 5 | 26 | 1,970 | ||||||||||||
Non-agency | 2,153 | 35 | 8 | 2,180 | ||||||||||||
Auto loan asset-backed securities | 1,733 | 4 | — | 1,737 | ||||||||||||
Corporate bonds | 3,886 | 55 | 1 | 3,940 | ||||||||||||
Collateralized loan obligations | 515 | — | 4 | 511 | ||||||||||||
FFELP student loan asset-backed securities2 | 3,406 | 2 | 80 | 3,328 | ||||||||||||
Total corporate and other debt | 13,684 | 101 | 119 | 13,666 | ||||||||||||
Total AFS debt securities | 65,532 | 382 | 191 | 65,723 | ||||||||||||
AFS equity securities | 15 | — | 6 | 9 | ||||||||||||
Total AFS securities | 65,547 | 382 | 197 | 65,732 | ||||||||||||
HTM securities | ||||||||||||||||
U.S. government securities: | ||||||||||||||||
U.S. Treasury securities | 4,539 | 25 | 20 | 4,544 | ||||||||||||
U.S. agency securities1 | 8,685 | 101 | 1 | 8,785 | ||||||||||||
Total HTM securities | 13,224 | 126 | 21 | 13,329 | ||||||||||||
Total Investment securities | $ | 78,771 | $ | 508 | $ | 218 | $ | 79,061 | ||||||||
| At December 31, 2015 | ||||||||||||||||
| $ in millions | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
AFS debt securities | ||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||
U.S. Treasury securities | $ | 31,555 | $ | 5 | $ | 143 | $ | 31,417 | ||||||||
U.S. agency securities1 | 21,103 | 29 | 156 | 20,976 | ||||||||||||
Total U.S. government and agency securities | 52,658 | 34 | 299 | 52,393 | ||||||||||||
Corporate and other debt: | ||||||||||||||||
Commercial mortgage-backed securities: | ||||||||||||||||
Agency | 1,906 | 1 | 60 | 1,847 | ||||||||||||
Non-agency | 2,220 | 3 | 25 | 2,198 | ||||||||||||
Auto loan asset-backed securities | 2,556 | — | 9 | 2,547 | ||||||||||||
Corporate bonds | 3,780 | 5 | 30 | 3,755 | ||||||||||||
Collateralized loan obligations | 502 | — | 7 | 495 | ||||||||||||
FFELP student loan assets-backed securities2 | 3,632 | — | 115 | 3,517 | ||||||||||||
Total corporate and other debt | 14,596 | 9 | 246 | 14,359 | ||||||||||||
Total AFS debt securities | 67,254 | 43 | 545 | 66,752 | ||||||||||||
AFS equity securities | 15 | — | 8 | 7 | ||||||||||||
Total AFS securities | 67,269 | 43 | 553 | 66,759 | ||||||||||||
HTM securities | ||||||||||||||||
U.S. government securities: | ||||||||||||||||
U.S. Treasury securities | 1,001 | — | 3 | 998 | ||||||||||||
U.S. agency securities1 | 4,223 | 1 | 34 | 4,190 | ||||||||||||
Total HTM securities | 5,224 | 1 | 37 | 5,188 | ||||||||||||
Total Investment securities | $ | 72,493 | $ | 44 | $ | 590 | $ | 71,947 | ||||||||
|
|
| |
Investment Securities in an Unrealized Loss Position
| At September 30, 2016 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| $ in millions | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||
AFS debt securities | ||||||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||||||
U.S. Treasury securities | $ | 6,520 | $ | 54 | $ | — | $ | — | $ | 6,520 | $ | 54 | ||||||||||||
U.S. agency securities | 4,485 | 6 | 1,961 | 12 | 6,446 | 18 | ||||||||||||||||||
Total U.S. government and agency securities | 11,005 | 60 | 1,961 | 12 | 12,966 | 72 | ||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||
Commercial mortgage-backed securities: | ||||||||||||||||||||||||
Agency | — | — | 1,143 | 26 | 1,143 | 26 | ||||||||||||||||||
Non-agency | 149 | 1 | 649 | 7 | 798 | 8 | ||||||||||||||||||
Auto loan asset-backed securities | 99 | — | 175 | — | 274 | — | ||||||||||||||||||
Corporate bonds | 333 | — | 142 | 1 | 475 | 1 | ||||||||||||||||||
Collateralized loan obligations | 13 | — | 498 | 4 | 511 | 4 | ||||||||||||||||||
FFELP student loan asset-backed securities | — | — | 2,885 | 80 | 2,885 | 80 | ||||||||||||||||||
Total corporate and other debt | 594 | 1 | 5,492 | 118 | 6,086 | 119 | ||||||||||||||||||
Total AFS debt securities | 11,599 | 61 | 7,453 | 130 | 19,052 | 191 | ||||||||||||||||||
AFS equity securities | 9 | 6 | — | — | 9 | 6 | ||||||||||||||||||
Total AFS securities | 11,608 | 67 | 7,453 | 130 | 19,061 | 197 | ||||||||||||||||||
HTM securities | ||||||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||||||
U.S. Treasury securities | 1,519 | 20 | — | — | 1,519 | 20 | ||||||||||||||||||
U.S. agency securities | 450 | 1 | — | — | 450 | 1 | ||||||||||||||||||
Total HTM securities | 1,969 | 21 | — | — | 1,969 | 21 | ||||||||||||||||||
Total Investment securities | $ | 13,577 | $ | 88 | $ | 7,453 | $ | 130 | $ | 21,030 | $ | 218 | ||||||||||||
| |
| At December 31, 2015 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| $ in millions | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||
AFS debt securities | ||||||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||||||
U.S. Treasury securities | $ | 25,994 | $ | 126 | $ | 2,177 | $ | 17 | $ | 28,171 | $ | 143 | ||||||||||||
U.S. agency securities | 14,242 | 135 | 639 | 21 | 14,881 | 156 | ||||||||||||||||||
Total U.S. government and agency securities | 40,236 | 261 | 2,816 | 38 | 43,052 | 299 | ||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||
Commercial mortgage-backed securities: | ||||||||||||||||||||||||
Agency | 1,185 | 44 | 422 | 16 | 1,607 | 60 | ||||||||||||||||||
Non-agency | 1,479 | 21 | 305 | 4 | 1,784 | 25 | ||||||||||||||||||
Auto loan asset-backed securities | 1,644 | 7 | 881 | 2 | 2,525 | 9 | ||||||||||||||||||
Corporate bonds | 2,149 | 19 | 525 | 11 | 2,674 | 30 | ||||||||||||||||||
Collateralized loan obligations | 352 | 5 | 143 | 2 | 495 | 7 | ||||||||||||||||||
FFELP student loan asset-backed securities | 2,558 | 79 | 929 | 36 | 3,487 | 115 | ||||||||||||||||||
Total corporate and other debt | 9,367 | 175 | 3,205 | 71 | 12,572 | 246 | ||||||||||||||||||
Total AFS debt securities | 49,603 | 436 | 6,021 | 109 | 55,624 | 545 | ||||||||||||||||||
AFS equity securities | 7 | 8 | — | — | 7 | 8 | ||||||||||||||||||
Total AFS securities | 49,610 | 444 | 6,021 | 109 | 55,631 | 553 | ||||||||||||||||||
HTM securities | ||||||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||||||
U.S. Treasury securities | 898 | 3 | — | — | 898 | 3 | ||||||||||||||||||
U.S. agency securities | 3,677 | 34 | — | — | 3,677 | 34 | ||||||||||||||||||
Total HTM securities | 4,575 | 37 | — | — | 4,575 | 37 | ||||||||||||||||||
Total Investment securities | $ | 54,185 | $ | 481 | $ | 6,021 | $ | 109 | $ | 60,206 | $ | 590 | ||||||||||||
As discussed in Note 2 to the consolidated financial statements in the 2015 Form 10-K, AFS and HTM securities with a current fair value less than their amortized cost are analyzed as part of the Firm’s ongoing assessment of temporary versus other-than-temporarily impaired at the individual security level.
The Firm believes there are no securities in an unrealized loss position that are other-than-temporarily-impaired at September 30, 2016 and December 31, 2015 for the reasons discussed herein.
For AFS debt securities, the Firm does not intend to sell the securities and is not likely to be required to sell the securities prior to recovery of amortized cost basis. For AFS and HTM debt securities, the securities have not experienced credit losses as the net unrealized losses reported in the previous table are primarily due to higher interest rates since those securities were purchased.
Additionally, the Firm does not expect to experience a credit loss based on consideration of the relevant information (as
discussed in Note 2 to the consolidated financial statements in the 2015 Form 10-K), including for U.S. government and agency securities, the existence of an explicit and implicit guarantee provided by the U.S. government. The risk of credit loss on securities in an unrealized loss position is considered minimal because all of the Firm’s agency securities as well as asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”) and collateralized loan obligations (“CLOs”) are highly rated and because corporate bonds are all investment grade.
For AFS equity securities, the Firm has the intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in market value.
See Note 12 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities, non-agency CMBS, auto loan ABS, CLO and FFELP student loan ABS.
| |
Investment Securities by Contractual Maturity
| At September 30, 2016 | ||||||||||||
| $ in millions | Amortized Cost | Fair Value | Annualized Average Yield | |||||||||
AFS debt securities | ||||||||||||
U.S. government and agency securities: |
| |||||||||||
U.S. Treasury securities: | ||||||||||||
Due within 1 year | $ | 372 | $ | 372 | 0.7% | |||||||
After 1 year through 5 years | 19,965 | 20,047 | 1.0% | |||||||||
After 5 years through 10 years | 7,332 | 7,294 | 1.4% | |||||||||
Total | 27,669 | 27,713 | ||||||||||
U.S. agency securities: | ||||||||||||
After 1 year through 5 years | 3,272 | 3,276 | 0.6% | |||||||||
After 5 years through 10 years | 1,130 | 1,150 | 1.9% | |||||||||
After 10 years | 19,777 | 19,918 | 1.6% | |||||||||
Total | 24,179 | 24,344 | ||||||||||
Total U.S. government and agency securities | 51,848 | 52,057 | 1.3% | |||||||||
Corporate and other debt: | ||||||||||||
Commercial mortgage-backed securities: |
| |||||||||||
Agency: | ||||||||||||
Due within 1 year | 83 | 84 | 0.9% | |||||||||
After 1 year through 5 years | 377 | 380 | 1.2% | |||||||||
After 5 years through 10 years | 564 | 565 | 1.2% | |||||||||
After 10 years | 967 | 941 | 1.6% | |||||||||
Total | 1,991 | 1,970 | ||||||||||
Non-agency: | ||||||||||||
After 10 years | 2,153 | 2,180 | 2.0% | |||||||||
Total | 2,153 | 2,180 | ||||||||||
Auto loan asset-backed securities: |
| |||||||||||
Due within 1 year | 142 | 142 | 1.3% | |||||||||
After 1 year through 5 years | 1,489 | 1,492 | 1.4% | |||||||||
After 5 years through 10 years | 102 | 103 | 1.7% | |||||||||
Total | 1,733 | 1,737 | ||||||||||
Corporate bonds: | ||||||||||||
Due within 1 year | 563 | 563 | 1.3% | |||||||||
After 1 year through 5 years | 2,620 | 2,656 | 1.8% | |||||||||
After 5 years through 10 years | 703 | 721 | 2.5% | |||||||||
Total | 3,886 | 3,940 | ||||||||||
Collateralized loan obligations: | ||||||||||||
After 5 years through 10 years | 502 | 498 | 1.5% | |||||||||
After 10 years | 13 | 13 | 1.5% | |||||||||
Total | 515 | 511 | ||||||||||
FFELP student loan asset-backed securities: | ||||||||||||
After 1 year through 5 years | 86 | 86 | 0.7% | |||||||||
After 5 years through 10 years | 870 | 847 | 0.9% | |||||||||
After 10 years | 2,450 | 2,395 | 1.0% | |||||||||
Total | 3,406 | 3,328 | ||||||||||
Total corporate and other debt | 13,684 | 13,666 | 1.5% | |||||||||
Total AFS debt securities | 65,532 | 65,723 | 1.3% | |||||||||
AFS equity securities | 15 | 9 | — % | |||||||||
Total AFS securities | 65,547 | 65,732 | 1.3% | |||||||||
| At September 30, 2016 | ||||||||||||
| $ in millions | Amortized Cost | Fair Value | Annualized Average Yield | |||||||||
HTM securities | ||||||||||||
U.S. government securities: | ||||||||||||
U.S. Treasury securities: | ||||||||||||
Due within 1 year | $ | 500 | $ | 500 | 0.7% | |||||||
After 1 year through 5 years | 1,107 | 1,116 | 1.2% | |||||||||
After 10 years | 2,932 | 2,928 | 1.8% | |||||||||
Total | 4,539 | 4,544 | ||||||||||
U.S. agency securities: | ||||||||||||
After 10 years | 8,685 | 8,785 | 2.0% | |||||||||
Total | 8,685 | 8,785 | ||||||||||
Total HTM securities | 13,224 | 13,329 | 1.8% | |||||||||
Total Investment securities | $ | 78,771 | $ | 79,061 | 1.4% | |||||||
Gross Realized Gains and Losses on Sales of AFS Securities
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Gross realized gains | $ | 45 | $ | 22 | $ | 130 | $ | 91 | ||||||||
Gross realized (losses) | — | (4 | ) | (3 | ) | (17 | ) | |||||||||
Total | $ | 45 | $ | 18 | $ | 127 | $ | 74 | ||||||||
Gross realized gains and losses are recognized in Other revenues in the consolidated statements of income.
6. Collateralized Transactions
The Firm enters into securities purchased under agreements to resell, securities sold under agreements to repurchase, securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance its inventory positions. For further discussion of the Firm’s collateralized transactions, see Note 6 to the consolidated financial statements in the 2015 Form 10-K.
Offsetting of Certain Collateralized Transactions
| At September 30, 2016 | ||||||||||||||||||||
| $ in millions | Gross Amounts1 | Amounts Offset | Net Amounts Presented | Amounts Not Offset2 | Net Exposure | |||||||||||||||
Assets | ||||||||||||||||||||
Securities purchased under agreements to resell | $ | 162,348 | $ | (71,769 | ) | $ | 90,579 | $ | (83,064 | ) | $ | 7,515 | ||||||||
Securities borrowed | 136,370 | (10,090 | ) | 126,280 | (121,245 | ) | 5,035 | |||||||||||||
Liabilities | ||||||||||||||||||||
Securities sold under agreements to repurchase | $ | 118,705 | $ | (71,769 | ) | $ | 46,936 | $ | (39,291 | ) | $ | 7,645 | ||||||||
Securities loaned | 26,605 | (10,090 | ) | 16,515 | (16,336 | ) | 179 | |||||||||||||
| |
| At December 31, 2015 | ||||||||||||||||||||
| $ in millions | Gross Amounts1 | Amounts Offset | Net Amounts Presented | Amounts Not Offset2 | Net Exposure | |||||||||||||||
Assets | ||||||||||||||||||||
Securities purchased under agreements to resell | $ | 135,714 | $ | (48,057 | ) | $ | 87,657 | $ | (84,752 | ) | $ | 2,905 | ||||||||
Securities borrowed | 147,445 | (5,029 | ) | 142,416 | (134,250 | ) | 8,166 | |||||||||||||
Liabilities | ||||||||||||||||||||
Securities sold under agreements to repurchase | $ | 84,749 | $ | (48,057 | ) | $ | 36,692 | $ | (31,604 | ) | $ | 5,088 | ||||||||
Securities loaned | 24,387 | (5,029 | ) | 19,358 | (18,881 | ) | 477 | |||||||||||||
|
|
For information related to offsetting of derivatives, see Note 4.
Secured Financing Transactions—Maturities and Collateral Pledged
Gross Secured Financing Balances by Remaining Contractual Maturity
| At September 30, 2016 | ||||||||||||||||||||
| $ in millions | Overnight and Open | Less than 30 Days | 30-90 Days | Over 90 Days | Total | |||||||||||||||
Securities sold under agreements to repurchase1 | $ | 37,212 | $ | 31,284 | $ | 24,697 | $ | 25,512 | $ | 118,705 | ||||||||||
Securities loaned1 | 15,613 | 134 | 3,128 | 7,730 | 26,605 | |||||||||||||||
Gross amount of secured financing included in the offsetting disclosure | $ | 52,825 | $ | 31,418 | $ | 27,825 | $ | 33,242 | $ | 145,310 | ||||||||||
Trading liabilities—Obligation to return securities received as collateral | 20,935 | — | — | — | 20,935 | |||||||||||||||
Total | $ | 73,760 | $ | 31,418 | $ | 27,825 | $ | 33,242 | $ | 166,245 | ||||||||||
| At December 31, 2015 | ||||||||||||||||||||
| $ in millions | Overnight and Open | Less than 30 Days | 30-90 Days | Over 90 Days | Total | |||||||||||||||
Securities sold under agreements to repurchase1 | $ | 20,410 | $ | 25,245 | $ | 13,221 | $ | 25,873 | $ | 84,749 | ||||||||||
Securities loaned1 | 12,247 | 478 | 2,156 | 9,506 | 24,387 | |||||||||||||||
Gross amount of secured financing included in the offsetting disclosure | $ | 32,657 | $ | 25,723 | $ | 15,377 | $ | 35,379 | $ | 109,136 | ||||||||||
Trading liabilities—Obligation to return securities received as collateral | 19,316 | — | — | — | 19,316 | |||||||||||||||
Total | $ | 51,973 | $ | 25,723 | $ | 15,377 | $ | 35,379 | $ | 128,452 | ||||||||||
|
Gross Secured Financing Balances by Class of Collateral Pledged
|
| |||||||
| $ in millions | At September 30, | At December 31, | ||||||
Securities sold under agreements to repurchase1 |
| |||||||
U.S. government and agency securities | $ | 46,027 | $ | 36,609 | ||||
State and municipal securities | 647 | 173 | ||||||
Other sovereign government obligations | 46,527 | 24,820 | ||||||
Asset-backed securities | 2,668 | 441 | ||||||
Corporate and other debt | 8,139 | 4,020 | ||||||
Corporate equities | 14,017 | 18,473 | ||||||
Other | 680 | 213 | ||||||
Total securities sold under agreements to repurchase | $ | 118,705 | $ | 84,749 | ||||
Securities loaned1 | ||||||||
U.S. government and agency securities | $ | 272 | $ | — | ||||
Other sovereign government obligations | 10,126 | 7,336 | ||||||
Corporate and other debt | 105 | 71 | ||||||
Corporate equities | 16,047 | 16,972 | ||||||
Other | 55 | 8 | ||||||
Total securities loaned | $ | 26,605 | $ | 24,387 | ||||
Gross amount of secured financing included in the offsetting disclosure | $ | 145,310 | $ | 109,136 | ||||
Trading liabilities—Obligation to return securities received as collateral |
| |||||||
Corporate and other debt | $ | — | $ | 3 | ||||
Corporate equities | 20,916 | 19,313 | ||||||
Other | 19 | — | ||||||
Total Trading liabilities—obligation to return securities received as collateral | $ | 20,935 | $ | 19,316 | ||||
Total | $ | 166,245 | $ | 128,452 | ||||
|
| |
Trading Assets Pledged
The Firm pledges its trading assets to collateralize securities sold under agreements to repurchase and other secured financings. Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets (pledged to various parties) in the consolidated balance sheets. At September 30, 2016 and December 31, 2015, the carrying value of Trading assets that have been loaned or pledged to counterparties, where those counterparties do not have the right to sell or repledge the collateral, were $40.3 billion and $35.0 billion, respectively.
Collateral Received
The Firm receives collateral in the form of securities in connection with securities purchased under agreements to resell, securities borrowed and derivative transactions, customer margin loans and securities-based lending. In many cases, the Firm is permitted to sell or repledge these securities held as collateral and use the securities to secure securities sold under agreements to repurchase, to enter into securities lending and derivative transactions or for delivery to counterparties to cover short positions. The Firm additionally receives securities as collateral in connection with certain securities-for-securities transactions in which it is the lender. In instances where the Firm is permitted to sell or repledge these securities, it reports the fair value of the collateral received and the related obligation to return the collateral included in Trading assets and Trading liabilities, respectively, in its consolidated balance sheets. At September 30, 2016 and December 31, 2015, the total fair value of financial instruments received as collateral where the Firm is permitted to sell or repledge the securities was $551.8 billion and $522.6 billion, respectively, and the fair value of the portion that had been sold or repledged was $433.8 billion and $398.1 billion, respectively.
Other
The Firm engages in margin lending to clients that allows the client to borrow against the value of qualifying securities. Margin loans are included within Customer and other receivables in the consolidated balance sheets. Under these agreements and transactions, the Firm receives collateral, including U.S. government and agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. Customer receivables generated from margin lending activities are collateralized by customer-owned securities held by the Firm. The Firm monitors required margin levels and established credit terms daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or reduce positions, when necessary. At September 30, 2016 and December 31, 2015, the amounts related to margin
lending were approximately $28.0 billion and $25.3 billion, respectively.
For a further discussion of the Firm’s margin lending activities, see Note 6 to the consolidated financial statements in the 2015 Form 10-K.
The Firm has additional secured liabilities. For a further discussion of other secured financings, see Note 10.
Cash and Securities Deposited with Clearing Organizations or Segregated
| $ in millions | At September 30, | At December 31, 2015 | ||||||
Securities1 | $ | 16,625 | $ | 14,390 | ||||
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements | 30,784 | 31,469 | ||||||
Total | $ | 47,409 | $ | 45,859 | ||||
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7. Loans and Allowance for Credit Losses
Loans
The Firm’s loans held for investment are recorded at amortized cost, and its loans held for sale are recorded at the lower of cost or fair value in the consolidated balance sheets. For a further description of these loans, refer to Note 7 to the consolidated financial statements in the 2015 Form 10-K. See Note 3 for further information regarding Loans and lending commitments held at fair value.
Loans Held for Investment and Held for Sale
| At September 30, 2016 | ||||||||||||
| $ in millions | Loans Held for Investment | Loans Held for Sale | Total Loans1,2 | |||||||||
Loans by Product Type | ||||||||||||
Corporate loans | $ | 24,792 | $ | 10,223 | $ | 35,015 | ||||||
Consumer loans | 24,717 | — | 24,717 | |||||||||
Residential real estate loans | 23,562 | 79 | 23,641 | |||||||||
Wholesale real estate loans | 7,616 | 1,806 | 9,422 | |||||||||
Total loans, gross | 80,687 | 12,108 | 92,795 | |||||||||
Allowance for loan losses | (287 | ) | — | (287 | ) | |||||||
Total loans, net | $ | 80,400 | $ | 12,108 | $ | 92,508 | ||||||
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| At December 31, 2015 | ||||||||||||
| $ in millions | Loans Held for Investment | Loans Held for Sale | Total Loans1,2 | |||||||||
Loans by Product Type | ||||||||||||
Corporate loans | $ | 23,554 | $ | 11,924 | $ | 35,478 | ||||||
Consumer loans | 21,528 | — | 21,528 | |||||||||
Residential real estate loans | 20,863 | 104 | 20,967 | |||||||||
Wholesale real estate loans | 6,839 | 1,172 | 8,011 | |||||||||
Total loans, gross | 72,784 | 13,200 | 85,984 | |||||||||
Allowance for loan losses | (225 | ) | — | (225 | ) | |||||||
Total loans, net | $ | 72,559 | $ | 13,200 | $ | 85,759 | ||||||
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Credit Quality
For a further discussion about the Firm’s evaluation of credit transactions and monitoring and credit quality indicators, see Note 7 to the consolidated financial statements in the 2015 Form 10-K.
Credit Quality Indicators for Loans Held for Investment, Gross of Allowance for Loan Losses, by Product Type
| At September 30, 2016 | ||||||||||||||||||||
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real | Total | |||||||||||||||
Pass | $ | 23,145 | $ | 24,717 | $ | 23,524 | $ | 7,321 | $ | 78,707 | ||||||||||
Special mention | 357 | — | — | 106 | 463 | |||||||||||||||
Substandard | 1,152 | — | 38 | 189 | 1,379 | |||||||||||||||
Doubtful | 138 | — | — | — | 138 | |||||||||||||||
Loss | — | — | — | — | — | |||||||||||||||
Total loans | $ | 24,792 | $ | 24,717 | $ | 23,562 | $ | 7,616 | $ | 80,687 | ||||||||||
| At December 31, 2015 | ||||||||||||||||||||
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real | Total | |||||||||||||||
Pass | $ | 22,040 | $ | 21,528 | $ | 20,828 | $ | 6,839 | $ | 71,235 | ||||||||||
Special mention | 300 | — | — | — | 300 | |||||||||||||||
Substandard | 1,202 | — | 35 | — | 1,237 | |||||||||||||||
Doubtful | 12 | — | — | — | 12 | |||||||||||||||
Loss | — | — | — | — | — | |||||||||||||||
Total loans | $ | 23,554 | $ | 21,528 | $ | 20,863 | $ | 6,839 | $ | 72,784 | ||||||||||
Allowance for Credit Losses and Impaired Loans
For factors considered by the Firm in determining the allowance for loan losses and impairments, see Notes 2 and 7 to the consolidated financial statements in the 2015Form 10-K.
Impaired and Past Due Loans by Product Type
| At September 30, 2016 | ||||||||||||
| $ in millions | Corporate | Residential Real Estate | Total | |||||||||
Impaired loans with allowance | $ | 181 | $ | — | $ | 181 | ||||||
Impaired loans without allowance1 | 186 | 28 | 214 | |||||||||
Impaired loans unpaid principal balance2 | 374 | 30 | 404 | |||||||||
Past due 90 days loans and on nonaccrual | 1 | 21 | 22 | |||||||||
| At December 31, 2015 | ||||||||||||
| $ in millions | Corporate | Residential Real Estate | Total | |||||||||
Impaired loans with allowance | $ | 39 | $ | — | $ | 39 | ||||||
Impaired loans without allowance1 | 89 | 17 | 106 | |||||||||
Impaired loans unpaid principal balance2 | 130 | 19 | 149 | |||||||||
Past due 90 days loans and on nonaccrual | 1 | 21 | 22 | |||||||||
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Select Loan Information by Region
| At September 30, 2016 | ||||||||||||||||
| $ in millions | Americas | EMEA | Asia- Pacific | Total | ||||||||||||
Impaired loans | $ | 395 | $ | — | $ | — | $ | 395 | ||||||||
Past due 90 days loans and on nonaccrual | 22 | — | — | 22 | ||||||||||||
Allowance for loan losses | 254 | 29 | 4 | 287 | ||||||||||||
| At December 31, 2015 | ||||||||||||||||
| $ in millions | Americas | EMEA | Asia- Pacific | Total | ||||||||||||
Impaired loans | $ | 108 | $ | 12 | $ | 25 | $ | 145 | ||||||||
Past due 90 days loans and on nonaccrual | 22 | — | — | 22 | ||||||||||||
Allowance for loan losses | 183 | 34 | 8 | 225 | ||||||||||||
EMEA— Europe, Middle East and Africa
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Allowance for Credit Losses on Lending Activities
$ in millions | Corporate | Consumer | Residential Real Estate | Wholesale Real Estate | Total | |||||||||||||||
Allowance for Loan Losses | ||||||||||||||||||||
Balance at December 31, 2015 | $ | 166 | $ | 5 | $ | 17 | $ | 37 | $ | 225 | ||||||||||
Gross charge-offs | (15 | ) | — | — | — | (15 | ) | |||||||||||||
Gross recoveries | — | — | — | — | — | |||||||||||||||
Net recoveries/(charge-offs) | (15 | ) | — | — | — | (15 | ) | |||||||||||||
Provision for (release of) loan losses1 | 120 | (2 | ) | 3 | 8 | 129 | ||||||||||||||
Other2 | (52 | ) | — | — | — | (52 | ) | |||||||||||||
Balance at September 30, 2016 | $ | 219 | $ | 3 | $ | 20 | $ | 45 | $ | 287 | ||||||||||
Allowance for Loan Losses by Impairment Methodology | ||||||||||||||||||||
Inherent | $ | 142 | $ | 3 | $ | 20 | $ | 45 | $ | 210 | ||||||||||
Specific | 77 | — | — | — | 77 | |||||||||||||||
Total allowance for loan losses at September 30, 2016 | $ | 219 | $ | 3 | $ | 20 | $ | 45 | $ | 287 | ||||||||||
Loans Evaluated by Impairment Methodology3 | ||||||||||||||||||||
Inherent | $ | 24,425 | $ | 24,717 | $ | 23,534 | $ | 7,616 | $ | 80,292 | ||||||||||
Specific | 367 | — | 28 | — | 395 | |||||||||||||||
Total loans evaluated at September 30, 2016 | $ | 24,792 | $ | 24,717 | $ | 23,562 | $ | 7,616 | $ | 80,687 | ||||||||||
Allowance for Lending Commitments | ||||||||||||||||||||
Balance at December 31, 2015 | $ | 180 | $ | 1 | $ | — | $ | 4 | $ | 185 | ||||||||||
Provision for lending commitments1 | 9 | — | — | — | 9 | |||||||||||||||
Other | (7 | ) | — | — | — | (7 | ) | |||||||||||||
Balance at September 30, 2016 | $ | 182 | $ | 1 | $ | — | $ | 4 | $ | 187 | ||||||||||
Allowance for Lending Commitments by Impairment Methodology | ||||||||||||||||||||
Inherent | $ | 180 | $ | 1 | $ | — | $ | 4 | $ | 185 | ||||||||||
Specific | 2 | — | — | — | 2 | |||||||||||||||
Total allowance for lending commitments at September 30, 2016 | $ | 182 | $ | 1 | $ | — | $ | 4 | $ | 187 | ||||||||||
Lending Commitments Evaluated by Impairment Methodology3 | ||||||||||||||||||||
Inherent | $ | 64,261 | $ | 5,561 | $ | 326 | $ | 536 | $ | 70,684 | ||||||||||
Specific | 76 | — | — | — | 76 | |||||||||||||||
Total lending commitments evaluated at September 30, 2016 | $ | 64,337 | $ | 5,561 | $ | 326 | $ | 536 | $ | 70,760 | ||||||||||
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$ in millions | Corporate | Consumer | Residential Real Estate | Wholesale Real Estate | Total | |||||||||||||||
Allowance for Loan Losses | ||||||||||||||||||||
Balance at December 31, 2014 | $ | 118 | $ | 2 | $ | 8 | $ | 21 | $ | 149 | ||||||||||
Gross charge-offs | — | — | (1 | ) | — | (1 | ) | |||||||||||||
Gross recoveries | 1 | — | — | — | 1 | |||||||||||||||
Net recoveries/(charge-offs) | 1 | — | (1 | ) | — | — | ||||||||||||||
Provision for loan losses1 | 31 | — | 3 | 1 | 35 | |||||||||||||||
Other | (11 | ) | — | — | — | (11 | ) | |||||||||||||
Balance at September 30, 2015 | $ | 139 | $ | 2 | $ | 10 | $ | 22 | $ | 173 | ||||||||||
Allowance for Loan Losses by Impairment Methodology | ||||||||||||||||||||
Inherent | $ | 134 | $ | 2 | $ | 10 | $ | 22 | $ | 168 | ||||||||||
Specific | 5 | — | — | — | 5 | |||||||||||||||
Total allowance for loan losses at September 30, 2015 | $ | 139 | $ | 2 | $ | 10 | $ | 22 | $ | 173 | ||||||||||
Loans Evaluated by Impairment Methodology3 | ||||||||||||||||||||
Inherent | $ | 22,426 | $ | 20,447 | $ | 19,615 | $ | 6,577 | $ | 69,065 | ||||||||||
Specific | 93 | — | 25 | — | 118 | |||||||||||||||
Total loans evaluated at September 30, 2015 | $ | 22,519 | $ | 20,447 | $ | 19,640 | $ | 6,577 | $ | 69,183 | ||||||||||
Allowance for Lending Commitments | ||||||||||||||||||||
Balance at December 31, 2014 | $ | 147 | $ | — | $ | — | $ | 2 | $ | 149 | ||||||||||
Provision for lending commitments1 | 11 | — | — | 1 | 12 | |||||||||||||||
Balance at September 30, 2015 | $ | 158 | $ | — | $ | — | $ | 3 | $ | 161 | ||||||||||
Allowance for Lending Commitments by Impairment Methodology | ||||||||||||||||||||
Inherent | $ | 158 | $ | — | $ | — | $ | 3 | $ | 161 | ||||||||||
Total allowance for lending commitments at September 30, 2015 | $ | 158 | $ | — | $ | — | $ | 3 | $ | 161 | ||||||||||
Lending Commitments Evaluated by Impairment Methodology3 | ||||||||||||||||||||
Inherent | $ | 65,627 | $ | 4,587 | $ | 310 | $ | 446 | $ | 70,970 | ||||||||||
Specific | 128 | — | — | — | 128 | |||||||||||||||
Total lending commitments evaluated at September 30, 2015 | $ | 65,755 | $ | 4,587 | $ | 310 | $ | 446 | $ | 71,098 | ||||||||||
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Troubled Debt Restructurings
At September 30, 2016 and December 31, 2015, the impaired loans and lending commitments classified as held for investment include troubled debt restructurings of $52.8 million and $44.0 million related to loans and $13.9 million and $34.8 million related to lending commitments, respectively, within corporate loans. At September 30, 2016 the Firm did not record an allowance related to these troubled debt restructurings. At December 31, 2015, an allowance of $5.1 million was recorded. These restructurings typically include modifications of interest rates, collateral requirements, other loan covenants, and payment extensions.
Employee Loans
Employee loans are granted primarily in conjunction with a program established in the Wealth Management business segment to retain and recruit certain employees. These loans are recorded in Customer and other receivables in the consolidated balance sheets. These loans are full recourse, generally require periodic payments and have repayment terms ranging from 1 to 12 years. The Firm establishes an allowance for loan amounts it does not consider recoverable, which is recorded in Compensation and benefits expense. At September 30, 2016, the Firm had $4,821 million of employee loans, net of an allowance of approximately $96 million. At December 31, 2015, the Firm had $4,923 million of employee loans, net of an allowance of approximately $108 million.
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Overview
The Firm has investments accounted for under the equity method of accounting (see Note 1 to the consolidated financial statements in the 2015 Form 10-K) of $3,168 million and $3,144 million at September 30, 2016 and December 31, 2015, respectively, included in Other assets—Other investments in the consolidated balance sheets. Income (loss) from equity method investments was $(40) million for the current quarter and $35 million for the prior year quarter, and $(39) million for the current year period and $118 million for the prior year period, and is included in Other revenues in the consolidated statements of income. In addition, a loss of $35 million was recognized in the current year period in connection with the sale of solar investments and impairments of the remaining unsold solar investments accounted for under the equity method.
Japanese Securities Joint Venture
Included in the equity method investments is the Firm’s 40% voting interest (“40% interest”) in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”). Mitsubishi UFJ Financial Group, Inc. (“MUFG”) holds a 60% voting interest. The Firm accounts for its equity method investment in MUMSS within the Institutional Securities business segment. The Firm recorded income from its 40% interest in MUMSS of $26 million in the current quarter and $54 million in the prior year quarter, and income of $83 million in the current year period and $194 million in the prior year period, within Other revenues in the consolidated statements of income.
Deposits
| $ in millions | At September 30, 20161 | At December 31, 20151 | ||||||
Savings and demand deposits | $ | 150,244 | $ | 153,346 | ||||
Time deposits2 | 1,599 | 2,688 | ||||||
Total3 | $ | 151,843 | $ | 156,034 | ||||
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Interest bearing deposits at September 30, 2016 included $150,228 million of savings deposits payable upon demand and $728 million of time deposits maturing in 2016, $805 million of time deposits maturing in 2017 and $12 million of time deposits maturing in 2018.
10. Long-Term Borrowings and Other Secured Financings
Long-Term Borrowings
Components of Long-term Borrowings
| $ in millions | At September 30, 2016 | At December 31, 2015 | ||||||
Senior debt | $ | 152,917 | $ | 140,494 | ||||
Subordinated debt | 11,010 | 10,404 | ||||||
Junior subordinated debentures | — | 2,870 | ||||||
Total | $ | 163,927 | $ | 153,768 | ||||
The Firm issued notes with a principal amount of approximately $27.5 billion in the current year period and $30.2 billion in the prior year period, and approximately $22.9 billion and $17.6 billion, respectively, in aggregate long-term borrowings matured or were retired.
The weighted average maturity of long-term borrowings, based upon stated maturity dates, was approximately 5.9 years and 6.1 years at September 30, 2016 and December 31, 2015, respectively.
Trust Preferred Securities
During the current quarter, Morgan Stanley Capital Trust III, Morgan Stanley Capital Trust IV, Morgan Stanley Capital Trust V and Morgan Stanley Capital Trust VIII redeemed all of their issued and outstanding Capital Securities pursuant to the optional redemption provisions provided in the respective governing documents. In the aggregate, $2.8 billion was redeemed. We concurrently redeemed the related underlying junior subordinated debentures.
Other Secured Financings
Other secured financings include the liabilities related to transfers of financial assets that are accounted for as financings rather than sales, consolidated VIEs where the Firm is deemed to be the primary beneficiary, pledged commodities, certain equity-linked notes and other secured borrowings. These liabilities are generally payable from the cash flows of the related assets accounted for as Trading assets. See Note 12 for further information on Other secured financings related to VIEs and securitization activities.
Components of Other Secured Financings
| $ in millions | At September 30, | At December 31, | ||||||
Secured financings with original maturities greater than one year | $ | 8,251 | $ | 7,629 | ||||
Secured financings with original maturities one year or less | 1,292 | 1,435 | ||||||
Failed sales1 | 269 | 400 | ||||||
Total | $ | 9,812 | $ | 9,464 | ||||
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11. Commitments, Guarantees and Contingencies
Commitments
The Firm’s commitments are summarized in the following table by years to maturity. Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
Commitments
| Years to Maturity at September 30, 2016 | ||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | Total | |||||||||||||||
Letters of credit and other financial guarantees obtained to satisfy collateral requirements | $ | 122 | $ | 1 | $ | 1 | $ | 42 | $ | 166 | ||||||||||
Investment activities | 551 | 101 | 33 | 273 | 958 | |||||||||||||||
Corporate lending commitments1 | 16,695 | 22,606 | 46,098 | 1,556 | 86,955 | |||||||||||||||
Consumer lending commitments | 5,555 | 2 | — | 4 | 5,561 | |||||||||||||||
Residential real estate lending commitments | 79 | 43 | 96 | 227 | 445 | |||||||||||||||
Wholesale real estate lending commitments | 118 | 328 | 111 | 79 | 636 | |||||||||||||||
Forward-starting securities purchased under agreements to resell and securities borrowed2 | 70,997 | — | — | — | 70,997 | |||||||||||||||
Underwriting commitments | 51 | — | — | — | 51 | |||||||||||||||
Total | $ | 94,168 | $ | 23,081 | $ | 46,339 | $ | 2,181 | $ | 165,769 | ||||||||||
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For a further description of these commitments, refer to Note 12 to the consolidated financial statements in the 2015 Form 10-K.
The Firm sponsors several non-consolidated investment funds for third-party investors where it typically acts as general partner of, and investment advisor to, these funds and typically commits to invest a minority of the capital of such funds, with subscribing third-party investors contributing the
majority. The Firm’s employees, including its senior officers as well as the Firm’s Board of Directors, may participate on the same terms and conditions as other investors in certain of these funds that the Firm sponsors primarily for client investment, except that the Firm may waive or lower applicable fees and charges for its employees. The Firm has contractual capital commitments, guarantees, lending facilities and counterparty arrangements with respect to these investment funds.
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Guarantees
Obligations Under Guarantee Arrangements at September 30, 2016
| Maximum Potential Payout/Notional | Carrying (Asset)/ Liability | Collateral/ Recourse | ||||||||||||||||||||||||||
| Years to Maturity | ||||||||||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | Total | |||||||||||||||||||||||
Credit derivative contracts1 | $ | 207,761 | $ | 178,588 | $ | 96,890 | $ | 42,905 | $ | 526,144 | $ | (1,873 | ) | $ | — | |||||||||||||
Other credit contracts | 55 | 18 | — | 260 | 333 | (9 | ) | — | ||||||||||||||||||||
Non-credit derivative contracts1 | 994,398 | 644,322 | 269,117 | 551,899 | 2,459,736 | 73,892 | — | |||||||||||||||||||||
Standby letters of credit and other financial guarantees issued2 | 1,177 | 651 | 1,480 | 5,590 | 8,898 | (129 | ) | 6,886 | ||||||||||||||||||||
Market value guarantees | 52 | 254 | 93 | 13 | 412 | 2 | 6 | |||||||||||||||||||||
Liquidity facilities | 3,038 | — | — | — | 3,038 | (5 | ) | 5,404 | ||||||||||||||||||||
Whole loan sales guarantees | — | — | 2 | 23,359 | 23,361 | 8 | — | |||||||||||||||||||||
Securitization representations and warranties | — | — | — | 60,333 | 60,333 | 103 | — | |||||||||||||||||||||
General partner guarantees | 8 | 36 | 52 | 309 | 405 | 50 | — | |||||||||||||||||||||
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The Firm has obligations under certain guarantee arrangements, including contracts and indemnification agreements, that contingently require the Firm to make payments to the guaranteed party based on changes in an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index, or the occurrence or non-occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Also included as guarantees are contracts that contingently require the Firm to make payments to the guaranteed party based on another entity’s failure to perform under an agreement, as well as indirect guarantees of the indebtedness of others.
For more information on the nature of the obligation and related business activity for market value guarantees, liquidity facilities, whole loan sale guarantees and general partner guarantees related to certain investment management funds, as well as the other products in the previous table, see Note 12 to the consolidated financial statements in the 2015 Form 10-K.
Other Guarantees and Indemnities
In the normal course of business, the Firm provides guarantees and indemnifications in a variety of transactions. These provisions generally are standard contractual terms. Certain of these guarantees and indemnifications related to trust preferred securities, indemnities and exchange/clearinghouse member guarantees are described in Note 12 to the consolidated financial statements in the 2015 Form 10-K.
In addition, in the ordinary course of business, the Firm guarantees the debt and/or certain trading obligations (including obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or trading counterparties. The activities of the Firm’s subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the consolidated financial statements.
Finance Subsidiary
The Parent Company fully and unconditionally guarantees the securities issued by Morgan Stanley Finance LLC, a 100%-owned finance subsidiary.
Contingencies
Legal. In the normal course of business, the Firm has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress. These actions have included, but are not limited to, residential mortgage and
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credit crisis related matters. Over the last several years, the level of litigation and investigatory activity (both formal and informal) by governmental and self-regulatory agencies has increased materially in the financial services industry. As a result, the Firm expects that it may become the subject of increased claims for damages and other relief and, while the Firm has identified below any individual proceedings where the Firm believes a material loss to be reasonably possible and reasonably estimable, there can be no assurance that material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be probable or possible and reasonably estimable losses.
The Firm contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the consolidated financial statements and the Firm can reasonably estimate the amount of that loss, the Firm accrues the estimated loss by a charge to income. The Firm’s future legal expenses may fluctuate from period to period, given the current environment regarding government investigations and private litigation affecting global financial services firms, including the Firm.
In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where a loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.
For certain legal proceedings and investigations, the Firm cannot reasonably estimate such losses, particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or governmental entities seek substantial or indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to the proceedings or investigations in question, before a loss or additional loss or range of loss or additional range of loss can be reasonably estimated for a proceeding or investigation.
For certain other legal proceedings and investigations, the Firm can estimate reasonably possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued, but does not believe, based on current knowledge and after consultation with counsel, that such
losses will have a material adverse effect on the Firm’s consolidated financial statements as a whole, other than the matters referred to in the following paragraphs.
On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Firm, styledChina Development Industrial Bank v. Morgan Stanley& Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million credit default swap referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Firm misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Firm knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Firm’s motion to dismiss the complaint. Based on currently available information, the Firm believes it could incur a loss in this action of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.
On January 25, 2011, the Firm was named as a defendant inThe Bank of New York Mellon Trust, National Association v. Morgan Stanley Mortgage Capital, Inc., a litigation pending in the United States District Court for the Southern District of New York (“SDNY”). The suit, brought by the trustee of a series of commercial mortgage pass-through certificates, alleges that the Firm breached certain representations and warranties with respect to an $81 million commercial mortgage loan that was originated and transferred to the trust by the Firm. The complaint seeks, among other things, to have the Firm repurchase the loan and pay additional monetary damages. On June 16, 2014, the court granted the Firm’s supplemental motion for summary judgment, which was appealed by plaintiff. On April 27, 2016, the United States Court of Appeals for the Second Circuit vacated the judgment of the SDNY and remanded the case to the SDNY for further proceedings consistent with its opinion. A trial has been set for February 13, 2017. Based on currently available information, the Firm believes it could incur a loss in this action of up to approximately $81 million, plus pre-judgment interest, fees and costs.
On August 7, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-4SL and Mortgage Pass-Through Certificates, Series 2006-4SL against the Firm. The matter is styledMorgan Stanley Mortgage Loan Trust 2006-4SL, et al. v.
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Morgan Stanley Mortgage Capital Inc. and is pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $303 million, breached various representations and warranties. The complaint seeks, among other relief, rescission of the mortgage loan purchase agreement underlying the transaction, specific performance and unspecified damages and interest. On August 8, 2014, the court granted in part and denied in part the Firm’s motion to dismiss. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $149 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On August 8, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-14SL, Mortgage Pass-Through Certificates, Series 2006-14SL, Morgan Stanley Mortgage Loan Trust 2007-4SL and Mortgage Pass-Through Certificates, Series 2007-4SL against the Firm styledMorgan Stanley Mortgage Loan Trust 2006-14SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trusts, which had original principal balances of approximately $354 million and $305 million respectively, breached various representations and warranties. The complaint seeks, among other relief, rescission of the mortgage loan purchase agreements underlying the transactions, specific performance and unspecified damages and interest. On August 16, 2013, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On August 16, 2016, the Firm moved for summary judgment and the plaintiffs moved for partial summary judgment. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $527 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On September 28, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-13ARX against the Firm styledMorgan Stanley Mortgage Loan Trust 2006-13ARX v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc., pending in the Supreme Court of NY. The plaintiff filed an amended
complaint on January 17, 2013, which asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $609 million, breached various representations and warranties. The amended complaint seeks, among other relief, declaratory judgment relief, specific performance and unspecified damages and interest. By order dated September 30, 2014, the court granted in part and denied in part the Firm’s motion to dismiss the amended complaint. On August 11, 2016, the Appellate Division, First Department reversed in part the trial court’s granting of the Firm’s motion to dismiss. On September 9, 2016, the Firm filed a motion for reargument or, in the alternative, leave to appeal that decision. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $170 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On January 10, 2013, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-10SL and Mortgage Pass-Through Certificates, Series 2006-10SL against the Firm styledMorgan Stanley Mortgage Loan Trust 2006-10SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $300 million, breached various representations and warranties. The complaint seeks, among other relief, an order requiring the Firm to comply with the loan breach remedy procedures in the transaction documents, unspecified damages, and interest. On August 8, 2014, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $197 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On May 3, 2013, plaintiffs inDeutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al.filed a complaint against the Firm, certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing
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residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Firm to plaintiff currently at issue in this action was approximately $644 million. The complaint alleges causes of action against the Firm for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. The Firm perfected its appeal from that decision on June 12, 2015. At September 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $252 million, and the certificates had incurred actual losses of approximately $85 million. Based on currently available information, the Firm believes it could incur a loss in this action up to the difference between the $252 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Firm, or upon sale, plus pre- and post-judgment interest, fees and costs. The Firm may be entitled to be indemnified for some of these losses.
On July 8, 2013, U.S. Bank National Association, in its capacity as trustee, filed a complaint against the Firm styled U.S. Bank National Association, solely in its capacity as Trustee of the Morgan Stanley Mortgage Loan Trust 2007-2AX (MSM 2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC, as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. and Greenpoint Mortgage Funding, Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $650 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages and interest. On August 22, 2013, the Firm filed a motion to dismiss the complaint, which was granted in part and denied in part on November 24, 2014. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $240 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On December 30, 2013, Wilmington Trust Company, in its capacity as trustee for Morgan Stanley Mortgage Loan Trust 2007-12, filed a complaint against the Firm. The matter is styledWilmington Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC et al. and is pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the
loans in the trust, which had an original principal balance of approximately $516 million, breached various representations and warranties. The complaint seeks, among other relief, unspecified damages, attorneys’ fees, costs and interest. On February 28, 2014, the defendants filed a motion to dismiss the complaint, which was granted in part and denied in part on June 14, 2016. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $152 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus attorney’s fees, costs and interest, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On April 28, 2014, Deutsche Bank National Trust Company, in its capacity as trustee for Morgan Stanley Structured Trust I 2007-1, filed a complaint against the Firm styledDeutsche Bank National Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC, pending in the SDNY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $735 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified compensatory and/or rescissory damages, interest and costs. On April 3, 2015, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $292 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On January 23, 2015, Deutsche Bank National Trust Company, in its capacity as trustee, filed a complaint against the Firm styledDeutsche Bank National Trust Company solely in its capacity as Trustee of the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 v. Morgan Stanley Mortgage Capital Holdings LLC as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.05 billion, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential, rescissory, equitable and punitive damages, attorneys’ fees, costs and other related expenses, and interest. On October 20, 2015, the court
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granted in part and denied in part the Firm’s motion to dismiss the complaint. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and a monoline insurer that the Firm did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
12. Variable Interest Entities and Securitization Activities
Overview
For a discussion on the Firm’s VIEs, the determination and structure of VIEs and securitization activities, see Note 13 to the consolidated financial statements in the 2015 Form 10-K.
As a result of adopting the accounting update,Amendments to the Consolidation Analysis, on January 1, 2016, certain consolidated entities are now considered VIEs and are included in the balances at September 30, 2016. See Note 2 for further information.
Consolidated VIEs
Assets and Liabilities by Type of Activity
| At September 30, 2016 | At December 31, 2015 | |||||||||||||||
| $ in millions | VIE Assets | VIE Liabilities | VIE Assets | VIE Liabilities | ||||||||||||
Credit-linked notes | $ | 901 | $ | — | $ | 900 | $ | — | ||||||||
Other structured financings | 572 | 7 | 787 | 13 | ||||||||||||
Asset-backed securitizations1 | 597 | 371 | 668 | 423 | ||||||||||||
Other2 | 916 | 32 | 245 | — | ||||||||||||
Total | $ | 2,986 | $ | 410 | $ | 2,600 | $ | 436 | ||||||||
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Assets and Liabilities by Balance Sheet Caption
| $ in millions | At September 30, 2016 | At December 31, 2015 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 86 | $ | 14 | ||||
Trading assets, at fair value | 1,889 | 1,842 | ||||||
Customer and other receivables | 7 | 3 | ||||||
Goodwill | 18 | — | ||||||
Intangible assets | 138 | — | ||||||
Other assets | 848 | 741 | ||||||
Total assets | $ | 2,986 | $ | 2,600 | ||||
Liabilities | ||||||||
Other secured financings, at fair value | $ | 378 | $ | 431 | ||||
Other liabilities and accrued expenses | 32 | 5 | ||||||
Total liabilities | $ | 410 | $ | 436 | ||||
Consolidated VIE assets and liabilities are presented in the previous tables after intercompany eliminations. The assets owned by many consolidated VIEs cannot be removed unilaterally by the Firm and are not generally available to the Firm. The related liabilities issued by many consolidated VIEs are non-recourse to the Firm. In certain other consolidated VIEs, the Firm either has the unilateral right to remove assets or provide additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.
As part of the Institutional Securities business segment’s securitization and related activities, the Firm has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Firm (see Note 11).
In general, the Firm’s exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE’s net assets recognized in its financial statements, net of amounts absorbed by third-party variable interest holders. At September 30, 2016 and December 31, 2015, noncontrolling interests in the consolidated financial statements related to consolidated VIEs were $204 million and $37 million, respectively. The Firm also had additional maximum exposure to losses of approximately $78 million and $72 million at September 30, 2016 and December 31, 2015, respectively, primarily related to certain derivatives, commitments, guarantees and other forms of involvement.
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Non-consolidated VIEs
The following tables include all VIEs in which the Firm has determined that its maximum exposure to loss is greater than specific thresholds or meets certain other criteria, and exclude exposure to loss from liabilities due to immateriality. Most of the VIEs included in the following tables are sponsored by unrelated parties; the Firm’s involvement generally is the result of its secondary market-making activities, securities held in its Investment securities portfolio (see Note 5), and certain investments in funds.
Non-Consolidated VIE Assets, Maximum and Carrying Value of Exposure to Loss
| At September 30, 2016 | ||||||||||||||||||||
| $ in millions | Mortgage- and Asset-Backed Securitizations | Collateralized Debt Obligations | Municipal Option Bonds | Other Structured Financings | �� | Other | ||||||||||||||
VIE assets that the Firm does not consolidate (unpaid principal balance) | $ | 120,846 | $ | 4,875 | $ | 5,070 | $ | 4,597 | $ | 39,119 | ||||||||||
Maximum exposure to loss | ||||||||||||||||||||
Debt and equity interests | $ | 12,505 | $ | 741 | $ | 45 | $ | 1,639 | $ | 5,011 | ||||||||||
Derivative and other contracts | — | — | 3,038 | — | 46 | |||||||||||||||
Commitments, guarantees and other | 714 | 196 | — | 373 | 363 | |||||||||||||||
Total maximum exposure to loss | $ | 13,219 | $ | 937 | $ | 3,083 | $ | 2,012 | $ | 5,420 | ||||||||||
Carrying value of exposure to loss—Assets | ||||||||||||||||||||
Debt and equity interests | $ | 12,505 | $ | 741 | $ | 12 | $ | 1,248 | $ | 5,011 | ||||||||||
Derivative and other contracts | — | — | 6 | — | 15 | |||||||||||||||
Total carrying value of exposure to loss—Assets | $ | 12,505 | $ | 741 | $ | 18 | $ | 1,248 | $ | 5,026 | ||||||||||
| At December 31, 2015 | ||||||||||||||||||||
| $ in millions | Mortgage- and Asset-Backed Securitizations | Collateralized Debt Obligations | Municipal Option Bonds | Other Structured Financings | Other | |||||||||||||||
VIE assets that the Firm does not consolidate (unpaid principal balance) | $ | 126,872 | $ | 8,805 | $ | 4,654 | $ | 2,201 | $ | 20,775 | ||||||||||
Maximum exposure to loss | ||||||||||||||||||||
Debt and equity interests | $ | 13,361 | $ | 1,259 | $ | 1 | $ | 1,129 | $ | 3,854 | ||||||||||
Derivative and other contracts | — | — | 2,834 | — | 67 | |||||||||||||||
Commitments, guarantees and other | 494 | 231 | — | 361 | 222 | |||||||||||||||
Total maximum exposure to loss | $ | 13,855 | $ | 1,490 | $ | 2,835 | $ | 1,490 | $ | 4,143 | ||||||||||
Carrying value of exposure to loss—Assets | ||||||||||||||||||||
Debt and equity interests | $ | 13,361 | $ | 1,259 | $ | 1 | $ | 685 | $ | 3,854 | ||||||||||
Derivative and other contracts | — | — | 5 | — | 13 | |||||||||||||||
Total carrying value of exposure to loss—Assets | $ | 13,361 | $ | 1,259 | $ | 6 | $ | 685 | $ | 3,867 | ||||||||||
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Non-Consolidated VIE Mortgage- and Asset-Backed Securitization Assets
| At September 30, 2016 | At December 31, 2015 | |||||||||||||||
| $ in millions | Unpaid Principal Balance | Debt and Equity Interests | Unpaid Principal Balance | Debt and Equity Interests | ||||||||||||
Residential mortgages | $ | 7,824 | $ | 620 | $ | 13,787 | $ | 1,012 | ||||||||
Commercial mortgages | 63,835 | 2,705 | 57,313 | 2,871 | ||||||||||||
U.S. agency collateralized mortgage obligations | 18,744 | 3,532 | 13,236 | 2,763 | ||||||||||||
Other consumer or commercial loans | 30,443 | 5,648 | 42,536 | 6,715 | ||||||||||||
Total mortgage- and asset-backed securitization assets | $ | 120,846 | $ | 12,505 | $ | 126,872 | $ | 13,361 | ||||||||
The Firm’s maximum exposure to loss often differs from the carrying value of the variable interests held by the Firm. The maximum exposure to loss is dependent on the nature of the Firm’s variable interest in the VIEs and is limited to the notional amounts of certain liquidity facilities, other credit support, total return swaps, written put options, and the fair value of certain other derivatives and investments the Firm has made in the VIEs. Liabilities issued by VIEs generally are non-recourse to the Firm. Where notional amounts are utilized in quantifying maximum exposure related to derivatives, such amounts do not reflect fair value write-downs already recorded by the Firm.
The Firm’s maximum exposure to loss does not include the offsetting benefit of any financial instruments that the Firm may utilize to hedge these risks associated with its variable interests. In addition, the Firm’s maximum exposure to loss is not reduced by the amount of collateral held as part of a transaction with the VIE or any party to the VIE directly against a specific exposure to loss.
Securitization transactions generally involve VIEs. Primarily as a result of its secondary market-making activities, the Firm owned additional VIE assets mainly issued by securitization SPEs for which the maximum exposure to loss is less than specific thresholds. These additional assets totaled $13.3 billion and $12.9 billion at September 30, 2016 and December 31, 2015, respectively. These assets were either retained in connection with transfers of assets by the Firm, acquired in connection with secondary market-making activities or held as AFS securities in its Investment securities portfolio (see Note 5) or held as investments in funds. At September 30, 2016 and December 31, 2015, these assets consisted of securities backed by residential mortgage loans, commercial mortgage loans or other consumer loans, such as credit card receivables, automobile loans and student loans, CDOs or CLOs, and investment funds. The Firm’s primary risk exposure is to the securities issued by the SPE owned by the Firm, with the risk highest on the most subordinate class
of beneficial interests. These assets generally are included in Trading assets—Corporate and other debt, Trading assets—Investments or AFS securities within its Investment securities portfolio and are measured at fair value (see Note 3). The Firm does not provide additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees or similar derivatives. The Firm’s maximum exposure to loss generally equals the fair value of the assets owned.
Transactions with SPEs in which the Firm, acting as principal, transferred financial assets with continuing involvement and received sales treatment are shown below.
Transfers of Assets with Continuing Involvement
| At September 30, 2016 | ||||||||||||||||
| $ in millions | Residential Mortgage Loans | Commercial Mortgage Loans | U.S. Agency Collateralized Mortgage Obligations | Credit- Other1 | ||||||||||||
SPE assets (unpaid principal balance)2 | $ | 19,196 | $ | 61,089 | $ | 14,433 | $ | 11,497 | ||||||||
Retained interests (fair value) |
| |||||||||||||||
Investment grade | $ | — | $ | 65 | $ | 518 | $ | — | ||||||||
Non-investment grade | 6 | 72 | — | 973 | ||||||||||||
Total retained interests (fair value) | $ | 6 | $ | 137 | $ | 518 | $ | 973 | ||||||||
Interests purchased in the secondary market (fair value) |
| |||||||||||||||
Investment grade | $ | — | $ | 131 | $ | 156 | $ | — | ||||||||
Non-investment grade | 24 | 89 | — | — | ||||||||||||
Total interests purchased in the secondary market (fair value) | $ | 24 | $ | 220 | $ | 156 | $ | — | ||||||||
Derivative assets (fair value) | $ | — | $ | 301 | $ | — | $ | 111 | ||||||||
Derivative liabilities (fair value) | — | — | — | 443 | ||||||||||||
| At December 31, 2015 | ||||||||||||||||
| $ in millions | Residential Mortgage Loans | Commercial Mortgage Loans | U.S. Agency Collateralized Mortgage Obligations | Credit- Other1 | ||||||||||||
SPE assets (unpaid principal balance)2 | $ | 22,440 | $ | 72,760 | $ | 17,978 | $ | 12,235 | ||||||||
Retained interests (fair value) |
| |||||||||||||||
Investment grade | $ | — | $ | 238 | $ | 649 | $ | — | ||||||||
Non-investment grade | 160 | 63 | — | 1,136 | ||||||||||||
Total retained interests (fair value) | $ | 160 | $ | 301 | $ | 649 | $ | 1,136 | ||||||||
Interests purchased in the secondary market (fair value) |
| |||||||||||||||
Investment grade | $ | — | $ | 88 | $ | 99 | $ | — | ||||||||
Non-investment grade | 60 | 63 | — | 10 | ||||||||||||
Total interests purchased in the secondary market (fair value) | $ | 60 | $ | 151 | $ | 99 | $ | 10 | ||||||||
Derivative assets (fair value) | $ | — | $ | 343 | $ | — | $ | 151 | ||||||||
Derivative liabilities (fair value) | — | — | — | 449 | ||||||||||||
|
|
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| At September 30, 2016 | ||||||||||||
| $ in millions | Level 2 | Level 3 | Total | |||||||||
Retained interests (fair value) | ||||||||||||
Investment grade | $ | 583 | $ | — | $ | 583 | ||||||
Non-investment grade | 31 | 1,020 | 1,051 | |||||||||
Total retained interests (fair value) | $ | 614 | $ | 1,020 | $ | 1,634 | ||||||
Interests purchased in the secondary market (fair value) |
| |||||||||||
Investment grade | $ | 287 | $ | — | $ | 287 | ||||||
Non-investment grade | 100 | 13 | 113 | |||||||||
Total interests purchased in the secondary market (fair value) | $ | 387 | $ | 13 | $ | 400 | ||||||
Derivative assets (fair value) | $ | 396 | $ | 16 | $ | 412 | ||||||
Derivative liabilities (fair value) | 82 | 361 | 443 | |||||||||
| At December 31, 2015 | ||||||||||||
| $ in millions | Level 2 | Level 3 | Total | |||||||||
Retained interests (fair value) | ||||||||||||
Investment grade | $ | 886 | $ | 1 | $ | 887 | ||||||
Non-investment grade | 17 | 1,342 | 1,359 | |||||||||
Total retained interests (fair value) | $ | 903 | $ | 1,343 | $ | 2,246 | ||||||
Interests purchased in the secondary market (fair value) |
| |||||||||||
Investment grade | $ | 187 | $ | — | $ | 187 | ||||||
Non-investment grade | 112 | 21 | 133 | |||||||||
Total interests purchased in the secondary market (fair value) | $ | 299 | $ | 21 | $ | 320 | ||||||
Derivative assets (fair value) | $ | 466 | $ | 28 | $ | 494 | ||||||
Derivative liabilities (fair value) | 110 | 339 | 449 | |||||||||
Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the consolidated statements of income. The Firm may act as underwriter of the beneficial interests issued by these securitization vehicles. Investment banking underwriting net revenues are recognized in connection with these transactions. The Firm may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are included in the consolidated balance sheets at fair value. Any changes in the fair value of such retained interests are recognized in the consolidated statements of income.
Proceeds from New Securitization Transactions and Retained Interests in Securitization Transactions
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Proceeds received from new securitization transactions | $ | 6,819 | $ | 6,105 | $ | 13,695 | $ | 17,270 | ||||||||
Proceeds from retained interests in securitization transactions | 768 | 476 | 1,901 | 2,082 | ||||||||||||
Net gains on sale of assets in securitization transactions at the time of the sale were not material for all periods presented.
The Firm has provided, or otherwise agreed to be responsible for representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Firm (see Note 11).
Proceeds from Sales to CLO Entities Sponsored by Non-Affiliates
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Proceeds from sale of corporate loans sold to those SPEs | $ | 199 | $ | 121 | $ | 230 | $ | 1,086 | ||||||||
Net gains on sale of corporate loans to CLO transactions at the time of sale were not material for all periods presented.
The Firm also enters into transactions in which it sells equity securities and contemporaneously enters into bilateral OTC equity derivatives with the purchasers of the securities, through which it retains the exposure to the securities as shown in the following table.
Carrying and Fair Value of Assets Sold and Retained Interest Exposure
| $ in millions | At September 30, 2016 | At December 31, 2015 | ||||||
Carrying value of assets derecognized at the time of sale and gross cash proceeds | $ | 9,792 | $ | 7,878 | ||||
Fair value of assets sold | 9,900 | 7,935 | ||||||
Fair value of derivative assets recognized in the consolidated balance sheets | 118 | 97 | ||||||
Fair value of derivative liabilities recognized in the consolidated balance sheets | 10 | 40 | ||||||
Failed Sales
For transfers that fail to meet the accounting criteria for a sale, the Firm continues to recognize the assets in Trading assets at fair value, and the Firm recognizes the associated liabilities in Other secured financings at fair value in the consolidated balance sheets (see Note 10).
The assets transferred to certain unconsolidated VIEs in transactions accounted for as failed sales cannot be removed unilaterally by the Firm and are not generally available to the Firm. The related liabilities are also non-recourse to the Firm. In certain other failed sale transactions, the Firm has the right to remove assets or provide additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.
Carrying Value of Assets and Liabilities Related to Failed Sales
At September 30, 2016 | At December 31, 2015 | |||||||||||||||
| $ in millions | Assets | Liabilities | Assets | Liabilities | ||||||||||||
Failed sales | $ | 269 | $ | 269 | $ | 400 | $ | 400 | ||||||||
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Regulatory Capital Framework
For a discussion of the Firm’s regulatory capital framework, see Note 14 to the consolidated financial statements in the 2015 Form 10-K.
Risk-Based Capital Requirement
The Firm is required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. The Firm’s binding risk-based capital ratios for regulatory purposes are the lower of the capital ratios computed under the (i) standardized approaches for calculating credit risk-weighted assets (“RWAs”) and market risk RWAs (the “Standardized Approach”) and (ii) applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “Advanced Approach”).
In addition to the minimum risk-based capital ratio requirements, on a fully phased-in basis by 2019, the Firm will be subject to:
A greater than 2.5% Common Equity Tier 1 capital conservation buffer;
The Common Equity Tier 1 global systemically important bank capital surcharge, currently at 3%; and
Up to a 2.5% Common Equity Tier 1 countercyclical capital buffer, currently set by banking regulators at zero (collectively, the “buffers”).
In 2016, the phase-in amount for each of the buffers is 25% of the fully phased-in buffer requirement. Failure to maintain the buffers will result in restrictions on the Firm’s ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.
The methods for calculating each of the Firm’s risk-based capital ratios will change through January 1, 2022 as aspects of the capital rules are phased in. These changes may result in differences in the Firm’s reported capital ratios from one reporting period to the next that are independent of changes to its capital base, asset composition, off-balance sheet exposures or risk profile.
For a further discussion of the Firm’s calculation of risk-based capital ratios, see Note 14 to the consolidated financial statements in the 2015 Form 10-K.
The Firm’s Regulatory Capital and Capital Ratios
At September 30, 2016 and December 31, 2015, the Firm’s binding ratios are based on the Advanced Approach transitional rules.
Regulatory Capital
| At September 30, 2016 | ||||||||||||
| $ in millions | Amount | Ratio | Minimum Ratio1 | |||||||||
Regulatory capital and capital ratios | ||||||||||||
Common Equity Tier 1 capital | $ | 60,340 | 16.8 | % | 5.9% | |||||||
Tier 1 capital | 67,603 | 18.9 | % | 7.4% | ||||||||
Total capital | 78,838 | 22.0 | % | 9.4% | ||||||||
Tier 1 leverage2 | — | 8.3 | % | 4.0% | ||||||||
Assets | ||||||||||||
Total RWAs | $ | 358,486 | N/A | N/A | ||||||||
Adjusted average assets3 | 809,927 | N/A | N/A | |||||||||
| At December 31, 2015 | ||||||||||||
| $ in millions | Amount | Ratio | Minimum Ratio1 | |||||||||
Regulatory capital and capital ratios | ||||||||||||
Common Equity Tier 1 capital | $ | 59,409 | 15.5 | % | 4.5% | |||||||
Tier 1 capital | 66,722 | 17.4 | % | 6.0% | ||||||||
Total capital | 79,403 | 20.7 | % | 8.0% | ||||||||
Tier 1 leverage2 | — | 8.3 | % | 4.0% | ||||||||
Assets | ||||||||||||
Total RWAs | $ | 384,162 | N/A | N/A | ||||||||
Adjusted average assets3 | 803,574 | N/A | N/A | |||||||||
N/A—NotApplicable
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U.S. Bank Subsidiaries’ Regulatory Capital and Capital Ratios
Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”) are subject to similar regulatory capital requirements as the Firm. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the Firm’s U.S. Bank Subsidiaries’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each of the Firm’s U.S. Bank Subsidiaries must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.
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At September 30, 2016 and December 31, 2015, the Firm’s U.S. Bank Subsidiaries’ binding ratios are based on the Standardized Approach transitional rules.
MSBNA’s Regulatory Capital
| At September 30, 2016 | ||||||||||||
| $ in millions | Amount | Ratio | Required Capital Ratio1 | |||||||||
Common Equity Tier 1 capital | $ | 13,105 | 15.7 | % | 6.5% | |||||||
Tier 1 capital | 13,105 | 15.7 | % | 8.0% | ||||||||
Total capital | 14,577 | 17.5 | % | 10.0% | ||||||||
Tier 1 leverage | 13,105 | 10.1 | % | 5.0% | ||||||||
| At December 31, 2015 | ||||||||||||
| $ in millions | Amount | Ratio | Required Capital Ratio1 | |||||||||
Common Equity Tier 1 capital | $ | 13,333 | 15.1 | % | 6.5% | |||||||
Tier 1 capital | 13,333 | 15.1 | % | 8.0% | ||||||||
Total capital | 15,097 | 17.1 | % | 10.0% | ||||||||
Tier 1 leverage | 13,333 | 10.2 | % | 5.0% | ||||||||
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MSPBNA’s Regulatory Capital
| At September 30, 2016 | ||||||||||||
| $ in millions | Amount | Ratio | Required Capital Ratio1 | |||||||||
Common Equity Tier 1 capital | $ | 5,264 | 26.5 | % | 6.5% | |||||||
Tier 1 capital | 5,264 | 26.5 | % | 8.0% | ||||||||
Total capital | 5,298 | 26.7 | % | 10.0% | ||||||||
Tier 1 leverage | 5,264 | 10.5 | % | 5.0% | ||||||||
| At December 31, 2015 | ||||||||||||
| $ in millions | Amount | Ratio | Required Capital Ratio1 | |||||||||
Common Equity Tier 1 capital | $ | 4,197 | 26.5 | % | 6.5% | |||||||
Tier 1 capital | 4,197 | 26.5 | % | 8.0% | ||||||||
Total capital | 4,225 | 26.7 | % | 10.0% | ||||||||
Tier 1 leverage | 4,197 | 10.5 | % | 5.0% | ||||||||
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Under regulatory capital requirements adopted by the U.S. federal banking agencies, U.S. depository institutions, in order to be considered well-capitalized, must maintain certain minimum capital ratios. Each U.S. depository institution subsidiary of the Firm must be well-capitalized in order for the Firm to continue to qualify as a financial holding company and to continue to engage in the broadest range of financial activities permitted for financial holding companies. At September 30, 2016 and December 31, 2015, the Firm’s U.S.
Bank Subsidiaries maintained capital at levels sufficiently in excess of the universally mandated well-capitalized requirements to address any additional capital needs and requirements identified by the U.S. federal banking regulators.
Broker-Dealer Regulatory Capital Requirements
Morgan Stanley & Co. LLC (“MS&Co.”) is a registered broker-dealer and registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Commodity Futures Trading Commission (“CFTC”). MS&Co. has consistently operated with capital in excess of its regulatory capital requirements. MS&Co.’s net capital totaled $10,170 million and $10,254 million at September 30, 2016 and December 31, 2015, respectively, which exceeded the amount required by $8,093 million and $8,458 million, respectively. MS&Co. is required to hold tentative net capital in excess of $1 billion and net capital in excess of $500 million in accordance with the market and credit risk standards of Appendix E of SEC Rule 15c3-1. In addition, MS&Co. is required to notify the SEC in the event that its tentative net capital is less than $5 billion. At September 30, 2016 and December 31, 2015, MS&Co. had tentative net capital in excess of the minimum and the notification requirements.
Morgan Stanley Smith Barney LLC (“MSSB LLC”) is a registered broker-dealer and introducing broker for the futures business and, accordingly, is subject to the minimum net capital requirements of the SEC and the CFTC. MSSB LLC has consistently operated with capital in excess of its regulatory capital requirements. MSSB LLC’s net capital totaled $3,858 million and $3,613 million at September 30, 2016 and December 31, 2015, respectively, which exceeded the amount required by $3,711 million and $3,459 million, respectively.
Morgan Stanley & Co. International plc (“MSIP”), a London-based broker-dealer subsidiary, is subject to the capital requirements of the Prudential Regulation Authority, and Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”), a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Agency. MSIP and MSMS have consistently operated with capital in excess of their respective regulatory capital requirements.
Other Regulated Subsidiaries
Certain other U.S. and non-U.S. subsidiaries of the Firm are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated with capital in excess of their local capital adequacy requirements.
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Dividends and Share Repurchases
The Firm repurchased approximately $1,250 million of our outstanding common stock as part of our share repurchase program during the current quarter and $2,500 million during the current year period. The Firm repurchased approximately $625 million during the prior year quarter and $1,500 million in the prior year period.
For a description of the 2015 capital plan, see Note 15 to the consolidated financial statements in the 2015 Form 10-K.
In June 2016, the Firm received a conditional non-objection from the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to its 2016 capital plan. The capital plan included a share repurchase of up to $3.5 billion of the Firm’s outstanding common stock during the period beginning July 1, 2016 through June 30, 2017. Additionally, the capital plan included an increase in the quarterly common stock dividend to $0.20 per share from $0.15 per share during the period beginning with the dividend declared on July 20, 2016 (see Note 20). The Federal Reserve Board also asked the Firm to submit an additional capital plan by December 29, 2016 addressing weaknesses identified in the Firm’s capital planning process.
Preferred Stock
For a description of Series A through Series J preferred stock issuances, see Note 15 to the consolidated financial statements in the 2015 Form 10-K. Dividends declared on the Firm’s outstanding preferred stock were $78 million during the current quarter and $78 million during the prior year quarter, and $312 million during the current year period and $297 million during the prior year period. On September 15, 2016, the Firm announced that the Board declared a quarterly dividend for preferred stock shareholders of record on September 30, 2016 that was paid on October 17, 2016. The Firm is authorized to issue 30 million shares of preferred stock. The preferred stock has a preference over the common stock upon liquidation. The Firm’s preferred stock qualifies as Tier 1 capital in accordance with regulatory capital requirements (see Note 13).
Preferred Stock Outstanding
| $ in millions, except per share data | Shares | Liquidation | Carrying Value | |||||||||||||
| Outstanding | At September 30, | At December 31, | ||||||||||||||
| At September 30, 2016 | ||||||||||||||||
Series | ||||||||||||||||
A | 44,000 | $ | 25,000 | $ | 1,100 | $ | 1,100 | |||||||||
C1 | 519,882 | 1,000 | 408 | 408 | ||||||||||||
E | 34,500 | 25,000 | 862 | 862 | ||||||||||||
F | 34,000 | 25,000 | 850 | 850 | ||||||||||||
G | 20,000 | 25,000 | 500 | 500 | ||||||||||||
H | 52,000 | 25,000 | 1,300 | 1,300 | ||||||||||||
I | 40,000 | 25,000 | 1,000 | 1,000 | ||||||||||||
J | 60,000 | 25,000 | 1,500 | 1,500 | ||||||||||||
Total | $ | 7,520 | $ | 7,520 | ||||||||||||
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Accumulated Other Comprehensive Income (Loss)
Changes in AOCI by Component, Net of Tax and Noncontrolling Interests
| $ in millions | Foreign Currency Translation Adjustments | AFS Securities | Pensions, Postretirement and Other | DVA | Total | |||||||||||||||
Balance at June 30, 2016 | $ | (779 | ) | $ | 219 | $ | (378 | ) | $ | 33 | $ | (905 | ) | |||||||
Change in OCI before reclassifications | 25 | (69 | ) | — | (94 | ) | (138 | ) | ||||||||||||
Amounts reclassified from AOCI2 | — | (30 | ) | (1 | ) | 4 | (27 | ) | ||||||||||||
Net OCI during the period | 25 | (99 | ) | (1 | ) | (90 | ) | (165 | ) | |||||||||||
Balance at September 30, 2016 | $ | (754 | ) | $ | 120 | $ | (379 | ) | $ | (57 | ) | $ | (1,070 | ) | ||||||
Balance at June 30, 2015 | $ | (833 | ) | $ | (101 | ) | $ | (513 | ) | $ | — | $ | (1,447 | ) | ||||||
Change in OCI before reclassifications | (76 | ) | 111 | 2 | — | 37 | ||||||||||||||
Amounts reclassified from AOCI2 | — | (11 | ) | 2 | — | (9 | ) | |||||||||||||
Net OCI during the period | (76 | ) | 100 | 4 | — | 28 | ||||||||||||||
Balance at September 30, 2015 | $ | (909 | ) | $ | (1 | ) | $ | (509 | ) | $ | — | $ | (1,419 | ) | ||||||
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$ in millions | Foreign Currency Translation Adjustments | AFS Securities | Pensions, Postretirement and Other | DVA | Total | |||||||||||||||
Balance at December 31, 2015 | $ | (963 | ) | $ | (319 | ) | $ | (374 | ) | $ | — | $ | (1,656 | ) | ||||||
Cumulative adjustment for accounting change related to DVA1 | — | — | — | (312 | ) | (312 | ) | |||||||||||||
Change in OCI before reclassifications | 209 | 521 | (3 | ) | 277 | 1,004 | ||||||||||||||
Amounts reclassified from AOCI2, 3 | — | (82 | ) | (2 | ) | (22 | ) | (106 | ) | |||||||||||
Net OCI during the period | 209 | 439 | (5 | ) | 255 | 898 | ||||||||||||||
Balance at September 30, 2016 | $ | (754 | ) | $ | 120 | $ | (379 | ) | $ | (57 | ) | $ | (1,070 | ) | ||||||
Balance at December 31, 2014 | $ | (663 | ) | $ | (73 | ) | $ | (512 | ) | $ | — | $ | (1,248 | ) | ||||||
Change in OCI before reclassifications | (246 | ) | 118 | (2 | ) | — | (130 | ) | ||||||||||||
Amounts reclassified from AOCI2 | — | (46 | ) | 5 | — | (41 | ) | |||||||||||||
Net OCI during the period | (246 | ) | 72 | 3 | — | (171 | ) | |||||||||||||
Balance at September 30, 2015 | $ | (909 | ) | $ | (1 | ) | $ | (509 | ) | $ | — | $ | (1,419 | ) | ||||||
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Noncontrolling Interests
Noncontrolling interests were $1,313 million and $1,002 million at September 30, 2016 and December 31, 2015, respectively. The increase in noncontrolling interests was primarily due to the consolidation of certain investment management funds sponsored by the Firm. See Note 2 for further information on the adoption of the accounting updateAmendments to the Consolidation Analysis.
Calculation of Basic and Diluted Earnings per Common Share (“EPS”)
Three Months Ended
September 30, | Nine Months Ended
September 30, | |||||||||||||||
| in millions, except for per share data | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Basic EPS | ||||||||||||||||
Income from continuing operations | $ | 1,632 | $ | 1,051 | $ | 4,442 | $ | 5,352 | ||||||||
Income (loss) from discontinued operations | 8 | (2 | ) | 1 | (9 | ) | ||||||||||
Net income | 1,640 | 1,049 | 4,443 | 5,343 | ||||||||||||
Net income applicable to noncontrolling interests | 43 | 31 | 130 | 124 | ||||||||||||
Net income applicable to Morgan Stanley | 1,597 | 1,018 | 4,313 | 5,219 | ||||||||||||
Less: Preferred stock dividends | (78 | ) | (78 | ) | (312 | ) | (297 | ) | ||||||||
Less: Allocation of (earnings) loss to participating RSUs1 | (1 | ) | (1 | ) | (2 | ) | (4 | ) | ||||||||
Earnings applicable to Morgan Stanley common shareholders | $ | 1,518 | $ | 939 | $ | 3,999 | $ | 4,918 | ||||||||
Weighted average common shares outstanding | 1,838 | 1,904 | 1,863 | 1,916 | ||||||||||||
Earnings per basic common share | ||||||||||||||||
Income from continuing operations | $ | 0.82 | $ | 0.49 | $ | 2.15 | $ | 2.57 | ||||||||
Income (loss) from discontinued operations | 0.01 | — | — | — | ||||||||||||
Earnings per basic common share | $ | 0.83 | $ | 0.49 | $ | 2.15 | $ | 2.57 | ||||||||
Diluted EPS | ||||||||||||||||
Earnings applicable to Morgan Stanley common shareholders | $ | 1,518 | $ | 939 | $ | 3,999 | $ | 4,918 | ||||||||
Weighted average common shares outstanding | 1,838 | 1,904 | 1,863 | 1,916 | ||||||||||||
Effect of dilutive securities: Stock options and RSUs1 | 41 | 45 | 35 | 42 | ||||||||||||
Weighted average common shares outstanding and common stock equivalents | 1,879 | 1,949 | 1,898 | 1,958 | ||||||||||||
Earnings per diluted common share | ||||||||||||||||
Income from continuing operations | $ | 0.80 | $ | 0.48 | $ | 2.11 | $ | 2.52 | ||||||||
Income (loss) from discontinued operations | 0.01 | — | — | (0.01 | ) | |||||||||||
Earnings per diluted common share | $ | 0.81 | $ | 0.48 | $ | 2.11 | $ | 2.51 | ||||||||
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16. Interest Income and Interest Expense
Interest Income and Interest Expense
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Interest income1 | ||||||||||||||||
Trading assets2 | $ | 526 | $ | 568 | $ | 1,651 | $ | 1,707 | ||||||||
Investment securities | 289 | 211 | 762 | 650 | ||||||||||||
Loans | 698 | 560 | 2,026 | 1,573 | ||||||||||||
Interest bearing deposits with banks | 30 | 29 | 134 | 74 | ||||||||||||
Securities purchased under agreements to resell and Securities borrowed3 | (118 | ) | (99 | ) | (315 | ) | (404 | ) | ||||||||
Customer receivables and Other4 | 309 | 182 | 890 | 721 | ||||||||||||
Total interest income | $ | 1,734 | $ | 1,451 | $ | 5,148 | $ | 4,321 | ||||||||
Interest expense1 | ||||||||||||||||
Deposits | $ | 12 | $ | 17 | $ | 48 | $ | 51 | ||||||||
Short-term borrowings | (3 | ) | 7 | 12 | 16 | |||||||||||
Long-term borrowings | 817 | 908 | 2,621 | 2,749 | ||||||||||||
Securities sold under agreements to repurchase and Securities loaned5 | 228 | 254 | 761 | 797 | ||||||||||||
Customer payables and Other6 | (323 | ) | (497 | ) | (1,109 | ) | (1,348 | ) | ||||||||
Total interest expense | $ | 731 | $ | 689 | $ | 2,333 | $ | 2,265 | ||||||||
Net interest | $ | 1,003 | $ | 762 | $ | 2,815 | $ | 2,056 | ||||||||
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The Firm sponsors various retirement plans for the majority of its U.S. and non-U.S. employees. The Firm provides certain other postretirement benefits, primarily health care and life insurance, to eligible U.S. employees.
Components of Net Periodic Benefit Expense (Income) for Pension and Other Postretirement Plans
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Service cost, benefits earned during the period | $ | 6 | $ | 5 | $ | 14 | $ | 15 | ||||||||
Interest cost on projected benefit obligation | 38 | 39 | 115 | 116 | ||||||||||||
Expected return on plan assets | (31 | ) | (30 | ) | (91 | ) | (89 | ) | ||||||||
Net amortization of prior service credit | (4 | ) | (4 | ) | (13 | ) | (14 | ) | ||||||||
Net amortization of actuarial loss | 3 | 6 | 9 | 19 | ||||||||||||
Net periodic benefit expense | $ | 12 | $ | 16 | $ | 34 | $ | 47 | ||||||||
The Firm is under continuous examination by the Internal Revenue Service (the “IRS”) and other tax authorities in certain countries, such as Japan and the United Kingdom (“U.K.”), and in states in which it has significant business operations, such as New York. The Firm is currently at various levels of field examination with respect to audits by the IRS, as well as New York State and New York City, for tax years 2009-2012 and 2007-2009, respectively. The Firm believes that the resolution of these tax matters will not have a material effect in the consolidated balance sheets, although a resolution could have a material impact in the consolidated statements of income for a particular future period and on the effective tax rate for any period in which such resolution occurs.
In April 2016, the Firm received a notification from the IRS that the Congressional Joint Committee on Taxation approved the final report of an Appeals Office review of matters from tax years 1999-2005, and the Revenue Agent’s Report reflecting agreed closure of the 2006-2008 tax years. The Firm has reserved the right to contest certain items, associated with tax years 1999-2005, the resolution of which is not expected to have a material impact on the effective tax rate or the consolidated financial statements.
During 2017, the Firm expects to reach a conclusion with the U.K. tax authorities on substantially all issues through tax year 2010, the resolution of which is not expected to have a material impact on the effective tax rate or the consolidated financial statements.
The Firm has established a liability for unrecognized tax benefits that it believes is adequate in relation to the potential for additional assessments. Once established, the Firm adjusts liabilities for unrecognized tax benefits only when more information is available or when an event occurs necessitating a change.
It is reasonably possible that significant changes in the balance of unrecognized tax benefits may occur within the next 12 months related to certain tax authority examinations referred to herein. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the Firm’s effective tax rate over the next 12 months.
The Firm’s effective tax rate from continuing operations for the prior year period included a net discrete tax benefit of $564 million. This net discrete tax benefit was primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated due to an internal restructuring to simplify the Firm’s legal entity organization in the U.K.
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19. Segment and Geographic Information
Segment Information
For a discussion about the Firm’s business segments, see Note 21 to the consolidated financial statements in the 2015 Form 10-K.
Selected Financial Information by Business Segment
| Three Months Ended September 30, 2016 | ||||||||||||||||||||
| $ in millions | Institutional Securities1,2 | Wealth Management2 | Investment Management | Intersegment Eliminations | Total | |||||||||||||||
Total non-interest revenues3,4 | $ | 4,436 | $ | 2,996 | $ | 551 | $ | (77 | ) | $ | 7,906 | |||||||||
Interest income | 980 | 979 | 1 | (226 | ) | 1,734 | ||||||||||||||
Interest expense | 863 | 94 | — | (226 | ) | 731 | ||||||||||||||
Net interest | 117 | 885 | 1 | — | 1,003 | |||||||||||||||
Net revenues | $ | 4,553 | $ | 3,881 | $ | 552 | $ | (77 | ) | $ | 8,909 | |||||||||
Income (loss) from continuing operations before income taxes | $ | 1,383 | $ | 901 | $ | 97 | $ | — | $ | 2,381 | ||||||||||
Provision (benefit) for income taxes | 381 | 337 | 31 | — | 749 | |||||||||||||||
Income (loss) from continuing operations | 1,002 | 564 | 66 | — | 1,632 | |||||||||||||||
Income from discontinued operations, net of income taxes | 8 | — | — | — | 8 | |||||||||||||||
Net income (loss) | 1,010 | 564 | 66 | — | 1,640 | |||||||||||||||
Net income (loss) applicable to noncontrolling interests | 44 | — | (1 | ) | — | 43 | ||||||||||||||
Net income (loss) applicable to Morgan Stanley | $ | 966 | $ | 564 | $ | 67 | $ | — | $ | 1,597 | ||||||||||
| Three Months Ended September 30, 2015 | ||||||||||||||||||||
| $ in millions | Institutional Securities1 | Wealth Management | Investment Management | Intersegment Eliminations | Total | |||||||||||||||
Total non-interest revenues3,4 | $ | 3,889 | $ | 2,889 | $ | 278 | $ | (51 | ) | $ | 7,005 | |||||||||
Interest income | 825 | 777 | — | (151 | ) | 1,451 | ||||||||||||||
Interest expense | 810 | 26 | 4 | (151 | ) | 689 | ||||||||||||||
Net interest | 15 | 751 | (4 | ) | — | 762 | ||||||||||||||
Net revenues | $ | 3,904 | $ | 3,640 | $ | 274 | $ | (51 | ) | $ | 7,767 | |||||||||
Income (loss) from continuing operations before income taxes | $ | 688 | $ | 824 | $ | (38 | ) | $ | — | $ | 1,474 | |||||||||
Provision (benefit) for income taxes | 141 | 315 | (33 | ) | — | 423 | ||||||||||||||
Income (loss) from continuing operations | 547 | 509 | (5 | ) | — | 1,051 | ||||||||||||||
Income (loss) from discontinued operations, net of income taxes | (3 | ) | — | 1 | — | (2 | ) | |||||||||||||
Net income (loss) | 544 | 509 | (4 | ) | — | 1,049 | ||||||||||||||
Net income applicable to noncontrolling interests | 26 | — | 5 | — | 31 | |||||||||||||||
Net income (loss) applicable to Morgan Stanley | $ | 518 | $ | 509 | $ | (9 | ) | $ | — | $ | 1,018 | |||||||||
| Nine Months Ended September 30, 2016 | ||||||||||||||||||||
| $ in millions | Institutional Securities1,2 | Wealth Management2 | Investment Management | Intersegment Eliminations | Total | |||||||||||||||
Total non-interest revenues3,4 | $ | 12,577 | $ | 8,815 | $ | 1,610 | $ | (207 | ) | $ | 22,795 | |||||||||
Interest income | 2,999 | 2,813 | 5 | (669 | ) | 5,148 | ||||||||||||||
Interest expense | 2,731 | 268 | 3 | (669 | ) | 2,333 | ||||||||||||||
Net interest | 268 | 2,545 | 2 | — | 2,815 | |||||||||||||||
Net revenues | $ | 12,845 | $ | 11,360 | $ | 1,612 | $ | (207 | ) | $ | 25,610 | |||||||||
Income from continuing operations before income taxes | $ | 3,797 | $ | 2,546 | $ | 259 | $ | — | $ | 6,602 | ||||||||||
Provision for income taxes | 1,109 | 973 | 78 | — | 2,160 | |||||||||||||||
Income from continuing operations | 2,688 | 1,573 | 181 | — | 4,442 | |||||||||||||||
Income from discontinued operations, net of income taxes | 1 | — | — | — | 1 | |||||||||||||||
Net income | 2,689 | 1,573 | 181 | — | 4,443 | |||||||||||||||
Net income applicable to noncontrolling interests | 144 | — | (14 | ) | — | 130 | ||||||||||||||
Net income applicable to Morgan Stanley | $ | 2,545 | $ | 1,573 | $ | 195 | $ | — | $ | 4,313 | ||||||||||
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| Nine Months Ended September 30, 2015 | ||||||||||||||||||||
| $ in millions | Institutional Securities1 | Wealth Management | Investment Management | Intersegment Eliminations | Total | |||||||||||||||
Total non-interest revenues3,4 | $ | 14,640 | $ | 9,172 | $ | 1,709 | $ | (160) | $ | 25,361 | ||||||||||
Interest income | 2,418 | 2,296 | 1 | (394) | 4,321 | |||||||||||||||
Interest expense | 2,524 | 119 | 16 | (394) | 2,265 | |||||||||||||||
Net interest | (106 | ) | 2,177 | (15) | — | 2,056 | ||||||||||||||
Net revenues | $ | 14,534 | $ | 11,349 | $ | 1,694 | $ | (160) | $ | 27,417 | ||||||||||
Income from continuing operations before income taxes | $ | 4,123 | $ | 2,564 | $ | 369 | $ | — | $ | 7,056 | ||||||||||
Provision for income taxes5 | 658 | 959 | 87 | — | 1,704 | |||||||||||||||
Income from continuing operations | 3,465 | 1,605 | 282 | — | 5,352 | |||||||||||||||
Income (loss) from discontinued operations, net of income taxes | (10 | ) | — | 1 | — | (9) | ||||||||||||||
Net income | 3,455 | 1,605 | 283 | — | 5,343 | |||||||||||||||
Net income applicable to noncontrolling interests | 100 | — | 24 | — | 124 | |||||||||||||||
Net income applicable to Morgan Stanley | $ | 3,355 | $ | 1,605 | $ | 259 | $ | — | $ | 5,219 | ||||||||||
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Total Assets by Business Segment
| $ in millions | At September 30, 2016 | At December 31, 2015 | ||||||
Institutional Securities | $ | 634,648 | $ | 602,714 | ||||
Wealth Management | 174,521 | 179,708 | ||||||
Investment Management | 4,722 | 5,043 | ||||||
Total1 | $ | 813,891 | $ | 787,465 | ||||
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Geographic Information
For a discussion about the Firm’s geographic net revenues, see Note 21 to the consolidated financial statements in the 2015 Form 10-K.
Net Revenues by Region
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Americas | $ | 6,624 | $ | 5,652 | $ | 18,914 | $ | 19,359 | ||||||||
EMEA | 1,236 | 1,198 | 3,677 | 4,396 | ||||||||||||
Asia-Pacific | 1,049 | 917 | 3,019 | 3,662 | ||||||||||||
Net revenues | $ | 8,909 | $ | 7,767 | $ | 25,610 | $ | 27,417 | ||||||||
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The Firm has evaluated subsequent events for adjustment to or disclosure in the consolidated financial statements through the date of this report and has not identified any recordable or disclosable events, not otherwise reported in these consolidated financial statements or the notes thereto, except for the following:
Common Stock Dividend
On October 19, 2016, the Firm announced that its Board of Directors declared a quarterly dividend per common share of $0.20. The dividend is payable on November 15, 2016 to common shareholders of record on October 31, 2016.
Long-Term Borrowings
Subsequent to September 30, 2016 and through October 31, 2016, long-term borrowings increased by approximately $2.2 billion, net of maturities. This amount includes the issuance of $2.5 billion of senior debt on October 24, 2016 and $3.0 billion of senior debt on October 27, 2016.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Morgan Stanley:
We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the “Company”) as of September 30, 2016, and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2016 and 2015, and the condensed consolidated statements of cash flows and changes in total equity for the nine-month periods ended September 30, 2016 and 2015. These interim condensed consolidated financial statements are the responsibility of the management of the Company.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such interim condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of the Company as of December 31, 2015, and the consolidated statements of income, comprehensive income, cash flows and changes in total equity for the year then ended (not presented herein) included in the Company’s Annual Report on Form 10-K; and in our report dated February 23, 2016, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2015 is fairly stated, in all material respects, in relation to the consolidated statement of financial condition from which it has been derived.
/s/ Deloitte & Touche LLP
New York, New York
November 2, 2016
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Morgan Stanley, a financial holding company, 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”,Stanley,” “Firm,” “us,” “we,” or “our” mean Morgan Stanley (the “Parent”“Parent Company”) together with its consolidated subsidiaries.
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 to ultra-high net worth clients. Investment banking services compriseconsist 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 and market-making activities in equity securities and fixed income products, including foreign exchangeprime brokerage services, global macro, credit and commodities as well as prime brokerage services.products. Lending services include originating and/or purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending, financing extended to equities and commodities customers, and loans to municipalities. Other services include corporate lending activitiesinvestment and credit products, investments and research.research activities.
Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small-to-medium sizedsmall tomedium-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 Managementprovides 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 compriseinclude equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution pensions,plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are serviced through intermediaries, including affiliated andnon-affiliated distributors.
The results of operations in the past have been, and in the future may continue to be, materially affected by competition,competition; risk factors,factors; and legislative, legal and regulatory developments,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” immediately preceding Part I, Item 1, “Business—Competition” and “Business—Supervision and Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A of our Annual Report on Form10-K for the year ended December 31, 20152016 (the “2015“2016 Form10-K”), “Business Segments—Wealth Management—Other Items,” and “Liquidity and Capital Resources”Resources—Regulatory Requirements” herein.
| 1 | March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
Overview of Financial Results
Consolidated Results
Net Revenues
($ in millions)
Net Income Applicable to Morgan Stanley
($ in millions)
Earnings per Common Share1
| 1. | For the calculation of basic and diluted earnings per common share, see Note 15 to the consolidated financial statements. |
We reported net revenues of $9,745 million in the quarter ended March 31, 2017 (“current quarter,” or “1Q 2017”), compared with $7,792 million in the quarter ended March 31, 2016 (“prior year quarter,” or “1Q 2016”). For the current quarter, net income applicable to Morgan Stanley was $1,930 million, or $1.00 per diluted common share, compared with $1,134 million, or $0.55 per diluted common share, in the prior year quarter.
Results for the current quarter included a recurring-type of discrete tax benefit of $112 million associated with the accounting update related to employee share-based payments.
Non-interest Expenses
($ in millions)
Compensation and benefits expenses of $4,466 million in the current quarter increased 21% from $3,683 million in the prior year quarter, primarily due to increases in discretionary incentive compensation driven mainly by higher revenues and increases in the fair value of investments to which certain deferred compensation plans are referenced.
Non-compensation expenses were $2,471 million in the current quarter compared with $2,371 million in the prior year quarter, representing a 4% increase, primarily as a result of higher litigation costs and volume-driven expenses.
| March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
Return on Average Common Equity
The annualized return on average common equity (“ROE”) was 10.7% in the current quarter compared with 6.2% in the prior year quarter (see “SelectedNon-Generally Accepted Accounting Principles(“Non-GAAP”) Financial Information” herein).
Business Segment Financial Information and Other Statistical DataResults
Net Revenues by Segment1, 2
($ in millions)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in millions, except per share amounts | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Net revenues by segment | ||||||||||||||||
Institutional Securities | $ | 4,553 | $ | 3,904 | $ | 12,845 | $ | 14,534 | ||||||||
Wealth Management | 3,881 | 3,640 | 11,360 | 11,349 | ||||||||||||
Investment Management | 552 | 274 | 1,612 | 1,694 | ||||||||||||
Intersegment Eliminations | (77 | ) | (51 | ) | (207 | ) | (160 | ) | ||||||||
Consolidated net revenues | $ | 8,909 | $ | 7,767 | $ | 25,610 | $ | 27,417 | ||||||||
Net revenues by region1 | ||||||||||||||||
Americas | $ | 6,624 | $ | 5,652 | $ | 18,914 | $ | 19,359 | ||||||||
EMEA | 1,236 | 1,198 | 3,677 | 4,396 | ||||||||||||
Asia-Pacific | 1,049 | 917 | 3,019 | 3,662 | ||||||||||||
Consolidated net revenues | $ | 8,909 | $ | 7,767 | $ | 25,610 | $ | 27,417 | ||||||||
Income from continuing operations applicable to Morgan Stanley | ||||||||||||||||
Institutional Securities | $ | 958 | $ | 521 | $ | 2,544 | $ | 3,365 | ||||||||
Wealth Management | 564 | 509 | 1,573 | 1,605 | ||||||||||||
Investment Management | 67 | (10 | ) | 195 | 258 | |||||||||||
Income from continuing operations applicable to Morgan Stanley | 1,589 | 1,020 | 4,312 | 5,228 | ||||||||||||
Income (loss) from discontinued operations applicable to Morgan Stanley | 8 | (2 | ) | 1 | (9 | ) | ||||||||||
Net income applicable to Morgan Stanley | 1,597 | 1,018 | 4,313 | 5,219 | ||||||||||||
Preferred stock dividend and other | 79 | 79 | 314 | 301 | ||||||||||||
Earnings applicable to Morgan Stanley common shareholders | $ | 1,518 | $ | 939 | $ | 3,999 | $ | 4,918 | ||||||||
Earnings per basic common share2 | $ | 0.83 | $ | 0.49 | $ | 2.15 | $ | 2.57 | ||||||||
Earnings per diluted common share2 | 0.81 | 0.48 | 2.11 | 2.51 | ||||||||||||
Effective income tax rate from continuing operations | 31.5 | % | 28.7 | % | 32.7 | % | 24.1 | % | ||||||||
| At September 30, 2016 | At December 31, 2015 | |||||||
Capital ratios (Transitional)3 | ||||||||
Common Equity Tier 1 capital ratio | 16.8% | 15.5% | ||||||
Tier 1 capital ratio | 18.9% | 17.4% | ||||||
Total capital ratio | 22.0% | 20.7% | ||||||
Tier 1 leverage ratio4 | 8.3% | 8.3% | ||||||
Net Income Applicable to Morgan Stanley by Segment2, 3
($ in millions)
| $ in millions, except per share amounts | At September 30, 2016 | At December 31, 2015 | ||||||
Loans5 | $ | 92,508 | $ | 85,759 | ||||
Total assets | $ | 813,891 | $ | 787,465 | ||||
Global Liquidity Reserve6 | $ | 197,094 | $ | 203,264 | ||||
Deposits | $ | 151,843 | $ | 156,034 | ||||
Long-term borrowings | $ | 163,927 | $ | 153,768 | ||||
Book value per common share7 | $ | 37.11 | $ | 35.24 | ||||
Worldwide employees | 55,256 | 56,218 | ||||||
| 1. | The total amount of Net Revenues by Segment also includes intersegment eliminations of $(74) million and $(67) million in the current quarter and prior year quarter, respectively. |
| 2. | The percentages on the sides of 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. |
| 3. | The total amount of Net Income Applicable to Morgan Stanley by Segment also includes intersegment eliminations of $2 million in the current quarter. |
Institutional Securities net revenues of $5,152 million in the current quarter increased 39% compared with $3,714 million in the prior year quarter, primarily as a result of higher sales and trading and Investment banking revenues.
Wealth Management net revenues of $4,058 million in the current quarter increased 11% from $3,668 million in the prior year quarter, primarily as a result of growth in Net interest income and higher transactional and asset management fee revenues.
Investment Management net revenues of $609 million in the current quarter increased 28% from $477 million in the prior year quarter, primarily driven by investment gains in certain private equity and real estate funds compared with losses in the prior year quarter.
Net Revenues by Region1
($ in millions)
EMEA—Europe, Middle East and Africa
| 1. | For a discussion of how the geographic breakdown for net revenues is determined, see Note 21 to the consolidated financial statements in Item 8 of the |
| ||||
| 3 | March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
Selected Financial Information and Other Statistical Data
| Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Income from continuing operations applicable to Morgan Stanley | $ | 1,952 | $ | 1,137 | ||||
Income (loss) from discontinued operations applicable to Morgan Stanley | (22 | ) | (3 | ) | ||||
Net income applicable to Morgan Stanley | 1,930 | 1,134 | ||||||
Preferred stock dividends and other | 90 | 79 | ||||||
Earnings applicable to Morgan Stanley common shareholders | $ | 1,840 | $ | 1,055 | ||||
Effective income tax rate from continuing operations | 29.0 | % | 33.3 | % | ||||
| At March 31, 2017 | At December 31, 2016 | |||||||
Capital ratios (Transitional—Advanced)1 |
| |||||||
Common Equity Tier 1 capital ratio | 17.4 | % | 16.9 | % | ||||
Tier 1 capital ratio | 19.9 | % | 19.0 | % | ||||
Total capital ratio | 22.9 | % | 22.0 | % | ||||
Capital ratios (Transitional—Standardized)1 |
| |||||||
Tier 1 leverage ratio2 | 8.5 | % | 8.4 | % | ||||
| in millions, except per share amounts | At March 31, 2017 | At December 31, 2016 | ||||||
Loans3 | $ | 95,953 | $ | 94,248 | ||||
Total assets | $ | 832,391 | $ | 814,949 | ||||
Global Liquidity Reserve4 | $ | 197,647 | $ | 202,297 | ||||
Deposits | $ | 152,109 | $ | 155,863 | ||||
Long-term borrowings | $ | 172,688 | $ | 164,775 | ||||
Common shareholders’ equity | $ | 69,404 | $ | 68,530 | ||||
Common shares outstanding | 1,852 | 1,852 | ||||||
Book value per common share5 | $ | 37.48 | $ | 36.99 | ||||
Worldwide employees | 55,607 | 55,311 | ||||||
| 1. | For a discussion of our regulatory capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein. |
See Note 13 to the consolidated financial statements |
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 consolidated balance sheets (see Note 7 to the consolidated financial |
For a discussion of Global Liquidity Reserve, 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 Part II, Item 7 of the |
Book value per common share equals common shareholders’ equity |
|
Overview of Financial Results
Consolidated Results for the Quarter Ended September 30, 2016
We reported net revenues of $8,909 million in the quarter ended September 30, 2016 (“current quarter”), compared with $7,767 million in the quarter ended September 30, 2015 (“prior year quarter”). For the current quarter, net income applicable to Morgan Stanley was $1,597 million, or $0.81 per diluted common share, compared with $1,018 million, or $0.48 per diluted common share, in the prior year quarter.
The prior year quarter included positive revenues due to the impact of debt valuation adjustments (“DVA”) of $435 million or $0.14 per diluted common share. Excluding DVA, net revenues were $7,332 million and net income applicable to Morgan Stanley was $740 million, or $0.34 per diluted common share, in the prior year quarter (see “Selected SelectedNon-Generally Accepted Accounting Principles(“Non-GAAP”) Financial Information” herein).
|
Consolidated Results for the Nine Months Ended September 30, 2016Information
We reported net revenues of $25,610 million in the nine months ended September 30, 2016 (“current year period”), compared with $27,417 million in the nine months ended September 30, 2015 (“prior year period”). For the current year period, net income applicable to Morgan Stanley was $4,313 million, or $2.11 per diluted common share, compared with $5,219 million, or $2.51 per diluted common share in the prior year period.
The prior year period included a net discrete tax benefit of $564 million or $0.29 per diluted common share, primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated, and positive revenues associated with DVA of $742 million or $0.24 per diluted common share. For a further discussion of the net discrete tax benefit, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.
Net revenues excluding DVA were $26,675 million in the prior year period, while net income applicable to Morgan Stanley was $4,742 million excluding DVA, or $2.27 per
|
Business Segment Net Revenues for the Current Quarter and Current Year Period
Institutional Securities net revenues were $4,553 million in the current quarter and $12,845 million in the current year period, an increase of 17% from the prior year quarter and a decrease of 12% from the prior year period. The current quarter results reflected improved performance across sales and trading products, partially offset by lower Investment banking advisory and underwriting revenues. The current year period results reflected lower revenues in sales and trading and underwriting, partially offset by higher results in M&A advisory.
Wealth Management net revenues of $3,881 million in the current quarter and $11,360 million in the current year period increased 7% from the prior year quarter and were essentially flat compared with the prior year period. The current quarter results reflected higher revenues related to investments associated with certain employee deferred compensation plans and growth in net interest income. The current year period results reflected growth in net interest income, partially offset by lower asset management, distribution and administration fees.
Investment Management net revenues of $552 million in the current quarter increased from $274 million in the prior year quarter and net revenues of $1,612 million in the current year period decreased from $1,694 million in the prior year period. Results reflected positive carried interest in the current quarter and significant reversal of previously accrued carried interest associated with Asia private equity in the prior year quarter and prior year period. The current year period reflected weaker investment performance compared to the prior year period. Asset management fees were relatively unchanged from the comparable prior year periods.
Consolidated Non-Interest Expenses for the Current Quarter and Current Year Period
Compensation and benefits expenses of $4,097 million in the current quarter and $11,795 million in the current year period increased 19% and decreased 5% from $3,437 million in the prior year quarter and $12,366 million in the prior year period. The current quarter results primarily reflected an increase in the fair value of investments to which certain deferred compensation plans are referenced, an increase in carried interest payable to employees, and an increase in discretionary incentive compensation driven
|
|
Non-compensation expenses were $2,431 million in the current quarter and $7,213 million in the current year period compared with $2,856 million in the prior year quarter and $7,995 million in the prior year period, representing a 15% and a 10% decrease, respectively, primarily due to lower litigation costs.
Return on Average Common Equity
The annualized return on average common equity was 8.7% in the current quarter and 7.7% in the current year period. For the prior year quarter, the annualized return on average common equity was 5.6%, or 3.9% excluding DVA. For the prior year period, the annualized return on average common equity was 9.8%, or 8.8% excluding DVA, and 7.7% excluding DVA and the net discrete tax benefit (see “Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information” herein).
Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information
We prepare our Consolidated Financial Statementsconsolidated financial statements using accounting principles generally accepted in the United States of America (“U.S. GAAP”). From time to time, we may disclose certain “non-GAAP“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“non-GAAP financial measure” excludes, or includes, amounts from the most directly comparable measure calculated and presented in accordance with U.S. GAAP.Non-GAAP financial measures disclosed by us are provided as additional information to investors and analysts in order to provide them with further transparency about, or as an alternative method for assessing, our financial condition, operating results or prospective regulatory capital requirements. These measures are not in accordance with, or a substitute for, U.S. GAAP and may be different from or inconsistent withnon-GAAP financial measures used by other companies. Whenever we refer to anon-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 differences between the U.S. GAAP financial measure and thenon-GAAP financial measure.
The principal non-GAAP financial measure.measures presented in this document are set forth below.
Non-GAAP Financial Measures by Business Segment
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in billions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Pre-tax profit margin1 | ||||||||||||||||
Institutional Securities | 30 | % | 18 | % | 30 | % | 28% | |||||||||
Wealth Management | 23 | % | 23 | % | 22 | % | 23% | |||||||||
Investment Management | 18 | % | N/M | 16 | % | 22% | ||||||||||
Consolidated | 27 | % | 19 | % | 26 | % | 26% | |||||||||
Average common equity2 | ||||||||||||||||
Institutional Securities | $ | 43.2 | $ | 33.8 | $ | 43.2 | $ | 35.4 | ||||||||
Wealth Management | 15.3 | 11.4 | 15.3 | 10.9 | ||||||||||||
Investment Management | 2.8 | 2.1 | 2.8 | 2.2 | ||||||||||||
Parent | 8.2 | 20.3 | 7.6 | 18.2 | ||||||||||||
Consolidated average common equity | $ | 69.5 | $ | 67.6 | $ | 68.9 | $ | 66.7 | ||||||||
Return on average common equity2 |
| |||||||||||||||
Institutional Securities | 8.3 | % | 5.6 | % | 7.1 | % | 12.0% | |||||||||
Wealth Management | 14.5 | % | 16.8 | % | 13.3 | % | 18.1% | |||||||||
Investment Management | 9.3 | % | N/M | 9.0 | % | 15.5% | ||||||||||
Consolidated | 8.7 | % | 5.6 | % | 7.7 | % | 9.8% | |||||||||
Reconciliations from U.S. GAAP to Non-GAAP Consolidated Financial Measures
| $ in millions, except per share data | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
Net revenues | ||||||||||||||||
Net revenues—U.S. GAAP | $ | 8,909 | $ | 7,767 | $ | 25,610 | $ | 27,417 | ||||||||
Impact of DVA3 | — | (435 | ) | — | (742 | ) | ||||||||||
Net revenues, excluding DVA—non-GAAP4 | $ | 8,909 | $ | 7,332 | $ | 25,610 | $ | 26,675 | ||||||||
Net income applicable to Morgan Stanley |
| |||||||||||||||
Net income applicable to Morgan Stanley—U.S. GAAP | $ | 1,597 | $ | 1,018 | $ | 4,313 | $ | 5,219 | ||||||||
Impact of DVA3 | — | (278 | ) | — | (477 | ) | ||||||||||
Net income applicable to Morgan Stanley, excluding DVA—non-GAAP4 | $ | 1,597 | $ | 740 | $ | 4,313 | $ | 4,742 | ||||||||
Impact of net discrete tax benefit5 | — | — | — | (564 | ) | |||||||||||
Net income applicable to Morgan Stanley, excluding DVA and net discrete tax benefit—non-GAAP4 | $ | 1,597 | $ | 740 | $ | 4,313 | $ | 4,178 | ||||||||
Earnings per diluted common share |
| |||||||||||||||
Earnings per diluted common share—U.S. GAAP | $ | 0.81 | $ | 0.48 | $ | 2.11 | $ | 2.51 | ||||||||
Impact of DVA3 | — | (0.14 | ) | — | (0.24 | ) | ||||||||||
Earnings per diluted common share, excluding DVA—non-GAAP4 | $ | 0.81 | $ | 0.34 | $ | 2.11 | $ | 2.27 | ||||||||
Impact of net discrete tax benefit5 | — | — | — | (0.29 | ) | |||||||||||
Earnings per diluted common share, excluding DVA and net discrete tax benefit—non-GAAP4 | $ | 0.81 | $ | 0.34 | $ | 2.11 | $ | 1.98 | ||||||||
| Three Months Ended March 31, | ||||||||
| $ in billions | 2017 | 2016 | ||||||
Pre-tax profit margin1
| ||||||||
Institutional Securities | 34 | % | 24 | % | ||||
Wealth Management | 24 | % | 21 | % | ||||
Investment Management | 17 | % | 9 | % | ||||
Consolidated | 29 | % | 22 | % | ||||
Average common equity2
| ||||||||
Institutional Securities | $ | 40.2 | $ | 43.2 | ||||
Wealth Management | 17.2 | 15.3 | ||||||
Investment Management | 2.4 | 2.8 | ||||||
Parent Company | 9.2 | 6.9 | ||||||
Consolidated average common equity | $ | 69.0 | $ | 68.2 | ||||
Return on average common equity2
| ||||||||
Institutional Securities | 11.4 | % | 4.9 | % | ||||
Wealth Management | 14.6 | % | 12.6 | % | ||||
Investment Management | 11.1 | % | 6.9 | % | ||||
Consolidated | 10.7 | % | 6.2 | % | ||||
| March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
| $ in millions, except per share data | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
Effective income tax rate | ||||||||||||||||
Effective income tax rate from continuing operations—U.S. GAAP | 31.5% | 28.7% | 32.7% | 24.1% | ||||||||||||
Impact of net discrete tax benefit5 | — | — | — | 8.0% | ||||||||||||
Effective income tax rate from continuing operations, excluding net discrete tax benefit—non-GAAP4 | 31.5% | 28.7% | 32.7% | 32.1% | ||||||||||||
N/M—Not MeaningfulReconciliations from U.S. GAAP toNon-GAAP Consolidated Financial Measures
DVA—Debt valuation adjustments represent the change in the fair value resulting from fluctuations in our credit spreads and other credit factors related to liabilities carried at fair value, primarily certain Long-term and Short-term borrowings.
| Three Months Ended March 31, | ||||||||
| $ in millions, except per share data | 2017 | 2016 | ||||||
Net income applicable to Morgan Stanley
|
| |||||||
U.S. GAAP | $ | 1,930 | $ | 1,134 | ||||
Impact of discrete tax provision3 | 14 | — | ||||||
Net income applicable to Morgan Stanley, excluding discrete tax provision—non-GAAP4 | $ | 1,944 | $ | 1,134 | ||||
Earnings per diluted common share
|
| |||||||
U.S. GAAP | $ | 1.00 | $ | 0.55 | ||||
Impact of discrete tax provision3 | 0.01 | — | ||||||
Earnings per diluted common share, excluding discrete taxprovision—non-GAAP4 | $ | 1.01 | $ | 0.55 | ||||
Effective income tax rate
| ||||||||
U.S. GAAP | 29.0 | % | 33.3 | % | ||||
Impact of discrete tax provision3 | (0.5 | )% | — | |||||
Effective income tax rate from continuing operations, excluding discrete taxprovision—non-GAAP4 | 28.5 | % | 33.3 | % | ||||
| 1. | Pre-tax profit margin is anon-GAAP financial measure that we consider to be a useful measure to us, investors and analysts to assess operating performance and represents income from continuing operations before income taxes as a percentage of net |
| 2. | Average common equity and return on average common equity arenon-GAAP financial measures we consider to be useful measures to us, investors and analysts to assess capital adequacy and to allow better comparability ofperiod-to-period operating performance. Average common equity for each business segment is determined at the beginning of each year using our Required Capital framework, an internal capital adequacy measure (see “Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity |
| 3. |
|
| 4. | Net |
|
Consolidated Non-GAAP Financial Measures
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in billions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Average common equity1, 2, 3 |
| |||||||||||||||
Average common equity | $ | 69.5 | $ | 67.6 | $ | 68.9 | $ | 66.7 | ||||||||
Average common equity, excluding DVA | 69.6 | 68.1 | 69.0 | 67.4 | ||||||||||||
Average common equity, excluding DVA and net discrete tax benefit | 69.6 | 68.1 | 69.0 | 67.0 | ||||||||||||
Return on average common equity1, 2 |
| |||||||||||||||
Return on average common equity | 8.7% | 5.6% | 7.7% | 9.8% | ||||||||||||
Return on average common equity, excluding DVA | 8.7% | 3.9% | 7.7% | 8.8% | ||||||||||||
Return on average common equity, excluding DVA and net discrete tax benefit | 8.7% | 3.9% | 7.7% | 7.7% | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| $ in billions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Average tangible common equity1, 3 |
| |||||||||||||||
Average tangible common equity | $ | 60.2 | $ | 57.9 | $ | 59.4 | $ | 57.0 | ||||||||
Average tangible common equity, excluding DVA | 60.2 | 58.4 | 59.5 | 57.7 | ||||||||||||
Average tangible common equity, excluding DVA and net discrete tax benefit | 60.2 | 58.4 | 59.5 | 57.3 | ||||||||||||
Return on average tangible common equity1, 4 |
| |||||||||||||||
Return on average tangible common equity | 10.1% | 6.5% | 9.0% | 11.5% | ||||||||||||
Return on average tangible common equity, excluding DVA | 10.1% | 4.5% | 9.0% | 10.3% | ||||||||||||
Return on average tangible common equity, excluding DVA and net discrete tax benefit | 10.1% | 4.5% | 9.0% | 9.0% | ||||||||||||
| Three Months Ended March 31, | ||||||||
| $ in billions | 2017 | 2016 | ||||||
Average common equity1, 3, 4, 5
| ||||||||
Unadjusted | $ | 69.0 | $ | 68.2 | ||||
Excluding DVA | 69.6 | 68.3 | ||||||
Excluding DVA and discrete tax provision | 69.6 | 68.3 | ||||||
Return on average common equity1, 2, 3, 4
|
| |||||||
Unadjusted | 10.7 | % | 6.2 | % | ||||
Excluding DVA | 10.6 | % | 6.2 | % | ||||
Excluding DVA and discrete tax provision | 10.7 | % | 6.2 | % | ||||
Average tangible common equity1, 3, 4, 5
|
| |||||||
Unadjusted | $ | 59.7 | $ | 58.7 | ||||
Excluding DVA | 60.3 | 58.8 | ||||||
Excluding DVA and discrete tax provision | 60.3 | 58.8 | ||||||
Return on average tangible common equity1, 2, 3, 4
|
| |||||||
Unadjusted | 12.3 | % | 7.2 | % | ||||
Excluding DVA | 12.2 | % | 7.2 | % | ||||
Excluding DVA and discrete tax provision | 12.3 | % | 7.2 | % | ||||
Expense efficiency ratio1, 6 | 71.2 | % | 77.7 | % | ||||
| At September 30, 2016 | At December 31, 2015 | |||||||
Tangible book value per common share1, 5 | $ | 32.13 | $ | 30.26 | ||||
| At March 31, 2017 | At December 31, 2016 | |||||||
Tangible book value per common share1, 7 | $ | 32.49 | $ | 31.98 | ||||
DVA—Debt valuation adjustment represents the change in the fair value resulting from fluctuations in our credit spreads and other credit factors related to liabilities carried at fair value under the fair value option, primarily certain Long-term and Short-term borrowings.
| 1. |
|
| 2. | Return on average common equity equals annualized consolidated net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity. |
| 3. | When excluding DVA, |
| 4. | The calculation used in determining the Firm’s “ROE Target” is return on average common equity excluding DVA and |
The impact of DVA on average common equity and average tangible common equity was approximately |
|
7. Tangible book value per common share equals tangible common equity of $60,175 million at March 31, 2017 and $59,234 million at December 31, 2016 divided by common shares outstanding of 1,852 million at both March 31, 2017 and December 31, 2016. |
| March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
Return on Equity Target
We are aiminghave an ROE Target of 9% to improve our return to shareholders, and accordingly have established a target return on average common equity, excluding DVA, (“Return on Equity”)11% to be achieved by 2017, subject2017. Our ROE Target and the related strategies and goals 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; legal expenses and the ability to the successful execution of our strategic objectives.reduce expenses in general; capital levels; and discrete tax items. For further information on our Return on Equity targetROE Target and related assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Return on Equity Target” in Part II, Item 7 of the 20152016 Form10-K.
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.
Net Revenues, and Compensation Expense and Income Taxes
For discussions of our net revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in Part II, Item 7 of the 20152016 Form10-K. For a discussion of our compensation expense, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Compensation Expense” in Part II, Item 7 of the 20152016 Form10-K. For a discussion of our Income Tax expense, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Income Taxes” in Part II, Item 7 of the 2016 Form10-K.
| March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
Institutional Securities
Income Statement Information
| Three Months Ended September 30, | ||||||||||||
| $ in millions | 2016 | 2015 | �� | % Change | ||||||||
Revenues | ||||||||||||
Investment banking | $ | 1,104 | $ | 1,181 | (7)% | |||||||
Trading | 2,393 | 1,984 | 21% | |||||||||
Investments | 36 | 113 | (68)% | |||||||||
Commissions and fees | 592 | 657 | (10)% | |||||||||
Asset management, distribution and administration fees | 68 | 66 | 3% | |||||||||
Other | 243 | (112 | ) | N/M | ||||||||
Total non-interest revenues | 4,436 | 3,889 | 14% | |||||||||
Interest income | 980 | 825 | 19% | |||||||||
Interest expense | 863 | 810 | 7% | |||||||||
Net interest | 117 | 15 | N/M | |||||||||
Net revenues | 4,553 | 3,904 | 17% | |||||||||
Compensation and benefits | 1,657 | 1,318 | 26% | |||||||||
Non-compensation expenses | 1,513 | 1,898 | (20)% | |||||||||
Total non-interest expenses | 3,170 | 3,216 | (1)% | |||||||||
Income from continuing operations before income taxes | 1,383 | 688 | 101% | |||||||||
Provision for income taxes | 381 | 141 | 170% | |||||||||
Income from continuing operations | 1,002 | 547 | 83% | |||||||||
Income (loss) from discontinued operations, net of income taxes | 8 | (3 | ) | N/M | ||||||||
Net income | 1,010 | 544 | 86% | |||||||||
Net income applicable to noncontrolling interests | 44 | 26 | 69% | |||||||||
Net income applicable to Morgan Stanley | $ | 966 | $ | 518 | 86% | |||||||
| Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||
| $ in millions | 2016 | 2015 | % Change | 2017 | 2016 | % Change | ||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Investment banking | $ | 3,202 | $ | 3,794 | (16)% | $ | 1,417 | $ | 990 | 43 | % | |||||||||||||
Trading | 6,782 | 8,191 | (17)% | 3,012 | 1,891 | 59 | % | |||||||||||||||||
Investments | 144 | 241 | (40)% | 66 | 32 | 106 | % | |||||||||||||||||
Commissions and fees | 1,854 | 2,013 | (8)% | 620 | 655 | (5 | )% | |||||||||||||||||
Asset management, distribution and administration fees | 210 | 211 | — | 91 | 73 | 25 | % | |||||||||||||||||
Other | 385 | 190 | 103% | 173 | 4 | N/ | M | |||||||||||||||||
Total non-interest revenues | 12,577 | 14,640 | (14)% | 5,379 | 3,645 | 48 | % | |||||||||||||||||
Interest income | 2,999 | 2,418 | 24% | 1,124 | 1,053 | 7 | % | |||||||||||||||||
Interest expense | 2,731 | 2,524 | 8% | 1,351 | 984 | 37 | % | |||||||||||||||||
Net interest | 268 | (106 | ) | N/M | (227 | ) | 69 | N/ | M | |||||||||||||||
Net revenues | 12,845 | 14,534 | (12)% | 5,152 | 3,714 | 39 | % | |||||||||||||||||
Compensation and benefits | 4,664 | 5,241 | (11)% | 1,870 | 1,382 | 35 | % | |||||||||||||||||
Non-compensation expenses | 4,384 | 5,170 | (15)% | 1,552 | 1,424 | 9 | % | |||||||||||||||||
Total non-interest expenses | 9,048 | 10,411 | (13)% | 3,422 | 2,806 | 22 | % | |||||||||||||||||
Income from continuing operations before income taxes | 3,797 | 4,123 | (8)% | 1,730 | 908 | 91 | % | |||||||||||||||||
Provision for income taxes | 1,109 | 658 | 69% | 459 | 275 | 67 | % | |||||||||||||||||
Income from continuing operations | 2,688 | 3,465 | (22)% | 1,271 | 633 | 101 | % | |||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | 1 | (10 | ) | N/M | (22 | ) | (3 | ) | N/ | M | ||||||||||||||
Net income | 2,689 | 3,455 | (22)% | 1,249 | 630 | 98 | % | |||||||||||||||||
Net income applicable to noncontrolling interests | 144 | 100 | 44% | 35 | 39 | (10 | )% | |||||||||||||||||
Net income applicable to Morgan Stanley | $ | 2,545 | $ | 3,355 | (24)% | $ | 1,214 | $ | 591 | 105 | % | |||||||||||||
N/M—Not Meaningful
Investment Banking
Investment Banking Revenues
| Three Months Ended September 30, | ||||||||||||
| $ in millions | 2016 | 2015 | % Change | |||||||||
Advisory revenues | $ | 504 | $ | 557 | (10)% | |||||||
Underwriting revenues: | ||||||||||||
Equity underwriting revenues | 236 | 250 | (6)% | |||||||||
Fixed income underwriting revenues | 364 | 374 | (3)% | |||||||||
Total underwriting revenues | 600 | 624 | (4)% | |||||||||
Total investment banking revenues | $ | 1,104 | $ | 1,181 | (7)% | |||||||
| Nine Months Ended September 30, | ||||||||||||
| $ in millions | 2016 | 2015 | % Change | |||||||||
Advisory revenues | $ | 1,592 | $ | 1,451 | 10% | |||||||
Underwriting revenues: | ||||||||||||
Equity underwriting revenues | 662 | 1,046 | (37)% | |||||||||
Fixed income underwriting revenues | 948 | 1,297 | (27)% | |||||||||
Total underwriting revenues | 1,610 | 2,343 | (31)% | |||||||||
Total investment banking revenues | $ | 3,202 | $ | 3,794 | (16)% | |||||||
| Three Months Ended March 31, | ||||||||||||
| $ in millions | 2017 | 2016 | % Change | |||||||||
Advisory | $ | 496 | $ | 591 | (16)% | |||||||
Underwriting revenues: | ||||||||||||
Equity | 390 | 160 | 144% | |||||||||
Fixed income | 531 | 239 | 122% | |||||||||
Total underwriting | 921 | 399 | 131% | |||||||||
Total investment banking | $ | 1,417 | $ | 990 | 43% | |||||||
Investment Banking Volumes
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| $ in billions | 2016 1 | 2015 1 | 2016 1 | 2015 1 | 20171 | 20161 | ||||||||||||||||||
Completed mergers and acquisitions2 | $ | 156 | $ | 201 | $ | 690 | $ | 463 | $ | 150 | $ | 297 | ||||||||||||
Equity and equity-related offerings3 | 12 | 12 | 33 | 51 | 10 | 7 | ||||||||||||||||||
Fixed income offerings4 | 71 | 49 | 187 | 197 | 71 | 51 | ||||||||||||||||||
| 1. | Source: Thomson Reuters, data at |
| 2. | Amounts include transactions of $100 million or more. |
| 3. | Amounts include Rule 144A issuances and registered public offerings of common stock and convertible securities and rights offerings. |
| 4. | Amounts includenon-convertible preferred stock, mortgage-backed and asset-backed securities, and taxable municipal debt. Amounts include publicly registered and Rule 144A issues. Amounts exclude leveraged loans andself-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 $1,104$1,417 million in the current quarter and $3,202 millionincreased 43% from the prior year quarter due to higher underwriting revenues, partially offset by a decrease in advisory revenues in the current year periodquarter.
Advisory revenues decreased reflecting the lower levels of global completed merger, acquisition and restructuring transactions (“M&A”) activity (see Investment Banking Volumes table), partially offset by higher fee realization.
Equity underwriting revenues increased as a result of higher global market volumes in both initial public offerings andfollow-on offerings (see Investment Banking Volumes table), as well as higher fee realization. Fixed income underwriting revenues increased in the current quarter, primarily due to higher bond andnon-investment grade loan fees.
Sales and Trading Net Revenues
By Income Statement Line Item
| Three Months Ended March 31, | ||||||||||||
| $ in millions | 2017 | 2016 | % Change | |||||||||
Trading | $ | 3,012 | $ | 1,891 | 59 | % | ||||||
Commissions and fees | 620 | 655 | (5 | )% | ||||||||
Asset management, distribution and administration fees | 91 | 73 | 25 | % | ||||||||
Net interest | (227 | ) | 69 | N/ | M | |||||||
Total | $ | 3,496 | $ | 2,688 | 30 | % | ||||||
N/M—Not Meaningful
| 7 | March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
By Business
| Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Equity | $ | 2,016 | $ | 2,056 | ||||
Fixed income | 1,714 | 873 | ||||||
Other | (234 | ) | (241 | ) | ||||
Total | $ | 3,496 | $ | 2,688 | ||||
Sales and Trading Activities—Equity and Fixed Income
Following is a description of the sales and trading activities within our equities and fixed income businesses as well as how their results impact the income statement line items, followed by a presentation and explanation of results.
Equities—Financing.We provide financing and prime brokerage services to our clients active in the equity markets through a variety of products including margin lending, securities lending and swaps. Results from this business are largely driven by the difference between financing income earned and financing costs incurred, which are reflected in Net interest for securities and equity lending products and in Trading revenues for derivative products.
Equities—Execution services. We make markets for our clients in equity-related securities and derivative products, including providing liquidity and hedging products. A significant portion of the results for this business is generated by commissions and fees from executing and clearing client transactions on major stock and derivative exchanges as well as fromover-the-counter (“OTC”) transactions. Market-making also generates gains and losses on inventory, which are reflected in Trading revenues.
Fixed income—Within fixed income we make markets in order to facilitate client activity as part of the following products and services.
| • | Global macro products. We make markets for our clients in interest rate, foreign exchange and emerging market products, including exchange-traded and OTC securities, loans and derivative instruments. The results of this market-making activity are primarily driven by gains and losses from buying and selling positions to stand ready for and satisfy client demand and are recorded in Trading revenues. |
| • | Credit products. We make markets in credit-sensitive products, such as corporate bonds and mortgage securities and other securitized products, and related derivative instruments. The values of positions in this business are sensitive to changes in credit spreads and interest rates, which result in gains and losses reflected in Trading revenues. Due to the amount and type of theinterest-bearing securities and loans |
making up this business, a significant portion of the results is also reflected in Net interest revenues. |
| • | Commodities products. We make markets in various commodity products related primarily to electricity, natural gas, oil, and precious metals, with the results primarily reflected in Trading revenues. |
Sales and Trading Net Revenues—Equity and Fixed Income
| Three Months Ended March 31, 2017 | ||||||||||||||||
| $ in millions | Trading | Fees1 | Net Interest2 | Total | ||||||||||||
Financing | $ | 931 | $ | 89 | $ | (188 | ) | $ | 832 | |||||||
Execution services | 664 | 568 | (48 | ) | 1,184 | |||||||||||
Total Equity | $ | 1,595 | $ | 657 | $ | (236 | ) | $ | 2,016 | |||||||
Total Fixed Income | $ | 1,598 | $ | 54 | $ | 62 | $ | 1,714 | ||||||||
| Three Months Ended | ||||||||||||||||
| March 31, 2016 | ||||||||||||||||
| $ in millions | Trading | Fees1 | Net Interest2 | Total | ||||||||||||
Financing | $ | 886 | $ | 86 | $ | 40 | $ | 1,012 | ||||||||
Execution services | 509 | 600 | (65 | ) | 1,044 | |||||||||||
Total Equity | $ | 1,395 | $ | 686 | $ | (25 | ) | $ | 2,056 | |||||||
Total Fixed Income | $ | 555 | $ | 40 | $ | 278 | $ | 873 | ||||||||
| 1. | Includes Commissions and fees and Asset management, distribution and administration fees. |
| 2. | Funding costs are allocated to the businesses based on funding usage and are included in Net interest. |
We manage each of the sales and trading businesses based on its aggregate net revenues, which are comprised of the consolidated income statement line items quantified in the previous table. Trading revenues are affected by a variety of market dynamics, including volumes,bid-offer spreads, and inventory prices, as well as impacts from hedging activity, which are interrelated. 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 4 to the consolidated financial statements.
Equity
Equity sales and trading net revenues of $2,016 million in the current quarter were lower than the prior year quarter, reflecting lower results in our financing businesses driven by higher funding costs, partially offset by strong results in our execution services revenues.
Financing revenues decreased 18% from the prior year quarter as Net interest revenues declined from higher net
| March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
interest costs, reflecting increased liquidity requirements, and an increased proportion of lower spread transactions. |
decreased 7% and 16%
Execution services increased 13% from the comparable prior year periodsquarter, primarily reflecting improved results in Trading revenues due to a lower advisory and underwriting revenuesvolatility environment compared with the prior year quarter when increased volatility resulted in the current quarter, and lower underwriting revenues,inventory losses. This was partially offset by higher advisory revenueslower fees in the current year period.
Advisory revenues decreased in the current quarter and increased in the current year period reflecting lower completed M&A activity in the current quarter and higher completed M&A activity in the current year period (see Investment Banking Volumes table).
Equity underwriting revenues decreased as a result of a shift in product mix in the current quarter and due to lower equity—related offerings in the current year period (see Investment Banking Volumes table). Fixed income underwriting revenues decreased in the current quarter primarily due to lower loan fees, partially offset by higher bond fees. In the current year period, fixed income underwriting revenues decreased primarily due to lower bond and loan fees.
Sales and Trading Net Revenues
Sales and Trading Net Revenues
| Three Months Ended September 30, | ||||||||||||
| $ in millions | 2016 | 2015 | % Change | |||||||||
Trading | $ | 2,393 | $ | 1,984 | 21% | |||||||
Commissions and fees | 592 | 657 | (10)% | |||||||||
Asset management, distribution and administration fees | 68 | 66 | 3% | |||||||||
Net interest | 117 | 15 | N/M | |||||||||
Total sales and trading net revenues | $ | 3,170 | $ | 2,722 | 16% | |||||||
| Nine Months Ended September 30, | ||||||||||||
| $ in millions | 2016 | 2015 | % Change | |||||||||
Trading | $ | 6,782 | $ | 8,191 | (17)% | |||||||
Commissions and fees | 1,854 | 2,013 | (8)% | |||||||||
Asset management, distribution and administration fees | 210 | 211 | — | |||||||||
Net interest | 268 | (106 | ) | N/M | ||||||||
Total sales and trading net revenues | $ | 9,114 | $ | 10,309 | (12)% | |||||||
N/M—Not Meaningful
Sales and Trading Net Revenues by Business
|
| |||||||||||
| Three Months Ended September 30, | % Change | |||||||||||
| $ in millions | 2016 | 2015 | ||||||||||
Equity | $ | 1,883 | $ | 1,869 | 1% | |||||||
Fixed income1 | 1,479 | 918 | 61% | |||||||||
Other | (192 | ) | (65 | ) | (195)% | |||||||
Total sales and trading net revenues | $ | 3,170 | $ | 2,722 | 16% | |||||||
| Nine Months Ended September 30, | % Change | |||||||||||
| $ in millions | 2016 | 2015 | ||||||||||
Equity | $ | 6,084 | $ | 6,504 | (6)% | |||||||
Fixed income1 | 3,649 | 4,298 | (15)% | |||||||||
Other | (619 | ) | (493 | ) | (26)% | |||||||
Total sales and trading net revenues | $ | 9,114 | $ | 10,309 | (12)% | |||||||
|
Sales and Trading Net Revenues, Excluding DVA in 2015
Sales and trading net revenues, including equity and fixed income sales and trading net revenues that exclude the impact of DVA in 2015, are non-GAAP financial measures that we consider useful for us, investors and analysts to allow further comparability of period-to-period operating performance.
| Three Months Ended September 30, | ||||||||||||
| $ in millions | 2016 | 2015 | % Change | |||||||||
Total sales and trading net revenues—U.S. GAAP | $ | 3,170 | $ | 2,722 | 16% | |||||||
Impact of DVA1 | — | (435 | ) | (100)% | ||||||||
Total sales and trading net revenues—non-GAAP | $ | 3,170 | $ | 2,287 | 39% | |||||||
Equity sales and trading net revenues—U.S. GAAP | $ | 1,883 | $ | 1,869 | 1% | |||||||
Impact of DVA1 | — | (100 | ) | (100)% | ||||||||
Equity sales and trading net revenues—non-GAAP | $ | 1,883 | $ | 1,769 | 6% | |||||||
Fixed income sales and trading net revenues—U.S. GAAP | $ | 1,479 | $ | 918 | 61% | |||||||
Impact of DVA1 | — | (335 | ) | (100)% | ||||||||
Fixed income sales and trading net revenues—non-GAAP | $ | 1,479 | $ | 583 | N/M | |||||||
|
| Nine Months Ended September 30, | ||||||||||||
| $ in millions | 2016 | 2015 | % Change | |||||||||
Total sales and trading net revenues—U.S. GAAP | $ | 9,114 | $ | 10,309 | (12)% | |||||||
Impact of DVA1 | — | (742 | ) | (100)% | ||||||||
Total sales and trading net revenues—non-GAAP | $ | 9,114 | $ | 9,567 | (5)% | |||||||
Equity sales and trading net revenues—U.S. GAAP | $ | 6,084 | $ | 6,504 | (6)% | |||||||
Impact of DVA1 | — | (197 | ) | (100)% | ||||||||
Equity sales and trading net revenues—non-GAAP | $ | 6,084 | $ | 6,307 | (4)% | |||||||
Fixed income sales and trading net revenues—U.S. GAAP | $ | 3,649 | $ | 4,298 | (15)% | |||||||
Impact of DVA1 | — | (545 | ) | (100)% | ||||||||
Fixed income sales and trading net revenues—non-GAAP | $ | 3,649 | $ | 3,753 | (3)% | |||||||
|
Sales and Trading Net Revenues during the Current Quarter
Equity
Equity sales and trading net revenues were $1,883 million, an increase from the comparable prior year period reflecting improved performance in derivatives and cash products due to improveddriven by reduced market conditions, and increased activity in some derivative products.volumes.
Fixed Income
Excluding the $335 million positive impact of DVA on prior year quarter results, fixedFixed income net revenues of $1,479$1,714 million in the current quarter were 96% higher than the prior year quarter, primarilydriven by an increase in Trading revenues reflecting strong performance across products and regions on improved market conditions.
Credit products increased due to a more favorable credit products, which benefited from an improved credit market environment and improved market conditions for interest rate products. The increasein the current quarter compared with the widening spread environment in the prior year quarter that resulted in inventory losses. This was partially offset by a lower level of interest realized in securitized products in the absence of revenues from the global oil merchanting business, which was sold on November 1, 2015. For more information on the sale of the global oil merchanting business, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Business Segments—Institutional Securities—Investments, Other Revenues, Non-interest Expenses, Income Tax Items, Dispositions and Other Items—2015 Compared with 2014—Dispositions” in Part II, Item 7 of the 2015 Form 10-K.current quarter.
Other
Other sales and trading net losses of $192 millionGlobal macro products increased due to a more favorable environment across products compared with the prior year quarter when results were impacted by inventory losses. This was partially offset by higher interest costs in the current quarter increased from the comparable prior year period primarily reflecting losses in the current quarter associated with corporate loan hedging activity compared with gains in the prior year quarter.which were impacted by interest products inventory management.
Sales and Trading Net Revenues during the Current Year Period
Equity
Equity sales and trading net revenues were $6,084 million, a decrease from the comparable prior year period, primarily reflecting lower revenues in cashCommodities products increased due to reduced volumesincreased structured transactions and customer flow in international markets, partially offset by improved performance in prime brokerage across regions.
Fixed Income
Excluding the $545 million positive impact of DVA on the prior year period, fixed income net revenues of $3,649 million in the current year period were lower than the prior year period primarily due to the absence of revenues from the global oil merchanting business, as discussed herein,electricity and lower results in foreign exchange driven mainly by lower volumes, partially offset bynatural gas products and an improved credit market environment.
Other
Other sales and trading net losses of $619 million in the current year increased from the comparable prior year period primarily reflecting losses in the current year period associated with corporate loan hedging activity compared with gains in the prior year period.
Investments, Other Revenues,Non-interest Expenses and Other Items
Investments
Net investment gains of $36$66 million in the current quarter decreasedincreased from the prior year quarter, primarily as a result of lower gains on real estate and business related investments and losses on investments associated with our compensationscompensation plans compared to gainswith losses in the prior year quarter. Net investment gains of $144 million in the current year period decreased from the comparable prior year period primarily reflecting losses on investments associated with our compensations plans compared to gains in the prior year period and lower gains on real estate investments, partially offset by higher gains on business related investments.
|
Other
Other revenues of $243$173 million were recognizedin the current quarter increased from the prior year quarter, primarily reflectingmark-to-market gains on loans held for sale in the current quarter compared with negative revenues of $112 millionmark-to-market losses in the prior year quarter. Other revenues were $385 millionquarter and a decrease in the current year period and $190 million in the prior year period. Results in both current quarter and current year period reflected mark-to-market gains on loans held for sale compared with mark-to-market losses in the comparable prior year periods, partially offset by lower results related to our 40% stake in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (see Note 8 to the consolidated financial statements in Item 1 for further information). In the current year period, results also reflected an increase in the allowance for lossesprovision on loans held for investment.
Non-interest Expenses
Non-interest expenses of $3,170$3,422 million in the current quarter and $9,048 million in the current year period decreasedincreased from the comparable prior year periods. Results reflectedquarter, primarily reflecting a 20% reduction in Non-compensation expenses, partially offset by a 26%35% increase in Compensation and benefits expenses in the current quarter. In the current year period, results reflected an 11% reduction in Compensation and benefits expenses and a 15% reduction9% increase inNon-compensation expenses. expenses in the current quarter.
Compensation and benefits expenses increased in the current quarter, primarily due to an increase in the fair value of investments to which certain deferred compensation plans are referenced and an increaseincreases in discretionary incentive compensation driven mainly by higher revenues. Compensation and benefits expenses decreased in the current year period primarily due to a decrease in discretionary incentive compensation driven mainly by lower revenues and a decrease in salaries due to lower headcount, partially offset by an increase in the fair value of investments to which certain deferred compensation plans are referenced.
Non-compensation expenses decreasedincreased in the current quarter, and current year period primarily due to lowerhigher litigation costs. In the prior year quartercosts and prior year period, Non-compensation expenses included a reserve for the settlement of a credit default swap (“CDS”) antitrust litigation. For more information on the CDS antitrust litigation, see “Legal Proceedings” in Part I, Item 3 of the 2015 Form 10-K.Brokerage, clearing and exchange fees expense due to higher volumes.
Noncontrolling Interests
Noncontrolling interests primarily relate to Mitsubishi UFJ Financial Group, Inc.’s interest in Morgan Stanley MUFG Securities Co., Ltd.
| Management’s Discussion and Analysis | |
Wealth Management
Income Statement Information
| Three Months Ended September 30, | % Change | |||||||||||
| $ in millions | 20161 | 2015 | ||||||||||
Revenues | ||||||||||||
Investment banking | $ | 129 | $ | 140 | (8)% | |||||||
Trading | 229 | 47 | N/M | |||||||||
Investments | — | 3 | N/M | |||||||||
Commissions and fees | 433 | 465 | (7)% | |||||||||
Asset management, distribution and administration fees | 2,133 | 2,182 | (2)% | |||||||||
Other | 72 | 52 | 38% | |||||||||
Total non-interest revenues | 2,996 | 2,889 | 4% | |||||||||
Interest income | 979 | 777 | 26% | |||||||||
Interest expense | 94 | 26 | N/M | |||||||||
Net interest | 885 | 751 | 18% | |||||||||
Net revenues | 3,881 | 3,640 | 7% | |||||||||
Compensation and benefits | 2,203 | 2,024 | 9% | |||||||||
Non-compensation expenses | 777 | 792 | (2)% | |||||||||
Total non-interest expenses | 2,980 | 2,816 | 6% | |||||||||
Income from continuing operations before income taxes | 901 | 824 | 9% | |||||||||
Provision for income taxes | 337 | 315 | 7% | |||||||||
Net income applicable to Morgan Stanley | $ | 564 | $ | 509 | 11% | |||||||
| Nine Months Ended September 30, | % Change | |||||||||||
| $ in millions | 20161 | 2015 | ||||||||||
Revenues | ||||||||||||
Investment banking | $ | 373 | $ | 518 | (28)% | |||||||
Trading | 675 | 475 | 42% | |||||||||
Investments | (2 | ) | 18 | N/M | ||||||||
Commissions and fees | 1,268 | 1,481 | (14)% | |||||||||
Asset management, distribution and administration fees | 6,269 | 6,471 | (3)% | |||||||||
Other | 232 | 209 | 11% | |||||||||
Total non-interest revenues | 8,815 | 9,172 | (4)% | |||||||||
Interest income | 2,813 | 2,296 | 23% | |||||||||
Interest expense | 268 | 119 | N/M | |||||||||
Net interest | 2,545 | 2,177 | 17% | |||||||||
Net revenues | 11,360 | 11,349 | — | |||||||||
Compensation and benefits | 6,443 | 6,449 | — | |||||||||
Non-compensation expenses | 2,371 | 2,336 | 1% | |||||||||
Total non-interest expenses | 8,814 | 8,785 | — | |||||||||
Income from continuing operations before income taxes | 2,546 | 2,564 | (1)% | |||||||||
Provision for income taxes | 973 | 959 | 1% | |||||||||
Net income applicable to Morgan Stanley | $ | 1,573 | $ | 1,605 | (2)% | |||||||
N/M – Not Meaningful
| Three Months Ended March 31, | % Change | |||||||||||
| $ in millions | 2017 | 20161 | ||||||||||
Revenues | ||||||||||||
Investment banking | $ | 145 | $ | 121 | 20% | |||||||
Trading | 238 | 194 | 23% | |||||||||
Investments | 1 | (2 | ) | 150% | ||||||||
Commissions and fees | 440 | 412 | 7% | |||||||||
Asset management, distribution and administration fees | 2,184 | 2,054 | 6% | |||||||||
Other | 56 | 58 | (3)% | |||||||||
Totalnon-interest revenues | 3,064 | 2,837 | 8% | |||||||||
Interest income | 1,079 | 914 | 18% | |||||||||
Interest expense | 85 | 83 | 2% | |||||||||
Net interest | 994 | 831 | 20% | |||||||||
Net revenues | 4,058 | 3,668 | 11% | |||||||||
Compensation and benefits | 2,317 | 2,088 | 11% | |||||||||
Non-compensation expenses | 768 | 794 | (3)% | |||||||||
Totalnon-interest expenses | 3,085 | 2,882 | 7% | |||||||||
Income from continuing operations before income taxes | 973 | 786 | 24% | |||||||||
Provision for income taxes | 326 | 293 | 11% | |||||||||
Net income applicable to Morgan Stanley | $ | 647 | $ | 493 | 31% | |||||||
| 1. | Effective July 1, 2016, the Institutional Securities and Wealth Management |
Statistical Data
Financial Information and Statistical Data
$ in billions, except where noted | At September 30, 2016 | At December 31, 2015 | ||||||
Client assets | $ | 2,090 | $ | 1,985 | ||||
Fee-based client assets1 | $ | 855 | $ | 795 | ||||
Fee-based client assets as a percentage of total client assets | 41 | % | 40 | % | ||||
Client liabilities2 | $ | 70 | $ | 64 | ||||
Bank deposit program | $ | 149 | $ | 149 | ||||
Investment securities portfolio | $ | 64.7 | $ | 57.9 | ||||
Loans and lending commitments | $ | 65.9 | $ | 55.3 | ||||
Wealth Management representatives | 15,856 | 15,889 | ||||||
Retail locations | 608 | 608 | ||||||
| Three Months Ended September 30, | ||||||||
| 2016 | 2015 | |||||||
Annualized revenues per representative (dollars in thousands)3 | $ | 977 | $ | 922 | ||||
Client assets per representative (dollars in millions)4 | $ | 132 | $ | 122 | ||||
Fee-based asset flows5 | $ | 13.5 | $ | 7.7 | ||||
| Nine Months Ended September 30, | ||||||||
| 2016 | 2015 | |||||||
Annualized revenues per representative (dollars in thousands)3 | $ | 953 | $ | 952 | ||||
Client assets per representative (dollars in millions)4 | $ | 132 | $ | 122 | ||||
Fee-based asset flows5 | $ | 31.4 | $ | 34.9 | ||||
| $ in billions | At March 31, 2017 | At December 31, 2016 | ||||||
Client assets | $ | 2,187 | $ | 2,103 | ||||
Fee-based client assets1 | $ | 927 | $ | 877 | ||||
Fee-based client assets as a percentage of total client assets | 42% | 42% | ||||||
Client liabilities2 | $ | 74 | $ | 73 | ||||
Bank deposit program | $ | 149 | $ | 153 | ||||
Investment securities portfolio | $ | 62.6 | $ | 63.9 | ||||
Loans and lending commitments | $ | 70.3 | $ | 68.7 | ||||
Wealth Management representatives | 15,777 | 15,763 | ||||||
| Three Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
Annualized revenues per representative | ||||||||
(dollars in thousands)3 | $ | 1,029 | $ | 923 | ||||
Client assets per representative | ||||||||
(dollars in millions)4 | $ | 139 | $ | 126 | ||||
Fee-based asset flows5 | ||||||||
(dollars in billions) | $ | 18.8 | $ | 5.9 | ||||
| 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, |
| 3. | Annualized revenues per representative equal |
| 4. | Client assets per representative equal totalperiod-end client assets divided byperiod-end representative headcount. |
| 5. | Fee-based asset flows include net newfee-based assets, net account transfers, dividends, interest and client fees and exclude institutional cash management-related activity. |
NetTransactional Revenues
Transactional Revenues
| Three Months Ended September 30, | % Change | Three Months Ended March 31, | % Change | |||||||||||||||||||||
| $ in millions | 2016 | 2015 | 2017 | 2016 | ||||||||||||||||||||
Investment banking | $ | 129 | $ | 140 | (8)% | $ | 145 | $ | 121 | 20% | ||||||||||||||
Trading | 229 | 47 | N/M | 238 | 194 | 23% | ||||||||||||||||||
Commissions and fees | 433 | 465 | (7)% | 440 | 412 | 7% | ||||||||||||||||||
Transactional revenues | $ | 791 | $ | 652 | 21% | |||||||||||||||||||
Total | $ | 823 | $ | 727 | 13% | |||||||||||||||||||
| Management’s Discussion and Analysis | |
| Nine Months Ended September 30, | % Change | |||||||||||
| $ in millions | 2016 | 2015 | ||||||||||
Investment banking | $ | 373 | $ | 518 | (28)% | |||||||
Trading | 675 | 475 | 42% | |||||||||
Commissions and fees | 1,268 | 1,481 | (14)% | |||||||||
Transactional revenues | $ | 2,316 | $ | 2,474 | (6)% | |||||||
Net Revenues
Transactional Revenues
Transactional revenues of $791$823 million in the current quarter increased 21%13% from the prior year quarter primarily reflecting higher revenues related to investments associated with certain employee deferred compensation plans partially offset by lower commission revenues.
Transactional revenues of $2,316 million in the current year period decreased 6% from the prior year period due to lower revenues in Investment banking and Commissions and fees, partially offset by higher revenues in Trading.plans.
Investment banking revenues decreasedincreased in the current quarter due to lower fixed income revenues as a result of the Fixed Income Integration. The decrease in the current year period was due to lowerhigher revenues from unit investments trusts, equitythe distribution of structured products and structured products,equities, partially offset by increased levels oflower preferred stock underwriting activity.
Trading revenues increased in the current quarter and the current year period primarily due to gains related to investments associated with certain employee deferred compensation plans, and higher revenues from fixed income products, partially offset by decreases from the Fixed Income Integration.
Commissions and fees decreasedincreased in the current quarter primarily related to the Fixed Income Integration and current year period reflected lower daily average commissions primarily due to reduced clienthigher equities activity, in equity and annuity products. The decrease in the current quarter was partially offset by increases from the Fixed Income Integration.lower annuity product revenues.
Asset Management
Asset management, distribution and administration fees of $2,133$2,184 million in the current quarter decreased 2%increased 6% from the comparable prior year periodquarter primarily due to lower average fee rates reflecting larger client account balances with lower tiered rates, as well as shifts in the mix of investment typesmarket appreciation and strategies in fee-based accounts,positive flows, partially offset by positive flows. Asset management, distribution and administration fees of $6,269 million in the current year period decreased 3% from the comparable prior year period primarily due to lower fees from mutual funds reflecting the impact of lower average asset levels and lower averageclient fee rates related to fee-based accounts, partially offset by positive flows.rates. See “Fee-Based“Fee-Based Client Assets Activity and Average Fee Rate by Account Type” herein.
Net Interest
Net interest of $885 million in the current quarter and $2,545 million in the current year period increased 18% and 17%, respectively, from the comparable prior year periods primarily due to higher loan and investment securities balances which were funded by higher average deposits.
Other
Other revenues of $72 million in the current quarter and $232 million in the current year period increased 38% and 11%, respectively, from the comparable prior year periods, due to higher realized gains from the available for sale (“AFS”) securities portfolio. The increase in Other revenues in the current year period was also due to higher referral fees.
Non-interest Expenses
Non-interest expenses of $2,980$994 million in the current quarter increased 6%20% from the comparable prior year period. quarter primarily due to higher loan balances and higher interest rates.
Non-interest expense Expenses
Non-interest expenses of $3,085 million in the current year period was relatively unchangedquarter increased 7% from the comparable prior year period.quarter.
Compensation and benefits expenses increased in the current quarter primarily due to the increasehigher revenues and increases in the fair value of investments to which certain deferred compensation plans are referenced. Compensation and benefits expenses in the current year period were relatively unchanged from the prior year period.
Non-compensation expenses decreased in the current quarter primarily due to lower professional service costs partially offset by higher litigation costs. Non-compensation expenses in the current year period were relatively unchanged.
Other Items
U.S. Department of Labor Conflict of Interest Rule
In April 2016, the U.S. Department of Labor adopted a conflict of interest rule under the Employee Retirement Income Security Act of 1974 that broadens the circumstances under which a firm is considered a fiduciary when transacting with retail investment accounts and sets forth requirements to ensure that advice given by broker-dealers acting as investment advice fiduciaries is impartial. The new fiduciary standard for investment advice will apply on April 10, 2017 and full compliance is required by January 1, 2018. Given the breadth and scale of our platform and continued investment in technology and infrastructure, we believe that we will be able to provide compliant solutions to meet our clients’ investment needs (see also “Business—Supervision and Regulation—Institutional Securities and Wealth Management—Broker-Dealer and Investment Adviser Regulation” in Part I, Item 1 of the 2015 Form 10-K).
|
Fee-Based Client Assets Activity and Average Fee Rate by Account Type
For a description offee-based client assets, including descriptions for 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—WealthManagement—Fee-Based Client Assets”Assets Activity and Average Fee Rate by Account Type” in Part II, Item 7 of the 20152016 Form10-K.
At December 31, 2016 | Inflows | Outflows | Market Impact | At March 31, 2017 | Average for the Three Months Ended March 31, 2017 | |||||||||||||||||||||||||||||||||||||||
$ in billions, Fee Rate in bps | At June 30, 2016 | Inflows | Outflows | Market Impact | At September 30, 2016 | Average for the Three Months Ended September 30, 2016 | Fee Rate1 | |||||||||||||||||||||||||||||||||||||
| Fee Rate | ||||||||||||||||||||||||||||||||||||||||||||
Separately managed accounts1 | $ | 279 | $ | 8 | $ | (15 | ) | $ | 7 | $ | 279 | 28 | ||||||||||||||||||||||||||||||||
Unified managed accounts | 120 | 17 | (5 | ) | 4 | 136 | 106 | |||||||||||||||||||||||||||||||||||||
Separately managed accounts2,3 | $ | 222 | $ | 9 | $ | (5 | ) | $ | 4 | $ | 230 | 16 | ||||||||||||||||||||||||||||||||
Unified managed accounts3 | 204 | 13 | (9 | ) | 9 | 217 | 100 | |||||||||||||||||||||||||||||||||||||
Mutual fund advisory | 23 | — | (1 | ) | 1 | 23 | 121 | 21 | — | (1 | ) | 1 | 21 | 120 | ||||||||||||||||||||||||||||||
Representative as advisor | 117 | 10 | (7 | ) | 3 | 123 | 87 | 125 | 10 | (7 | ) | 5 | 133 | 86 | ||||||||||||||||||||||||||||||
Representative as portfolio manager | 265 | 19 | (12 | ) | 6 | 278 | 100 | 285 | 20 | (11 | ) | 11 | 305 | 98 | ||||||||||||||||||||||||||||||
Subtotal | $ | 804 | $ | 54 | $ | (40 | ) | $ | 21 | $ | 839 | 73 | $ | 857 | $ | 52 | $ | (33 | ) | $ | 30 | $ | 906 | 77 | ||||||||||||||||||||
Cash management | 16 | 2 | (2 | ) | — | 16 | 6 | 20 | 3 | (2 | ) | — | 21 | 6 | ||||||||||||||||||||||||||||||
Total fee-based client assets | $ | 820 | $ | 56 | $ | (42 | ) | $ | 21 | $ | 855 | 72 | $ | 877 | $ | 55 | $ | (35 | ) | $ | 30 | $ | 927 | 75 | ||||||||||||||||||||
$ in billions, Fee Rate in bps | At June 30, 2015 | Inflows | Outflows | Market Impact | At September 30, 2015 | Average for the Three Months Ended September 30, 2015 | ||||||||||||||||
| Fee Rate | ||||||||||||||||||||||
Separately managed accounts1 | $ | 294 | $ | 13 | $ | (11 | ) | $ | (18 | ) | $ | 278 | 34 | |||||||||
Unified managed accounts | 103 | 6 | (4 | ) | (7 | ) | 98 | 112 | ||||||||||||||
Mutual fund advisory | 29 | — | (1 | ) | (3 | ) | 25 | 120 | ||||||||||||||
Representative as advisor | 120 | 7 | (7 | ) | (8 | ) | 112 | 88 | ||||||||||||||
Representative as portfolio manager | 253 | 15 | (10 | ) | (16 | ) | 242 | 103 | ||||||||||||||
Subtotal | $ | 799 | $ | 41 | $ | (33 | ) | $ | (52 | ) | $ | 755 | 76 | |||||||||
Cash management | 14 | 3 | (2 | ) | — | 15 | 6 | |||||||||||||||
Total fee-based client assets | $ | 813 | $ | 44 | $ | (35 | ) | $ | (52 | ) | $ | 770 | 74 | |||||||||
| 11 | March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
$ in billions, Fee Rate in bps | At December 31, 2015 | Inflows | Outflows | Market Impact | At 2016 | Average for the Nine Months Ended September 30, 2016 | ||||||||||||||||
| Fee Rate | ||||||||||||||||||||||
Separately managed accounts1 | $ | 283 | $ | 24 | $ | (31 | ) | $ | 3 | $ | 279 | 30 | ||||||||||
Unified managed accounts | 105 | 37 | (13 | ) | 7 | 136 | 108 | |||||||||||||||
Mutual fund advisory | 25 | 1 | (5 | ) | 2 | 23 | 121 | |||||||||||||||
Representative as advisor | 115 | 22 | (20 | ) | 6 | 123 | 88 | |||||||||||||||
Representative as portfolio manager | 252 | 48 | (32 | ) | 10 | 278 | 101 | |||||||||||||||
Subtotal | $ | 780 | $ | 132 | $ | (101 | ) | $ | 28 | $ | 839 | 74 | ||||||||||
Cash management | 15 | 8 | (7 | ) | — | 16 | 6 | |||||||||||||||
Total fee-based client assets | $ | 795 | $ | 140 | $ | (108 | ) | $ | 28 | $ | 855 | 73 | ||||||||||
At December 31, 2015 | Inflows | Outflows | Market Impact | At March 31, 2016 | Average for the Three Months Ended March 31, 2016 | |||||||||||||||||||||||||||||||||||||||
$ in billions, Fee Rate in bps | At 2014 | Inflows | Outflows | Market Impact | At 2015 | Average for the Nine Months Ended September 30, 2015 | Fee Rate1 | |||||||||||||||||||||||||||||||||||||
| Fee Rate | ||||||||||||||||||||||||||||||||||||||||||||
Separately managed accounts1 | $ | 285 | $ | 34 | $ | (24 | ) | $ | (17 | ) | $ | 278 | 34 | |||||||||||||||||||||||||||||||
Separately managed accounts2 | $ | 283 | $ | 9 | $ | (10 | ) | $ | (4 | ) | $ | 278 | 37 | |||||||||||||||||||||||||||||||
Unified managed accounts | 93 | 21 | (10 | ) | (6 | ) | 98 | 113 | 105 | 10 | (5 | ) | 2 | 112 | 109 | |||||||||||||||||||||||||||||
Mutual fund advisory | 31 | 1 | (5 | ) | (2 | ) | 25 | 121 | 25 | — | (1 | ) | — | 24 | 121 | |||||||||||||||||||||||||||||
Representative as advisor | 119 | 22 | (20 | ) | (9 | ) | 112 | 89 | 115 | 6 | (7 | ) | — | 114 | 87 | |||||||||||||||||||||||||||||
Representative as portfolio manager | 241 | 44 | (28 | ) | (15 | ) | 242 | 104 | 252 | 15 | (11 | ) | (1 | ) | 255 | 102 | ||||||||||||||||||||||||||||
Subtotal | $ | 769 | $ | 122 | $ | (87 | ) | $ | (49 | ) | $ | 755 | 76 | $ | 780 | $ | 40 | $ | (34 | ) | $ | (3 | ) | $ | 783 | 78 | ||||||||||||||||||
Cash management | 16 | 7 | (8 | ) | — | 15 | 6 | 15 | 2 | (2 | ) | — | 15 | 6 | ||||||||||||||||||||||||||||||
Total fee-based client assets | $ | 785 | $ | 129 | $ | (95 | ) | $ | (49 | ) | $ | 770 | 75 | $ | 795 | $ | 42 | $ | (36 | ) | $ | (3 | ) | $ | 798 | 77 | ||||||||||||||||||
bps—Basis points
| 1. | Certain data enhancements during the current quarter resulted in a modification to the “Fee Rate” calculations. Prior periods have been restated to reflect the revised calculations. |
| 2. | Includesnon-custody account values reflecting priorquarter-end balances due to a lag in the reporting of asset values by third-party custodians. |
| 3. | A shift in client assets of approximately $66 billion in the fourth quarter of 2016 from separately managed accounts to unified managed accounts resulted in a lower average fee rate for those platforms but did not impact the average fee rate for total fee-based client assets. |
| Management’s Discussion and Analysis | |
Investment Management
Income Statement Information |
| |||||||||||
| Three Months Ended September 30, | % Change | |||||||||||
| $ in millions | 2016 | 2015 | ||||||||||
Revenues | ||||||||||||
Investment banking | $ | (2 | ) | $ | 1 | N/M | ||||||
Trading | (3 | ) | — | N/M | ||||||||
Investments | 51 | (235 | ) | N/M | ||||||||
Commissions and fees | — | — | — | |||||||||
Asset management, distribution and administration fees | 508 | 511 | (1)% | |||||||||
Other | (3 | ) | 1 | N/M | ||||||||
Total non-interest revenues | 551 | 278 | 98% | |||||||||
Interest income | 1 | — | N/M | |||||||||
Interest expense | — | 4 | N/M | |||||||||
Net interest | 1 | (4 | ) | N/M | ||||||||
Net revenues | 552 | 274 | 101% | |||||||||
Compensation and benefits | 237 | 95 | 149% | |||||||||
Non-compensation expenses | 218 | 217 | — | |||||||||
Total non-interest expenses | 455 | 312 | 46% | |||||||||
Income (loss) from continuing operations before income taxes | 97 | (38 | ) | N/M | ||||||||
Provision for (benefit from) income taxes | 31 | (33 | ) | N/M | ||||||||
Income (loss) from continuing operations | 66 | (5 | ) | N/M | ||||||||
Income (loss) from discontinued operations, net of income taxes | — | 1 | N/M | |||||||||
Net income (loss) | 66 | (4 | ) | N/M | ||||||||
Net income (loss) applicable to noncontrolling interests | (1 | ) | 5 | N/M | ||||||||
Net income (loss) applicable to Morgan Stanley | $ | 67 | $ | (9 | ) | N/M | ||||||
| Nine Months Ended September 30, | % Change | Three Months Ended March 31, | ||||||||||||||||||||||
| $ in millions | 2016 | 2015 | 2017 | 2016 | % Change | |||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Investment banking | $ | (1 | ) | $ | 1 | N/M | $ | — | $ | 1 | (100 | )% | ||||||||||||
Trading | (8 | ) | (3 | ) | (167)% | (11 | ) | (10 | ) | (10 | )% | |||||||||||||
Investments | 37 | 149 | (75)% | 98 | (64 | ) | N | /M | ||||||||||||||||
Commissions and fees | 3 | — | N/M | — | 3 | (100 | )% | |||||||||||||||||
Asset management, distribution and administration fees | 1,551 | 1,547 | — | 517 | 526 | (2 | )% | |||||||||||||||||
Other | 28 | 15 | 87% | 4 | 22 | (82 | )% | |||||||||||||||||
Total non-interest revenues | 1,610 | 1,709 | (6)% | 608 | 478 | 27 | % | |||||||||||||||||
Interest income | 5 | 1 | N/M | 1 | 1 | — | ||||||||||||||||||
Interest expense | 3 | 16 | (81)% | — | 2 | (100 | )% | |||||||||||||||||
Net interest | 2 | (15 | ) | N/M | 1 | (1 | ) | 200 | % | |||||||||||||||
Net revenues | 1,612 | 1,694 | (5)% | 609 | 477 | 28 | % | |||||||||||||||||
Compensation and benefits | 688 | 676 | 2% | 279 | 213 | 31 | % | |||||||||||||||||
Non-compensation expenses | 665 | 649 | 2% | 227 | 220 | 3 | % | |||||||||||||||||
Total non-interest expenses | 1,353 | 1,325 | 2% | 506 | 433 | 17 | % | |||||||||||||||||
Income from continuing operations before income taxes | 259 | 369 | (30)% | 103 | 44 | 134 | % | |||||||||||||||||
Provision for income taxes | 78 | 87 | (10)% | 30 | 10 | 200 | % | |||||||||||||||||
Income from continuing operations | 181 | 282 | (36)% | |||||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | — | 1 | N/M | |||||||||||||||||||||
Net income | 181 | 283 | (36)% | 73 | 34 | 115 | % | |||||||||||||||||
Net income (loss) applicable to noncontrolling interests | (14 | ) | 24 | N/M | 6 | (16 | ) | 138 | % | |||||||||||||||
Net income applicable to Morgan Stanley | $ | 195 | $ | 259 | (25)% | $ | 67 | $ | 50 | 34 | % | |||||||||||||
N/M – M—Not Meaningful
Net Revenues
Investments
Investments gains of $51$98 million in the current quarter and gains of $37 million in the current year period compared with losses of $235 million and gains of $149 million in the comparable prior year periods. The current quarter reflected positive carried interest in the current quarter and current year period. The losses inincreased from the prior year quarter were due to a reversal of previously accrued carried interest associated with Asia private equity. The current year period reflected weaker investment performance compared to the prior year period.primarily driven by
gains in certain private equity and real estate funds compared with losses in the prior year quarter. |
Asset Management, Distribution and Administration Fees
Asset management, distribution and administration fees of $508$517 million in the current quarter and $1,551 milliondecreased 2% from the prior year quarter primarily reflecting higher management fees in the currentprior year period were relatively unchangedquarter from the comparable prior year periods, as increasescompletion of certain fund raisings in management fees, drivenalternative/other products. This decrease was partially offset by higher fee rates and higher average assets under management or supervision (“AUM”) and average fee rates, were offset by lower performance feesfor the other product areas in the current quarter (see “AUM and Average Fee Rate by Asset Class” herein).
Non-interest Expenses
Non-interest expenses of $455$506 million in the current quarter and $1,353 million in the current year period increased 46% and 2%17% from the comparable prior year periodsquarter, primarily due to higher Compensation and benefitbenefits expenses.
Compensation and benefits expenses increased in the current quarter mainly attributed to reversal of previously accrued carried interest in the prior year quarter. Compensation and benefits expenses increased in the current year period primarily due to an increase in deferred compensation associated with carried interestinterest.
Non-compensation expenses increased, primarily due to higher brokerage clearing and an increase in amortization of the prior year compensation awardsexchange fees, partially offset by a decrease in discretionary incentive compensation driven by lower revenues.
Non-compensation expenses in the current quarter and current year period were relatively unchanged from the comparable prior year periods.professional service fees.
Assets Under Management or Supervision
Effective in the second quarter of 2016, the presentation of AUM for Investment Management has been revised to better align asset classes with its present organizational structure. With this change, the Alternative / Other products asset class now includes products in fund of funds, real estate, private equity and credit strategies, as well as multi-asset portfolios. All prior period information has been recast in the new format.
| Management’s Discussion and Analysis | |
AUM and Average Fee Rate by Asset Class
For a description of the rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Investment Management—Statistical Data”Assets Under Management or Supervision” in Part II, Item 7 of the 20152016 Form10-K.
At June 30, 2016 | Inflows | Outflows | Distributions | Market Impact | Foreign Currency Impact | At September 30, | Average for the Three Months Ended September 30, 2016 | At December 31, | Inflows | Outflows | Market Impact | Other1 | At March 31, | Average for the Three Months Ended March 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ in billions, Fee Rate in bps | Total AUM | Fee Rate | Total AUM | Fee Rate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity | $ | 81 | $ | 4 | $ | (6 | ) | $ | — | $ | 4 | $ | — | $ | 83 | $ | 83 | 74 | $ | 79 | $ | 5 | $ | (5 | ) | $ | 8 | $ | — | $ | 87 | $ | 83 | 74 | ||||||||||||||||||||||||||||||||||
Fixed income | 61 | 6 | (5 | ) | — | 1 | — | 63 | 62 | 32 | 60 | 5 | (5 | ) | 1 | 1 | 62 | 62 | 33 | |||||||||||||||||||||||||||||||||||||||||||||||||
Liquidity | 149 | 358 | (352 | ) | — | (1 | ) | — | 154 | 151 | 18 | 163 | 328 | (338 | ) | — | — | 153 | 157 | 18 | ||||||||||||||||||||||||||||||||||||||||||||||||
Alternative / Other products | 115 | 4 | (4 | ) | (1 | ) | 2 | 1 | 117 | 116 | 73 | 115 | 7 | (4 | ) | 1 | — | 119 | 117 | 71 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total assets under management or supervision | $ | 406 | $ | 372 | $ | (367 | ) | $ | (1 | ) | $ | 6 | $ | 1 | $ | 417 | $ | 412 | 47 | $ | 417 | $ | 345 | $ | (352 | ) | $ | 10 | $ | 1 | $ | 421 | $ | 419 | 46 | |||||||||||||||||||||||||||||||||
Shares of minority stake assets | 8 | 7 | 7 | 8 | 7 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At June 30, 2015 | Inflows | Outflows | Distributions | Market Impact | Foreign Currency Impact | At September 30, | Average for the Three Months Ended September 30, 2015 | |||||||||||||||||||||||||||||
| $ in billions, Fee Rate in bps | Total AUM | Fee Rate | ||||||||||||||||||||||||||||||||||
Equity | $ | 96 | $ | 4 | $ | (10 | ) | $ | — | $ | (10 | ) | $ | 1 | $ | 81 | $ | 90 | 69 | |||||||||||||||||
Fixed income | 64 | 5 | (8 | ) | — | — | — | 61 | 62 | 32 | ||||||||||||||||||||||||||
Liquidity | 132 | 338 | (323 | ) | — | 1 | — | 148 | 141 | 9 | ||||||||||||||||||||||||||
Alternative / Other products | 111 | 10 | (4 | ) | (1 | ) | (1 | ) | (1 | ) | 114 | 113 | 79 | |||||||||||||||||||||||
Total assets under management or supervision | $ | 403 | $ | 357 | $ | (345 | ) | $ | (1 | ) | $ | (10 | ) | $ | — | $ | 404 | $ | 406 | 45 | ||||||||||||||||
Shares of minority stake assets | 7 | 8 | 8 | |||||||||||||||||||||||||||||||||
| At December 31, 2015 | Inflows | Outflows | Distributions | Market Impact | Foreign Currency Impact | At September 30, | Average for the Nine Months Ended September 30, 2016 | |||||||||||||||||||||||||||||
| $ in billions, Fee Rate in bps | Total AUM | Fee Rate | ||||||||||||||||||||||||||||||||||
Equity | $ | 83 | $ | 14 | $ | (18 | ) | $ | — | $ | 4 | $ | — | $ | 83 | $ | 81 | 72 | ||||||||||||||||||
Fixed income | 60 | 18 | (19 | ) | — | 3 | 1 | 63 | 61 | 32 | ||||||||||||||||||||||||||
Liquidity | 149 | 985 | (979 | ) | — | (1 | ) | — | 154 | 149 | 18 | |||||||||||||||||||||||||
Alternative / Other products | 114 | 18 | (18 | ) | (2 | ) | 3 | 2 | 117 | 115 | 76 | |||||||||||||||||||||||||
Total assets under management or supervision | $ | 406 | $ | 1,035 | $ | (1,034 | ) | $ | (2 | ) | $ | 9 | $ | 3 | $ | 417 | $ | 406 | 48 | |||||||||||||||||
Shares of minority stake assets | 8 | 7 | 8 | |||||||||||||||||||||||||||||||||
At December 31, | Inflows | Outflows | Distributions | Market Impact | Foreign Currency Impact | At September 30, | Average for the Nine Months Ended September 30, 2015 | At December 31, | Inflows | Outflows | Market Impact | Other1 | At March 31, | Average for the Three Months Ended March 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ in billions, Fee Rate in bps | Total AUM | Fee Rate | Total AUM | Fee Rate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity | $ | 99 | $ | 11 | $ | (24 | ) | $ | — | $ | (5 | ) | $ | — | $ | 81 | $ | 96 | 69 | $ | 83 | $ | 5 | $ | (6 | ) | $ | (1 | ) | — | $ | 81 | $ | 79 | 71 | |||||||||||||||||||||||||||||||||
Fixed income | 65 | 17 | (19 | ) | — | — | (2 | ) | 61 | 64 | 32 | 60 | 5 | (6 | ) | 2 | 1 | 62 | 60 | 32 | ||||||||||||||||||||||||||||||||||||||||||||||||
Liquidity | 128 | 927 | (908 | ) | — | 1 | — | 148 | 133 | 9 | 149 | 336 | (338 | ) | (1 | ) | — | 146 | 149 | 17 | ||||||||||||||||||||||||||||||||||||||||||||||||
Alternative / Other products | 111 | 21 | (14 | ) | (3 | ) | — | (1 | ) | 114 | 112 | 80 | 114 | 5 | (4 | ) | — | 1 | 116 | 115 | 81 | |||||||||||||||||||||||||||||||||||||||||||||||
Total assets under management or supervision | $ | 403 | $ | 976 | $ | (965 | ) | $ | (3 | ) | $ | (4 | ) | $ | (3 | ) | $ | 404 | $ | 405 | 46 | $ | 406 | $ | 351 | $ | (354 | ) | $ | — | 2 | $ | 405 | $ | 403 | 48 | ||||||||||||||||||||||||||||||||
Shares of minority stake assets | 7 | 8 | 7 | 8 | 8 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
bps—Basis points
| 1. | Includes distributions and foreign currency impact. |
| Management’s Discussion and Analysis | |
Supplemental Financial Information and Disclosures
U.S. Bank Subsidiaries
We provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, primarily through our U.S. bank subsidiaries, Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”). The lending activities in the Institutional Securities business segment primarily include loans or lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily include securities-based lending that allows clients to borrow money against the value of qualifying securities and also include residential real estate loans. We expect our lending activities to continue to grow through further market penetration of the Wealth Management business segments’segment’s client base. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk” in Item 3.Risk.” For further discussion about loans and lending commitments, see Notes 7 and 11 to the consolidated financial statements in Item 1.statements.
U.S. Bank Subsidiaries’ Supplemental Financial Information Excluding Transactions with the Parent Company
| $ in billions | At September 30, 2016 | At December 31, 2015 | At March 31, | At December 31, | ||||||||||||
U.S. Bank Subsidiaries assets | $ | 173.9 | $ | 174.2 | $ | 179.4 | $ | 180.7 | ||||||||
U.S. Bank Subsidiaries investment securities portfolio1 | 64.7 | 57.9 | ||||||||||||||
U.S. Bank Subsidiaries investment securities portfolio: | ||||||||||||||||
Investment securities—AFS | 48.5 | 50.3 | ||||||||||||||
Investment securities—HTM | 14.1 | 13.6 | ||||||||||||||
Total | $ | 62.6 | $ | 63.9 | ||||||||||||
Wealth Management U.S. Bank Subsidiaries data | Wealth Management U.S. Bank Subsidiaries data |
| Wealth Management U.S. Bank Subsidiaries data |
| ||||||||||||
Securities-based lending and other loans2 | $ | 34.1 | $ | 28.6 | ||||||||||||
Securities-based lending and other loans1 | $ | 36.6 | $ | 36.0 | ||||||||||||
Residential real estate loans | 23.6 | 20.9 | 25.0 | 24.4 | ||||||||||||
Total | $ | 57.7 | $ | 49.5 | $ | 61.6 | $ | 60.4 | ||||||||
Institutional Securities U.S. Bank Subsidiaries data | Institutional Securities U.S. Bank Subsidiaries data |
| Institutional Securities U.S. Bank Subsidiaries data |
| ||||||||||||
Corporate loans | $ | 21.0 | $ | 22.9 | $ | 19.2 | $ | 20.3 | ||||||||
Wholesale real estate loans | 9.9 | 8.9 | 10.3 | 9.9 | ||||||||||||
Total | $ | 30.9 | $ | 31.8 | $ | 29.5 | $ | 30.2 | ||||||||
AFS—Available for sale
HTM—Held to maturity
| 1. |
|
Other loans primarily include tailored lending. |
Income Tax Matters
Effective Tax Rate
| Three Months Ended | ||||||||
| March 31, 2017 | March 31, 2016 | |||||||
From continuing operations | 29.0 | % | 33.3 | % | ||||
The effective tax rate from continuing operations was 31.5% and 32.7% for the current quarter and current year period, respectively.
The effective tax rate from continuing operations was 28.7% and 24.1% for the prior year quarter and prior year period, respectively. The results for prior year period includedincludes a net discrete tax benefit of $564$98 million, primarily resulting from a $112 million recurring-type benefit associated with the repatriationadoption of non-U.S. earnings at a cost lower than originally estimated duenew accounting guidance related to an internal restructuringemployee share-based payments. See Note 2 to simplify our legal entity organization in the U.K. Excluding this net discrete tax benefit,consolidated financial statements for information on the effective tax rate from continuing operations foradoption of the prior year period would have been 32.1%accounting updateImprovements to Employee Share-Based Payment Accounting.
Accounting Development Updates
The Financial Accounting Standards Board (the “FASB”) issued the following accounting updates whichthat apply to us.
The Firm considers the applicability and impact of all accounting updates. Accounting updates not listed below were assessed and determined to be either not applicable or are not expected to have a materialsignificant impact on our consolidated financial statements.
The following accounting updates are currently being evaluated to determine the potential impact of adoption:
| • | Revenue from Contracts with Customers. This accounting update aims to clarify the principles of revenue recognition, to develop a common revenue recognition standard across all industries for U.S. GAAP and International Financial Reporting Standards, and to provide enhanced disclosures for users of the financial statements. The core principle of this guidance is that an entity should recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We will adopt the guidance on January 1, 2018 and are currently evaluating the method of adoption. |
Revenue from Contracts with Customers. ThisWe expect this accounting update aims to clarifypotentially change the principlestiming and presentation of revenue recognition, to develop a common revenue recognition standard across all industriescertain revenues, as well as the timing and presentation of certain related costs, for U.S. GAAPInvestment banking fees and International Financial Reporting StandardsAsset management, distribution and to provide enhanced disclosures for usersadministration fees. Outside of Investment Management performance fees in the financial statements. The core principleform of this guidance is that an entity should recognize revenue to depictcarried interest, discussed further in the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expectsfollowing paragraph, these changes are not expected to be entitled in exchange for those goods or services. This update is effective as of January 1, 2018, with early adoption permitted as of January 1, 2017.significant.
Statement of Cash Flows. This accounting update standardizes the cash flow classification of certain cash flow matters. This update is effective as of January 1, 2018, with early adoption permitted.
Financial Instruments – Credit Losses. This accounting update impacts the impairment model for certain financial assets measured at amortized cost such as loans held for investment and held to maturity debt securities. The amendments in this update will accelerateRegarding the recognition of credit losses by replacingperformance fees from fund management activities in the incurred loss impairment methodology with a current expected credit loss (“CECL”) methodologyform of carried interest that requires an estimateare subject to reversal, we are currently assessing the alternative accounting approaches available for these arrangements. If we consider the equity method of expected credit losses over the entire life of the financial asset. Additionally, although the CECL methodology will not apply to AFS debt securities, the update will require establishment of anaccounting
| Management’s Discussion and Analysis | |
principles to apply to carried interest, the current recognition of such fees would remain essentially unchanged. If the fees are deemed in the scope of the new revenue guidance, we would defer recognition until such fees are no longer subject to reversal, which would cause a significant delay in the recognition of these fees as revenue.
We will continue to assess the impact of the new rule as we progress through the implementation of the new standard; therefore, additional impacts may be identified prior to adoption.
| • | Gains and Losses from the Derecognition of Nonfinancial Assets.This accounting update clarifies the guidance on how to account for the derecognition of nonfinancial assets and in substance nonfinancial assets and also provides guidance on the accounting for partial sales of nonfinancial assets. This update is effective as of January 1, 2018. |
| • | Leases. This accounting update requires lessees to recognize on 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 right of use asset and lease liability will initially be measured using the present value of the remaining rental payments. The accounting for leases where we are the lessor is largely unchanged. This update is effective as of January 1, 2019. |
| • | Financial Instruments—Credit Losses. This accounting update impacts the impairment model for certain financial assets measured at amortized cost such as loans held for investment and HTM securities. The amendments in this update will accelerate the recognition of credit losses by replacing the incurred loss impairment methodology with a current expected credit loss (“CECL”) methodology that requires an estimate of expected credit losses over the entire life of the financial asset. Additionally, although the CECL methodology will not apply to AFS debt securities, the update will require establishment of an allowance to reflect impairment of these securities, thereby eliminating the concept of a permanent write-down. This update is effective as of January 1, |
Leases. This accounting update requires lessees to recognize all leases with terms exceeding one year on the balance sheet which results in the recognition of a right of use asset and corresponding lease liability, including for those leases which we currently classify as operating leases. The right of use asset and lease liability will initially be measured using the present value of the remaining rental payments. The accounting for leases where we are the lessor is largely unchanged. This update is effective as of January 1, 2019 with early adoption permitted.
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which require us to make estimates and assumptions (see Note 1 to the consolidated financial statements in Item 1)statements). We believe that of our significant accounting policies (see Note 2 to the consolidated financial statements in Item 8 of the 20152016 Form10-K and Note 2 to the consolidated financial statements in Item 1)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 Part II, Item 7 of the 20152016 Form10-K.
| Management’s Discussion and Analysis | |
Liquidity and Capital Resources
Senior management establishes 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 consolidated balance sheets, liquidity and capital structure. Liquidity and capital matters are reported regularly to the Board and the Board’s Risk Committee.
The 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, business segment and business unit 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 tore-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, 2016 | At March 31, 2017 | |||||||||||||||||||||||||||||||
| $ in millions | Institutional Securities | Wealth Management | Investment Management | Total | Institutional Securities | Wealth Management | Investment Management | Total | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents1 | $ | 31,791 | $ | 10,670 | $ | 91 | $ | 42,552 | $ | 26,254 | $ | 16,537 | $ | 63 | $ | 42,854 | ||||||||||||||||
Trading assets, at fair value | 270,334 | 87 | 2,730 | 273,151 | ||||||||||||||||||||||||||||
Trading assets at fair value | 281,804 | 74 | 2,463 | 284,341 | ||||||||||||||||||||||||||||
Investment securities | 14,227 | 64,729 | — | 78,956 | 18,544 | 62,595 | — | 81,139 | ||||||||||||||||||||||||
Securities purchased under agreements to resell | 82,267 | 8,312 | — | 90,579 | 98,988 | 5,835 | — | 104,823 | ||||||||||||||||||||||||
Securities borrowed | 125,987 | 293 | — | 126,280 | 111,499 | 304 | — | 111,803 | ||||||||||||||||||||||||
Customer and other receivables | 31,509 | 19,387 | 515 | 51,411 | 29,621 | 18,180 | 543 | 48,344 | ||||||||||||||||||||||||
Loans, net of allowance | 34,698 | 57,810 | — | 92,508 | 34,312 | 61,636 | 5 | 95,953 | ||||||||||||||||||||||||
Other assets2 | 43,835 | 13,233 | 1,386 | 58,454 | 48,744 | 12,859 | 1,531 | 63,134 | ||||||||||||||||||||||||
Total assets | $ | 634,648 | $ | 174,521 | $ | 4,722 | $ | 813,891 | $ | 649,766 | $ | 178,020 | $ | 4,605 | $ | 832,391 | ||||||||||||||||
| At December 31, 2015 | At December 31, 2016 | |||||||||||||||||||||||||||||||
| $ in millions | Institutional Securities | Wealth Management | Investment Management | Total | Institutional Securities | Wealth Management | Investment Management | Total | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents1 | $ | 22,356 | $ | 31,216 | $ | 511 | $ | 54,083 | $ | 25,291 | $ | 18,022 | $ | 68 | $ | 43,381 | ||||||||||||||||
Trading assets, at fair value | 236,174 | 883 | 2,448 | 239,505 | ||||||||||||||||||||||||||||
Trading assets at fair value | 259,680 | 64 | 2,410 | 262,154 | ||||||||||||||||||||||||||||
Investment securities | 14,124 | 57,858 | 1 | 71,983 | 16,222 | 63,870 | — | 80,092 | ||||||||||||||||||||||||
Securities purchased under agreements to resell | 83,205 | 4,452 | — | 87,657 | 96,735 | 5,220 | — | 101,955 | ||||||||||||||||||||||||
Securities borrowed | 141,971 | 445 | — | 142,416 | 124,840 | 396 | — | 125,236 | ||||||||||||||||||||||||
Customer and other receivables | 23,390 | 21,406 | 611 | 45,407 | 26,624 | 19,268 | 568 | 46,460 | ||||||||||||||||||||||||
Loans, net of allowance | 36,237 | 49,522 | — | 85,759 | 33,816 | 60,427 | 5 | 94,248 | ||||||||||||||||||||||||
Other assets2 | 45,257 | 13,926 | 1,472 | 60,655 | 45,941 | 13,868 | 1,614 | 61,423 | ||||||||||||||||||||||||
Total assets | $ | 602,714 | $ | 179,708 | $ | 5,043 | $ | 787,465 | $ | 629,149 | $ | 181,135 | $ | 4,665 | $ | 814,949 | ||||||||||||||||
| 1. | Cash and cash equivalents include cash and due from banks and interest bearing deposits with banks. |
| 2. | Other assets primarily includes Cash deposited with clearing organizations or segregated under federal and other regulations or requirements; Other investments; Premises, equipment and software costs; Goodwill; Intangible assets 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. The liquid nature of these assets provides us with flexibility in managing the composition and size of our balance sheet. Total assets increased to $814$832.4 billion at September 30, 2016March 31, 2017 from $787$814.9 billion at December 31, 2015,2016, primarily due to increasesdriven by an increase in Trading assets includingtrading inventory within Institutional Securities. The increase reflects higher balancesmarket values for corporate equities compared with December 31, 2016, along with increased trading activity across fixed income in U.S. government and agency securities otherand Other sovereign government obligations and corporate equities.obligations.
Securities Repurchase Agreements and Securities Lending
Securities borrowed or securities purchased under agreements to resell and securities loaned or securities sold under agreements to repurchase are treated as collateralized financings (see NotesNote 2 and 6 to the consolidated financial statements in Item 1)the 2016 Form 10-K and Note 6 to the consolidated financial statements).
Collateralized Financing Transactions
| $ in millions | At September 30, 2016 | At December 31, 2015 | At March 31, 2017 | At December 31, 2016 | ||||||||||||
Securities purchased under agreements to resell and Securities borrowed | $ | 216,859 | $ | 230,073 | $ | 216,626 | $ | 227,191 | ||||||||
Securities sold under agreements to repurchase and Securities loaned | $ | 63,451 | $ | 56,050 | $ | 75,459 | $ | 70,472 | ||||||||
Securities received as collateral1 | $ | 13,339 | $ | 13,737 | ||||||||||||
Average Balance Three Months Ended | Daily Average Balance Three Months Ended | |||||||||||||||
| $ in millions | September 30, 2016 | December 31, 2015 | March 31, 2017 | December 31, 2016 | ||||||||||||
Securities purchased under agreements to resell and Securities borrowed | $ | 223,301 | $ | 250,605 | $ | 222,224 | $ | 224,355 | ||||||||
Securities sold under agreements to repurchase and Securities loaned | $ | 66,848 | $ | 62,373 | $ | 73,674 | $ | 68,908 | ||||||||
| 1. | Included in Trading assets in the consolidated balance sheets. |
| Management’s Discussion and Analysis | |
At September 30,March 31, 2017 and December 31, 2016, differences between period end balances and average balances during the current quarter in the previous table were not significant. Securities purchased under agreements to resell and Securities borrowed and Securities sold under agreements to repurchase and Securities loaned period-end balances at December 31, 2015 were lower than the average balance during 2015. The balances moved in line with client financing activity and with general movements of inventory. Securities financing assets and liabilities also include matched book transactions with minimal market, credit and/or liquidity risk. Matched book transactions accommodate customers, as well as obtain securities for the settlement and financing of inventory positions. Additionally, included within securities financing transactions were $13 billion and $11 billion at September 30, 2016 and December 31, 2015, respectively, related to fully collateralized securities-for-securities lending transactions represented in Trading assets.
Customer Securities Financing
The customer receivable portion of the securities financing transactions primarily includes customer margin loans, collateralized by customer-owned securities, which are segregated in accordance with regulatory requirements. The customer payable portion of the securities financing transactions primarily includes payables to our prime brokerage customers. 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.
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 following principles guide our Liquidity Risk Management Framework:
Sufficient liquid assets should be maintained to cover maturing liabilities and other planned and contingent outflows;
Maturity profile of assets and liabilities should be aligned, with limited reliance on short-term funding;
Source, counterparty, currency, region and term of funding should be diversified; and
Liquidity Stress Tests should anticipate, and account for, periods of limited access to funding.
The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the Global Liquidity Reserve, which support our target liquidity profile. For a further discussion about ourthe 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”Framework—Global Liquidity Reserve” in Part II, Item 7 of the 20152016 Form10-K.
At September 30, 2016March 31, 2017 and December 31, 2015,2016, 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 cover daily funding needs and to meet strategic liquidity targets sized by theour Required Liquidity Framework and Liquidity Stress Tests.Framework. For a further discussion of our Global Liquidity Reserve, 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 Part II, Item 7 of the 20152016 Form10-K.
Global Liquidity Reserve by Type of Investment
| $ in millions | At September 30, 2016 | At December 31, 2015 | At March 31, | At December 31, | ||||||||||||
Cash deposits with banks | $ | 10,468 | $ | 10,187 | $ | 10,336 | $ | 8,679 | ||||||||
Cash deposits with central banks | 27,898 | 39,774 | 27,896 | 30,568 | ||||||||||||
Unencumbered highly liquid securities: | ||||||||||||||||
U.S. government obligations | 76,508 | 72,265 | 83,133 | 78,615 | ||||||||||||
U.S. agency and agency mortgage-backed securities | 51,902 | 37,678 | 51,892 | 46,360 | ||||||||||||
Non-U.S. sovereign obligations1 | 17,129 | 28,999 | 17,997 | 30,884 | ||||||||||||
Other investment grade securities | 13,189 | 14,361 | 6,393 | 7,191 | ||||||||||||
Global Liquidity Reserve | $ | 197,094 | $ | 203,264 | $ | 197,647 | $ | 202,297 | ||||||||
| 1. | Non-U.S. sovereign obligations are primarily composed of unencumbered German, French, Dutch, United Kingdom (“U.K.”) and Japanese government obligations. |
Global Liquidity Reserve Managed by Bank andNon-Bank Legal Entities
Daily Average Three Months | ||||||||||||
| $ in millions | At March 31, | At December 31, | March 31, 2017 | |||||||||
Bank legal entities | ||||||||||||
Domestic | $ | 71,520 | $ | 74,411 | $ | 72,477 | ||||||
Foreign | 3,678 | 4,238 | 4,126 | |||||||||
Total Bank legal entities | 75,198 | 78,649 | 76,603 | |||||||||
Non-Bank legal entities | ||||||||||||
Domestic: | ||||||||||||
Parent Company | 60,375 | 66,514 | 64,436 | |||||||||
Non-Parent Company | 21,035 | 18,801 | 21,178 | |||||||||
Total Domestic | 81,410 | 85,315 | 85,614 | |||||||||
Foreign | 41,039 | 38,333 | 41,932 | |||||||||
TotalNon-Bank legal entities | 122,449 | 123,648 | 127,546 | |||||||||
Total | $ | 197,647 | $ | 202,297 | $ | 204,149 | ||||||
Regulatory Liquidity Framework
Liquidity Coverage Ratio
The Basel Committee on Banking Supervision’s (“Basel Committee”) Liquidity Coverage Ratio (“LCR”) standard is designed to ensure that banking organizations have sufficient high-quality liquid assets to cover net cash outflows arising from significant stress over 30 calendar days. The standard’s objective is to promote the short-term resilience of the liquidity risk profile of banking organizations.
| Management’s Discussion and Analysis | |
Global Liquidity Reserve Managed by Bank and Non-Bank Legal Entities
| $ in millions | At September 30, 2016 | At December 31, 2015 | Daily Average Three Months Ended | |||||||||
Bank legal entities | ||||||||||||
Domestic | $ | 78,903 | $ | 88,432 | $ | 83,892 | ||||||
Foreign | 5,688 | 5,896 | 5,408 | |||||||||
Total Bank legal entities | 84,591 | 94,328 | 89,300 | |||||||||
Non-Bank legal entities | ||||||||||||
Domestic | ||||||||||||
Parent | 58,276 | 54,810 | 60,161 | |||||||||
Non-Parent | 16,494 | 20,001 | 18,287 | |||||||||
Total Domestic | 74,770 | 74,811 | 78,448 | |||||||||
Foreign | 37,733 | 34,125 | 38,536 | |||||||||
Total Non-Bank legal entities | 112,503 | 108,936 | 116,984 | |||||||||
Total | $ | 197,094 | $ | 203,264 | $ | 206,284 | ||||||
Regulatory Liquidity Framework
The Basel Committee on Banking Supervision (the “Basel Committee”) has developed two standards intended for use in liquidity risk supervision: the Liquidity Coverage Ratio (“LCR”) and the Net Stable Funding Ratio (“NSFR”).
Liquidity Coverage Ratio
The LCR was developed to ensure banking organizations have sufficient high-quality liquid assets to cover net cash outflows arising from significant stress over 30 calendar days. This standard’s objective is to promote the short-term resilience of the liquidity risk profile of banking organizations.
The final rule to implement the LCR in the U.S. (“U.S. LCR”) applies to usWe and our U.S. Bank Subsidiaries and each is requiredare subject to the LCR requirements issued by U.S. banking regulators (“U.S. LCR”), which are based on the Basel Committee’s LCR, including a requirement to calculate its respectiveeach entity’s U.S. LCR on each business day. As of January 1, 2016,2017, we and our U.S. Bank Subsidiaries are required to maintain a minimum U.S. LCR of 90%, and this minimum standard will reach100% of the fullyphased-in level of 100% beginning on January 1, 2017. In addition, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) has proposed rules that would require large banking organizations, including us, to publicly disclose certain qualitative and quantitative information about their U.S. LCR. We and our U.S. Bank Subsidiaries are compliant with the minimum required U.S. LCR based on current interpretationinterpretations. In addition, effective April 1, 2017, we are required to disclose certain quantitative and we continuequalitative information related to evaluate its impact on our liquidity and funding requirements.U.S. LCR calculation after each calendar quarter.
Net Stable Funding Ratio
The objective of the NSFRNet Stable Funding Ratio (“NSFR”) is to reduce funding risk over aone-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 finalized the NSFR framework in 2014. In the second quarter ofMay 2016, the U.S. banking regulators issued a proposal to implement the NSFR in the U.S. The proposal would require a covered company to maintain an amount of available stable funding, which is calculated by applying standardized weightings to its equity and liabilities based on their expected stability, that is no less than the amount of its required stable funding, which is calculated by applying standardized weightings to its assets, derivatives exposures, and certain other off-balance sheet exposures based on their liquidity characteristics. If adopted as proposed, the requirements would apply to us and our U.S. Bank Subsidiaries frombeginning January 1, 2018. We continue to evaluate the potential impact of the proposal, which is subject to further rulemaking procedures following the closing of the public comment and further rulemaking procedures.period. Our preliminary estimates, based on the current proposal, indicate that stepsactions will be necessary to meet the requirement, which we expect to accomplish by the effective date of the 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 aan additional discussion of risksNSFR, see “Management’s Discussion and uncertainties that may affect our future results, see “Risk Factors”Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Liquidity Framework—Net Stable Funding Ratio” in Part I,II, Item 1A7 of the 20152016 Form10-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, long-term borrowings, securities sold under agreements to repurchase (“repurchase agreements”), securities lending, deposits, commercial paper, 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 Part II, Item 7 of the 20152016 Form10-K.
At September 30, 2016March 31, 2017 and December 31, 2015,2016, the weighted average maturity of our secured financing againstof less liquid assets was greater than 120 days.
Unsecured Financing
For a discussion of our unsecured financing activities, see “Management’s Discussion and Analysis of Financial Condi-
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tionFinancing Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Unsecured Financing” in Part II, Item 7 of the 20152016 Form 10-K. When appropriate, we may use derivative products to conduct asset10-K and liability management and to make adjustments to our interest rate and structured borrowings risk profile (seesee Note 4 to the consolidated financial statements in Item 1).statements.
Deposits
Available funding sources to our bank subsidiariesU.S. Bank Subsidiaries include demand deposit accounts, money market deposit accounts, time deposits, repurchase agreements, federal funds purchased and Federal Home Loan Bank advances. The vast majority of deposits in our U.S. Bank Subsidiaries are sourced from our retail brokerage accounts and are considered to have stable,low-cost funding characteristics. At September 30, 2016March 31, 2017 and December 31, 20152016, deposits were $151,843$152,109 million and $156,034$155,863 million, respectively (see Note 9 to the consolidated financial statements in Item 1)statements).
Short-Term Borrowings
Our unsecured short-term borrowings may primarily consist of structured notes, bank loans and bank notes commercial paper and structured notes with original maturities of 12 months or less at issuance.less. At September 30, 2016March 31, 2017 and December 31, 2015,2016, we had approximately $914$1,122 million and $2,173$941 million, respectively, in Short-termshort-term borrowings.
Long-Term Borrowings
We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of long-term borrowings allows us to reduce reliance on short-term credit sensitive instruments. Long-term borrowings 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. 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.
| 19 | March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
We may engage in various transactions in the credit markets (including, for example, debt retirements) that we believe are in our investors’ best interests and our investors.interests.
Long-term Borrowings by Maturity Profileat March 31, 2017
| $ in millions | Parent | Subsidiaries | Total | |||||||||
Due in 2016 | $ | 5,245 | $ | 3,343 | $ | 8,588 | ||||||
Due in 2017 | 22,377 | 1,418 | 23,795 | |||||||||
Due in 2018 | 18,250 | 1,217 | 19,467 | |||||||||
Due in 2019 | 20,403 | 923 | 21,326 | |||||||||
Due in 2020 | 16,329 | 1,005 | 17,334 | |||||||||
Thereafter | 68,391 | 5,026 | 73,417 | |||||||||
Total | $ | 150,995 | $ | 12,932 | $ | 163,927 | ||||||
| $ in millions | Parent Company | Subsidiaries | Total | |||||||||
2017 | $ | 12,491 | $ | 4,187 | $ | 16,678 | ||||||
2018 | 18,238 | 2,008 | 20,246 | |||||||||
2019 | 21,335 | 1,144 | 22,479 | |||||||||
2020 | 19,266 | 1,456 | 20,722 | |||||||||
2021 | 15,667 | 1,202 | 16,869 | |||||||||
Thereafter | 69,414 | 6,280 | 75,694 | |||||||||
Total | $ | 156,411 | $ | 16,277 | $ | 172,688 | ||||||
Maturities of long-term borrowings outstanding over the next 12 months were $27,255 million and $22,396$23,239 million at September 30, 2016March 31, 2017.
Subsequent to March 31, 2017 and December 31, 2015, respectively.
Trust Preferred Securities
Duringthrough April 28, 2017, long-term borrowings increased by approximately $4.6 billion, net of maturities. This amount includes the current quarter, Morgan Stanley Capital Trust III, Morgan Stanley Capital Trust IV, Morgan Stanley Capital Trust Vissuances of senior debt; $1.8 billion on April 24, 2017 and Morgan Stanley Capital Trust VIII redeemed all of their issued and outstanding Capital Securities pursuant to the optional redemption provisions provided in the respective governing documents. In the aggregate, $2.8$3.8 billion was redeemed. We concurrently redeemed the related underlying junior subordinated debentures.on April 27, 2017.
For further information on Long-termlong-term borrowings, see NotesNote 10 and 20 to the consolidated financial statements in Item 1.statements.
Credit Ratings
We rely on external sources to finance a significant portion of our day-to-daydaily operations. The cost and availability of financing generally are impacted by our credit ratings, among other things, our credit ratings.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 over-the-counter (“OTC”)OTC derivative transactions, including credit derivatives and interest rate swaps. Rating agencies consider company-specific factors; other industry factors such as regulatory or legislative changes;changes and the macroeconomic environment; and perceived levels of government support,environment, among other things.
Our credit ratings no longer incorporatedo not include any uplift from perceived government support from any rating agency given the significant progress of the U.S. financial reform legislation and regulations. Meanwhile, someSome rating agencies have stated that they currently incorporate various degrees of credit rating uplift fromnon-governmental third-party sources of potential support.
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Parent Company and MSBNA’s Senior Unsecured Ratings at October 31, 2016April 28, 2017
| 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 | |||
Standard & Poor’s Global Ratings | A-2 | BBB+ | Stable | |||
| Morgan Stanley Bank, N.A. | ||||||
| Short-Term Debt | Long-Term Debt | Rating Outlook | ||||
| ||||||
Fitch Ratings, Inc. | F1 | A+ | Stable | |||
Moody’s Investors Service, Inc. | P-1 | A1 | Stable | |||
| ||||||
Standard & Poor’s Global Ratings | A-1 | |||||
In connection with certain OTC trading agreements 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 or immediately settle any outstanding liability balances with certain counterparties or pledge additional collateral to certain exchanges and clearing organizations in the event of a future credit rating downgrade irrespective of whether we are in a net asset or net liability position.
The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and canandcan be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Global Ratings (“S&P”). The following table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchanges and clearing organizations in the event ofone-notch ortwo-notch downgrade scenarios, from the lowest of Moody’s or S&P ratings, based on the relevant contractual downgrade triggers.
Incremental Collateral or Terminating Payments upon Potential Future Rating Downgrade
| $ in millions | At September 30, 2016 | At December 31, 2015 | At March 31, | At December 31, | ||||||||||||
One-notch downgrade | $ | 1,388 | $ | 1,169 | $ | 1,373 | $ | 1,292 | ||||||||
Two-notch downgrade | 1,321 | 1,465 | 676 | 875 | ||||||||||||
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 agencypre-downgrade, individual
| March 2017 Form 10-Q | 20 |
| Management’s Discussion and Analysis | |
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
Senior management viewsWe view capital as an important source of financial strength. Westrength 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
We repurchased approximately $1,250$750 million of our outstanding common stock as part of our share repurchase program during the current quarter and $2,500 million during the current year period. We repurchased approximately $625 million during the prior year quarter and $1,500 million in the prior year period (see Note 14 to the consolidated financial statements in Item 1)statements).
For a description of our share repurchase program, see “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases“Unregistered Sales of Equity Securities” in Part II, Item 5Securities and Use of the 2015 Form 10-K.Proceeds.”
The Board determines the declaration and payment of dividends on a quarterly basis. On OctoberApril 19, 2016,2017, we announced that the Board declared a quarterly dividend per common share of $0.20. The dividend is payable on NovemberMay 15, 20162017 to common shareholders of record on October 31, 2016 (see Note 20 to the consolidated financial statements in Item 1).May 1, 2017.
Preferred Stock
On SeptemberMarch 15, 2016,2017, we announced that the Board declared quarterly dividends for preferred stock shareholders of record on March 31, 2017 that were paid on April 17, 2017.
Series K Preferred Stock.The Series K Preferred Stock offering (net of related issuance costs) resulted in proceeds of approximately $994 million. On March 15, 2017, we announced that the Board declared a quarterly dividend forof $304.69 per share of Series K Preferred Stock.
For additional information on preferred stock, shareholders of record on September 30, 2016 that was paid on October 17, 2016.see Note 14 to the consolidated financial statements.
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Tangible Equity
Tangible Equity Measures—Period End and Average
| Monthly Average Balance Three Months Ended | Monthly Average Balance Three Months Ended | |||||||||||||||||||||||
| $ in millions | At September 30, 2016 | At December 31, 2015 | September 30, 2016 | At March 31, 2017 | At December 31, 2016 | March 31, 2017 | ||||||||||||||||||
Common equity | $ | 69,629 | $ | 67,662 | $ | 69,531 | $ | 69,404 | $ | 68,530 | $ | 68,989 | ||||||||||||
Preferred equity | 7,520 | 7,520 | 7,520 | 8,520 | 7,520 | 8,270 | ||||||||||||||||||
Morgan Stanley shareholders’ equity | 77,149 | 75,182 | 77,051 | 77,924 | 76,050 | 77,259 | ||||||||||||||||||
Junior subordinated debentures issued to capital trusts | — | 2,870 | 1,427 | |||||||||||||||||||||
Less: Goodwill and net intangible assets | (9,329 | ) | (9,564 | ) | (9,368 | ) | (9,229 | ) | (9,296 | ) | (9,262 | ) | ||||||||||||
Tangible Morgan Stanley shareholders’ equity1 | $ | 67,820 | $ | 68,488 | $ | 69,110 | ||||||||||||||||||
Tangible Morgan Stanley shareholder’s equity1 | $ | 68,695 | $ | 66,754 | $ | 67,997 | ||||||||||||||||||
Common equity | $ | 69,629 | $ | 67,662 | $ | 69,531 | $ | 69,404 | $ | 68,530 | $ | 68,989 | ||||||||||||
Less: Goodwill and net intangible assets | (9,329 | ) | (9,564 | ) | (9,368 | ) | (9,229 | ) | (9,296 | ) | (9,262 | ) | ||||||||||||
Tangible common equity1 | $ | 60,300 | $ | 58,098 | $ | 60,163 | $ | 60,175 | $ | 59,234 | $ | 59,727 | ||||||||||||
| 1. | Tangible Morgan Stanley shareholders’ equity and tangible common equity arenon-GAAP financial measures that we and investors consider to be a useful measure to assess capital adequacy. |
Regulatory Requirements
Regulatory Capital Framework
We are a financial holding company (“FHC”) under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and are subject to the regulation and oversight of the Board of Governors of the Federal Reserve.Reserve System (the “Federal Reserve”). The Federal Reserve establishes capital requirements for us, including well-capitalized standards, and evaluates our compliance with such capital requirements. The Office of the Comptroller of the Currency (“OCC”) establishes similar capital requirements and standards for our U.S. Bank Subsidiaries. The regulatory capital requirements 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 (the “Dodd-Frank Act”).
The Basel Committee has finalizedrecently published revisions to the Basel IIIcertain standards in its capital framework, and is actively considering potential revisions to other capital standards, that, if adopted by the U.S. banking agencies, could result in substantial changes to our capital requirements. In particular,substantially change the Basel Committee has finalized a new standardized approach methodology for calculating counterparty credit risk exposures in derivatives transactions, and revised frameworks for market risk, interest rate risk in the banking book, and securitization capital requirements. In addition, the Basel Committee has proposed revisions to variousU.S. regulatory capital standards,framework. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Framework” in Part II, Item 7 of the impact of which is uncertain and depends on future rulemakings by the U.S. banking agencies.2016 Form10-K.
| 21 | March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
Regulatory Capital Requirements
We are required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital, risk-weighted assets (“RWAs”) and transition provisions follows. For a further discussion of these calculations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Implementation of U.S. Basel III” in Part II, Item 7 of the 2015 Form 10-K.
Regulatory Capital.Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital. Certain adjustments to and deductions from capital are required for purposes of determining these ratios, such as deductions for goodwill, intangibles,intangible assets, certain deferred tax assets, other amounts in accumulatedAccumulated other comprehensive income (loss) (“AOCI”) and investments in the capital instruments of unconsolidated financial institutions. Certain of these adjustments and deductions are also subject to transitional provisions.
In addition to the minimum risk-based capital ratio requirements, on a fullyphased-in basis by 2019, we will be subject to:
A greater than 2.5% Common Equity Tier 1 capital conservation buffer;
The Common Equity Tier 1 global systemically important bank(“G-SIB”) capital surcharge, currently at 3%; and
Up to a 2.5% Common Equity Tier 1 countercyclical capital buffer (“CCyB”), currently set by banking regulators at zero (collectively, the “buffers”).
In 2016,2017, thephase-in amount for each of the buffers is 25%50% of the fullyphased-in buffer requirement. 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 theG-SIB capital surcharge, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources—RegulatoryRequirements—G-SIB Capital Surcharge” in Part II, Item 7 of the 20152016 Form10-K.
Risk-Weighted Assets.RWAs reflect both ouron- andoff-balance sheet risk as well as capital charges attributable to the risk of loss arising from the following:
Credit risk: The failure of a borrower, counterparty or issuer to meet its financial obligationobligations to us;
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Market risk: Adverse changes in the level of one or more market prices, rate,rates, indices, implied volatilities, correlations or other market factors, such as market liquidity; and
| • | Operational risk: Inadequate or failed processes |
For a further discussion of our market, credit and operational risks, see “Quantitative and Qualitative Disclosures about Market Risk.”
Our binding risk-based capital ratios for regulatory purposes are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk RWAs and market risk RWAs (the “Standardized Approach”) and (ii) the
applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “Advanced Approach”). At September 30, 2016,March 31, 2017, our binding ratios are based on the Advanced Approach transitional rules.
The methods for calculating each of our risk-based capital ratios will change through January 1, 2022 as aspects of the capital rules are phased in. These changes may result in differences in our reported capital ratios from one reporting period to the next that are independent of changes to our capital base, asset composition,off-balance sheet exposures or risk profile.
Minimum Risk-Based Capital Ratios: Transitional Provisions
|
| March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
Minimum Risk-Based Capital Ratios: Transitional Provisions
| 1. | These ratios assume the requirements for theG-SIB capital surcharge (3.0%) and CCyB (zero) remain at current levels. See “Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” herein for additional capital requirements effective January 1, 2019. |
Transitional and Fully Phased-In Regulatory Capital Ratios
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| At September 30, 2016 | ||||||||||||||||
| Transitional | Fully Phased-In | |||||||||||||||
| $ in millions | Standardized | Advanced | Standardized | Advanced | ||||||||||||
Risk-based capital | ||||||||||||||||
Common Equity Tier 1 capital | $ | 60,340 | $ | 60,340 | $ | 58,362 | $ | 58,362 | ||||||||
Tier 1 capital | 67,603 | 67,603 | 66,065 | 66,065 | ||||||||||||
Total capital | 79,144 | 78,838 | 77,629 | 77,323 | ||||||||||||
Total RWAs | 350,430 | 358,486 | 360,948 | 369,636 | ||||||||||||
Common Equity Tier 1 capital ratio | 17.2 | % | 16.8 | % | 16.2 | % | 15.8 | % | ||||||||
Tier 1 capital ratio | 19.3 | % | 18.9 | % | 18.3 | % | 17.9 | % | ||||||||
Total capital ratio | 22.6 | % | 22.0 | % | 21.5 | % | 20.9 | % | ||||||||
Leverage-based capital | ||||||||||||||||
Adjusted average assets1 | $ | 809,927 | N/A | $ | 808,826 | N/A | ||||||||||
Tier 1 leverage ratio2 | 8.3 | % | N/A | 8.2 | % | N/A | ||||||||||
| At December 31, 2015 | ||||||||||||||||
| Transitional | Fully Phased-In | |||||||||||||||
| $ in millions | Standardized | Advanced | Standardized | Advanced | ||||||||||||
Risk-based capital | ||||||||||||||||
Common Equity Tier 1 capital | $ | 59,409 | $ | 59,409 | $ | 55,441 | $ | 55,441 | ||||||||
Tier 1 capital | 66,722 | 66,722 | 63,000 | 63,000 | ||||||||||||
Total capital | 79,663 | 79,403 | 73,858 | 73,598 | ||||||||||||
Total RWAs | 362,920 | 384,162 | 373,421 | 395,277 | ||||||||||||
Common Equity Tier 1 capital ratio | 16.4 | % | 15.5 | % | 14.8 | % | 14.0 | % | ||||||||
Tier 1 capital ratio | 18.4 | % | 17.4 | % | 16.9 | % | 15.9 | % | ||||||||
Total capital ratio | 22.0 | % | 20.7 | % | 19.8 | % | 18.6 | % | ||||||||
Leverage-based capital | ||||||||||||||||
Adjusted average assets1 | $ | 803,574 | N/A | $ | 801,346 | N/A | ||||||||||
Tier 1 leverage ratio2 | 8.3 | % | N/A | 7.9 | % | N/A | ||||||||||
Transitional and FullyPhased-In Regulatory Capital Ratios
| At March 31, 2017 | ||||||||||||||||
| Transitional | Pro Forma FullyPhased-In | |||||||||||||||
| $ in millions | Standardized | Advanced | Standardized | Advanced | ||||||||||||
Risk-based capital | ||||||||||||||||
Common Equity Tier 1 capital | $ | 60,414 | $ | 60,414 | $ | 59,554 | $ | 59,554 | ||||||||
Tier 1 capital | 69,136 | 69,136 | 68,297 | 68,297 | ||||||||||||
Total capital | 79,957 | 79,675 | 79,130 | 78,848 | ||||||||||||
Total RWAs | 345,131 | 347,472 | 355,668 | 358,642 | ||||||||||||
Common Equity Tier 1 capital ratio | 17.5 | % | 17.4 | % | 16.7 | % | 16.6 | % | ||||||||
Tier 1 capital ratio | 20.0 | % | 19.9 | % | 19.2 | % | 19.0 | % | ||||||||
Total capital ratio | 23.2 | % | 22.9 | % | 22.2 | % | 22.0 | % | ||||||||
Leverage-based capital | ||||||||||||||||
Adjusted average assets1 | $ | 816,077 | N/A | $ | 815,537 | N/A | ||||||||||
Tier 1 leverage ratio2 | 8.5 | % | N/A | 8.4 | % | N/A | ||||||||||
| At December 31, 2016 | ||||||||||||||||
| Transitional | Pro Forma FullyPhased-In | |||||||||||||||
| $ in millions | Standardized | Advanced | Standardized | Advanced | ||||||||||||
Risk-based capital | ||||||||||||||||
Common Equity Tier 1 capital | $ | 60,398 | $ | 60,398 | $ | 58,616 | $ | 58,616 | ||||||||
Tier 1 capital | 68,097 | 68,097 | 66,315 | 66,315 | ||||||||||||
Total capital | 78,917 | 78,642 | 77,155 | 76,881 | ||||||||||||
Total RWAs | 340,191 | 358,141 | 351,101 | 369,709 | ||||||||||||
Common Equity Tier 1 capital ratio | 17.8 | % | 16.9 | % | 16.7 | % | 15.9 | % | ||||||||
Tier 1 capital ratio | 20.0 | % | 19.0 | % | 18.9 | % | 17.9 | % | ||||||||
Total capital ratio | 23.2 | % | 22.0 | % | 22.0 | % | 20.8 | % | ||||||||
Leverage-based capital | ||||||||||||||||
Adjusted average assets1 | $ | 811,402 | N/A | $ | 810,288 | N/A | ||||||||||
Tier 1 leverage ratio2 | 8.4 | % | N/A | 8.2 | % | N/A | ||||||||||
N/A—Not Applicable
| 1. | Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidatedon-balance sheet assets under U.S. GAAP during the calendar quarter ended March 31, 2017 and December 31, 2016 adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments. |
| 2. | The minimum Tier 1 leverage ratio requirement is 4.0%. |
| 23 | March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
The fullyphased-in pro forma estimates in the previous tables are based on our current understanding of the capital rules and other factors, which may be subject to change as we receive additional clarification and implementation guidance
from the Federal Reserve and as the interpretation of the regulationregulations evolves over time. These fullyphased-in pro forma estimates arenon-GAAP financial measures that we consider to be useful measures for us, investors and analysts in evaluating compliance with new regulatory capital requirements that were not yet effective at September 30, 2016.March 31, 2017. These preliminary estimates are subject to risks and uncertainties that may cause actual results to differ materially and should not be taken as a projection of what our capital, capital ratios, RWAs, earnings or other results will actually be at future dates. For a discussion of risks and uncertainties that may affect our future results, see “Risk Factors” in Part I, Item 1A of the 20152016 Form10-K.
Well-Capitalized Minimum Regulatory Capital Ratios for U.S. Bank Subsidiaries
| At | ||||
Common Equity Tier 1 risk-based capital ratio | 6.5% | |||
Tier 1 risk-based capital ratio | 8.0% | |||
Total risk-based capital ratio | 10.0% | |||
Tier 1 leverage ratio | 5.0% | |||
For us to remain a financial holding company,FHC, our U.S. Bank Subsidiaries must qualify as well-capitalized by maintaining the minimum ratio requirements set forth in the previous table. The Federal Reserve has not yet revised the well-capitalized standard for financial holding companies to reflect the higher capital standards required for us under the capital rules. Assuming that the Federal Reserve would apply the same or very similar well-capitalized standards to financial holding companies, each of our risk-based capital ratios and Tier 1 leverage ratio at September 30, 2016March 31, 2017 would have exceeded the revised well-capitalized standard. The Federal Reserve may require us to maintain risk- and leverage-based capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a financial holding company’s particular condition, risk profile and growth plans.
Regulatory Capital Calculated under Advanced Approach
Transitional Rules
| $ in millions | At March 31, | At December 31, 2016 | ||||||
Common Equity Tier 1 capital | ||||||||
Common stock and surplus | $ | 16,745 | $ | 17,494 | ||||
Retained earnings | 55,109 | 53,679 | ||||||
AOCI | (2,450 | ) | (2,643 | ) | ||||
Regulatory adjustments and deductions: | ||||||||
Net goodwill | (6,538 | ) | (6,526 | ) | ||||
Net intangible assets (other than goodwill and mortgage servicing assets) | (2,113 | ) | (1,631 | ) | ||||
Credit spread premium over risk-free rate for derivative liabilities | (324 | ) | (271 | ) | ||||
Net deferred tax assets | (449 | ) | (304 | ) | ||||
Netafter-tax DVA | 473 | 357 | ||||||
Adjustments related to AOCI | 194 | 422 | ||||||
Other adjustments and deductions | (233 | ) | (179 | ) | ||||
Total Common Equity Tier 1 capital | $ | 60,414 | $ | 60,398 | ||||
Additional Tier 1 capital | ||||||||
Preferred stock | $ | 8,520 | $ | 7,520 | ||||
Noncontrolling interests | 490 | 613 | ||||||
Regulatory adjustments and deductions: | ||||||||
Credit spread premium over risk-free rate for derivative liabilities | (81 | ) | (181 | ) | ||||
Net deferred tax assets | (112 | ) | (202 | ) | ||||
Netafter-tax DVA | 118 | 238 | ||||||
Other adjustments and deductions | (52 | ) | (101 | ) | ||||
Additional Tier 1 capital | $ | 8,883 | $ | 7,887 | ||||
Deduction for investments in covered funds | (161 | ) | (188 | ) | ||||
Total Tier 1 capital | $ | 69,136 | $ | 68,097 | ||||
Tier 2 capital | ||||||||
Subordinated debt | $ | 10,255 | $ | 10,303 | ||||
Noncontrolling interests | 79 | 62 | ||||||
Eligible allowance for credit losses | 208 | 189 | ||||||
Regulatory adjustments and deductions | (3 | ) | (9 | ) | ||||
Total Tier 2 capital | $ | 10,539 | $ | 10,545 | ||||
Total capital | $ | 79,675 | $ | 78,642 | ||||
| Management’s Discussion and Analysis | |
Regulatory Capital Calculated under Advanced Approach Transitional Rules
| $ in millions | At September 30, | At December 31, 2015 | ||||||
Common Equity Tier 1 capital | ||||||||
Common stock and surplus | $ | 18,154 | $ | 20,114 | ||||
Retained earnings | 52,545 | 49,204 | ||||||
AOCI | (1,070 | ) | (1,656 | ) | ||||
Regulatory adjustments and deductions: | ||||||||
Net goodwill | (6,577 | ) | (6,582 | ) | ||||
Net intangible assets (other than goodwill and mortgage servicing assets) | (1,646 | ) | (1,192 | ) | ||||
Credit spread premium over risk-free rate for derivative liabilities | (351 | ) | (202 | ) | ||||
Net deferred tax assets | (615 | ) | (675 | ) | ||||
Net after-tax DVA1 | 34 | 156 | ||||||
Adjustments related to AOCI | 101 | 411 | ||||||
Other adjustments and deductions | (235 | ) | (169 | ) | ||||
Total Common Equity Tier 1 capital | $ | 60,340 | $ | 59,409 | ||||
Additional Tier 1 capital | ||||||||
Preferred stock | $ | 7,520 | $ | 7,520 | ||||
Trust preferred securities | — | 702 | ||||||
Noncontrolling interests | 675 | 678 | ||||||
Regulatory adjustments and deductions: | ||||||||
Net deferred tax assets | (410 | ) | (1,012 | ) | ||||
Credit spread premium over risk-free rate for derivative liabilities | (234 | ) | (303 | ) | ||||
Net after-tax DVA1 | 23 | 233 | ||||||
Other adjustments and deductions | (155 | ) | (253 | ) | ||||
Additional Tier 1 capital | $ | 7,419 | $ | 7,565 | ||||
Deduction for investments in covered funds | (156 | ) | (252 | ) | ||||
Total Tier 1 capital | $ | 67,603 | $ | 66,722 | ||||
Tier 2 capital | ||||||||
Subordinated debt | $ | 11,010 | $ | 10,404 | ||||
Trust preferred securities | — | 2,106 | ||||||
Other qualifying amounts | 56 | 35 | ||||||
Regulatory adjustments and deductions | 169 | 136 | ||||||
Total Tier 2 capital | $ | 11,235 | $ | 12,681 | ||||
Total capital | $ | 78,838 | $ | 79,403 | ||||
Roll-forwardRollforward of Regulatory Capital Calculated under Advanced Approach Transitional Rules
| $ in millions | Nine Months Ended | |||
Common Equity Tier 1 capital | ||||
Common Equity Tier 1 capital at December 31, 2015 | $ | 59,409 | ||
Change related to the following items: | ||||
Value of shareholders’ common equity | 1,967 | |||
Net goodwill | 5 | |||
Net intangible assets (other than goodwill and mortgage servicing assets) | (454 | ) | ||
Credit spread premium over risk-free rate for derivative liabilities | (149 | ) | ||
Net deferred tax assets | 60 | |||
Net after-tax DVA1 | (122 | ) | ||
Adjustments related to AOCI | (310 | ) | ||
Other deductions and adjustments | (66 | ) | ||
Common Equity Tier 1 capital at September 30, 2016 | $ | 60,340 | ||
Additional Tier 1 capital | ||||
Additional Tier 1 capital at December 31, 2015 | $ | 7,565 | ||
Change related to the following items: | ||||
Trust preferred securities | (702 | ) | ||
Noncontrolling interests | (3 | ) | ||
Net deferred tax assets | 602 | |||
Credit spread premium over risk-free rate for derivative liabilities | 69 | |||
Net after-tax DVA1 | (210 | ) | ||
Other adjustments and deductions | 98 | |||
Additional Tier 1 capital at September 30, 2016 | 7,419 | |||
Deduction for investments in covered funds at December 31, 2015 | (252 | ) | ||
Deduction for investments in covered funds | 96 | |||
Deduction for investments in covered funds at September 30, 2016 | (156 | ) | ||
Tier 1 capital at September 30, 2016 | $ | 67,603 | ||
Tier 2 capital | ||||
Tier 2 capital at December 31, 2015 | $ | 12,681 | ||
Change related to the following items: | ||||
Subordinated debt | 606 | |||
Trust preferred securities | (2,106 | ) | ||
Noncontrolling interests | 21 | |||
Other adjustments and deductions | 33 | |||
Tier 2 capital at September 30, 2016 | $ | 11,235 | ||
Total capital at September 30, 2016 | $ | 78,838 | ||
|
| $ in millions | Three Months March 31, 2017 | |||
Common Equity Tier 1 capital | ||||
Common Equity Tier 1 capital at December 31, 2016 | $ | 60,398 | ||
Change related to the following items: | ||||
Value of shareholders’ common equity | 874 | |||
Net goodwill | (12 | ) | ||
Net intangible assets (other than goodwill and mortgage servicing assets) | (482 | ) | ||
Credit spread premium over risk-free rate for derivative liabilities | (53 | ) | ||
Net deferred tax assets | (145 | ) | ||
Netafter-tax DVA | 116 | |||
Adjustments related to AOCI | (228 | ) | ||
Other deductions and adjustments | (54 | ) | ||
Common Equity Tier 1 capital at March 31, 2017 | $ | 60,414 | ||
Additional Tier 1 capital | ||||
Additional Tier 1 capital at December 31, 2016 | $ | 7,887 | ||
New issuance of qualifying preferred stock | 1,000 | |||
Change related to the following items: | ||||
Noncontrolling interests | (123 | ) | ||
Credit spread premium over risk-free rate for derivative liabilities | 100 | |||
Net deferred tax assets | 90 | |||
Netafter-tax DVA | (120 | ) | ||
Other adjustments and deductions | 49 | |||
Additional Tier 1 capital at March 31, 2017 | 8,883 | |||
Deduction for investments in covered funds at December 31, 2016 | (188 | ) | ||
Deduction for investments in covered funds | 27 | |||
Deduction for investments in covered funds at March 31, 2017 | (161 | ) | ||
Tier 1 capital at March 31, 2017 | $ | 69,136 | ||
Tier 2 capital | ||||
Tier 2 capital at December 31, 2016 | $ | 10,545 | ||
Change related to the following items: | ||||
Subordinated debt | (48 | ) | ||
Noncontrolling interests | 17 | |||
Eligible allowance for credit losses | 19 | |||
Other adjustments and deductions | 6 | |||
Tier 2 capital at March 31, 2017 | $ | 10,539 | ||
Total capital at March 31, 2017 | $ | 79,675 | ||
|
Roll-forward of RWAs Calculated under Advanced Approach Transitional Rules
Rollforward of RWAs Calculated under Advanced Approach Transitional Rules
| Rollforward of RWAs Calculated under Advanced Approach Transitional Rules
|
| ||||||
| $ in millions | Nine Months Ended September 30, 20161 | Three Months 20171 | ||||||
Credit risk RWAs | ||||||||
Balance at December 31, 2015 | $ | 173,586 | ||||||
Balance at December 31, 2016 | $ | 169,231 | ||||||
Change related to the following items: | ||||||||
Derivatives | 598 | (302 | ) | |||||
Securities financing transactions | 2,020 | 1,413 | ||||||
Other counterparty credit risk | (60 | ) | ||||||
Securitizations | (1,560 | ) | 912 | |||||
Credit valuation adjustment | 5,172 | (1,269 | ) | |||||
Investment securities | 1,324 | (18 | ) | |||||
Loans | (7,151 | ) | (3,396 | ) | ||||
Cash | 376 | 343 | ||||||
Equity investments | (1,266 | ) | (2 | ) | ||||
Other credit risk2 | (1,265 | ) | (202 | ) | ||||
Total change in credit risk RWAs | $ | (1,812 | ) | $ | (2,521 | ) | ||
Balance at September 30, 2016 | $ | 171,774 | ||||||
Balance at March 31, 2017 | $ | 166,710 | ||||||
Market risk RWAs | ||||||||
Balance at December 31, 2015 | $ | 71,476 | ||||||
Balance at December 31, 2016 | $ | 60,872 | ||||||
Change related to the following items: | ||||||||
Regulatory VaR | (2,226 | ) | 848 | |||||
Regulatory stressed VaR | (5,676 | ) | 330 | |||||
Incremental risk charge | (577 | ) | 1,018 | |||||
Comprehensive risk measure | (2,399 | ) | (1,314 | ) | ||||
Specific risk: | ||||||||
Non-securitizations | 244 | 2,425 | ||||||
Securitizations | (547 | ) | 728 | |||||
Total change in market risk RWAs | $ | (11,181 | ) | $ | 4,035 | |||
Balance at September 30, 2016 | $ | 60,295 | ||||||
Balance at March 31, 2017 | $ | 64,907 | ||||||
Operational risk RWAs | ||||||||
Balance at December 31, 2015 | $ | 139,100 | ||||||
Balance at December 31, 2016 | $ | 128,038 | ||||||
Change in operational risk RWAs3 | (12,683 | ) | (12,183 | ) | ||||
Balance at September 30, 2016 | $ | 126,417 | ||||||
Balance at March 31, 2017 | $ | 115,855 | ||||||
Total RWAs | $ | 358,486 | $ | 347,472 | ||||
VaR—Value-at-Risk
| 1. | The RWAs for each category in the table reflect bothon- andoff-balance sheet exposures, where appropriate. |
| 2. | Amount reflects assets not in a defined category,non-material portfolios of exposures and unsettled transactions. |
| 3. | Amount reflects a reduction in the internal loss data related to litigation utilized in the operational risk capital model. |
Supplementary Leverage Ratio
We and our U.S. Bank Subsidiaries are required to publicly disclose our supplementary leverage ratios, which will become effective as a capital standard on January 1, 2018. By January 1, 2018, we must also maintain a Tier 1 supplementary leverage capital buffer of at least 2% in addition to the 3% minimum supplementary leverage ratio (for a total of at
| 25 | March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
least 5%), in order to avoid limitations on capital distributions, including dividends and stock repurchases, and discre-
tionarydiscretionary bonus payments to executive officers. In addition, beginning in 2018, our U.S. Bank Subsidiaries must maintain a supplementary leverage ratio of 6% to be considered well-capitalized.
Pro Forma Supplementary Leverage Exposure and Ratio on a Transitional Basis
| $ in millions | At September 30, 2016 | At December 31, 2015 | At March 31, 2017 | At December 31, 2016 | ||||||||||||
Average total assets1 | $ | 819,725 | $ | 813,715 | $ | 825,739 | $ | 820,536 | ||||||||
Adjustments2, 3 | 245,701 | 284,090 | 241,734 | 242,113 | ||||||||||||
Pro forma supplementary leverage exposure | $ | 1,065,426 | $ | 1,097,805 | $ | 1,067,473 | $ | 1,062,649 | ||||||||
Pro forma supplementary leverage ratio | 6.3% | 6.1% | 6.5% | 6.4% | ||||||||||||
| 1. | Computed as the average daily balance of consolidated total assets under U.S. GAAP during the calendar |
| 2. | Computed as the arithmetic mean of themonth-end balances over the calendar |
| 3. | Adjustments are to: (i) incorporate derivative exposures, including adding the related potential future exposure (including for derivatives cleared for clients), grossing up cash collateral netting where qualifying criteria are not met and adding the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) reflect the counterparty credit risk for repo-style transactions; (iii) add the credit equivalent amount foroff-balance sheet exposures; and (iv) apply other adjustments to Tier 1 capital, including disallowed goodwill, transitional intangible assets, certain deferred tax assets and certain investments in the capital instruments of unconsolidated financial institutions. |
Based on our current understanding of the rules and other factors, we estimate our pro forma fullyphased-in supplementary leverage ratio to be approximately 6.4% at March 31, 2017 and 6.2% and 5.8% at September 30, 2016 and December 31, 2015, respectively. This estimate utilizes2016. These estimates utilize a fullyphased-in Tier 1 capital numerator and a fullyphased-in denominator of approximately $1,064.3 billion and $1,095.6$1,066.9 billion at September 30, 2016March 31, 2017 and $1,061.5 billion at December 31, 2015, respectively,2016, which takes into consideration the Tier 1 capital deductions that would be applicable in 2018 after thephase-in period has ended.
U.S. Subsidiary Banks’ Pro Forma Supplementary Leverage Ratios on a Transitional Basis
| At September 30, 2016 | At December 31, 2015 | At March 31, 2017 | At December 31, 2016 | |||||||||||||
MSBNA | 7.4 | % | 7.3% | 8.1 | % | 7.7% | ||||||||||
MSPBNA | 10.1 | % | 10.3% | 10.4 | % | 10.2% | ||||||||||
The pro forma supplementary leverage exposures and pro forma supplementary leverage ratios, both on transitional and fullyphased-in bases, arenon-GAAP financial measures that we consider to be useful measures for us, investors and analysts in evaluating prospective compliance with new regulatory capital requirements that have not yet become effective. Our estimates are subject to risks and uncertainties that may cause actual results to differ materially from estimates based on these regulations. Further, these expectations should not be taken as projections of what our supplementary leverage ratios, earnings, assets or exposures will actually be
at future dates. For a discussion of risks and uncertainties that may affect our future results, see “Risk Factors” in Part I, Item 1A of the 20152016 Form10-K.
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Total Loss-Absorbing Capacity, and Long-Term Debt and Clean Holding Company Requirements
TheOn December 15, 2016, the Federal Reserve has proposedadopted a final rule fortop-tier bank holding companies of U.S.G-SIBs (“covered BHCs”), including the Parent Company, that establishes external total loss-absorbing capacity (“TLAC”) andTLAC, long-term debt (“LTD”) and clean holding company requirements. The proposalfinal rule contains various definitions and restrictions, such as requiring eligible LTD to be issued by the covered BHC and be unsecured, have a remaining maturity of one year or more from the date of issuance and not have certain derivative-linked features such astypically associated with certain types of structured notes. The proposal would also impose restrictions on certain liabilities that coveredCovered BHCs may incur or have outstanding, including structured notes, as well as requiremust comply with all U.S. banking organizations supervisedrequirements under the rule by the Federal Reserve with assets of at least $1 billionJanuary 1, 2019, which we expect to make certain deductions from capital for their investments in unsecured debt issued by covered BHCs. comply with.
For a further discussion of TLAC and LTD requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Total Loss-Absorbing Capacity, and Long-Term Debt and Clean Holding Company Requirements” in Part II, Item 7 of the 20152016 Form10-K. For discussions about the implication ofinteraction between the single point of entry (“SPOE”) resolution strategy and the TLAC proposal,and LTD requirements, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” in Part I, Item 1 and “Risk Factors—Legal, Regulatory and Compliance Risk” in Part I, Item 1A of the 20152016 Form10-K.
Capital Plans and Stress Tests
Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large bank holding companies, including us, which form part of the Federal Reserve’s annual Comprehensive Capital Analysis and Review (“CCAR”) framework.
On April 5, 2016, we submitted our 2016 CCAR capital plan, and summary results of the Dodd-Frank Act and CCAR supervisory stress tests were published by the Federal Reserve in June. We exceeded all stressed capital ratio minimum requirements in the Federal Reserve severely adverse scenario, and our quantitative capital results improved from our prior year submission. In June 2016,March 2017, we received a conditional non-objection from the Federal Reserve to our resubmitted 2016 capital plan.
We submitted our 2017 capital plan (see “Capital Management” herein). As required, we disclosedandcompany-run stress test results to the Federal Reserve on April 5, 2017. We expect that the Federal Reserve will provide its response to our 2017 capital plan by June 30, 2017. The Federal Reserve is expected to publish summary results of the CCAR and Dodd-Frank Act supervisory stress tests of each large bank holding company, including us, by June 30, 2017. We must disclose a summary of the resultresults of ourcompany-run stress tests on June 23, 2016. The Federal Reserve Board also asked us to submit an additional capital plan by December 29, 2016 addressing weaknesses identified in our capital planning process. Future capital distributions may be restricted if these identified weaknesses are not satisfactorily addressed whenwithin 15 days of the date the Federal Reserve reviews our resubmitted capital plan. Pursuant todiscloses the conditional non-
objection, we are able to executeresults of the capital actions set forth in our 2016 capital plan, which included increasing our common stock dividend to $0.20 per share beginning in the third quarter of 2016 and executing share repurchases of $3.5 billion during the period July 1, 2016 through June 30, 2017.supervisory stress tests. In addition, we submittedmust
| March 2017 Form 10-Q | 26 |
| Management’s Discussion and Analysis | |
submit the results of our mid-cycle company-runmid-cyclecompany-run stress test to the Federal Reserve onby October 5, 20162017 and we discloseddisclose a summary of the results onbetween October 31, 2016.
In September 2016, the Federal Reserve proposed revisions to the capital plan5, 2017 and stress test rules that would, among other things, reduce thede minimis threshold for additional capital distributions that a firm may make during a capital plan cycle without seeking the Federal Reserve’s prior approval. The proposal would also establish a one-quarter “blackout period” while the Federal Reserve is conducting CCAR during which firms would not be permitted to submitde minimis exception notices or prior approval requests for additional capital distributions. The Federal Reserve is currently considering making further changes to CCAR requirements, which may increase minimum capital requirements for the Firm.November 4, 2017.
The Dodd-Frank Act also requires each of our U.S. Bank Subsidiaries to conduct an annual stress test. MSBNA and MSPBNA submitted their 20162017 annualcompany-run stress tests to the OCC on April 5, 20162017 and publishedmust publish a summary of their stress test results onbetween June 23, 2016.15, 2017 and July 15, 2017.
For a further discussion of our capital plans and stress tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests” in Part II, Item 7 of the 20152016 Form10-K.
Attribution of Average Common Equity accordingAccording to the Required Capital Framework
Our required capital (“Required Capital”) estimation is based on the Required Capital framework, an internal capital adequacy measure. Common equity attribution to the business segments is based on capital usage calculated by the Required Capital framework, as well as each business segment’s relative contribution to our total Required Capital. Required Capital is assessed for each business segment and further attributed to product lines. This process is intended to align capital with the risks in each business segment in order to allow senior management to evaluate returns on a risk-adjusted basis.
The Required Capital framework is a risk-based and leverageuse-of-capital measure, which is compared with our regulatory capital to ensure that we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. We define the difference between our total average common equity and the
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sum of the average common equity amounts allocated to our business segments as Parent Company equity. We generally hold Parent Company equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.
Effective January 1, 2016, the commonCommon equity estimation and attribution to the business segments are based on our pro forma fullyphased-in regulatory capital estimates, including supplementary leverage, and incorporates our internal stress losses (which results in more capital being attributed to the business segments), whereas prior periods were attributed based on transitional regulatory capital provisions. Also, beginning in 2016, thetests. The amount of capital allocated to the business segments will beare set at the beginning of each year and will remain fixed throughout the year until the next annual reset. Differences between available and Required Capital will be reflected inattributed to Parent Company equity during the year. Periods prior to 2016 have not been recast under the new methodology.
The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory environment, andfor example, to incorporate enhancements in modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.
Average Common Equity by Business Segment and Parent EquityAttribution
| Three Months Ended | ||||||||||||||||||||||||
Three Months Ended1 September 30, | Nine Months Ended1 September 30, | March 31, | ||||||||||||||||||||||
| $ in billions | 2016 | 2015 | 2016 | 2015 | 2017 | 2016 | ||||||||||||||||||
Institutional Securities | $ | 43.2 | $ | 33.8 | $ | 43.2 | $ | 35.4 | $ | 40.2 | $ | 43.2 | ||||||||||||
Wealth Management | 15.3 | 11.4 | 15.3 | 10.9 | 17.2 | 15.3 | ||||||||||||||||||
Investment Management | 2.8 | 2.1 | 2.8 | 2.2 | 2.4 | 2.8 | ||||||||||||||||||
Parent | 8.2 | 20.3 | 7.6 | 18.2 | ||||||||||||||||||||
Total | $ | 69.5 | $ | 67.6 | $ | 68.9 | $ | 66.7 | ||||||||||||||||
Parent Company | 9.2 | 6.9 | ||||||||||||||||||||||
Total1 | $ | 69.0 | $ | 68.2 | ||||||||||||||||||||
| 1. |
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Regulatory Developments
Resolution and Recovery Planning
Pursuant to the Dodd-Frank Act, we are required to submit to the Federal Reserve and the Federal Deposit Insurance Corporation (“FDIC”) an annual resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure.
Our preferred resolution strategy, which is set out in our 2015 resolution plan, is an SPOE strategy. On September 30, 2016, we submitted a status report to the Federal Reserve and the FDIC in respect of certain shortcomings identified in our 2015 resolution plan. Pursuant to theAs indicated in our status report, we indicated that the parent holding companyParent Company will amend and restate
its support agreement with its material subsidiaries that are designed to ensure such subsidiaries have sufficient capital and liquidity as and when needed throughout a resolution scenario.subsidiaries. Under the amended and restated support agreement, upon the occurrence of a resolution scenario, the parent holding companyParent Company will be obligated to contribute or loan on a subordinated basis all of its material assets, other than shares in subsidiaries of the parent holding companyParent Company and certain intercompany payables,receivables, to provide capital and liquidity, as applicable, to our material subsidiaries. The obligations of the parent holding companyParent Company under the amended and restated support agreement will be secured on a senior basis by the assets of the parent holding companyParent Company (other than shares in subsidiaries of the parent holding company)Parent Company). As a result, claims of our material subsidiaries against the assets of the parent holding companyParent Company (other than shares in subsidiaries of the parent holding company)Parent Company) will be effectively senior to unsecured obligations of the parent holding company. OurParent Company. Due to a filing extension
| 27 | March 2017 Form 10-Q |
| Management’s Discussion and Analysis | |
issued by the Federal Reserve and the FDIC in 2016, our next full resolution plan submission will be on July 1, 2017. If the Federal Reserve and the FDIC were, at a later time, to jointly determine that our 2017 resolution plan is not credible or would not facilitate an orderly resolution, and if we were unable to address any deficiencies at that later time, we or any of our subsidiaries may be subjected to more stringent capital, leverage, or liquidity requirements or restrictions on our growth, activities, or operations, or, after a two-year period, we may be required to divest assets or operations.
In September 2016, the OCC issued final guidelines that establish enforceable standards for recovery planning by national banks and certain other institutions with total consolidated assets of $50 billion or more, calculated on a rolling four-quarter average basis, including MSBNA.MSBNA and MSPBNA. The guidelines arewere effective on January 1, 2017, and2017; MSBNA must be in compliance by January 1, 2018.
In May 2016, the Federal Reserve proposed a rule that would impose contractual requirements on certain “qualified financial contracts” (“covered QFCs”) to which U.S. G-SIBs, including us,2018 and their subsidiaries are parties. In August 2016, the OCC proposed a rule that would subject national banks that are subsidiaries of U.S. G-SIBs, including our U.S. Bank Subsidiaries, as well as certain other institutions (collectively with U.S. G-SIBs and their other subsidiaries, “covered entities”), to substantively identical requirements. Under the proposals, covered QFCsMSPBNA must expressly provide that transfer restrictions and default rights against a covered entity are limited to the same extent as provided under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Act and their implementing regulations. In addition, covered QFCs may not permit the exercise of cross-default rights against a covered entity based on an affiliate’s entry into insolvency, resolution or similar proceedings. If adopted as proposed, the requirements would take effect at the start of
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the first calendar quarter that begins at least one year after the final rules are issued. We continue to evaluate the potential impact of the proposals, which are subject to public comment and further rulemaking procedures.be in compliance by October 1, 2018.
For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” in Part I, Item 1, “Risk Factors—Legal, Regulatory and Compliance Risk” in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources—Regulatory Developments—Resolution and Recovery Planning” in Part II, Item 7 of the 20152016 Form10-K.
Single-Counterparty Credit Limits
In March 2016, the Federal Reserve re-proposed rules that would establish single-counterparty credit limits for large banking organizations (“covered companies”), with more stringent limits for the largest covered companies. U.S. G-SIBs, including us, would be subject to a limit of 15% of Tier 1 capital for credit exposures to any “major counterparty” (defined as other U.S. G-SIBs, foreign G-SIBs and nonbank systemically important financial institutions supervised by the Federal Reserve) and to a limit of 25% of Tier 1 capital for credit exposures to any other unaffiliated counterparty. We continue to evaluate the potential impact of the proposed rules.
Compensation Practices
In the second quarter of 2016, the federal regulatory agencies required under the Dodd-Frank Act to issue regulations relating to the compensation practices of covered financial institutions, including us, re-proposed rules that if implemented would require, among other things, the deferral of a percentage of certain incentive-based compensation for senior executives and certain other employees and, under certain circumstances, “clawback” of incentive-based compensation. We continue to evaluate the proposal, which is subject to further rulemaking procedures.
Legacy Covered Funds under the Volcker Rule
The Volcker Rule prohibits “banking entities,” including us and our affiliates, from engaging in certain “proprietary trading” activities, as defined in the Volcker Rule, subject to exemptions for underwriting, market-making-related activities, risk-mitigating hedging and certain other activities. The Volcker Rule also prohibits certain investments and relationships by banking entities such as us, with “covered funds,” with a number of exemptions and exclusions. The Federal Reserve has extended
For more information about Volcker Rule requirements and our activities in these areas, including the conformance period until July 21, 2017 for investments in, and relationships with,periods applicable to certain covered funds that were in place before December 31, 2013, referred to as “legacy covered funds.” On July 7, 2016, the Federal Reserve stated that it will continue to consider whether to take action regarding the additional extended five-year transition periodand our application for certain legacy covered funds that are also illiquid funds and that it expects to provide more information in the near term as to how it will address applications by banking entities seeking thea statutory extension, for this limited category of legacy covered funds. We currently have approximately $2.2 billion of non-conforming investments in,
see “Business—Supervision and relationships with, legacy covered funds subject toRegulation—Financial Holding Company—Activities Restrictions under the Volcker Rule. While we expect to request additional extensions forRule” in Part I, Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Developments—Legacy Covered Funds under the overwhelming majorityVolcker Rule” in Part II, Item 7 of the investments, we also continue to consider various alternatives to be in compliance with the Volcker Rule, including sales, redemptions, and liquidations, where the amounts we ultimately realize on these investments may be less than their current carrying values.2016 Form10-K.
U.S. Department of the Treasury RegulationsLabor Conflict of Interest Rule
On October 13, 2016,In April 2017, the U.S. Department of Labor published a final Conflict of Interest Rule, which delayed the Treasury released finalapplicability date
from April 10, 2017 to June 9, 2017, with certain aspects subject tophased-in compliance, and temporary regulations under Section 385with full compliance required by January 1, 2018, assuming no further delays. For a discussion of the U.S. tax code addressing, among other things,Department of Labor Conflict of Interest Rule, see “Business—Supervision and Regulation— Institutional Securities and Wealth Management” in Part I, Item 1 of the treatment2016 Form10-K.
U.K. Referendum
Following the U.K. electorate vote to leave the European Union, the U.K. invoked Article 50 of certain related-party indebtedness as equity for U.S. federal income tax purposes. The regulations include multiple effective dates, the earliestLisbon Treaty on March 29, 2017. For further discussion of which is effective from January 19, 2017 and applies to certain financial instruments issued after April 4, 2016. Although we are continuing to evaluate the regulations, we do not expect them to have a material effective tax rate impact.
Commodities and Merchant Banking Activities
In September 2016, the Federal Reserve issued a proposed rulemaking that would increase risk-based capital requirements for certain commodities-related activities and commodities-related merchant banking investments of U.S. financial holding companies (“FHCs”), including us; impose new limitations on the physical commodity trading activities of certain U.S. FHCs; and enhance reporting requirements with respect to U.S. FHCs’ commodities-related activities and investments. If adopted in its current form, the proposed rulemaking would result in increases in our RWAs with respect to certain commodities-related investments and physical commodity holdings. However, we expect that the proposed rule, if finalized in its proposed form, would not have a significantU.K. referendum’s potential impact on our aggregate RWAs or risk-based capital ratios.operations, see “Risk Factors—International Risk” in Part I, Item 1A of the 2016 Form10-K. For further information regarding our exposure to the U.K., see also “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Country Risk Exposure.”
Off-Balance Sheet Arrangements
We enter into variousoff-balance sheet arrangements, including through unconsolidated special purpose entities (“SPEs”) and lending-related financial instruments (e.g., guarantees and commitments), primarily in connection with the Institutional Securities and Investment Management business segments.
We utilize SPEs primarily in connection with securitization activities. For information on our securitization activities, see Note 12 to the consolidated financial statements in Item 1.statements.
For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 11
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to the consolidated financial statements in Item 1.statements. For further information on our lending commitments, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities” in Item 3.Activities.”
Effects of Inflation and Changes in Interest and Foreign Exchange Rates
For a discussion of the effects of inflation and changes in interest and foreign exchange rates on our business and financial results and strategies to mitigate potential exposures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Effects of Inflation and Changes in Interest and Foreign Exchange Rates” in Part II, Item 7 of the 20152016 Form10-K.
U.K. Referendum
On June 23, 2016, the U.K. electorate voted to leave the European Union (the “EU”). It is difficult to predict the future of the U.K.’s relationship with the EU, which uncertainty may increase the volatility in the global financial markets in the short- and medium-term. There are several alternative models of relationship that the U.K. might seek to negotiate with the EU, the timeframe for which is uncertain but could take two years or more. The regulatory framework applicable to financial institutions with significant operations in Europe, such as us, is expected to evolve and specific and meaningful information regarding the long-term consequences of the vote is expected to become clearer over time. We will continue to evaluate various courses of action in the context of the development of the U.K.’s withdrawal from the EU and the referendum’s potential impact on our operations. For further information regarding our exposure to the U.K., see also “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Country Risk Exposure” in Part I, Item 3.
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Risk Management
Management believes effective risk management is vital to the success of our business activities. For a discussion of our risk management functions, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the 20152016 Form10-K.
Market Risk
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, implied volatilities (the price volatility of the underlying instrument imputed from option prices), correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of ourValue-at-Risk (“VaR”) for market risk exposures is generated. In addition, we incur trading-related market risk within the Wealth Management and Investment Management business segment.segments. The Institutional Securities and Wealth Management business segments incur segment primarily incursnon-trading interest rate market risk primarily from lending and deposit takingdeposit-taking activities. The Investment Management business segment primarily incursnon-trading market risk from capital investments in real estate funds and investments in private equity and real estate funds.vehicles. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” in Part II, Item 7A of the 20152016 Form10-K.
VaR
We use the statistical technique known as VaR as one of the tools used to measure, monitor and review the market risk exposures of our trading portfolios. The Market Risk Department calculates and distributes dailyVaR-based risk measures to various levels of management.
VaR Methodology, Assumptions and Limitations.For information regarding our VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk—Sales and Trading and Related Activities—VaR Methodology, Assumptions and Limitations” in Part II, Item 7A of the 20152016 Form10-K.
We utilize the same VaR model for risk management purposes as well as for regulatory capital calculations ascalculations. Our VaR model has been approved by our regulators.regulators for use in regulatory calculations.
The portfolio of positions used for our VaR for risk management purposes (“Management VaR”) differs from that used
for regulatory capital requirements (“Regulatory VaR”). Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include counterparty Credit Valuation Adjustmentscredit valuation adjustment (“CVA”) and related hedges, as well as loans that are carried at fair value and associated hedges.
The following table presents the Management VaR for the Trading portfolio, on aperiod-end, quarterly average and quarterly high and low basis. To further enhance the transparency of the traded market risk, the Credit Portfolio VaR has been disclosed as a separate category from the Primary Risk Categories. The Credit Portfolio includes counterparty CVA and related hedges, as well as loans that are carried at fair value and associated hedges.
Trading Risks
95%/One-Day Management VaR
| 95%/One-Day VaR for the | ||||||||||||||||
| Quarter Ended September 30, 2016 | ||||||||||||||||
| $ in millions | Period End | Average | High | Low | ||||||||||||
Interest rate and credit spread | $ | 26 | 26 | 33 | 22 | |||||||||||
Equity price | 14 | 15 | 27 | 13 | ||||||||||||
Foreign exchange rate | 7 | 7 | 9 | 4 | ||||||||||||
Commodity price | 10 | 9 | 10 | 8 | ||||||||||||
Less: Diversification benefit1, 2 | (23 | ) | (25 | ) | N/A | N/A | ||||||||||
Primary Risk Categories | $ | 34 | 32 | 42 | 29 | |||||||||||
Credit Portfolio | 18 | 22 | 24 | 18 | ||||||||||||
Less: Diversification benefit1, 2 | (9 | ) | (12 | ) | N/A | N/A | ||||||||||
Total Management VaR | $ | 43 | 42 | 51 | 39 | |||||||||||
| 95%/One-Day VaR for the | ||||||||||||||||||||||||||||||||
| 95%/One-Day VaR for the | Quarter Ended | |||||||||||||||||||||||||||||||
| Quarter Ended June 30, 2016 | March 31, 2017 | |||||||||||||||||||||||||||||||
| $ in millions | Period End | Average | High | Low | Period End | Average | High | Low | ||||||||||||||||||||||||
Interest rate and credit spread | $ | 26 | $ | 32 | $ | 38 | $ | 26 | $ | 40 | $ | 30 | $ | 40 | $ | 23 | ||||||||||||||||
Equity price | 20 | 17 | 43 | 13 | 19 | 15 | 26 | 12 | ||||||||||||||||||||||||
Foreign exchange rate | 10 | 7 | 12 | 6 | 11 | 11 | 18 | 7 | ||||||||||||||||||||||||
Commodity price | 9 | 10 | 12 | 9 | 8 | 8 | 11 | 7 | ||||||||||||||||||||||||
Less: Diversification benefit1, 2 | (32 | ) | (28 | ) | N/A | N/A | (26 | ) | (25 | ) | N/A | N/A | ||||||||||||||||||||
Primary Risk Categories | $ | 33 | $ | 38 | $ | 61 | $ | 31 | $ | 52 | $ | 39 | $ | 52 | $ | 28 | ||||||||||||||||
Credit Portfolio | 22 | 20 | 23 | 18 | 14 | 15 | 17 | 14 | ||||||||||||||||||||||||
Less: Diversification benefit1, 2 | (13 | ) | (12 | ) | N/A | N/A | (9 | ) | (10 | ) | N/A | N/A | ||||||||||||||||||||
Total Management VaR | $ | 42 | $ | 46 | $ | 68 | $ | 39 | $ | 57 | $ | 44 | $ | 57 | $ | 33 | ||||||||||||||||
95%/One-Day VaR for the | ||||||||||||||||||||||||||||||||
| Quarter Ended | ||||||||||||||||||||||||||||||||
| December 31, 2016 | ||||||||||||||||||||||||||||||||
| $ in millions | Period End | Average | High | Low | ||||||||||||||||||||||||||||
Interest rate and credit spread | $ | 24 | $ | 25 | $ | 30 | $ | 22 | ||||||||||||||||||||||||
Equity price | 12 | 14 | 28 | 11 | ||||||||||||||||||||||||||||
Foreign exchange rate | 7 | 9 | 12 | 6 | ||||||||||||||||||||||||||||
Commodity price | 8 | 8 | 10 | 7 | ||||||||||||||||||||||||||||
Less: Diversification benefit1, 2 | (21 | ) | (24 | ) | N/A | N/A | ||||||||||||||||||||||||||
Primary Risk Categories | $ | 30 | $ | 32 | $ | 46 | $ | 29 | ||||||||||||||||||||||||
Credit Portfolio | 15 | 17 | 19 | 15 | ||||||||||||||||||||||||||||
Less: Diversification benefit1, 2 | (11 | ) | (10 | ) | N/A | N/A | ||||||||||||||||||||||||||
Total Management VaR | $ | 34 | $ | 39 | $ | 54 | $ | 34 | ||||||||||||||||||||||||
N/A—Not Applicable
| 1. | Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulatedone-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component. |
| 2. | The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the quarter, and therefore, the diversification benefit is not an applicable measure. |
| Risk Disclosures | |
The average Totaltotal Management VaR for the quarter ended September 30, 2016March 31, 2017 (“current quarter”) was $42$44 million which was reduced from $46compared with $39 million for the quarter ended June 30,December 31, 2016 (“last quarter”).
The average Management VaR for the Primary Risk Categories for the current quarter was $32$39 million compared with $38$32 million for the last quarter. The decrease wasThese increases were driven by an overall reduction in risk exposuresstrong client demand within our sales and trading businesses and areas of volatility across the Sales and Trading businesses.several fixed income asset classes.
Distribution of VaR Statistics and Net Revenues for the Current Quarter. One method of evaluating the reasonableness of our VaR model as a measure of our potential volatility of net revenues is to compare VaR with actual trading revenues. Assuming no intraday trading, for a95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the VaR model would be questioned. We evaluate the reasonableness of our VaR model by comparing the potential declines in portfolio values generated by the model with actual trading results for the Firm, as well as individual business units. For days where losses exceed the VaR statistic, we examine the drivers of trading losses to evaluate the VaR model’s accuracy relative to realized trading results.
The distribution of VaR Statistics and Net Revenues is presented in the following histograms for the Total Trading populations.
Total Trading. As shown in the95%/One-Day Management VaR table on the preceding page, the average95%/one-day Total total Management VaR for the current quarter was $42$44 million. The following histogram presents the distribution of the daily95%/one-day Total total Management VaR for the current quarter, which was in a range between $35 million and $45$55 million for approximately 95% of trading days during the current quarter.
The following histogram shows the distribution for the current quarter of daily net trading revenues, including profits and losses from Interest rate and credit spread, Equity price,
Foreign exchange rate, Commodity price, and Credit Portfolio positions and intraday trading activities, for our Trading businesses. Daily net trading revenues also include intraday trading activities but exclude certain items not captured in the VaR model, such as fees, commissions and net interest income. Daily net trading revenues differ from the definition of revenues required for Regulatory VaR backtesting, which further excludes intraday trading. During the current quarter, we experienced net trading losses on 13 days, of which no day which was not in excess of the95%/one-day Total Management VaR.
Non-tradingNon-Trading Risks
We believe that sensitivity analysis is an appropriate representation of ournon-trading risks. Reflected below is this analysis covering substantially all of thenon-trading risk in our portfolio.
Counterparty Exposure Related to Our Own Credit Spread. The credit spread risk sensitivity of the counterparty exposure related to our own credit spread corresponded to an increase in value of approximately $7$6 million for each 1 basis point widening in our credit spread level at both September 30, 2016March 31, 2017 and June 30,December 31, 2016.
Funding Liabilities. The credit spread risk sensitivity of ourmark-to-market funding liabilities corresponded to an increase in value of approximately $17$19 million and $15$17 million for each 1 basis point widening in our credit spread level at September 30, 2016March 31, 2017 and June 30,December 31, 2016, respectively.
Interest Rate Risk Sensitivity. The following table presents an analysis of selected instantaneous upward and downward parallel interest rate shocks on net interest income over the next 12 months for our U.S. Bank Subsidiaries. These shocks are applied to our12-month forecast for our U.S. Bank
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Subsidiaries, which incorporates market expectations of interest rates and our forecasted business activity, including our deposit deployment strategy and asset-liability management hedges.
| March 2017 Form 10-Q | 30 |
| Risk Disclosures | |
U.S. Bank Subsidiaries’ Net Interest Income Sensitivity Analysis
| $ in millions | At September 30, 2016 | At June 30, 2016 | ||||||
+200 basis points | $ | (171 | ) | $ | (204) | |||
+100 basis points | (87 | ) | (21) | |||||
–100 basis points | (652 | ) | (532) | |||||
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Basis point change | ||||||||
+200 | $ | 537 | $ | 550 | ||||
+100 | 332 | 262 | ||||||
-100 | (569 | ) | (655) | |||||
At September 30, 2016 and June 30, 2016, large instantaneous interest rates shocks had a negative impact to our U.S. Bank Subsidiaries’ projected net interest income over the following 12 months due to composition of the banks’ assets as well as expected deposit pricing behavior at higher levels of interest rates. We do not manage to any single rate scenario but rather manage net interest income in our U.S. Bank Subsidiaries to optimize across a range of possible outcomes. The sensitivity analysis assumes that we take no action in response to these scenarios, and does not assume any changeassumes there are no changes in other macroeconomic variables normally correlated with changes in interest rates.rates, and includes subjective assumptions regarding customer and marketre-pricing behavior and other factors.
Investments.We have exposure to public and private companies through direct investments, as well as through funds that invest in these assets. These investments are predominantly equity positions with long investment horizons, a portion of which are for business facilitation purposes. The market risk related to these investments is measured by estimating the potential reduction in net income associated with a 10% decline in investment values and related impact on performance fees.
Investments Sensitivity, Including Related Performance Fees
| 10% Sensitivity | 10% Sensitivity | |||||||||||||||
| $ in millions | At September 30, 2016 | At June 30, 2016 | At March 31, 2017 | At December 31, 2016 | ||||||||||||
Investments related to Investment Management activities | $ | 381 | $ | 375 | $ | 337 | $ | 332 | ||||||||
Other investments: | ||||||||||||||||
Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. | 181 | 175 | 171 | 158 | ||||||||||||
Other Firm investments | 160 | 162 | 151 | 130 | ||||||||||||
Equity Market Sensitivity. In the Wealth Management and Investment Management business segments, certainfee-based revenue streams are driven by the value of clients’ equity holdings. The overall level of revenues for these streams also depends on multiple additional factors that include, but are not limited to, the level and duration of the equity market decline, price volatility, the geographic and industry mix of client assets, the rate and magnitude of client investments and
redemptions, and the impact of such market decline and price volatility on client behavior. Therefore, overall revenues do not correlate completely with changes in the equity markets.
Credit Risk
Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to us. We primarily incur credit risk exposure to institutions and individuals through our Institutional Securities and Wealth Management business segments. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk” in Part II, Item 7A of the 20152016 Form10-K. Also, see Notes 7 and 11 to the consolidated financial statements in Item 1 for additional information about our loans and lending commitments, respectively.
Lending Activities
We provide loans and lending commitments to a variety of customers, from large corporate and institutional clients to high net worth individuals. In addition, we purchase loans in the secondary market. In the consolidated balance sheets, these loans and lending commitments are carried at either fair value with changes in fair value recorded in earnings; held for investment, which are recorded at amortized cost; or held for sale, which are recorded at the lower of cost or fair value. Loans held for investment and loans held for sale are classified in Loans, and loans held at fair value are classified in Trading assets in the consolidated balance sheets. See Notes 3, 7 and 11 to the consolidated financial statements in Item 1 for further information.
Loan and Lending Commitment Portfolio by Business Segment
| At March 31, 2017 | ||||||||||||||||
| $ in millions | Institutional Securities | Wealth Management | Investment Management1 | Total | ||||||||||||
Corporate loans | $ | 13,671 | $ | 11,553 | $ | 5 | $ | 25,229 | ||||||||
Consumer loans | — | 25,042 | — | 25,042 | ||||||||||||
Residential real estate loans | — | 25,036 | — | 25,036 | ||||||||||||
Wholesale real estate loans | 8,292 | — | — | 8,292 | ||||||||||||
Loans held for investment, gross of allowance | 21,963 | 61,631 | 5 | 83,599 | ||||||||||||
Allowance for loan losses | (260 | ) | (37 | ) | — | (297) | ||||||||||
Loans held for investment, net of allowance | 21,703 | 61,594 | 5 | 83,302 | ||||||||||||
Corporate loans | 11,216 | — | — | 11,216 | ||||||||||||
Residential real estate loans | 11 | 42 | — | 53 | ||||||||||||
Wholesale real estate loans | 1,382 | — | — | 1,382 | ||||||||||||
Loans held for sale | 12,609 | 42 | — | 12,651 | ||||||||||||
Corporate loans | 6,225 | — | 19 | 6,244 | ||||||||||||
Residential real estate loans | 857 | — | — | 857 | ||||||||||||
Wholesale real estate loans | 1,197 | — | — | 1,197 | ||||||||||||
Loans held at fair value | 8,279 | — | 19 | 8,298 | ||||||||||||
Total loans2 | 42,591 | 61,636 | 24 | 104,251 | ||||||||||||
Lending commitments3,4 | 88,721 | 8,659 | — | 97,380 | ||||||||||||
Total loans and lending commitments2,3,4 | $ | 131,312 | $ | 70,295 | $ | 24 | $ | 201,631 | ||||||||
| Risk Disclosures | |
Loan and Lending Commitment Portfolio by Business Segment
| At September 30, 2016 | ||||||||||||
| $ in millions | Institutional Securities | Wealth Management | Total | |||||||||
Corporate loans | $ | 15,293 | $ | 9,499 | $ | 24,792 | ||||||
Consumer loans | — | 24,717 | 24,717 | |||||||||
Residential real estate loans | — | 23,562 | 23,562 | |||||||||
Wholesale real estate loans | 7,616 | — | 7,616 | |||||||||
Loans held for investment, gross of allowance | 22,909 | 57,778 | 80,687 | |||||||||
Allowance for loan losses | (253 | ) | (34 | ) | (287) | |||||||
Loans held for investment, net of allowance | 22,656 | 57,744 | 80,400 | |||||||||
Corporate loans | 10,223 | — | 10,223 | |||||||||
Residential real estate loans | 13 | 66 | 79 | |||||||||
Wholesale real estate loans | 1,806 | — | 1,806 | |||||||||
Loans held for sale | 12,042 | 66 | 12,108 | |||||||||
Corporate loans | 7,038 | — | 7,038 | |||||||||
Residential real estate loans | 1,338 | — | 1,338 | |||||||||
Wholesale real estate loans | 836 | — | 836 | |||||||||
Loans held at fair value | 9,212 | — | 9,212 | |||||||||
Total loans1 | 43,910 | 57,810 | 101,720 | |||||||||
Lending commitments2, 3 | 85,548 | 8,049 | 93,597 | |||||||||
Total loans and lending commitments2, 3 | $ | 129,458 | $ | 65,859 | $ | 195,317 | ||||||
| At December 31, 2015 | At December 31, 2016 | |||||||||||||||||||||||||||
| $ in millions | Institutional Securities | Wealth Management | Total | Institutional Securities | Wealth Management | Investment Management1 | Total | |||||||||||||||||||||
Corporate loans | $ | 16,452 | $ | 7,102 | $ | 23,554 | $ | 13,858 | $ | 11,162 | $ | 5 | $ | 25,025 | ||||||||||||||
Consumer loans | — | 21,528 | 21,528 | — | 24,866 | — | 24,866 | |||||||||||||||||||||
Residential real estate loans | — | 20,863 | 20,863 | — | 24,385 | — | 24,385 | |||||||||||||||||||||
Wholesale real estate loans | 6,839 | — | 6,839 | 7,702 | — | — | 7,702 | |||||||||||||||||||||
Loans held for investment, gross of allowance | 23,291 | 49,493 | 72,784 | 21,560 | 60,413 | 5 | 81,978 | |||||||||||||||||||||
Allowance for loan losses | (195 | ) | (30 | ) | (225) | (238 | ) | (36 | ) | — | (274) | |||||||||||||||||
Loans held for investment, net of allowance | 23,096 | 49,463 | 72,559 | 21,322 | 60,377 | 5 | 81,704 | |||||||||||||||||||||
Corporate loans | 11,924 | — | 11,924 | 10,710 | — | — | 10,710 | |||||||||||||||||||||
Residential real estate loans | 45 | 59 | 104 | 11 | 50 | — | 61 | |||||||||||||||||||||
Wholesale real estate loans | 1,172 | — | 1,172 | 1,773 | — | — | 1,773 | |||||||||||||||||||||
Loans held for sale | 13,141 | 59 | 13,200 | 12,494 | 50 | — | 12,544 | |||||||||||||||||||||
Corporate loans | 7,286 | — | 7,286 | 7,199 | — | 18 | 7,217 | |||||||||||||||||||||
Residential real estate loans | 1,885 | — | 1,885 | 966 | — | — | 966 | |||||||||||||||||||||
Wholesale real estate loans | 1,447 | — | 1,447 | 519 | — | — | 519 | |||||||||||||||||||||
Loans held at fair value | 10,618 | — | 10,618 | 8,684 | — | 18 | 8,702 | |||||||||||||||||||||
Total loans1 | 46,855 | 49,522 | 96,377 | |||||||||||||||||||||||||
Lending commitments2, 3 | 95,572 | 5,821 | 101,393 | |||||||||||||||||||||||||
Total loans and lending commitments2, 3 | $ | 142,427 | $ | 55,343 | $ | 197,770 | ||||||||||||||||||||||
Total loans2 | 42,500 | 60,427 | 23 | 102,950 | ||||||||||||||||||||||||
Lending commitments3,4 | 90,143 | 8,299 | — | 98,442 | ||||||||||||||||||||||||
Total loans and lending commitments2,3,4 | $ | 132,643 | $ | 68,726 | $ | 23 | $ | 201,392 | ||||||||||||||||||||
| 1. | Loans in the Investment Management business segment are entered into in conjunction with certain investment advisory activities. |
| 2. | Amounts exclude |
Lending commitments represent the notional amount of legally binding obligations to provide funding to clients for all lending transactions. Since commitments associated with these business activities may expire unused or may not be utilized to full capacity, they do not necessarily reflect the actual future cash funding requirements. |
For syndications led by us, the lending commitments accepted by the borrower but not yet closed are net of the amounts agreed to by counterparties that will participate in the syndication. For syndications that we participate in and do not lead, lending commitments accepted by the borrower but not yet closed include only the amount that we expect will be allocated from the lead, syndicate bank. Due to the nature of our obligations under the commitments, these amounts include certain commitments participated to third parties. |
Our credit exposure from our loans and lending commitments is measured in accordance with our internal risk management standards. Risk factors considered in determining the aggregate allowance for loan and commitment losses include the borrower’s financial strength, seniority of the loan, collateral type, volatility of collateral value, debt cushion,loan-to-value ratio, debt service ratio, covenants and counterparty type. Qualitative and environmental factors such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered.
At September 30, 2016March 31, 2017 and December 31, 2015,2016, the allowance for loan losses related to loans that were accounted for as held for investment was $287$297 million and $225$274 million, respectively,
and the allowance for commitment losses related to lending commitments that were accounted for as held for investment was $187$193 million and $185$190 million, respectively. The aggregate allowance for loan and commitment losses increased overduring the nine months ended September 30, 2016current quarter primarily due to specific reserves on exposuresupdates to counterpartiesmodel parameters used in determining the energy sector and other select downgrades.inherent allowance. See “Institutional Securities Lending Exposures Related to the Energy Industry” herein and Note 7 to the consolidated financial statements in Item 1 for further information.
Institutional Securities Lending Activities.In connection with certain of our Institutional Securities business segment activities, we provide loans and lending commitments to a diverse group of corporate and other institutional clients. These activities include originating and purchasing corporate lending,loans, commercial and residential mortgage lending, asset-backed lending, corporate loans purchased in the secondary market, financing extended to equities and commodities customers, and loans to municipalities. These loans and lending commitments may have varying terms; may be senior or subordinated; may be secured or unsecured; are generally contingent upon representations, warranties and contractual conditions applicable to the borrower; and may be syndicated, traded or hedged by us.
We also participate in securitization activities whereby we extend short-term or long-term funding to clients through loans and lending commitments that are secured by the assets of the borrower and generally provide for over-collateralization, including commercial real estate loans, loans secured by loan pools, commercial company loans, and secured lines of revolving credit. Credit risk with respect to these loans and lending commitments arises from the failure of a borrower to perform according to the terms of the loan agreement or a decline in the underlying collateral value. See Note 12 to the consolidated financial statements for information about our securitization activities. In addition, a collateral management group monitors collateral levels against requirements and oversees the administration of the collateral function. See Note 6 to the consolidated financial statements for additional information about our collateralized transactions.
Institutional Securities loans and lending commitments are mainly related to relationship-based and event-driven lending to select corporate clients. Relationship-based loans and lending commitments are used for general corporate purposes, working capital and liquidity purposes by our Investment Bankinginvestment banking clients and typically consist of revolving lines of credit, letter of credit facilities and term loans. In connection with the relationship-based lending activities, we had hedges (which included single-name, sector and index hedges) with a notional amount of $18.0$14.4 billion and $12.0$20.2 billion at September 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. Event-driven loans and lending commitments are associated with a particular event or transaction, such as to support client merger, acquisition, recapitalization and project finance activities. Event-driven loans and lending commitments typically consist of revolving lines of credit, term loans and bridge loans.
| Risk Disclosures | |
project finance activities. Event-driven loans and lending commitments typically consist of revolving lines of credit, term loans and bridge loans.
Institutional Securities Loans and Lending Commitments by Credit Rating1
| At September 30, 2016 | At March 31, 2017 | |||||||||||||||||||||||||||||||||||||||
| Years to Maturity | Years to Maturity | |||||||||||||||||||||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | Total | Less than 1 | 1-3 | 3-5 | Over 5 | Total | ||||||||||||||||||||||||||||||
AAA | $ | 50 | $ | — | $ | 50 | $ | — | $ | 100 | $ | — | $ | 165 | $ | — | $ | — | $ | 165 | ||||||||||||||||||||
AA | 4,028 | 710 | 4,332 | — | 9,070 | 3,810 | 325 | 3,792 | 106 | 8,033 | ||||||||||||||||||||||||||||||
A | 2,276 | 5,825 | 11,959 | 1,097 | 21,157 | 3,812 | 6,296 | 12,979 | 1,096 | 24,183 | ||||||||||||||||||||||||||||||
BBB | 10,626 | 13,671 | 22,532 | 1,722 | 48,551 | 6,350 | 14,913 | 20,318 | 1,289 | 42,870 | ||||||||||||||||||||||||||||||
Investment grade | 16,980 | 20,206 | 38,873 | 2,819 | 78,878 | 13,972 | 21,699 | 37,089 | 2,491 | 75,251 | ||||||||||||||||||||||||||||||
Non-investment grade | 7,207 | 19,437 | 17,488 | 2,981 | 47,113 | 7,680 | 21,329 | 19,913 | 5,278 | 54,200 | ||||||||||||||||||||||||||||||
Unrated2 | 1,084 | 337 | 129 | 1,917 | 3,467 | 520 | 60 | 124 | 1,157 | 1,861 | ||||||||||||||||||||||||||||||
Total | $ | 25,271 | $ | 39,980 | $ | 56,490 | $ | 7,717 | $ | 129,458 | $ | 22,172 | $ | 43,088 | $ | 57,126 | $ | 8,926 | $ | 131,312 | ||||||||||||||||||||
| At December 31, 2015 | At December 31, 2016 | |||||||||||||||||||||||||||||||||||||||
| Years to Maturity | Years to Maturity | |||||||||||||||||||||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | Total | Less than 1 | 1-3 | 3-5 | Over 5 | Total | ||||||||||||||||||||||||||||||
AAA | $ | 287 | $ | 24 | $ | 50 | $ | — | $ | 361 | $ | 50 | $ | 105 | $ | 50 | $ | — | $ | 205 | ||||||||||||||||||||
AA | 5,022 | 2,553 | 3,735 | 63 | 11,373 | 3,724 | 451 | 4,027 | — | 8,202 | ||||||||||||||||||||||||||||||
A | 3,996 | 5,726 | 11,993 | 1,222 | 22,937 | 2,229 | 5,385 | 12,526 | 944 | 21,084 | ||||||||||||||||||||||||||||||
BBB | 5,089 | 16,720 | 23,248 | 4,086 | 49,143 | 7,970 | 15,479 | 20,916 | 2,015 | 46,380 | ||||||||||||||||||||||||||||||
Investment grade | 14,394 | 25,023 | 39,026 | 5,371 | 83,814 | 13,973 | 21,420 | 37,519 | 2,959 | 75,871 | ||||||||||||||||||||||||||||||
Non-investment grade | 7,768 | 15,863 | 22,818 | 7,779 | 54,228 | 7,506 | 21,048 | 19,896 | 5,722 | 54,172 | ||||||||||||||||||||||||||||||
Unrated2 | 930 | 1,091 | 246 | 2,118 | 4,385 | 806 | 132 | 175 | 1,487 | 2,600 | ||||||||||||||||||||||||||||||
Total | $ | 23,092 | $ | 41,977 | $ | 62,090 | $ | 15,268 | $ | 142,427 | $ | 22,285 | $ | 42,600 | $ | 57,590 | $ | 10,168 | $ | 132,643 | ||||||||||||||||||||
| 1. | Obligor credit ratings are determined by the Credit Risk Management Department. |
| 2. | Unrated loans and lending commitments are primarily trading positions that are measured at fair value and risk managed as a component of Market Risk. For a further discussion of our Market Risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” |
At September 30, 2016 and December 31, 2015, the aggregate amount of investment grade loans was $16.6 billion and $15.8 billion, respectively, the aggregate amount of non-investment grade loans was $24.0 billion and $26.9 billion, respectively, and the aggregate amount of unrated loans was $3.3 billion and $4.2 billion, respectively.
Event-DrivenInstitutional Securities Loans and Lending Commitmentsby Credit Grade
| $ in billions | At September 30, 2016 | At December 31, 2015 | ||||||
Event-driven loans | $ | 4.4 | $ | 5.4 | ||||
Event-driven lending commitments | 11.0 | 17.8 | ||||||
Total | $ | 15.4 | $ | 23.2 | ||||
Event-driven loans and lending commitments to non- investment grade borrowers | $ | 7.9 | $ | 13.5 | ||||
Maturity Profile of Event-driven Loans and Lending Commitments
| $ in millions | At March 31, | At December 31, 2016 | ||||||
Investment grade | $ | 15,400 | $ | 15,303 | ||||
Non-investment grade | 25,395 | 24,714 | ||||||
Unrated | 1,796 | 2,483 | ||||||
Total1 | $ | 42,591 | $ | 42,500 | ||||
| At September 30, 2016 | At December 31, 2015 | |||||||
Less than 1 year | 43% | 24% | ||||||
1-3 years | 21% | 21% | ||||||
3-5 years | 23% | 24% | ||||||
Over 5 years | 13% | 31% | ||||||
At September 30,
| 1. | At March 31, 2017 and December 31, 2016, |
Event-Driven Loans and Lending Commitments
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Loans | $ | 6,392 | $ | 5,097 | ||||
Lending commitments | 12,542 | 16,252 | ||||||
Total | $ | 18,934 | $ | 21,349 | ||||
Loans and lending commitments to non-investment grade borrowers | $ | 13,876 | $ | 15,339 | ||||
Maturity Profile of Event-Driven Loans and Lending Commitments
| At March 31, 2017 | At December 31, 2016 | |||||||
Less than 1 year | 31% | 34% | ||||||
1-3 years | 18% | 14% | ||||||
3-5 years | 29% | 28% | ||||||
Over 5 years | 22% | 24% | ||||||
Institutional Securities Credit Exposure from Loans and Lending Commitments by Industry
| $ in millions | At September 30, 2016 | At December 31, 2015 | At March 31, 2017 | At December 31, 2016 | ||||||||||||
Industry1 | ||||||||||||||||
Real estate | $ | 18,935 | $ | 17,847 | $ | 21,952 | $ | 19,807 | ||||||||
Healthcare | 13,923 | 12,677 | ||||||||||||||
Energy | 13,036 | 15,921 | ||||||||||||||
Consumer discretionary | 12,494 | 12,098 | 11,825 | 12,059 | ||||||||||||
Industrials | 10,989 | 10,018 | 11,791 | 11,465 | ||||||||||||
Energy | 11,654 | 11,757 | ||||||||||||||
Funds, exchanges and other financial services2 | 10,517 | 11,481 | ||||||||||||||
Healthcare | 10,555 | 11,534 | ||||||||||||||
Utilities | 9,785 | 12,631 | 10,059 | 9,216 | ||||||||||||
Information technology | 9,168 | 8,602 | ||||||||||||||
Consumer staples | 7,895 | 8,597 | 7,515 | 7,329 | ||||||||||||
Information technology | 7,708 | 11,122 | ||||||||||||||
Funds, exchanges and other financial services2 | 7,278 | 11,649 | ||||||||||||||
Mortgage finance | 6,675 | 8,260 | ||||||||||||||
Materials | 6,449 | 6,440 | 6,879 | 7,630 | ||||||||||||
Telecommunications services | 3,879 | 4,403 | 5,568 | 6,156 | ||||||||||||
Mortgage finance | 5,085 | 6,296 | ||||||||||||||
Insurance | 3,711 | 4,682 | 3,899 | 4,190 | ||||||||||||
Consumer finance | 3,208 | 977 | 2,841 | 2,847 | ||||||||||||
Special purpose vehicles | 1,657 | 3,482 | ||||||||||||||
Other | 1,836 | 1,623 | 2,004 | 2,274 | ||||||||||||
Total | $ | 129,458 | $ | 142,427 | $ | 131,312 | $ | 132,643 | ||||||||
| 1. | Industry categories are based on the Global Industry Classification Standard®. |
| 2. | Includes mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses, and diversified financial services. |
Institutional Securities Lending Exposures Related to the Energy Industry. At September 30, 2016,March 31, 2017, Institutional Securities’ loans and lending commitments related to the energy industry were $13.0$11.7 billion, of which approximately 66%68% are accounted for as held for investment and 34%32% are accounted for as either held for sale or at fair value. Additionally, approximately 56%55% of the total energy industry loans and lending commitments were to investment grade counterparties.
At September 30, 2016,March 31, 2017, the energy industry portfolio included $1.6$1.1 billion in loans and $2.0$2.1 billion in lending commitments to Oil and Gas Exploration and Production (“E&P”) companies. The E&P lending commitments were primarily to investment grade counterparties. The E&P loans were tonon-investment grade counterparties, which are generally subject to periodic borrowing base reassessments based on the value of the underlying oil
| Risk Disclosures | |
the underlying oil and gas reserves pledged as collateral. In limited situations, we may extend the period related to borrowing base reassessments typically in conjunction with taking certain risk mitigating actions with the borrower. OverApproximately 53% of the nine months ended September 30, 2016, we increased the allowance for loan and commitment losses on held forE&P lending commitments were to investment energy exposures and incurred mark-to-market losses on fair value energy loans. See “Credit Risk—Lending Activities” herein for further information.grade counterparties. To the extent commodities prices, or oil prices, remain atquarter-end levels, or deteriorate further, we may incur additional lending losses.
At December 31, 2015, Institutional Securities’ loans and lending commitments related to the energy industry were $15.9 billion. Approximately 60% of these energy industry loans and lending commitments were to investment grade counterparties. At December 31, 2015, the energy industry portfolio included $1.7 billion in loans and $2.7 billion in lending commitments to E&P companies. The E&P loans were substantially all to non-investment grade counterparties which are subject to semi-annual borrowing base reassessments based on the value of the underlying oil and gas reserves pledged as collateral. The E&P lending commitments were primarily to investment grade counterparties.
Institutional Securities Margin Lending. In addition to the activities noted above, Institutional Securities provides margin lending, which allows the client to borrow against the value of qualifying securities. At September 30, 2016March 31, 2017 and December 31, 2015,2016, the amounts related to margin lending were $15.2$14.0 billion and $10.6$11.9 billion, respectively, which were classified within Customer and other receivables in the consolidated balance sheets.
Wealth Management Lending Activities. The principal Wealth Management lending activities include securities-based lending and residential real estate loans.
Securities-based lending provided to our retail clients is primarily conducted through our Portfolio Loan Account (“PLA”) and Liquidity Access Line (“LAL”) platforms, which had an outstanding loan balance of $29.1$30.1 billion and $24.9$29.7 billion at September 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. For more information about our securities-based lending and residential real estate loans, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities” in Part II, Item 7A of the 20152016 Form10-K.
For the current quarter, loans and lending commitments associated with the Wealth Management business segment lending activities increased by approximately 7.5%2%, mainly due to growth in LAL and residential real estate loans.
Wealth Management Lending Activities by Remaining
Contractual Maturity
| At September 30, 2016 | ||||||||||||||||||||
| Years to Maturity | ||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | Total | |||||||||||||||
Securities-based lending and other loans | $ | 30,410 | $ | 1,572 | $ | 1,149 | $ | 1,071 | $ | 34,202 | ||||||||||
Residential real estate loans | — | — | 43 | 23,565 | 23,608 | |||||||||||||||
Total | $ | 30,410 | $ | 1,572 | $ | 1,192 | $ | 24,636 | $ | 57,810 | ||||||||||
Lending commitments | 7,354 | 302 | 140 | 253 | 8,049 | |||||||||||||||
Total loans and lending commitments | $ | 37,764 | $ | 1,874 | $ | 1,332 | $ | 24,889 | $ | 65,859 | ||||||||||
| At December 31, 2015 | At March 31, 2017 | |||||||||||||||||||||||||||||||||||||||
| Years to Maturity | Years to Maturity | |||||||||||||||||||||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | Total | Less than 1 | 1-3 | 3-5 | Over 5 | Total | ||||||||||||||||||||||||||||||
Securities-based lending and other loans | $ | 25,975 | $ | 1,004 | $ | 889 | $ | 749 | $ | 28,617 | $ | 30,654 | $ | 3,182 | $ | 1,481 | $ | 1,261 | $ | 36,578 | ||||||||||||||||||||
Residential real estate loans | — | — | 35 | 20,870 | 20,905 | — | 3 | 43 | 25,012 | 25,058 | ||||||||||||||||||||||||||||||
Total | $ | 25,975 | $ | 1,004 | $ | 924 | $ | 21,619 | $ | 49,522 | $ | 30,654 | $ | 3,185 | $ | 1,524 | $ | 26,273 | $ | 61,636 | ||||||||||||||||||||
Lending commitments | 5,143 | 286 | 115 | 277 | 5,821 | 6,319 | 1,837 | 248 | 255 | 8,659 | ||||||||||||||||||||||||||||||
Total loans and lending commitments | $ | 31,118 | $ | 1,290 | $ | 1,039 | $ | 21,896 | $ | 55,343 | $ | 36,973 | $ | 5,022 | $ | 1,772 | $ | 26,528 | $ | 70,295 | ||||||||||||||||||||
| At December 31, 2016 | ||||||||||||||||||||
| Years to Maturity | ||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | Total | |||||||||||||||
Securities-based lending and other loans | $ | 30,547 | $ | 2,983 | $ | 1,304 | $ | 1,179 | $ | 36,013 | ||||||||||
Residential real estate loans | — | — | 45 | 24,369 | 24,414 | |||||||||||||||
Total | $ | 30,547 | $ | 2,983 | $ | 1,349 | $ | 25,548 | $ | 60,427 | ||||||||||
Lending commitments | 6,372 | 1,413 | 268 | 246 | 8,299 | |||||||||||||||
Total loans and lending commitments | $ | 36,919 | $ | 4,396 | $ | 1,617 | $ | 25,794 | $ | 68,726 | ||||||||||
At September 30, 2016March 31, 2017 and December 31, 2015,2016, approximately 99.9% of the Wealth Management business segment loans held for investment were current, while approximately 0.1% were on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt.
The Wealth Management business segment also provides margin lending to clients and had an outstanding balance of $12.8$12.2 billion and $14.7$12.5 billion at September 30, 2016March 31, 2017 and December 31, 2015,2016, respectively, which were classified within Customer and other receivables in the consolidated balance sheets.
In addition, the Wealth Management business segment has employee loans, net of allowance of $4.3 billion and $4.7 billion at March 31, 2017 and December 31, 2016, respectively, that are granted primarily in conjunction with programs established by us to retain and recruit certain employees. These loans are recorded in Customer and other receivables in the consolidated balance sheets. These loans are full recourse, generally require periodic payments and have repayment terms ranging from 1 to 1220 years. We establish an allowance for loan amounts we do not consider recoverable, whichand the related provision is recorded in Compensation and benefits expense.
Credit Exposure—Derivatives
We incur credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the failure of a counterparty to perform according to the terms of
|
the contract. In connection with our OTC derivative activities, we generally enter into master netting agreements and collateral arrangements with counterparties. These agreements provide us with the ability to demand collateral, as well as to liquidate collateral and offset receivables and payables covered under the same master netting agreement in the event of counterparty default. We manage our trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products (e.g., futures,
| March 2017 Form 10-Q | 34 |
| Risk Disclosures | |
forwards, swaps and options). For credit exposure information on our OTC derivative products, see Note 4 to the consolidated financial statements in Item 1.statements. For a discussion of our credit exposure to derivative contracts, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Credit Exposure—Derivatives” in Part II, Item 7A of the 20152016 Form10-K.
Credit Derivative Portfolio by Counterparty Type
| At September 30, 2016 | At March 31, 2017 | |||||||||||||||||||||||||||||||||||||||
| Fair Values1 | Notionals | Fair Values1 | Notionals | |||||||||||||||||||||||||||||||||||||
| $ in millions | Receivable | Payable | Net | Protection Purchased | Protection Sold | Receivable | Payable | Net | Protection Purchased | Protection Sold | ||||||||||||||||||||||||||||||
Banks and securities firms | $ | 10,396 | $ | 11,385 | $ | (989 | ) | $ | 394,746 | $ | 352,822 | $ | 6,941 | $ | 7,984 | $ | (1,043 | ) | $ | 306,511 | $ | 258,655 | ||||||||||||||||||
Insurance and other financial institutions | 4,247 | 4,663 | (416 | ) | 167,281 | 169,592 | 3,328 | 3,686 | (358 | ) | 155,666 | 158,974 | ||||||||||||||||||||||||||||
Non-financial entities | 81 | 116 | (35 | ) | 5,563 | 3,730 | 38 | 115 | (77 | ) | 3,249 | 1,684 | ||||||||||||||||||||||||||||
Total | $ | 14,724 | $ | 16,164 | $ | (1,440 | ) | $ | 567,590 | $ | 526,144 | $ | 10,307 | $ | 11,785 | $ | (1,478 | ) | $ | 465,426 | $ | 419,313 | ||||||||||||||||||
| At December 31, 2015 | At December 31, 2016 | |||||||||||||||||||||||||||||||||||||||
| Fair Values1 | Notionals | Fair Values1 | Notionals | |||||||||||||||||||||||||||||||||||||
| $ in millions | Receivable | Payable | Net | Protection Purchased | Protection Sold | Receivable | Payable | Net | Protection Purchased | Protection Sold | ||||||||||||||||||||||||||||||
Banks and securities firms | $ | 16,962 | $ | 17,295 | $ | (333 | ) | $ | 533,557 | $ | 491,267 | $ | 8,516 | $ | 9,397 | $ | (881 | ) | $ | 319,830 | $ | 273,462 | ||||||||||||||||||
Insurance and other financial institutions | 5,842 | 6,247 | (405 | ) | 189,439 | 194,723 | 3,619 | 3,901 | (282 | ) | 144,527 | 151,999 | ||||||||||||||||||||||||||||
Non-financial entities | 115 | 123 | (8 | ) | 5,932 | 3,529 | 94 | 127 | (33 | ) | 5,832 | 4,269 | ||||||||||||||||||||||||||||
Total | $ | 22,919 | $ | 23,665 | $ | (746 | ) | $ | 728,928 | $ | 689,519 | $ | 12,229 | $ | 13,425 | $ | (1,196 | ) | $ | 470,189 | $ | 429,730 | ||||||||||||||||||
| 1. | Our |
The fair values shown in the previous table are before the application of contractual netting or collateral. For additional credit exposure information on our credit derivative portfolio, see Note 4 to the consolidated financial statements in Item 1.statements.
OTC Derivative Products at Fair Value, Net of Collateral, by Industry
| $ in millions | At September 30, 2016 | At December 31, 2015 | At March 31, 2017 | At December 31, 20161 | ||||||||||||
Industry1 | ||||||||||||||||
Industry2 | ||||||||||||||||
Utilities | $ | 4,456 | $ | 3,428 | $ | 4,250 | $ | 4,184 | ||||||||
Banks and securities firms | 2,897 | 1,672 | ||||||||||||||
Funds, exchanges and other financial services2 | 2,582 | 2,029 | ||||||||||||||
Funds, exchanges and other financial services3 | 1,494 | 2,756 | ||||||||||||||
Industrials | 1,670 | 2,304 | 1,493 | 1,644 | ||||||||||||
Regional governments | 1,477 | 1,163 | 1,237 | 1,352 | ||||||||||||
Sovereign governments | 1,037 | 709 | ||||||||||||||
Healthcare | 1,335 | 1,041 | 963 | 1,103 | ||||||||||||
Sovereign governments | 780 | 524 | ||||||||||||||
Banks and securities firms | 853 | 1,485 | ||||||||||||||
Not-for-profit organizations | 622 | 794 | 740 | 830 | ||||||||||||
Insurance | 522 | 570 | ||||||||||||||
Special purpose vehicles | 523 | 718 | 516 | 821 | ||||||||||||
Consumer discretionary | 514 | 725 | 479 | 590 | ||||||||||||
Insurance | 495 | 380 | ||||||||||||||
Hedge funds | 331 | 233 | ||||||||||||||
Energy | 487 | 396 | 325 | 533 | ||||||||||||
Information technology | 324 | 267 | ||||||||||||||
Consumer staples | 412 | 506 | 302 | 567 | ||||||||||||
Materials | 407 | 473 | 220 | 235 | ||||||||||||
Information technology | 392 | 294 | ||||||||||||||
Other | 360 | 177 | 280 | 256 | ||||||||||||
Total3 | $ | 19,409 | $ | 16,624 | ||||||||||||
Total4 | $ | 15,366 | $ | 18,135 | ||||||||||||
| 1. | The amounts included in the December 31, 2016 industry categories have been revised due to previous misclassifications. The total remains unchanged. |
| 2. | Industry categories are based on the Global Industry Classification Standard®. |
Amounts include mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses, and diversified financial services. |
For further information on derivative instruments and hedging activities, see Note 4 to the consolidated financial |
Other
In addition to the activities noted above, there are other credit risks managed by the Credit Risk Management Department and various business areas within the Institutional Securities business segment. We participate in securitization activities whereby we extend short-term or long-term funding to clients through loans and lending commitments that are secured by the assets of the borrower and generally provide for over-collateralization, including commercial real estate loans, loans secured by loan pools, commercial company loans, and secured lines of revolving credit. Credit risk with respect to these loans and lending commitments arises from the failure of a borrower to perform according to the terms of the loan agreement or a decline in the underlying collateral value. See Note 12 to the consolidated financial statements in Item 1 for information about our securitization activities. In addition, a collateral management group monitors collateral levels against requirements and oversees the administration of the
| Risk Disclosures | |
collateral function. See Note 6 to the consolidated financial statements in Item 1 for additional information about our collateralized transactions.
Country Risk Exposure
Country risk exposure is the risk that events in, or that affect, a foreign country (any country other than the U.S.) might adversely affect us. We actively manage country risk exposure through a comprehensive risk management framework that combines credit and market fundamentals and allows us to effectively identify, monitor and limit country risk. Country risk exposure before and after hedging is monitored and managed. For a further discussion of our country risk exposure see, “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Country Risk Exposure” in Part II, Item 7A of the 20152016 Form10-K.
Our sovereign exposures consist of financial instruments entered into with sovereign and local governments. Ournon-sovereign exposures consist of exposures to primarily corporations and financial institutions. The following table shows our 10 largestnon-U.S. country risk net exposures at September 30, 2016.March 31, 2017. Index credit derivatives are included in the country risk exposure table. Each reference entity within an index is allocated to that reference entity’s country of risk. Index exposures are allocated to the underlying reference entities in proportion to the notional weighting of each reference entity in the index, adjusted for any fair value receivable/payable for that reference entity. Where credit risk crosses multiple jurisdictions, for example, a CDS purchased from an issuer in a specific country that references bonds issued by an entity in a different country, the fair value of the CDS is reflected in the Net Counterparty Exposure column based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable/payable is reflected in the Net Inventory column based on the country of the underlying reference entity.
| Risk Disclosures | |
Top Ten Country Exposures at September 30, 2016March 31, 2017
| $ in millions | Net Inventory1 | Net Counterparty Exposure2,3 | Loans | Lending Commitments | Exposure Before Hedges | Hedges4 | Net Exposure5 | Net Inventory1 | Net Counterparty Exposure2,3 | Loans | Lending Commitments | Exposure Before Hedges | Hedges4 | Net Exposure5 | ||||||||||||||||||||||||||||||||||||||||||
Country | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
United Kingdom: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereigns | $ | 409 | $ | 33 | $ | — | $ — | $ | 442 | $ | (255 | ) | $ | 187 | ||||||||||||||||||||||||||||||||||||||||||
Non-sovereigns | 499 | 9,395 | 2,535 | 4,825 | 17,254 | (2,001 | ) | 15,253 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 908 | $ | 9,428 | $ | 2,535 | $ | 4,825 | $ | 17,696 | $ | (2,256 | ) | $ | 15,440 | |||||||||||||||||||||||||||||||||||||||||
Germany: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereigns | $ | 479 | $ | 28 | $ | — | $ — | $ | 507 | $ | (256 | ) | $ | 251 | $ | 1,515 | $ | 787 | $ | — | $ | — | $ | 2,302 | $ | (871 | ) | $ | 1,431 | |||||||||||||||||||||||||||
Non-sovereigns | 824 | 10,780 | 2,476 | 5,751 | 19,831 | (2,126 | ) | 17,705 | 161 | 1,213 | 296 | 3,154 | 4,824 | (1,513 | ) | 3,311 | ||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,303 | $ | 10,808 | $ | 2,476 | $ | 5,751 | $ | 20,338 | $ | (2,382 | ) | $ | 17,956 | $ | 1,676 | $ | 2,000 | $ | 296 | $ | 3,154 | $ | 7,126 | $ | (2,384 | ) | $ | 4,742 | ||||||||||||||||||||||||||
Brazil: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereigns | $ | 4,861 | $ | — | $ | — | $ | — | $ | 4,861 | $ | (11 | ) | $ | 4,850 | $ | 3,197 | $ | — | $ | — | $ | — | $ | 3,197 | $ | (12 | ) | $ | 3,185 | ||||||||||||||||||||||||||
Non-sovereigns | 70 | 370 | 981 | 35 | 1,456 | (802 | ) | 654 | 115 | 408 | 947 | 74 | 1,544 | (648 | ) | 896 | ||||||||||||||||||||||||||||||||||||||||
Total | $ | 4,931 | $ | 370 | $ | 981 | $ | 35 | $ | 6,317 | $ | (813 | ) | $ | 5,504 | $ | 3,312 | $ | 408 | $ | 947 | $ | 74 | $ | 4,741 | $ | (660 | ) | $ | 4,081 | ||||||||||||||||||||||||||
Japan: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereigns | $ | 1,356 | $ | 92 | $ | — | $ | — | $ | 1,448 | $ | (82 | ) | $ | 1,366 | $ | (1,811 | ) | $ | 1,651 | $ | — | $ | — | $ | (160 | ) | $ | (82 | ) | $ | (242 | ) | |||||||||||||||||||||||
Non-sovereigns | 659 | 2,442 | 370 | — | 3,471 | (150 | ) | 3,321 | 618 | 2,788 | 261 | — | 3,667 | (146 | ) | 3,521 | ||||||||||||||||||||||||||||||||||||||||
Total | $ | 2,015 | $ | 2,534 | $ | 370 | $ | — | $ | 4,919 | $ | (232 | ) | $ | 4,687 | $ | (1,193 | ) | $ | 4,439 | $ | 261 | $ | — | $ | 3,507 | $ | (228 | ) | $ | 3,279 | |||||||||||||||||||||||||
France: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereigns | $ | 1,593 | $ | — | $ | — | $ | — | $ | 1,593 | $ | — | $ | 1,593 | $ | (1,327 | ) | $ | 5 | $ | — | $ | — | $ | (1,322 | ) | $ | (50 | ) | $ | (1,372 | ) | ||||||||||||||||||||||||
Non-sovereigns | (51 | ) | 1,890 | 179 | 2,343 | 4,361 | (1,369 | ) | 2,992 | (573 | ) | 3,132 | 160 | 3,034 | 5,753 | (1,395 | ) | 4,358 | ||||||||||||||||||||||||||||||||||||||
Total | $ | 1,542 | $ | 1,890 | $ | 179 | $ | 2,343 | $ | 5,954 | $ | (1,369 | ) | $ | 4,585 | $ | (1,900 | ) | $ | 3,137 | $ | 160 | $ | 3,034 | $ | 4,431 | $ | (1,445 | ) | $ | 2,986 | |||||||||||||||||||||||||
Italy: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Canada: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereigns | $ | 1,616 | $ | (12 | ) | $ | — | $ | — | $ | 1,604 | $ | — | $ | 1,604 | $ | (100 | ) | $ | 66 | $ | — | $ | — | $ | (34 | ) | $ | — | $ | (34 | ) | ||||||||||||||||||||||||
Non-sovereigns | 159 | 491 | — | 783 | 1,433 | (259 | ) | 1,174 | 196 | 1,419 | 176 | 1,455 | 3,246 | (318 | ) | 2,928 | ||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,775 | $ | 479 | $ | — | $ | 783 | $ | 3,037 | $ | (259 | ) | $ | 2,778 | $ | 96 | $ | 1,485 | $ | 176 | $ | 1,455 | $ | 3,212 | $ | (318 | ) | $ | 2,894 | ||||||||||||||||||||||||||
Canada: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
China: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereigns | $ | (22 | ) | $ | 306 | $ | — | $ | — | $ | 284 | $ | (400 | ) | $ | (116 | ) | |||||||||||||||||||||||||||||||||||||||
Non-sovereigns | 1,057 | 134 | 829 | 257 | 2,277 | (9 | ) | 2,268 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,035 | $ | 440 | $ | 829 | $ | 257 | $ | 2,561 | $ | (409 | ) | $ | 2,152 | |||||||||||||||||||||||||||||||||||||||||
Singapore: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereigns | $ | 1,455 | $ | 119 | $ | — | $ | — | $ | 1,574 | $ | — | $ | 1,574 | ||||||||||||||||||||||||||||||||||||||||||
Non-sovereigns | 127 | 267 | 37 | 37 | 468 | — | 468 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,582 | $ | 386 | $ | 37 | $ | 37 | $ | 2,042 | $ | — | $ | 2,042 | ||||||||||||||||||||||||||||||||||||||||||
Australia: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereigns | $ | 143 | $ | 37 | $ | — | $ | — | $ | 180 | $ | — | $ | 180 | $ | 252 | $ | 15 | $ | — | $ | — | $ | 267 | $ | — | $ | 267 | ||||||||||||||||||||||||||||
Non-sovereigns | (18 | ) | 931 | 187 | 1,517 | 2,617 | (345 | ) | 2,272 | 371 | 365 | 88 | 919 | 1,743 | (151 | ) | 1,592 | |||||||||||||||||||||||||||||||||||||||
Total | $ | 125 | $ | 968 | $ | 187 | $ | 1,517 | $ | 2,797 | $ | (345 | ) | $ | 2,452 | $ | 623 | $ | 380 | $ | 88 | $ | 919 | $ | 2,010 | $ | (151 | ) | $ | 1,859 | ||||||||||||||||||||||||||
Netherlands: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereigns | $ | 4 | $ | — | $ | — | $ | — | $ | 4 | $ | (20 | ) | $ | (16 | ) | $ | (139 | ) | $ | — | $ | — | $ | — | $ | (139 | ) | $ | (20 | ) | $ | (159 | ) | ||||||||||||||||||||||
Non-sovereigns | 442 | 719 | 458 | 1,091 | 2,710 | (371 | ) | 2,339 | 161 | 532 | 333 | 1,303 | 2,329 | (325 | ) | 2,004 | ||||||||||||||||||||||||||||||||||||||||
Total | $ | 446 | $ | 719 | $ | 458 | $ | 1,091 | $ | 2,714 | $ | (391 | ) | $ | 2,323 | $ | 22 | $ | 532 | $ | 333 | $ | 1,303 | $ | 2,190 | $ | (345 | ) | $ | 1,845 | ||||||||||||||||||||||||||
Germany: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereigns | $ | (368 | ) | $ | 325 | $ | — | $ | — | $ | (43 | ) | $ | (1,237 | ) | $ | (1,280 | ) | ||||||||||||||||||||||||||||||||||||||
Non-sovereigns | 76 | 1,334 | 279 | 3,565 | 5,254 | (1,760 | ) | 3,494 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | (292 | ) | $ | 1,659 | $ | 279 | $ | 3,565 | $ | 5,211 | $ | (2,997 | ) | $ | 2,214 | ||||||||||||||||||||||||||||||||||||||||
Singapore: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereigns | $ | 1,651 | $ | 157 | $ | — | $ | — | $ | 1,808 | $ | — | $ | 1,808 | ||||||||||||||||||||||||||||||||||||||||||
Non-sovereigns | 58 | 232 | 39 | 30 | 359 | — | 359 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,709 | $ | 389 | $ | 39 | $ | 30 | $ | 2,167 | $ | — | $ | 2,167 | ||||||||||||||||||||||||||||||||||||||||||
China: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereigns | $ | 189 | $ | 347 | $ | — | $ | — | $ | 536 | $ | (651 | ) | $ | (115 | ) | ||||||||||||||||||||||||||||||||||||||||
Non-sovereigns | 921 | 181 | 872 | 257 | 2,231 | (10 | ) | 2,221 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,110 | $ | 528 | $ | 872 | $ | 257 | $ | 2,767 | $ | (661 | ) | $ | 2,106 | |||||||||||||||||||||||||||||||||||||||||
| 1. | Net inventory represents exposure to both long and short single-name and index positions (i.e., bonds and equities at fair value and CDS based on a notional amount assuming zero recovery adjusted for any fair value receivable or payable). As a market maker, we may transact in these CDS positions to facilitate client trading. At |
| 2. | Net counterparty exposure (i.e., repurchase transactions, securities lending and OTC derivatives) takes into consideration legally enforceable master netting agreements and collateral. |
| 3. | At |
| 4. | Amounts represent CDS hedges (purchased and sold) on net counterparty exposure and lending executed by trading desks responsible for hedging counterparty and lending credit risk exposures for us. Amounts are based on the CDS notional amount assuming zero recovery adjusted for any fair value receivable or payable. |
| 5. | In addition, at |
| Risk Disclosures | |
Country Risk ExposureExposures Related to the United Kingdom. At September 30, 2016,March 31, 2017, our country risk exposures in the U.K. included net exposures of $17,956$15,440 million (shown in the previous table) and overnight deposits of $3,368$3,602 million. The $17,705$15,253 million (shown in the previous table) of exposures tonon-sovereigns were diversified across both names and sectors. Of this exposure, $15,201$13,487 million is to investment grade counterparties, with the largest single component ($4,7025,185 million) to exchanges and clearing houses.clearinghouses.
Country Risk ExposureExposures Related to Brazil.At September 30, 2016,March 31, 2017, our country risk exposures in Brazil included net exposures of $5,504$4,081 million (shown in the previous table). Our sovereign net exposures in Brazil were principally in the form of local currency government bonds held onshore to support client activity. The $654$896 million (shown in the previous table) of exposures tonon-sovereigns were diversified across both names and sectors.
Country Risk Exposure Related to China. At September 30, 2016, our country risk exposures in China included net exposures of $2,106 million (shown in the previous table) and overnight deposits with international banks of $303 million. The $2,221 million (shown in the previous table) of exposures to non-sovereigns were diversified across both names and sectors and were primarily concentrated in high-quality positions with negligible direct exposure to onshore equities.
Operational Risk
Operational risk refers to the risk of loss, or of damage to our reputation, resulting from inadequate or failed processes people andor systems, human factors or from external events (e.g., fraud, theft, legal and compliance risks, cyber attacks or damage to physical assets). We may incur operational risk across the full scope of our business activities, including revenue-generating activities (e.g., sales and trading) and support and control groups (e.g., information technology and trade processing). On March 4, 2016, the Basel Committee on Banking Supervision updated its proposal for calculating operational risk regulatory capital. Under the proposal, which would eliminate the use of an internal model-based approach, required levels
of operational risk regulatory capital would generally be determined under a standardized approach based primarily on a financial statement-based measure of operational risk exposure and adjustments based on the particular institution’s historic operational loss record. We are evaluating the potential impact of the proposal, which is subject to public comment and further rulemaking procedures. For a further discussion about our operational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Operational Risk” in Part II, Item 7A of the 20152016 Form10-K.
Model Risk
Model risk refers to the potential for adverse consequences from decisions based on incorrect or misused model outputs. Model risk can lead to financial loss, poor business and stra-
tegic decision making, or damage to the Firm’s reputation. The risk inherent in a model is a function of the materiality, complexity and uncertainty around inputs and assumptions. Model risk is generated from the use of models impacting financial statements, regulatory filings, capital adequacy assessments and the formulation of strategy. For a further discussion about our model risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Model Risk” in Part II, Item 7A of the 2016 Form10-K.
Liquidity and Funding Risk
Liquidity and funding risk refers to the risk that we will be unable to finance our operations due to a loss of access to the capital markets or difficulty in liquidating itsour assets. Liquidity and funding risk also encompasses our ability (or perceived ability) to meet our financial obligations without experiencing significant business disruption or reputational damage that may threaten our viability as a going concern. For a further discussion about our liquidity and funding risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Liquidity and Funding Risk” in Part II, Item 7A of the 20152016 Form10-K.
Legal and Compliance Risk
Legal and compliance risk includes the risk of legal or regulatory sanctions, material financial loss, including fines, penalties, judgments, damages and/or settlements, or loss to reputation that we may suffer as a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. This risk also includes contractual and commercial risk, such as the risk that a counterparty’s performance obligations will be unenforceable. It also includes compliance with anti-money laundering and terrorist financing rules and regulations. For a further discussion about our legal and compliance risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Legal and Compliance Risk” in Part II, Item 7A of the 20152016 Form10-K.
|
Item 4. Controls and Procedures
Under the supervision and with the participation of the Firm’s management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the Firm’s disclosure controls and procedures (as defined in Rule13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
No change in the Firm’s internal control over financial reporting (as defined in Rule13a-15(f) of the Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Morgan Stanley:
We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the “Firm”) as of March 31, 2017, and the related condensed consolidated income statements, comprehensive income statements, cash flow statements and statements of changes in total equity for the three-month periods ended March 31, 2017 and 2016. These interim condensed consolidated financial statements are the responsibility of the management of the Firm.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Firm as of December 31, 2016, and the consolidated income statement, comprehensive income statement, cash flow statement and statement of changes in total equity for the year then ended (not presented herein) included in the Firm’s Annual Report on Form10-K; and in our report dated February 27, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
New York, New York
May 4, 2017
| March 2017 Form 10-Q | 40 |
|
Consolidated Income Statements
(Unaudited)
| Three Months Ended March 31, | ||||||||
| in millions, except per share data | 2017 | 2016 | ||||||
Revenues | ||||||||
Investment banking | $ | 1,545 | $ | 1,107 | ||||
Trading | 3,235 | 2,065 | ||||||
Investments | 165 | (34 | ) | |||||
Commissions and fees | 1,033 | 1,055 | ||||||
Asset management, distribution and administration fees | 2,767 | 2,620 | ||||||
Other | 229 | 80 | ||||||
Totalnon-interest revenues | 8,974 | 6,893 | ||||||
Interest income | 1,965 | 1,747 | ||||||
Interest expense | 1,194 | 848 | ||||||
Net interest | 771 | 899 | ||||||
Net revenues | 9,745 | 7,792 | ||||||
Non-interest expenses | ||||||||
Compensation and benefits | 4,466 | 3,683 | ||||||
Occupancy and equipment | 327 | 329 | ||||||
Brokerage, clearing and exchange fees | 509 | 465 | ||||||
Information processing and communications | 428 | 442 | ||||||
Marketing and business development | 136 | 134 | ||||||
Professional services | 527 | 514 | ||||||
Other | 544 | 487 | ||||||
Totalnon-interest expenses | 6,937 | 6,054 | ||||||
Income from continuing operations before income taxes | 2,808 | 1,738 | ||||||
Provision for income taxes | 815 | 578 | ||||||
Income from continuing operations | 1,993 | 1,160 | ||||||
Income (loss) from discontinued operations, net of income taxes | (22 | ) | (3 | ) | ||||
Net income | $ | 1,971 | $ | 1,157 | ||||
Net income applicable to noncontrolling interests | 41 | 23 | ||||||
Net income applicable to Morgan Stanley | $ | 1,930 | $ | 1,134 | ||||
Preferred stock dividends and other | 90 | 79 | ||||||
Earnings applicable to Morgan Stanley common shareholders | $ | 1,840 | $ | 1,055 | ||||
Earnings per basic common share | ||||||||
Income from continuing operations | $ | 1.03 | $ | 0.56 | ||||
Income (loss) from discontinued operations | (0.01 | ) | — | |||||
Earnings per basic common share | $ | 1.02 | $ | 0.56 | ||||
Earnings per diluted common share | ||||||||
Income from continuing operations | $ | 1.01 | $ | 0.55 | ||||
Income (loss) from discontinued operations | (0.01 | ) | — | |||||
Earnings per diluted common share | $ | 1.00 | $ | 0.55 | ||||
Dividends declared per common share | $ | 0.20 | $ | 0.15 | ||||
Average common shares outstanding | ||||||||
Basic | 1,801 | 1,883 | ||||||
Diluted | 1,842 | 1,915 | ||||||
| See Notes to Consolidated Financial Statements | 41 | March 2017 Form 10-Q |
Consolidated Comprehensive Income Statements (Unaudited) | |
Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Net income | $ | 1,971 | $ | 1,157 | ||||
Other comprehensive income, net of tax: | ||||||||
Foreign currency translation adjustments | 150 | 186 | ||||||
Change in net unrealized gains on available-for-sale securities | 84 | 395 | ||||||
Pension, postretirement and other | — | 1 | ||||||
Change in net debt valuation adjustment | 9 | 203 | ||||||
Total other comprehensive income | $ | 243 | $ | 785 | ||||
Comprehensive income | $ | 2,214 | $ | 1,942 | ||||
Net income applicable to noncontrolling interests | 41 | 23 | ||||||
Other comprehensive income applicable to noncontrolling interests | 50 | 55 | ||||||
Comprehensive income applicable to Morgan Stanley | $ | 2,123 | $ | 1,864 | ||||
| March 2017 Form 10-Q | 42 | See Notes to Consolidated Financial Statements |
|
| (Unaudited) | ||||||||
| $ in millions, except share data | At March 31, 2017 | At December 31, 2016 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 22,081 | $ | 22,017 | ||||
Interest bearing deposits with banks | 20,773 | 21,364 | ||||||
Trading assets at fair value ($172,203and $152,548 were pledged to various parties) | 284,341 | 262,154 | ||||||
Investment securities (includes$61,166and $63,170 at fair value) | 81,139 | 80,092 | ||||||
Securities purchased under agreements to resell (includes$102 and $302 at fair value) | 104,823 | 101,955 | ||||||
Securities borrowed | 111,803 | 125,236 | ||||||
Customer and other receivables | 48,344 | 46,460 | ||||||
Loans:
| ||||||||
Held for investment (net of allowance of$297 and $274) | 83,302 | 81,704 | ||||||
Held for sale | 12,651 | 12,544 | ||||||
Goodwill | 6,588 | 6,577 | ||||||
Intangible assets (net of accumulated amortization of$2,498 and $2,421) | 2,644 | 2,721 | ||||||
Other assets | 53,902 | 52,125 | ||||||
Total assets | $ | 832,391 | $ | 814,949 | ||||
Liabilities | ||||||||
Deposits (includes$94 and $63 at fair value) | $ | 152,109 | $ | 155,863 | ||||
Short-term borrowings (includes$714 and $406 at fair value) | 1,122 | 941 | ||||||
Trading liabilities at fair value | 136,903 | 128,194 | ||||||
Securities sold under agreements to repurchase (includes$732 and $729 at fair value) | 56,525 | 54,628 | ||||||
Securities loaned | 18,934 | 15,844 | ||||||
Other secured financings (includes$4,802 and $5,041 at fair value) | 11,852 | 11,118 | ||||||
Customer and other payables | 189,544 | 190,513 | ||||||
Other liabilities and accrued expenses | 13,630 | 15,896 | ||||||
Long-term borrowings (includes$40,627 and $38,736 at fair value) | 172,688 | 164,775 | ||||||
Total liabilities | 753,307 | 737,772 | ||||||
Commitments and contingent liabilities (see Note 11) | ||||||||
Equity | ||||||||
Morgan Stanley shareholders’ equity: | ||||||||
Preferred stock | 8,520 | 7,520 | ||||||
Common stock, $0.01 par value: | ||||||||
Shares authorized:3,500,000,000; Shares issued:2,038,893,979; Shares outstanding:1,851,942,590 and 1,852,481,601 | 20 | 20 | ||||||
Additionalpaid-in capital | 22,880 | 23,271 | ||||||
Retained earnings | 55,109 | 53,679 | ||||||
Employee stock trusts | 3,037 | 2,851 | ||||||
Accumulated other comprehensive income (loss) | (2,450 | ) | (2,643 | ) | ||||
Common stock held in treasury at cost, $0.01 par value (186,951,389 and 186,412,378 shares) | (6,155 | ) | (5,797 | ) | ||||
Common stock issued to employee stock trusts | (3,037 | ) | (2,851 | ) | ||||
Total Morgan Stanley shareholders’ equity | 77,924 | 76,050 | ||||||
Noncontrolling interests | 1,160 | 1,127 | ||||||
Total equity | 79,084 | 77,177 | ||||||
Total liabilities and equity | $ | 832,391 | $ | 814,949 | ||||
| See Notes to Consolidated Financial Statements | 43 | March 2017 Form 10-Q |
Consolidated Statements of Changes in Total Equity (Unaudited) | |
| $ in millions | Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Employee Stock Trusts | Accumulated Other Comprehensive Income (Loss) | Common Stock Held in Treasury at Cost | Common Stock Issued to Employee Stock Trusts | Non- controlling Interests | Total Equity | ||||||||||||||||||||||||||||||
Balance at December 31, 2016 | $ | 7,520 | $ | 20 | $ | 23,271 | $ | 53,679 | $ | 2,851 | $ | (2,643 | ) | $ | (5,797 | ) | $ | (2,851 | ) | $ | 1,127 | $ | 77,177 | |||||||||||||||||
Cumulative adjustment for accounting changes1 | — | — | 45 | (35 | ) | — | — | — | — | — | 10 | |||||||||||||||||||||||||||||
Net income applicable to Morgan Stanley | — | — | — | 1,930 | — | — | — | — | — | 1,930 | ||||||||||||||||||||||||||||||
Net income applicable to noncontrolling interests | — | — | — | — | — | — | — | — | 41 | 41 | ||||||||||||||||||||||||||||||
Dividends | — | — | — | (465 | ) | — | — | — | — | — | (465 | ) | ||||||||||||||||||||||||||||
Shares issued under employee plans | — | — | (430 | ) | — | 186 | — | 803 | (186 | ) | — | 373 | ||||||||||||||||||||||||||||
Repurchases of common stock and employee tax withholdings | — | — | — | — | — | — | (1,161 | ) | — | — | (1,161 | ) | ||||||||||||||||||||||||||||
Net change in Accumulated other comprehensive income (loss) | — | — | — | — | — | 193 | — | — | 50 | 243 | ||||||||||||||||||||||||||||||
Issuance of preferred stock | 1,000 | — | (6 | ) | — | — | — | — | — | — | 994 | |||||||||||||||||||||||||||||
Other net decreases | — | — | — | — | — | — | — | — | (58 | ) | (58 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2017 | $ | 8,520 | $ | 20 | $ | 22,880 | $ | 55,109 | $ | 3,037 | $ | (2,450 | ) | $ | (6,155 | ) | $ | (3,037 | ) | $ | 1,160 | $ | 79,084 | |||||||||||||||||
Balance at December 31, 2015 | $ | 7,520 | $ | 20 | $ | 24,153 | $ | 49,204 | $ | 2,409 | $ | (1,656 | ) | $ | (4,059 | ) | $ | (2,409 | ) | $ | 1,002 | $ | 76,184 | |||||||||||||||||
Cumulative adjustment for accounting change related to DVA2 | — | — | — | 312 | — | (312 | ) | — | — | — | — | |||||||||||||||||||||||||||||
Net adjustment for accounting change related to consolidation3 | — | — | — | — | — | — | — | — | 106 | 106 | ||||||||||||||||||||||||||||||
Net income applicable to Morgan Stanley | — | — | — | 1,134 | — | — | — | — | — | 1,134 | ||||||||||||||||||||||||||||||
Net income applicable to noncontrolling interests | — | — | — | — | — | — | — | — | 23 | 23 | ||||||||||||||||||||||||||||||
Dividends | — | — | — | (378 | ) | — | — | — | — | — | (378 | ) | ||||||||||||||||||||||||||||
Shares issued under employee plans and related tax effects | — | — | (1,627 | ) | — | 452 | — | 1,945 | (452 | ) | — | 318 | ||||||||||||||||||||||||||||
Repurchases of common stock and employee tax withholdings | — | — | — | — | — | — | (976 | ) | — | — | (976 | ) | ||||||||||||||||||||||||||||
Net change in Accumulated other comprehensive income (loss) | — | — | — | — | — | 730 | — | — | 55 | 785 | ||||||||||||||||||||||||||||||
Other net decreases | — | — | — | — | — | — | — | — | (21 | ) | (21 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2016 | $ | 7,520 | $ | 20 | $ | 22,526 | $ | 50,272 | $ | 2,861 | $ | (1,238) | $ | (3,090) | $ | (2,861) | $ | 1,165 | $ | 77,175 | ||||||||||||||||||||
| 1. | The cumulative adjustment relates to the adoption of the following accounting updates on January 1, 2017: Improvements to Employee Share-Based Payment Accounting,for which the Firm recorded a cumulativecatch-up adjustment to reflect its election to account for forfeitures as they occur (see Note 2 for further information); andIntra-Entity Transfers of Assets Other Than Inventory, for which the Firm recorded a cumulativecatch-up adjustment to reflect the tax impact from an intercompany sale of assets. |
| 2. | Debt valuation adjustment (“DVA”) represents the change in the fair value resulting from fluctuations in the Firm’s credit spreads and other credit factors related to liabilities carried at fair value under the fair value option, primarily related to certain Long-term and Short-term borrowings. In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, a cumulativecatch-up adjustment was recorded as of January 1, 2016 to move the cumulative unrealized DVA amount, net of noncontrolling interests and tax, related to outstanding liabilities under the fair value option election from Retained earnings into Accumulated other comprehensive income (loss) (“AOCI”). See Note 2 to the consolidated financial statements in the 2016 Form10-K and Note 14 for further information. |
| 3. | In accordance with the accounting updateAmendments to the Consolidation Analysis, a net adjustment was recorded as of January 1, 2016 to both consolidate and deconsolidate certain entities under the new guidance. See Note 2 to the consolidated financial statements in the 2016 Form10-K for further information. |
| March 2017 Form 10-Q | 44 | See Notes to Consolidated Financial Statements |
Consolidated Cash Flow Statements (Unaudited) | |
Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 1,971 | $ | 1,157 | ||||
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | ||||||||
(Income) loss from equity method investments | (9 | ) | (15 | ) | ||||
Compensation payable in common stock and options | 269 | 217 | ||||||
Depreciation and amortization | 434 | 415 | ||||||
Net gain on sale of available-for-sale securities | (2 | ) | (12 | ) | ||||
Impairment charges | 5 | 8 | ||||||
Provision for credit losses on lending activities | 25 | 128 | ||||||
Other operating adjustments | (74 | ) | 93 | |||||
Changes in assets and liabilities: | ||||||||
Trading assets, net of Trading liabilities | (12,628 | ) | 5,814 | |||||
Securities borrowed | 13,433 | 2,003 | ||||||
Securities loaned | 3,090 | (2,218 | ) | |||||
Customer and other receivables and other assets | (3,735 | ) | 899 | |||||
Customer and other payables and other liabilities | (3,419 | ) | 2,192 | |||||
Securities purchased under agreements to resell | (2,868 | ) | (11,117 | ) | ||||
Securities sold under agreements to repurchase | 1,897 | 4,613 | ||||||
Net cash provided by (used for) operating activities | (1,611 | ) | 4,177 | |||||
Cash flows from investing activities | ||||||||
Proceeds from (payments for): | ||||||||
Other assets—Premises, equipment and software, net | (350 | ) | (315 | ) | ||||
Changes in loans, net | (1,105 | ) | (3,505 | ) | ||||
Investment securities: | ||||||||
Purchases | (6,449 | ) | (15,211 | ) | ||||
Proceeds from sales | 3,604 | 8,515 | ||||||
Proceeds from paydowns and maturities | 2,071 | 1,536 | ||||||
Other investing activities | 61 | (136 | ) | |||||
Net cash used for investing activities | (2,168 | ) | (9,116 | ) | ||||
Cash flows from financing activities | ||||||||
Net proceeds from (payments for): | ||||||||
Short-term borrowings | 181 | (1,064 | ) | |||||
Noncontrolling interests | (2 | ) | (5 | ) | ||||
Other secured financings | 199 | (329 | ) | |||||
Deposits | (3,754 | ) | 1,557 | |||||
Proceeds from: | ||||||||
Derivatives financing activities | 48 | — | ||||||
Issuance of preferred stock, net of issuance costs | 994 | — | ||||||
Issuance of long-term borrowings | 18,252 | 13,183 | ||||||
Payments for: | ||||||||
Long-term borrowings | (11,538 | ) | (7,961 | ) | ||||
Derivatives financing activities | — | (120 | ) | |||||
Repurchases of common stock and employee tax withholdings | (1,161 | ) | (976 | ) | ||||
Cash dividends | (511 | ) | (436 | ) | ||||
Other financing activities | 14 | — | ||||||
Net cash provided by financing activities | 2,722 | 3,849 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 530 | 645 | ||||||
Net decrease in cash and cash equivalents | (527 | ) | (445 | ) | ||||
Cash and cash equivalents, at beginning of period | 43,381 | 54,083 | ||||||
Cash and cash equivalents, at end of period | $ | 42,854 | $ | 53,638 | ||||
Cash and cash equivalents include: | ||||||||
Cash and due from banks | $ | 22,081 | $ | 22,797 | ||||
Interest bearing deposits with banks | 20,773 | 30,841 | ||||||
Cash and cash equivalents, at end of period | $ | 42,854 | $ | 53,638 | ||||
Supplemental Disclosure of Cash Flow Information
Cash payments for interest were$737 millionand $613 million.
Cash payments for income taxes, net of refunds, were$262 millionand $122 million.
| See Notes to Consolidated Financial Statements | 45 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
1. Introduction and Basis of Presentation
The Firm
Morgan Stanley, a financial holding company, 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” or the “Firm” mean Morgan Stanley (the “Parent Company”) together with its consolidated subsidiaries.
A description of the clients and principal products and services of each of the Firm’s 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 and market-making activities in equity and fixed income products, including prime brokerage services, global macro, credit and commodities products. Lending services include originating and/or purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending, financing extended to equities and commodities customers, and loans to municipalities. Other services include investment and research activities.
Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small tomedium-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 Managementprovides 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 andnon-affiliated distributors.
Basis of Financial Information
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require the Firm to make estimates and assumptions regarding the valuations of certain financial instruments, the valuation of goodwill and intangible assets, compensation, deferred tax assets, the outcome of legal and tax matters, allowance for credit losses and other matters that affect its consolidated financial statements and related disclosures. The Firm believes that the estimates utilized in the preparation of its consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior periods to conform to the current presentation.
The accompanying unaudited consolidated financial statements should be read in conjunction with the Firm’s consolidated financial statements and notes thereto included in the 2016 Form10-K. Certain footnote disclosures included in the 2016 Form10-K have been condensed or omitted from the consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The consolidated financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.
Consolidation
The consolidated financial statements include the accounts of the Firm, its wholly owned subsidiaries and other entities in which the Firm has a controlling financial interest, including certain variable interest entities (“VIE”) (see Note 12). For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income attributable to noncontrolling interests for such subsidiaries is presented as Net income applicable to noncontrolling interests in the consolidated income statements. The portion of shareholders’ equity that is attributable to noncontrolling interests for such subsidiaries is presented as noncontrolling interests, a component of total equity, in the consolidated balance sheets.
| March 2017 Form 10-Q | 46 |
Notes to Consolidated Financial Statements (Unaudited) | |
For a discussion of the Firm’s involvement with VIEs and its significant regulated U.S. and international subsidiaries, see Notes 1 and 2 to the consolidated financial statements in the 2016 Form10-K. See also Note 2 herein.
Consolidated Cash Flow Statements Presentation
The adoption of the accounting update,Amendments to the Consolidation Analysis on January 1, 2016 resulted in a net noncash increase in total assets of $126 million.
2. Significant Accounting Policies
For a detailed discussion about the Firm’s significant accounting policies, see Note 2 to the consolidated financial statements in the 2016 Form10-K.
During the quarter ended March 31, 2017 (“current quarter”), other than the following, there were no significant updates made to the Firm’s significant accounting policies.
Accounting Standards Adopted
The Firm adopted the following accounting update on January 1, 2017.
| • | Improvements to Employee Share-Based Payment Accounting. This accounting update simplifies the accounting for employee share-based payments, including the recognition of forfeitures, the classification of income tax consequences, and the classification within the consolidated cash flow statements. |
Beginning in 2017, the income tax consequences related to share-based payments are required to be recognized in Provision for income taxes in the consolidated income statements upon the conversion of employee share-based awards instead of additionalpaid-in capital. The impact of the income tax consequences upon conversion of the awards may be either a benefit or a provision. Conversion of employee share-based awards to Firm shares will primarily occur in the first quarter of each year. The impact of recognizing excess tax benefits upon conversion of awards in the current quarter was a $112 million benefit to Provision for income taxes. The classification of cash flows from excess tax benefits was moved from the financing section to the operating section of the consolidated cash flow statements, and was applied on a retrospective basis.
In addition, this accounting update permits an entity to elect whether to continue to estimate the total forfeitures, or to account for forfeitures on an actual basis as they occur. The Firm has elected to account for forfeitures on an actual basis as they occur. This change is required to be applied using a modified retrospective approach, and upon adoption, the Firm recorded a cumulativecatch-up adjustment, decreasing Retained earnings by approximately $30 million net of tax, increasing Additionalpaid-in capital by approximately $45 million and increasing deferred tax assets by approximately $15 million.
| 47 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
Fair Value Measurement
Assets and Liabilities Measured at Fair Value on a Recurring Basis
| $ in millions | Level 1 | Level 2 | Level 3 | Counterparty and Cash Collateral Netting | At March 31, 2017 | |||||||||||||||
Assets at Fair Value | ||||||||||||||||||||
Trading assets: | ||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||
U.S. Treasury securities | $ | 31,329 | $ | — | $ | — | $ | — | $ | 31,329 | ||||||||||
U.S. agency securities | 3,373 | 23,297 | 42 | — | 26,712 | |||||||||||||||
Total U.S. government and agency securities | 34,702 | 23,297 | 42 | — | 58,041 | |||||||||||||||
Other sovereign government obligations | 14,772 | 5,662 | 65 | — | 20,499 | |||||||||||||||
Corporate and other debt: | ||||||||||||||||||||
State and municipal securities | — | 2,280 | 55 | — | 2,335 | |||||||||||||||
Residential mortgage-, commercial mortgage- and asset-backed securities | — | 1,868 | 216 | — | 2,084 | |||||||||||||||
Corporate bonds | — | 14,633 | 445 | — | 15,078 | |||||||||||||||
Collateralized debt and loan obligations | — | 365 | 78 | — | 443 | |||||||||||||||
Loans and lending commitments1 | — | 3,819 | 4,479 | — | 8,298 | |||||||||||||||
Other debt | — | 1,282 | 194 | — | 1,476 | |||||||||||||||
Total corporate and other debt | — | 24,247 | 5,467 | — | 29,714 | |||||||||||||||
Corporate equities2 | 130,005 | 450 | 309 | — | 130,764 | |||||||||||||||
Securities received as collateral | 13,331 | 7 | 1 | — | 13,339 | |||||||||||||||
Derivative and other contracts: | ||||||||||||||||||||
Interest rate contracts | 711 | 265,488 | 3,141 | — | 269,340 | |||||||||||||||
Credit contracts | — | 9,947 | 360 | — | 10,307 | |||||||||||||||
Foreign exchange contracts | 114 | 54,516 | 1 | — | 54,631 | |||||||||||||||
Equity contracts | 1,182 | 39,335 | 1,933 | — | 42,450 | |||||||||||||||
Commodity and other contracts | 2,376 | 7,058 | 4,121 | — | 13,555 | |||||||||||||||
Netting3 | (3,583 | ) | (307,242 | ) | (1,967 | ) | (49,853 | ) | (362,645 | ) | ||||||||||
Total derivative and other contracts | 800 | 69,102 | 7,589 | (49,853 | ) | 27,638 | ||||||||||||||
Investments4 | 277 | 240 | 961 | — | 1,478 | |||||||||||||||
Physical commodities | — | 107 | — | — | 107 | |||||||||||||||
Total trading assets4 | 193,887 | 123,112 | 14,434 | (49,853 | ) | 281,580 | ||||||||||||||
Investment securities—AFS securities | 28,328 | 32,838 | — | — | 61,166 | |||||||||||||||
Securities purchased under agreements to resell | — | 102 | — | — | 102 | |||||||||||||||
Intangible assets | — | 3 | — | — | 3 | |||||||||||||||
Total assets measured at fair value5 | $ | 222,215 | $ | 156,055 | $ | 14,434 | $ | (49,853 | ) | $ | 342,851 | |||||||||
Liabilities at Fair Value | ||||||||||||||||||||
Deposits | $ | — | $ | 38 | $ | 56 | $ | — | $ | 94 | ||||||||||
Short-term borrowings | — | 714 | — | — | 714 | |||||||||||||||
Trading liabilities: | ||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||
U.S. Treasury securities | 16,213 | — | — | — | 16,213 | |||||||||||||||
U.S. agency securities | 568 | 202 | — | — | 770 | |||||||||||||||
Total U.S. government and agency securities | 16,781 | 202 | — | — | 16,983 | |||||||||||||||
Other sovereign government obligations | 26,974 | 3,072 | — | — | 30,046 | |||||||||||||||
Corporate and other debt: | ||||||||||||||||||||
Corporate bonds | — | 6,723 | 34 | — | 6,757 | |||||||||||||||
Other debt | — | 365 | 2 | — | 367 | |||||||||||||||
Total corporate and other debt | — | 7,088 | 36 | — | 7,124 | |||||||||||||||
Corporate equities2 | 35,852 | 130 | — | — | 35,982 | |||||||||||||||
Obligation to return securities received as collateral | 20,032 | 7 | 2 | — | 20,041 | |||||||||||||||
Derivative and other contracts: | ||||||||||||||||||||
Interest rate contracts | 729 | 244,166 | 2,843 | — | 247,738 | |||||||||||||||
Credit contracts | — | 11,074 | 711 | — | 11,785 | |||||||||||||||
Foreign exchange contracts | 28 | 56,898 | 72 | — | 56,998 | |||||||||||||||
Equity contracts | 903 | 42,913 | 1,716 | — | 45,532 | |||||||||||||||
Commodity and other contracts | 2,504 | 5,732 | 2,618 | — | 10,854 | |||||||||||||||
Netting3 | (3,583 | ) | (307,242 | ) | (1,967 | ) | (33,388 | ) | (346,180 | ) | ||||||||||
Total derivative and other contracts | 581 | 53,541 | 5,993 | (33,388 | ) | 26,727 | ||||||||||||||
Total trading liabilities | 100,220 | 64,040 | 6,031 | (33,388 | ) | 136,903 | ||||||||||||||
Securities sold under agreements to repurchase | — | 584 | 148 | — | 732 | |||||||||||||||
Other secured financings | — | 4,599 | 203 | — | 4,802 | |||||||||||||||
Long-term borrowings | 36 | 38,499 | 2,092 | — | 40,627 | |||||||||||||||
Total liabilities measured at fair value5 | $ | 100,256 | $ | 108,474 | $ | 8,530 | $ | (33,388 | ) | $ | 183,872 | |||||||||
| March 2017 Form 10-Q | 48 |
Notes to Consolidated Financial Statements (Unaudited) | |
| $ in millions | Level 1 | Level 2 | Level 3 | Counterparty and Cash Collateral Netting | At December 31, 2016 | |||||||||||||||
Assets at Fair Value | ||||||||||||||||||||
Trading assets: | ||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||
U.S. Treasury securities | $ | 25,457 | $ | — | $ | — | $ | — | $ | 25,457 | ||||||||||
U.S. agency securities | 2,122 | 20,392 | 74 | — | 22,588 | |||||||||||||||
Total U.S. government and agency securities | 27,579 | 20,392 | 74 | — | 48,045 | |||||||||||||||
Other sovereign government obligations | 14,005 | 5,497 | 6 | — | 19,508 | |||||||||||||||
Corporate and other debt: | ||||||||||||||||||||
State and municipal securities | — | 2,355 | 250 | — | 2,605 | |||||||||||||||
Residential mortgage-, commercial mortgage- and asset-backed securities | — | 1,691 | 217 | — | 1,908 | |||||||||||||||
Corporate bonds | — | 11,051 | 232 | — | 11,283 | |||||||||||||||
Collateralized debt and loan obligations | — | 602 | 63 | — | 665 | |||||||||||||||
Loans and lending commitments1 | — | 3,580 | 5,122 | — | 8,702 | |||||||||||||||
Other debt | — | 1,360 | 180 | — | 1,540 | |||||||||||||||
Total corporate and other debt | — | 20,639 | 6,064 | — | 26,703 | |||||||||||||||
Corporate equities2 | 117,857 | 333 | 445 | — | 118,635 | |||||||||||||||
Securities received as collateral | 13,717 | 19 | 1 | — | 13,737 | |||||||||||||||
Derivative and other contracts: | ||||||||||||||||||||
Interest rate contracts | 1,131 | 300,406 | 1,373 | — | 302,910 | |||||||||||||||
Credit contracts | — | 11,727 | 502 | — | 12,229 | |||||||||||||||
Foreign exchange contracts | 231 | 74,921 | 13 | — | 75,165 | |||||||||||||||
Equity contracts | 1,185 | 35,736 | 1,708 | — | 38,629 | |||||||||||||||
Commodity and other contracts | 2,808 | 6,734 | 3,977 | — | 13,519 | |||||||||||||||
Netting3 | (4,378 | ) | (353,543 | ) | (1,944 | ) | (51,381 | ) | (411,246 | ) | ||||||||||
Total derivative and other contracts | 977 | 75,981 | 5,629 | (51,381 | ) | 31,206 | ||||||||||||||
Investments4 | 237 | 197 | 958 | — | 1,392 | |||||||||||||||
Physical commodities | — | 112 | — | — | 112 | |||||||||||||||
Total trading assets4 | 174,372 | 123,170 | 13,177 | (51,381 | ) | 259,338 | ||||||||||||||
Investment securities—AFS securities | 29,120 | 34,050 | — | — | 63,170 | |||||||||||||||
Securities purchased under agreements to resell | — | 302 | — | — | 302 | |||||||||||||||
Intangible assets | — | 3 | — | — | 3 | |||||||||||||||
Total assets measured at fair value5 | $ | 203,492 | $ | 157,525 | $ | 13,177 | $ | (51,381 | ) | $ | 322,813 | |||||||||
Liabilities at Fair Value | ||||||||||||||||||||
Deposits | $ | — | $ | 21 | $ | 42 | $ | — | $ | 63 | ||||||||||
Short-term borrowings | — | 404 | 2 | — | 406 | |||||||||||||||
Trading liabilities: | ||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||
U.S. Treasury securities | 10,745 | — | — | — | 10,745 | |||||||||||||||
U.S. agency securities | 891 | 61 | — | — | 952 | |||||||||||||||
Total U.S. government and agency securities | 11,636 | 61 | — | — | 11,697 | |||||||||||||||
Other sovereign government obligations | 20,658 | 2,430 | — | — | 23,088 | |||||||||||||||
Corporate and other debt: | ||||||||||||||||||||
Corporate bonds | — | 5,572 | 34 | — | 5,606 | |||||||||||||||
Other debt | — | 549 | 2 | — | 551 | |||||||||||||||
Total corporate and other debt | — | 6,121 | 36 | — | 6,157 | |||||||||||||||
Corporate equities2 | 37,611 | 29 | 34 | — | 37,674 | |||||||||||||||
Obligation to return securities received as collateral | 20,236 | 25 | 1 | — | 20,262 | |||||||||||||||
Derivative and other contracts: | ||||||||||||||||||||
Interest rate contracts | 1,244 | 285,379 | 953 | — | 287,576 | |||||||||||||||
Credit contracts | — | 12,550 | 875 | — | 13,425 | |||||||||||||||
Foreign exchange contracts | 17 | 75,510 | 56 | — | 75,583 | |||||||||||||||
Equity contracts | 1,162 | 37,828 | 1,524 | — | 40,514 | |||||||||||||||
Commodity and other contracts | 2,663 | 6,845 | 2,377 | — | 11,885 | |||||||||||||||
Netting3 | (4,378 | ) | (353,543 | ) | (1,944 | ) | (39,803 | ) | (399,668 | ) | ||||||||||
Total derivative and other contracts | 708 | 64,569 | 3,841 | (39,803 | ) | 29,315 | ||||||||||||||
Physical commodities | — | 1 | — | — | 1 | |||||||||||||||
Total trading liabilities | 90,849 | 73,236 | 3,912 | (39,803 | ) | 128,194 | ||||||||||||||
Securities sold under agreements to repurchase | — | 580 | 149 | — | 729 | |||||||||||||||
Other secured financings | — | 4,607 | 434 | — | 5,041 | |||||||||||||||
Long-term borrowings | 47 | 36,677 | 2,012 | — | 38,736 | |||||||||||||||
Total liabilities measured at fair value5 | $ | 90,896 | $ | 115,525 | $ | 6,551 | $ | (39,803 | ) | $ | 173,169 | |||||||||
AFS—Available for sale
| 1. | At March 31, 2017, loans held at fair value consisted of $6,244 million of corporate loans, $857 million of residential real estate loans and $1,197 million of wholesale real estate loans. At December 31, 2016, loans held at fair value consisted of $7,217 million of corporate loans, $966 million of residential real estate loans and $519 million of wholesale real estate loans. |
| 2. | For trading purposes, the Firm holds or sells short equity securities issued by entities in diverse industries and of varying sizes. |
| 3. | For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled “Counterparty and Cash Collateral Netting.” For contracts with the same counterparty, counterparty netting among positions classified within the same level is included within that shared level. For further information on derivative instruments and hedging activities, see Note 4. |
| 4. | Amounts exclude certain investments that are measured at fair value using the net asset value (“NAV”) per share, which are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Fair Value of Investments Measured at NAV” herein. |
| 5. | Amounts exclude the unsettled fair value on long futures contracts of $799 million at March 31, 2017 and $784 million at December 31, 2016 included in Customer and other receivables in the consolidated balance sheets and unsettled fair value of short futures contracts of $139 million at March 31, 2017 and $174 million at December 31, 2016 in Customer and other payables in the consolidated balance sheets. These contracts are primarily: classified as Level 1 in the fair value hierarchy, actively traded, and valued based on quoted prices from the exchange. |
| 49 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
For a description of the valuation techniques applied to the Firm’s major categories of assets and liabilities measured at fair value on a recurring basis, see Note 3 to the consolidated financial statements in the 2016 Form10-K. During the current quarter there were no significant updates made to the Firm’s valuation techniques.
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the current quarter and prior year quarter. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the following tables do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Firm within the Level 1 and/or Level 2 categories.
Additionally, both observable and unobservable inputs may be used to determine the fair value of positions that the Firm has classified within the Level 3 category. As a result, the unrealized gains (losses) during the period for assets and liabilities within the Level 3 category presented in the following tables herein may include changes in fair value during the period that were attributable to both observable and unobservable inputs. Total realized and unrealized gains (losses) are primarily included in Trading revenues in the consolidated income statements.
| $ in millions | Beginning Balance at December 31, 2016 | Realized and Unrealized Gains (Losses) | Purchases1 | Sales | Issuances | Settlements1 | Net Transfers | Ending Balance at March 31, 2017 | Unrealized Gains (Losses) at March 31, 2017 | |||||||||||||||||||||||||||
Assets at Fair Value | ||||||||||||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||
U.S. agency securities | $ | 74 | $ | — | $ | 42 | $ | (241 | ) | $ | — | $ | — | $ | 167 | $ | 42 | $ | — | |||||||||||||||||
Other sovereign government obligations | 6 | — | 61 | (2 | ) | — | — | — | 65 | — | ||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
State and municipal securities | 250 | — | 2 | (2 | ) | — | — | (195 | ) | 55 | — | |||||||||||||||||||||||||
Residential mortgage-, commercial mortgage- and asset backed securities | 217 | 7 | 39 | (56 | ) | — | (11 | ) | 20 | 216 | (1 | ) | ||||||||||||||||||||||||
Corporate bonds | 232 | 20 | 222 | (97 | ) | — | — | 68 | 445 | — | ||||||||||||||||||||||||||
Collateralized debt and loan obligations | 63 | (2 | ) | 27 | (9 | ) | — | (1 | ) | — | 78 | (1 | ) | |||||||||||||||||||||||
Loans and lending commitments | 5,122 | 53 | 757 | (555 | ) | — | (985 | ) | 87 | 4,479 | 39 | |||||||||||||||||||||||||
Other debt | 180 | 3 | 13 | (36 | ) | — | — | 34 | 194 | 4 | ||||||||||||||||||||||||||
Total corporate and other debt | 6,064 | 81 | 1,060 | (755 | ) | — | (997 | ) | 14 | 5,467 | 41 | |||||||||||||||||||||||||
Corporate equities | 445 | (1 | ) | 41 | (105 | ) | — | — | (71 | ) | 309 | 3 | ||||||||||||||||||||||||
Securities received as collateral | 1 | — | — | — | — | — | — | 1 | — | |||||||||||||||||||||||||||
Net derivative and other contracts2: | ||||||||||||||||||||||||||||||||||||
Interest rate contracts | 420 | (114 | ) | 46 | — | (24 | ) | 16 | (46 | ) | 298 | (127 | ) | |||||||||||||||||||||||
Credit contracts | (373 | ) | (25 | ) | 6 | — | (5 | ) | 41 | 5 | (351 | ) | (33 | ) | ||||||||||||||||||||||
Foreign exchange contracts | (43 | ) | (36 | ) | 1 | — | — | 11 | (4 | ) | (71 | ) | (20 | ) | ||||||||||||||||||||||
Equity contracts | 184 | (144 | ) | 83 | — | (121 | ) | 231 | (16 | ) | 217 | (81 | ) | |||||||||||||||||||||||
Commodity and other contracts | 1,600 | 127 | 6 | — | (28 | ) | (69 | ) | (133 | ) | 1,503 | 34 | ||||||||||||||||||||||||
Total net derivative and other contracts | 1,788 | (192 | ) | 142 | — | (178 | ) | 230 | (194 | ) | 1,596 | (227 | ) | |||||||||||||||||||||||
Investments | 958 | 8 | 62 | (3 | ) | — | (66 | ) | 2 | 961 | 8 | |||||||||||||||||||||||||
Liabilities at Fair Value | ||||||||||||||||||||||||||||||||||||
Deposits | $ | 42 | $ | (1 | ) | $ | — | $ | — | $ | 13 | $ | — | $ | — | $ | 56 | $ | (1 | ) | ||||||||||||||||
Short-term borrowings | 2 | — | — | — | — | (2 | ) | — | — | — | ||||||||||||||||||||||||||
Trading liabilities: | ||||||||||||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
Corporate bonds | 34 | (1 | ) | (119 | ) | 101 | — | — | 17 | 34 | (1 | ) | ||||||||||||||||||||||||
Other debt | 2 | — | — | — | — | — | — | 2 | — | |||||||||||||||||||||||||||
Total corporate and other debt | 36 | (1 | ) | (119 | ) | 101 | — | — | 17 | 36 | (1 | ) | ||||||||||||||||||||||||
Corporate equities | 34 | 12 | (68 | ) | 25 | — | — | 21 | — | — | ||||||||||||||||||||||||||
Obligation to return securities received as collateral | 1 | — | — | 1 | — | — | — | 2 | — | |||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 149 | 1 | — | — | — | — | — | 148 | 1 | |||||||||||||||||||||||||||
Other secured financings | 434 | (19 | ) | — | — | 13 | (220 | ) | (43 | ) | 203 | (12 | ) | |||||||||||||||||||||||
Long-term borrowings | 2,012 | (59 | ) | — | — | 270 | (163 | ) | (86 | ) | 2,092 | (58 | ) | |||||||||||||||||||||||
| March 2017 Form 10-Q | 50 |
Notes to Consolidated Financial Statements (Unaudited) | |
| $ in millions | Beginning Balance at December 31, 2015 | Realized and Unrealized Gains (Losses) | Purchases1 | Sales | Issuances | Settlements1 | Net Transfers | Ending Balance at March 31, 2016 | Unrealized Gains (Losses) at March 31, 2016 | |||||||||||||||||||||||||||
Assets at Fair Value | ||||||||||||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||
U.S. agency securities | $ | — | $ | 5 | $ | — | $ | — | $ | — | $ | — | $ | 3 | $ | 8 | $ | 5 | ||||||||||||||||||
Other sovereign government obligations | 4 | — | — | (2 | ) | — | — | 6 | 8 | — | ||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
State and municipal securities | 19 | — | — | (15 | ) | — | — | 1 | 5 | — | ||||||||||||||||||||||||||
Residential mortgage-, commercial mortgage- and asset backed securities | 438 | (34 | ) | 20 | (99 | ) | — | — | 30 | 355 | (26 | ) | ||||||||||||||||||||||||
Corporate bonds | 267 | 44 | 17 | (98 | ) | — | — | (6 | ) | 224 | 28 | |||||||||||||||||||||||||
Collateralized debt and loan obligations | 430 | (14 | ) | 114 | (113 | ) | — | — | (69 | ) | 348 | (4 | ) | |||||||||||||||||||||||
Loans and lending commitments | 5,936 | (60 | ) | 952 | (319 | ) | — | (351 | ) | 27 | 6,185 | (64 | ) | |||||||||||||||||||||||
Other debt | 448 | 5 | 75 | (9 | ) | — | — | 8 | 527 | 5 | ||||||||||||||||||||||||||
Total corporate and other debt | 7,538 | (59 | ) | 1,178 | (653 | ) | — | (351 | ) | (9 | ) | 7,644 | (61 | ) | ||||||||||||||||||||||
Corporate equities | 433 | 11 | 78 | (44 | ) | — | — | (48 | ) | 430 | 6 | |||||||||||||||||||||||||
Securities received as collateral | 1 | — | — | (1 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Net derivative and other contracts2: | ||||||||||||||||||||||||||||||||||||
Interest rate contracts | 260 | 470 | 5 | — | (14 | ) | (30 | ) | (522 | ) | 169 | 411 | ||||||||||||||||||||||||
Credit contracts | (844 | ) | 28 | — | — | — | 67 | 26 | (723 | ) | 24 | |||||||||||||||||||||||||
Foreign exchange contracts | 141 | (61 | ) | — | — | — | (105 | ) | 151 | 126 | (38 | ) | ||||||||||||||||||||||||
Equity contracts | (2,031 | ) | (135 | ) | 137 | — | (128 | ) | 294 | 31 | (1,832 | ) | (12 | ) | ||||||||||||||||||||||
Commodity and other contracts | 1,050 | 73 | 9 | — | (61 | ) | (57 | ) | 186 | 1,200 | 68 | |||||||||||||||||||||||||
Total net derivative and other contracts | (1,424 | ) | 375 | 151 | — | (203 | ) | 169 | (128 | ) | (1,060 | ) | 453 | |||||||||||||||||||||||
Investments | 707 | (31 | ) | 365 | (54 | ) | — | (41 | ) | (24 | ) | 922 | (31 | ) | ||||||||||||||||||||||
Intangible assets | 5 | — | — | (1 | ) | — | — | — | 4 | (1 | ) | |||||||||||||||||||||||||
Liabilities at Fair Value | ||||||||||||||||||||||||||||||||||||
Deposits | $ | 19 | $ | (2 | ) | $ | — | $ | — | $ | 2 | $ | — | $ | — | $ | 23 | $ | (2 | ) | ||||||||||||||||
Short-term borrowings | 1 | — | — | — | — | (1 | ) | — | — | — | ||||||||||||||||||||||||||
Trading liabilities: | ||||||||||||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
Corporate bonds | — | (4 | ) | (2 | ) | 9 | — | — | (5 | ) | 6 | (4 | ) | |||||||||||||||||||||||
Other debt | 4 | 6 | — | 7 | — | — | — | 5 | 6 | |||||||||||||||||||||||||||
Total corporate and other debt | 4 | 2 | (2 | ) | 16 | — | — | (5 | ) | 11 | 2 | |||||||||||||||||||||||||
Corporate equities | 17 | (4 | ) | (15 | ) | 13 | — | — | 12 | 31 | (4 | ) | ||||||||||||||||||||||||
Obligation to return securities received as collateral | 1 | — | — | — | — | — | — | 1 | — | |||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 151 | — | — | — | — | — | — | 151 | — | |||||||||||||||||||||||||||
Other secured financings | 461 | (18 | ) | — | — | 47 | (22 | ) | (50 | ) | 454 | (18 | ) | |||||||||||||||||||||||
Long-term borrowings | 1,987 | (46 | ) | — | — | 72 | (79 | ) | (228 | ) | 1,798 | (45 | ) | |||||||||||||||||||||||
| 1. | Loan originations and consolidations of VIEs are included in purchases and deconsolidations of VIEs are included in settlements. |
| 2. | Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts. |
| 51 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
Significant Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements
The following disclosures provide information on the valuation techniques, significant unobservable inputs, and their ranges and averages for each major category of assets and liabilities measured at fair value on a recurring basis with a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed across the inventory. Further, the range of unobservable inputs may differ across firms in the financial services industry because of diversity in the types of products included in each firm’s inventory. The following disclosures also include qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs. There are no predictable relationships between multiple significant unobservable inputs attributable to a given valuation technique. A single amount is disclosed when there is no significant difference between the minimum, maximum and average (weighted average or simple average / median).
Valuation Techniques and Sensitivity of Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements
| Predominant Valuation Techniques/Significant Unobservable Inputs | Range (Weighted Averages or Simple Averages/Median)1 | |||||
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||
Assets at Fair Value | ||||||
U.S. agency securities ($42 million and $74 million) | ||||||
Comparable pricing: | Comparable bond price | N/M | 96 to 105 points (102 points) | |||
Other sovereign government obligations ($65 million and $6 million) | ||||||
Comparable pricing: | Comparable bond price | 89 to 97 points (95 points) | N/M | |||
State and municipal securities ($55 million and $250 million) | ||||||
Comparable pricing: | Comparable bond price | 54 to 91 points (57 points) | 53 to 100 points (91 points) | |||
Residential mortgage-, commercial mortgage- and asset-backed securities ($216 million and $217 million) | ||||||
Comparable pricing: | Comparable bond price | 0 to 106 points (34 points) | 0 to 86 points (27 points) | |||
Corporate bonds ($445 million and $232 million) | ||||||
Comparable pricing: | Comparable bond price | 3 to 125 points (79 points) | 3 to 130 points (70 points) | |||
Option model: | At the money volatility | 17% to 34% (25%) | 23% to 33% (30%) | |||
Collateralized debt and loan obligations ($78 million and $63 million) | ||||||
Comparable pricing: | Comparable bond price | 0 to 80 points (41 points) | 0 to 103 points (50 points) | |||
Correlation model: | Credit correlation | 39% to 47% (46%) | N/M | |||
Loans and lending commitments ($4,479 million and $5,122 million) | ||||||
Corporate loan model: | Credit spread | N/M | 402 to 672 bps (557 bps) | |||
Expected recovery: | Asset coverage | 35% to 100% (85%) | 43% to 100% (83%) | |||
Option model: | Volatility skew | -1% | N/M | |||
Margin loan model: | Discount rate | 2% to 6% (3%) | 2% to 8% (3%) | |||
| Volatility skew | 15% to 38% (22%) | 21% to 63% (33%) | ||||
Comparable pricing: | Comparable loan price | 45 to 105 points (96 points) | 45 to 100 points (84 points) | |||
Discounted cash flow: | Implied weighted average cost of capital | N/M | 5% | |||
| Capitalization rate | N/M | 4% to 10% (4%) | ||||
Other debt ($194 million and $180 million) | ||||||
Option model: | At the money volatility | 17% to 52% (52%) | 16% to 52% (52%) | |||
Discounted cash flow: | Discount rate | 8% to 12% (11%) | 7% to 12% (11%) | |||
Comparable pricing: | Comparable loan price | 2 to 98 points (21 points) | 1 to 74 points (23 points) | |||
Corporate equities ($309 million and $445 million) | ||||||
Comparable pricing: | Comparable equity price | 100% | 100% | |||
Net derivative and other contracts2: | ||||||
Interest rate contracts ($298 million and $420 million) | ||||||
Option model: | Interest rate - Foreign exchange correlation | N/M | 28% to 58% (44% / 43%) | |||
| Interest rate volatility skew | 28% to 97% (58% / 59%) | 19% to 117% (55% / 56%) | ||||
| Interest rate quanto correlation | N/M | -17% to 31% (1% /-5%) | ||||
| Interest rate curve correlation | N/M | 28% to 96% (68% / 72%) | ||||
| Inflation volatility | 24% to 63% (44% / 41%) | 23% to 55% (40% / 39%) | ||||
| Interest rate curve | 1% | N/M | ||||
| March 2017 Form 10-Q | 52 |
Notes to Consolidated Financial Statements (Unaudited) | |
| Predominant Valuation Techniques/Significant Unobservable Inputs | Range (Weighted Averages or Simple Averages/Median)1 | |||||
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||
Credit contracts ($(351) million and $(373) million) | ||||||
Comparable pricing: | Cash synthetic basis | 5 to 12 points (11 points) | 5 to 12 points (11 points) | |||
| Comparable bond price | 0 to 70 points (22 points) | 0 to 70 points (23 points) | ||||
Correlation model: | Credit correlation | 39% to 76% (53%) | 32% to 70% (45%) | |||
Foreign exchange contracts3 ($(71) million and $(43) million) | ||||||
Option model: | Interest rate - Foreign exchange correlation | 28% to 57% (44% / 43%) | 28% to 58% (44% / 43%) | |||
| Interest rate volatility skew | 28% to 97% (58% / 59%) | 34% to 117% (55% / 56%) | ||||
| Interest rate quanto correlation | -15% to 28% (2% /-3%) | -17% to 31% (1% /-5%) | ||||
Equity contracts3 ($217 million and $184 million) | ||||||
Option model: | At the money volatility | 13% to 49% (39%) | 7% to 66% (33%) | |||
| Volatility skew | -4% to 0%(-1%) | -4% to 0%(-1%) | ||||
| Equity - Equity correlation | 5% to 99% (77%) | 25% to 99% (73%) | ||||
| Equity - Foreign exchange correlation | -70% to 30%(-31%) | -63% to 30%(-43%) | ||||
| Equity - Interest rate correlation | -7% to 52% (14% / 7%) | -8% to 52% (12% / 4%) | ||||
Commodity and other contracts ($1,503 million and $1,600 million) | ||||||
Option model: | Forward power price | $0 to $82 ($31) per MWh | $7 to $90 ($32) per MWh | |||
| Commodity volatility | 6% to 93% (18%) | 6% to 130% (18%) | ||||
| Cross-commodity correlation | 5% to 99% (92%) | 5% to 99% (92%) | ||||
Investments ($961 million and $958 million) | ||||||
Discounted cash flow: | Implied weighted average cost of capital | N/M | 10% | |||
| Exit multiple | 9 times | 10 to 24 times (11 times) | ||||
Market approach: | EBITDA multiple | 6 to 24 times (12 times) | 6 to 24 times (12 times) | |||
Comparable pricing: | Comparable equity price | 75% to 100% (91%) | 75% to 100% (93%) | |||
Liabilities at Fair Value | ||||||
Deposits ($56 million and $42 million) | ||||||
Option model: | At the money volatility | 16% to 44% (29%) | N/M | |||
| Volatility skew | -1% to 0%(-1%) | N/M | ||||
Securities sold under agreements to repurchase ($148 million and $149 million) | ||||||
Discounted cash flow: | Funding spread | 131 to 143 bps (135 bps) | 118 to 127 bps (121 bps) | |||
Other secured financings ($203 million and $434 million) | ||||||
Discounted cash flow: | Funding spread | 36 to 81 bps (58 bps) | 63 to 92 bps (78 bps) | |||
Option model: | Volatility skew | -1% | -1% | |||
Discounted cash flow: | Discount rate | N/M | 4% | |||
Long-term borrowings ($2,092 million and $2,012 million) | ||||||
Option model: | At the money volatility | 6% to 44% (29%) | 7% to 42% (30%) | |||
| Volatility skew | -2% to 0%(-1%) | -2% to 0%(-1%) | ||||
| Equity - Equity correlation | 27% to 94% (66%) | 35% to 99% (84%) | ||||
| Equity - Foreign exchange correlation | -85% to 10%(-34%) | -63% to 13%(-40%) | ||||
Option model: | Interest rate volatility skew | 25% | 25% | |||
| Equity volatility discount | 9% to 11% (10% / 10%) | 7% to 11% (10% / 10%) | ||||
Comparable pricing: | Comparable equity price | 100% | N/M | |||
bps—Basis points. A basis point equals 1/100th of 1%.
Points—Percentage of par
MWh—Megawatt hours
EBITDA—Earnings before interest, taxes, depreciation and amortization
N/M—Not Meaningful
| 1. | Amounts represent weighted averages except where simple averages and the median of the inputs are provided when more relevant. |
| 2. | Credit valuation adjustment (“CVA”) and funding valuation adjustments (“FVA”) are included in the balance but excluded from the Valuation Technique(s) and Significant Unobservable Inputs in the previous table. CVA is a Level 3 input when the underlying counterparty credit curve is unobservable. FVA is a Level 3 input in its entirety given the lack of observability of funding spreads in the principal market. |
| 3. | Includes derivative contracts with multiple risks (i.e., hybrid products). |
| 53 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
For a description of the Firm’s significant unobservable inputs for all major categories of assets and liabilities, see Note 3 to the consolidated financial statements in the 2016 Form10-K. During the current quarter there were no significant updates made to the Firm’s significant unobservable inputs.
Fair Value of Investments Measured at NAV
For a description of the Firm’s investments in private equity funds, real estate funds and hedge funds measured at fair value based on NAV, see Note 3 to the consolidated financial statements in the 2016 Form10-K.
Investments in Certain Funds Measured at NAV per Share
| At March 31, 2017 | At December 31, 2016 | |||||||||||||||
| $ in millions | Fair Value | Commitment | Fair Value | Commitment | ||||||||||||
Private equity funds | $ | 1,585 | $ | 335 | $ | 1,566 | $ | 335 | ||||||||
Real estate funds | 1,031 | 157 | 1,103 | 136 | ||||||||||||
Hedge funds | 145 | 4 | 147 | 4 | ||||||||||||
Total | $ | 2,761 | $ | 496 | $ | 2,816 | $ | 475 | ||||||||
Nonredeemable Funds by Contractual Maturity
| Fair Value at March 31, 2017 | ||||||||
| $ in millions | Private Equity | Real Estate | ||||||
Less than 5 years | $ | 275 | $ | 68 | ||||
5-10 years | 745 | 641 | ||||||
Over 10 years | 565 | 322 | ||||||
Total | $ | 1,585 | $ | 1,031 | ||||
Restrictions
Investments in hedge funds may be subject to initial periodlock-up or gate provisions. Alock-up provision is a provision that provides that during a certain initial period an investor may not make a withdrawal from the fund. A gate provision restricts the amount of redemption that an investor can demand on any redemption date.
Hedge Funds Redemption Frequency
| Fair Value At March 31, 2017 | ||||
Quarterly | 66% | |||
Every six months | —% | |||
Greater than six months | 18% | |||
Subject tolock-up provisions1 | 16% | |||
| 1. | The remaining restriction period for these investments was primarily over three years. |
The redemption notice periods for hedge funds were primarily greater than six months. Hedge fund investments representing approximately 20% of the fair value cannot be redeemed as of March 31, 2017 because a gate provision has
been imposed by the hedge fund manager primarily for indefinite periods.
Fair Value Option
The Firm elected the fair value option for certain eligible instruments that are risk managed on a fair value basis to mitigate income statement volatility caused by measurement basis differences between the elected instruments and their associated risk management transactions or to eliminate complexities of applying certain accounting models.
Earnings Impact of Instruments under the Fair Value Option
| $ in millions | Trading Revenues | Interest Income (Expense) | Net Revenues | |||||||||
Three Months Ended March 31, 2017 | ||||||||||||
Securities purchased under agreements to resell | $ | — | $ | 1 | $ | 1 | ||||||
Deposits1 | (1 | ) | — | (1) | ||||||||
Short-term borrowings1 | (15 | ) | — | (15) | ||||||||
Securities sold under agreements to repurchase1 | 2 | (4 | ) | (2) | ||||||||
Long-term borrowings1 | (1,610 | ) | (119 | ) | (1,729) | |||||||
Three Months Ended March 31, 2016 | ||||||||||||
Securities purchased under agreements to resell | $ | — | $ | 2 | $ | 2 | ||||||
Deposits1 | (2 | ) | — | (2) | ||||||||
Short-term borrowings1 | 45 | — | 45 | |||||||||
Securities sold under agreements to repurchase1 | (9 | ) | (2 | ) | (11) | |||||||
Long-term borrowings1 | (965 | ) | (139 | ) | (1,104) | |||||||
| 1. | Gains (losses) in the current quarter and prior year quarter are mainly attributable to changes in foreign currency rates or interest rates or movements in the reference price or index for short-term and long-term borrowings before the impact of related hedges. |
The amounts in the previous table are included within Net revenues and do not reflect any gains or losses on related hedging instruments. In addition to the amounts in the previous table, as discussed in Note 2 to the consolidated financial statements in the 2016 Form10-K, instruments within Trading assets or Trading liabilities are measured at fair value.
Gains (Losses) Due to Changes in Instrument-Specific Credit Risk
| Three Months Ended March 31, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| $ in millions | Trading Revenues | OCI | Trading Revenues | OCI | ||||||||||||
Short-term and long-term borrowings1 | $ | (4 | ) | $ | 14 | $ | 41 | $ | 319 | |||||||
Securities sold under agreements to repurchase1 | — | (3 | ) | — | 4 | |||||||||||
Loans and other debt2 | (3 | ) | — | (100 | ) | — | ||||||||||
Lending commitments3 | — | — | 1 | — | ||||||||||||
| OCI—Other | comprehensive income (loss) |
| 1. | Unrealized DVA gains (losses) are recorded in OCI and when such gains (losses) are realized in Trading revenues. The cumulativepre-tax impact of changes in the Firm’s DVA recognized in AOCI were unrealized losses of $910 million and |
| March 2017 Form 10-Q | 54 |
Notes to Consolidated Financial Statements (Unaudited) | |
$921 million at March 31, 2017 and December 31, 2016, respectively. See Note 2 to the consolidated financial statements in the 2016 Form10-K and Note 14 for further information. |
| 2. | Loans and other debt instrument-specific credit gains (losses) were determined by excluding thenon-credit components of gains and losses, such as those due to changes in interest rates. |
| 3. | Gains (losses) on lending commitments were generally determined based on the difference between estimated expected client yields and contractual yields at each respectiveperiod-end. |
Short-Term and Long-Term Borrowings Measured at Fair Value on a Recurring Basis
| $ in millions | At March 31, | At December 31, 2016 | ||||||
| Business Unit Responsible for Risk Management | ||||||||
Equity | $ | 22,479 | $ | 21,066 | ||||
Interest rates | 16,698 | 16,051 | ||||||
Foreign exchange | 1,297 | 1,114 | ||||||
Credit | 636 | 647 | ||||||
Commodities | 231 | 264 | ||||||
Total | $ | 41,341 | $ | 39,142 | ||||
Net Difference of Contractual Principal Amount Over Fair Value
| $ in millions | At March 31, 2017 | At December 31, | ||||||
Loans and other debt1 | $ | 13,826 | $ | 13,495 | ||||
Loans 90 or more days past due and/or on nonaccrual status1 | 11,816 | 11,502 | ||||||
Short-term and long-term borrowings2 | 838 | 720 | ||||||
| 1. | The majority of the difference between principal and fair value amounts for loans and other debt relates to distressed debt positions purchased at amounts well below par. |
| 2. | Short-term and long-term borrowings do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in a reference price or index. |
Fair Value of Loans on Nonaccrual Status
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Aggregate fair value of loans on nonaccrual status1 | $ | 1,229 | $ | 1,536 | ||||
| 1. | Includes all loans 90 or more days past due in the amount of $562 million and $787 million at March 31, 2017 and December 31, 2016, respectively. |
The previous tables excludenon-recourse debt from consolidated VIEs, liabilities related to failed sales of financial assets, pledged commodities and other liabilities that have specified assets attributable to them.
Assets and Liabilities Measured at Fair Value on aNon-Recurring Basis
Gains and (Losses)
| Three Months Ended March 31, | ||||||||
| $ in millions | 20171 | 20161 | ||||||
Assets | ||||||||
Loans2 | $ | 32 | $ | (80 | ) | |||
Other Assets—Other investments3 | — | (3 | ) | |||||
Other assets—Premises, equipment and software costs4 | (5 | ) | (5 | ) | ||||
Total | $ | 27 | $ | (88 | ) | |||
Liabilities | ||||||||
Other liabilities and accrued expenses2 | $ | 11 | $ | (20 | ) | |||
Total | $ | 11 | $ | (20 | ) | |||
| 1. | Gains and losses for Loans and Other assets—Other investments are classified in Other revenues. For other items, gains and losses are recorded in Other revenues if the item is held for sale, otherwise Other expenses. |
| 2. | Non-recurring changes in the fair value of loans and lending commitments were calculated as follows: for the held for investment category, based on the value of the underlying collateral; for the held for sale category, based on recently executed transactions, market price quotations, valuation models that incorporate market observable inputs where possible, such as comparable loan or debt prices and credit default swap spread levels adjusted for any basis difference between cash and derivative instruments, or default recovery analysis where such transactions and quotations are unobservable. |
| 3. | Losses related to Other assets—Other investments were determined using techniques that included discounted cash flow models, methodologies that incorporate multiples of certain comparable companies and recently executed transactions. |
| 4. | Losses related to Other assets—Premises, equipment and software costs were determined using techniques that included a default recovery analysis and recently executed transactions. |
| 55 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
Carrying and Fair Values
| At March 31, 2017 | ||||||||||||
Carrying Value | Fair Value by Level | |||||||||||
| $ in millions | Level 2 | Level 3 | ||||||||||
Assets | ||||||||||||
Loans | $ | 4,062 | $ | 2,233 | $ | 1,829 | ||||||
Other assets—Premises, equipment and software costs | 45 | — | 45 | |||||||||
Total assets | $ | 4,107 | $ | 2,233 | $ | 1,874 | ||||||
Liabilities | ||||||||||||
Other liabilities and accrued expenses | $ | 208 | $ | 163 | $ | 45 | ||||||
Total liabilities | $ | 208 | $ | 163 | $ | 45 | ||||||
| At December 31, 2016 | ||||||||||||
Carrying Value | Fair Value by Level | |||||||||||
| $ in millions | Level 2 | Level 3 | ||||||||||
Assets | ||||||||||||
Loans | $ | 4,913 | $ | 2,470 | $ | 2,443 | ||||||
Other assets—Other investments | 123 | — | 123 | |||||||||
Other assets—Premises, equipment and software costs | 25 | 22 | 3 | |||||||||
Total assets | $ | 5,061 | $ | 2,492 | $ | 2,569 | ||||||
Liabilities | ||||||||||||
Other liabilities and accrued expenses | $ | 226 | $ | 166 | $ | 60 | ||||||
Total liabilities | $ | 226 | $ | 166 | $ | 60 | ||||||
Financial Instruments Not Measured at Fair Value
| At March 31, 2017 | ||||||||||||||||||||
Carrying | Fair Value by Level | |||||||||||||||||||
| $ in millions | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial Assets | ||||||||||||||||||||
Cash and due from banks | $ | 22,081 | $ | 22,081 | $ | 22,081 | $ | — | $ | — | ||||||||||
Interest bearing deposits with banks | 20,773 | 20,773 | 20,773 | — | — | |||||||||||||||
Investment securities—HTM securities | 19,973 | 19,517 | 7,409 | 12,073 | 35 | |||||||||||||||
Securities purchased under agreements to resell | 104,721 | 104,718 | — | 101,077 | 3,641 | |||||||||||||||
Securities borrowed | 111,803 | 111,804 | — | 111,793 | 11 | |||||||||||||||
Customer and other receivables1 | 42,923 | 42,771 | — | 38,652 | 4,119 | |||||||||||||||
Loans2 | 95,953 | 96,882 | — | 21,956 | 74,926 | |||||||||||||||
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements | 36,027 | 36,027 | 36,027 | — | — | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Deposits | $ | 152,015 | $ | 152,015 | $ | — | $ | 152,015 | $ | — | ||||||||||
Short-term borrowings | 408 | 408 | — | 408 | — | |||||||||||||||
Securities sold under agreements to repurchase | 55,793 | 55,830 | — | 52,647 | 3,183 | |||||||||||||||
Securities loaned | 18,934 | 18,949 | — | 18,949 | — | |||||||||||||||
Other secured financings | 7,050 | 7,359 | — | 5,989 | 1,370 | |||||||||||||||
Customer and other payables1 | 185,861 | 185,861 | — | 185,861 | — | |||||||||||||||
Long-term borrowings | 132,061 | 136,613 | — | 136,561 | 52 | |||||||||||||||
| March 2017 Form 10-Q | 56 |
Notes to Consolidated Financial Statements (Unaudited) | |
| At December 31, 2016 | ||||||||||||||||||||
Carrying | Fair Value | Fair Value by Level | ||||||||||||||||||
| $ in millions | Level 1 | Level 2 | Level 3 | |||||||||||||||||
Financial Assets | ||||||||||||||||||||
Cash and due from banks | $ | 22,017 | $ | 22,017 | $ | 22,017 | $ | — | $ | — | ||||||||||
Interest bearing deposits with banks | 21,364 | 21,364 | 21,364 | — | — | |||||||||||||||
Investment securities—HTM securities | 16,922 | 16,453 | 5,557 | 10,896 | — | |||||||||||||||
Securities purchased under agreements to resell | 101,653 | 101,655 | — | 97,825 | 3,830 | |||||||||||||||
Securities borrowed | 125,236 | 125,240 | — | 125,093 | 147 | |||||||||||||||
Customer and other receivables1 | 41,679 | 41,537 | — | 36,962 | 4,575 | |||||||||||||||
Loans2 | 94,248 | 95,027 | — | 20,906 | 74,121 | |||||||||||||||
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements | 33,979 | 33,979 | 33,979 | — | — | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Deposits | $ | 155,800 | $ | 155,800 | $ | — | $ | 155,800 | $ | — | ||||||||||
Short-term borrowings | 535 | 535 | — | 535 | — | |||||||||||||||
Securities sold under agreements to repurchase | 53,899 | 53,913 | — | 50,941 | 2,972 | |||||||||||||||
Securities loaned | 15,844 | 15,853 | — | 15,853 | — | |||||||||||||||
Other secured financings | 6,077 | 6,082 | — | 4,792 | 1,290 | |||||||||||||||
Customer and other payables1 | 187,497 | 187,497 | — | 187,497 | — | |||||||||||||||
Long-term borrowings | 126,039 | 129,877 | — | 129,826 | 51 | |||||||||||||||
| HTM—Held | to maturity |
| 1. | Accrued interest, fees, and dividend receivables and payables where carrying value approximates fair value have been excluded. |
| 2. | Amounts include loans measured at fair value on anon-recurring basis. |
At March 31, 2017 and December 31, 2016, notional amounts of approximately $95.8 billion and $97.4 billion, respectively, of the Firm’s lending commitments were held for investment and held for sale, which are not included in the previous table. The estimated fair value of such lending commitments was a liability of $1,020 million and $1,241 million at March 31, 2017 and December 31, 2016, respectively. Had these commitments been accounted for at fair value, $773 million would have been categorized in Level 2 and $247 million in Level 3 at March 31, 2017, and $973 million would have been categorized in Level 2 and $268 million in Level 3 at December 31, 2016.
The previous tables exclude certain financial instruments such as equity method investments and allnon-financial assets and liabilities such as the value of the long-term relationships with the Firm’s deposit customers. For further discussion of the contents and valuation techniques of financial instruments not measured at fair value, see Note 3 to the consolidated financial statements in the 2016 Form10-K. During the current quarter there were no significant updates made to the Firm’s valuation techniques for financial instruments not measured at fair value.
| 57 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
4. Derivative Instruments and Hedging Activities
Derivative Assets and Liabilities
| Derivative Assets at March 31, 2017 | ||||||||||||||||||||||||||||||||
| Fair Value | Notional | |||||||||||||||||||||||||||||||
| $ in millions | Bilateral OTC | Cleared OTC1 | Exchange- Traded | Total | Bilateral OTC | Cleared OTC | Exchange- Traded | Total | ||||||||||||||||||||||||
Designated as accounting hedges |
| |||||||||||||||||||||||||||||||
Interest rate contracts | $ | 1,657 | $ | 820 | $ | — | $ | 2,477 | $ | 27,122 | $ | 36,990 | $ | — | $ | 64,112 | ||||||||||||||||
Foreign exchange contracts | 85 | — | — | 85 | 3,813 | 182 | — | 3,995 | ||||||||||||||||||||||||
Total | 1,742 | 820 | — | 2,562 | 30,935 | 37,172 | — | 68,107 | ||||||||||||||||||||||||
Not designated as accounting hedges2 |
| |||||||||||||||||||||||||||||||
Interest rate contracts | 192,196 | 74,339 | 328 | 266,863 | 3,656,253 | 7,727,169 | 3,283,925 | 14,667,347 | ||||||||||||||||||||||||
Credit contracts | 8,175 | 2,132 | — | 10,307 | 320,933 | 117,347 | — | 438,280 | ||||||||||||||||||||||||
Foreign exchange contracts | 53,599 | 833 | 114 | 54,546 | 1,750,588 | 65,727 | 8,944 | 1,825,259 | ||||||||||||||||||||||||
Equity contracts | 22,861 | — | 19,589 | 42,450 | 360,979 | — | 298,373 | 659,352 | ||||||||||||||||||||||||
Commodity and other contracts | 10,566 | — | 2,989 | 13,555 | 69,295 | — | 105,042 | 174,337 | ||||||||||||||||||||||||
Total | 287,397 | 77,304 | 23,020 | 387,721 | 6,158,048 | 7,910,243 | 3,696,284 | 17,764,575 | ||||||||||||||||||||||||
Total gross derivatives3 | $ | 289,139 | $ | 78,124 | $ | 23,020 | $ | 390,283 | $ | 6,188,983 | $ | 7,947,415 | $ | 3,696,284 | $ | 17,832,682 | ||||||||||||||||
Amounts offset | ||||||||||||||||||||||||||||||||
Counterparty netting | (223,493 | ) | (72,943 | ) | (20,224 | ) | (316,660 | ) | ||||||||||||||||||||||||
Cash collateral netting | (41,542 | ) | (4,443 | ) | — | (45,985 | ) | |||||||||||||||||||||||||
Total in Trading assets | $ | 24,104 | $ | 738 | $ | 2,796 | $ | 27,638 | ||||||||||||||||||||||||
Amounts not offset4 | ||||||||||||||||||||||||||||||||
Financial instruments collateral | (9,470 | ) | — | — | (9,470 | ) | ||||||||||||||||||||||||||
Other cash collateral | (6 | ) | — | — | (6 | ) | ||||||||||||||||||||||||||
Net amounts | $ | 14,628 | $ | 738 | $ | 2,796 | $ | 18,162 | ||||||||||||||||||||||||
| Derivative Liabilities at March 31, 2017 | ||||||||||||||||||||||||||||||||
| Fair Value | Notional | |||||||||||||||||||||||||||||||
| $ in millions | Bilateral OTC | Cleared OTC1 | Exchange- Traded | Total | Bilateral OTC | Cleared OTC | Exchange- Traded | Total | ||||||||||||||||||||||||
Designated as accounting hedges |
| |||||||||||||||||||||||||||||||
Interest rate contracts | $ | 113 | $ | 900 | $ | — | $ | 1,013 | $ | 2,024 | $ | 72,421 | $ | — | $ | 74,445 | ||||||||||||||||
Foreign exchange contracts | 46 | 62 | — | 108 | 4,746 | 1,621 | — | 6,367 | ||||||||||||||||||||||||
Total | 159 | 962 | — | 1,121 | 6,770 | 74,042 | — | 80,812 | ||||||||||||||||||||||||
Not designated as accounting hedges2 |
| |||||||||||||||||||||||||||||||
Interest rate contracts | 177,007 | 69,485 | 233 | 246,725 | 3,511,380 | 4,998,316 | 1,254,328 | 9,764,024 | ||||||||||||||||||||||||
Credit contracts | 9,646 | 2,139 | — | 11,785 | 352,018 | 94,441 | — | 446,459 | ||||||||||||||||||||||||
Foreign exchange contracts | 55,802 | 1,060 | 28 | 56,890 | 1,801,720 | 70,452 | 18,703 | 1,890,875 | ||||||||||||||||||||||||
Equity contracts | 26,475 | — | 19,057 | 45,532 | 377,069 | — | 311,062 | 688,131 | ||||||||||||||||||||||||
Commodity and other contracts | 7,861 | — | 2,993 | 10,854 | 77,687 | — | 87,168 | 164,855 | ||||||||||||||||||||||||
Total | 276,791 | 72,684 | 22,311 | 371,786 | 6,119,874 | 5,163,209 | 1,671,261 | 12,954,344 | ||||||||||||||||||||||||
Total gross derivatives3 | $ | 276,950 | $ | 73,646 | $ | 22,311 | $ | 372,907 | $ | 6,126,644 | $ | 5,237,251 | $ | 1,671,261 | $ | 13,035,156 | ||||||||||||||||
Amounts offset | ||||||||||||||||||||||||||||||||
Counterparty netting | (223,493 | ) | (72,943 | ) | (20,224 | ) | (316,660 | ) | ||||||||||||||||||||||||
Cash collateral netting | (28,980 | ) | (540 | ) | — | (29,520 | ) | |||||||||||||||||||||||||
Total in Trading liabilities | $ | 24,477 | $ | 163 | $ | 2,087 | $ | 26,727 | ||||||||||||||||||||||||
Amounts not offset4 | ||||||||||||||||||||||||||||||||
Financial instruments collateral | (7,196 | ) | — | (328 | ) | (7,524 | ) | |||||||||||||||||||||||||
Other cash collateral | (34 | ) | (163 | ) | — | (197 | ) | |||||||||||||||||||||||||
Net amounts | $ | 17,247 | $ | — | $ | 1,759 | $ | 19,006 | ||||||||||||||||||||||||
| March 2017 Form 10-Q | 58 |
Notes to Consolidated Financial Statements (Unaudited) | |
| Derivative Assets at December 31, 2016 | ||||||||||||||||||||||||||||||||
| Fair Value | Notional | |||||||||||||||||||||||||||||||
| $ in millions | Bilateral OTC | Cleared OTC | Exchange- Traded | Total | Bilateral OTC | Cleared OTC | Exchange- Traded | Total | ||||||||||||||||||||||||
Designated as accounting hedges |
| |||||||||||||||||||||||||||||||
Interest rate contracts | $ | 1,924 | $ | 1,049 | $ | — | $ | 2,973 | $ | 30,280 | $ | 37,632 | $ | — | $ | 67,912 | ||||||||||||||||
Foreign exchange contracts | 249 | 18 | — | 267 | 6,400 | 339 | — | 6,739 | ||||||||||||||||||||||||
Total | 2,173 | 1,067 | — | 3,240 | 36,680 | 37,971 | — | 74,651 | ||||||||||||||||||||||||
Not designated as accounting hedges5 |
| |||||||||||||||||||||||||||||||
Interest rate contracts | 200,336 | 99,217 | 384 | 299,937 | 3,586,279 | 6,224,104 | 2,585,772 | 12,396,155 | ||||||||||||||||||||||||
Credit contracts | 9,837 | 2,392 | — | 12,229 | 332,641 | 111,954 | — | 444,595 | ||||||||||||||||||||||||
Foreign exchange contracts | 73,645 | 1,022 | 231 | 74,898 | 1,579,718 | 51,775 | 13,038 | 1,644,531 | ||||||||||||||||||||||||
Equity contracts | 20,710 | — | 17,919 | 38,629 | 337,791 | — | 241,837 | 579,628 | ||||||||||||||||||||||||
Commodity and other contracts | 9,792 | — | 3,727 | 13,519 | 67,216 | — | 79,670 | 146,886 | ||||||||||||||||||||||||
Total | 314,320 | 102,631 | 22,261 | 439,212 | 5,903,645 | 6,387,833 | 2,920,317 | 15,211,795 | ||||||||||||||||||||||||
Total gross derivatives3 | $ | 316,493 | $ | 103,698 | $ | 22,261 | $ | 442,452 | $ | 5,940,325 | $ | 6,425,804 | $ | 2,920,317 | $ | 15,286,446 | ||||||||||||||||
Amounts offset | ||||||||||||||||||||||||||||||||
Counterparty netting | (243,488 | ) | (100,477 | ) | (19,607 | ) | (363,572 | ) | ||||||||||||||||||||||||
Cash collateral netting | (45,875 | ) | (1,799 | ) | — | (47,674 | ) | |||||||||||||||||||||||||
Total in Trading assets | $ | 27,130 | $ | 1,422 | $ | 2,654 | $ | 31,206 | ||||||||||||||||||||||||
Amounts not offset4 | ||||||||||||||||||||||||||||||||
Financial instruments collateral | (10,293 | ) | — | — | (10,293 | ) | ||||||||||||||||||||||||||
Other cash collateral | (124 | ) | — | — | (124 | ) | ||||||||||||||||||||||||||
Net amounts | $ | 16,713 | $ | 1,422 | $ | 2,654 | $ | 20,789 | ||||||||||||||||||||||||
| Derivative Liabilities at December 31, 2016 | ||||||||||||||||||||||||||||||||
| Fair Value | Notional | |||||||||||||||||||||||||||||||
| $ in millions | Bilateral OTC | Cleared OTC | Exchange- Traded | Total | Bilateral OTC | Cleared OTC | Exchange- Traded | Total | ||||||||||||||||||||||||
Designated as accounting hedges |
| |||||||||||||||||||||||||||||||
Interest rate contracts | $ | 77 | $ | 647 | $ | — | $ | 724 | $ | 2,024 | $ | 51,934 | $ | — | $ | 53,958 | ||||||||||||||||
Foreign exchange contracts | 15 | 25 | — | 40 | 1,480 | 1,071 | — | 2,551 | ||||||||||||||||||||||||
Total | 92 | 672 | — | 764 | 3,504 | 53,005 | — | 56,509 | ||||||||||||||||||||||||
Not designated as accounting hedges5 |
| |||||||||||||||||||||||||||||||
Interest rate contracts | 183,063 | 103,392 | 397 | 286,852 | 3,461,927 | 6,086,774 | 896,971 | 10,445,672 | ||||||||||||||||||||||||
Credit contracts | 11,024 | 2,401 | — | 13,425 | 358,927 | 96,397 | — | 455,324 | ||||||||||||||||||||||||
Foreign exchange contracts | 74,575 | 952 | 16 | 75,543 | 1,556,918 | 47,647 | 14,338 | 1,618,903 | ||||||||||||||||||||||||
Equity contracts | 22,531 | — | 17,983 | 40,514 | 320,520 | — | 272,669 | 593,189 | ||||||||||||||||||||||||
Commodity and other contracts | 8,303 | — | 3,582 | 11,885 | 77,527 | — | 59,387 | 136,914 | ||||||||||||||||||||||||
Total | 299,496 | 106,745 | 21,978 | 428,219 | 5,775,819 | 6,230,818 | 1,243,365 | 13,250,002 | ||||||||||||||||||||||||
Total gross derivatives3 | $ | 299,588 | $ | 107,417 | $ | 21,978 | $ | 428,983 | $ | 5,779,323 | $ | 6,283,823 | $ | 1,243,365 | $ | 13,306,511 | ||||||||||||||||
Amounts offset | ||||||||||||||||||||||||||||||||
Counterparty netting | (243,488 | ) | (100,477 | ) | (19,607 | ) | (363,572 | ) | ||||||||||||||||||||||||
Cash collateral netting | (30,405 | ) | (5,691 | ) | — | (36,096 | ) | |||||||||||||||||||||||||
Total in Trading liabilities | $ | 25,695 | $ | 1,249 | $ | 2,371 | $ | 29,315 | ||||||||||||||||||||||||
Amounts not offset4 | ||||||||||||||||||||||||||||||||
Financial instruments collateral | (7,638 | ) | — | (585 | ) | (8,223 | ) | |||||||||||||||||||||||||
Other cash collateral | (10 | ) | (1 | ) | — | (11 | ) | |||||||||||||||||||||||||
Net amounts | $ | 18,047 | $ | 1,248 | $ | 1,786 | $ | 21,081 | ||||||||||||||||||||||||
| 59 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
OTC—Over-the-counter
| 1. | Effective January 3, 2017, the Chicago Mercantile Exchange (“CME”) amended its rulebook for cleared OTC derivatives, resulting in the characterization of variation margin transfers as settlement payments as opposed to cash posted as collateral. As a result, at March 31, 2017, the cleared OTC gross derivative assets and liabilities, and related counterparty and cash collateral netting amounts in total decreased by $13.1 billion and $20.3 billion, respectively. |
| 2. | Notional amounts include gross notionals related to open long and short futures contracts of $2,671 billion and $677 billion, respectively. The unsettled fair value on these futures contracts (excluded from this table) of $799 million and $139 million is included in Customer and other receivables and Customer and other payables, respectively, in the consolidated balance sheets. |
| 3. | Amounts include transactions that are either not subject to master netting agreements or collateral agreements or are subject to such agreements but the Firm has not determined the agreements to be legally enforceable as follows: $3.0 billion of derivative assets and $3.4 billion of derivative liabilities at March 31, 2017 and $3.7 billion of derivative assets and $3.5 billion of derivative liabilities at December 31, 2016. |
| 4. | Amounts relate to master netting agreements and collateral agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance. |
| 5. | Notional amounts include gross notionals related to open long and short futures contracts of $2,088 billion and $332 billion, respectively. The unsettled fair value on these futures contracts (excluded from this table) of $784 million and $174 million is included in Customer and other receivables and Customer and other payables, respectively, in the consolidated balance sheets. |
For information related to offsetting of certain collateralized transactions, see Note 6. For a discussion of the Firm’s derivative instruments and hedging activities, see Note 4 to the consolidated financial statements in the 2016 Form10-K.
Gains (Losses) on Fair Value Hedges
| Gains (Losses) Recognized in Interest Expense | ||||||||
| Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Derivatives | $ | (805 | ) | $ | 2,150 | |||
Borrowings | 717 | (2,289 | ) | |||||
Total | $ | (88 | ) | $ | (139 | ) | ||
Gains (Losses) on Effective Portion of Net Investment Hedges
| Gains (Losses) Recognized in OCI | ||||||||
| Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Foreign exchange contracts1 | $ | (205 | ) | $ | (224 | ) | ||
| 1. | Losses of $9 million in the current quarter and $20 million in the prior year quarter recognized in Interest income were related to the forward points on the hedging instruments that were excluded from hedge effectiveness testing. |
Trading Revenues by Product Type
| Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Interest rate contracts | $ | 594 | 306 | |||||
Foreign exchange contracts | 235 | 237 | ||||||
Equity security and index contracts1 | 1,641 | 1,330 | ||||||
Commodity and other contracts | 189 | (144 | ) | |||||
Credit contracts | 576 | 336 | ||||||
Total trading revenues | $ | 3,235 | $ | 2,065 | ||||
| 1. | Dividend income is included within equity security and index contracts. |
The previous table summarizes gains and losses included in Trading revenues in the consolidated income statements from trading activities. These activities include revenues related to derivative andnon-derivative financial instruments. The Firm generally utilizes financial instruments across a variety of product types in connection with their market-making and related risk management strategies. Accordingly, the trading revenues presented in the previous table are not representative of the manner in which the Firm manages its business activities and are prepared in a manner similar to the presentation of trading revenues for regulatory reporting purposes.
| March 2017 Form 10-Q | 60 |
Notes to Consolidated Financial Statements (Unaudited) | |
OTC Derivative Products—Trading Assets
Counterparty Credit Rating and Remaining Maturity of OTC Derivative Assets
| Fair Value at March 31, 20171 | ||||||||||||||||||||||||||||
| Contractual Years to Maturity | Cross-Maturity and Cash Collateral Netting2 | Net Amounts Post-cash Collateral | Net Amounts Post- | |||||||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | ||||||||||||||||||||||||
Credit Rating4 |
| |||||||||||||||||||||||||||
AAA | $ | 190 | $ | 424 | $ | 521 | $ | 3,403 | $ | (3,525 | ) | $ | 1,013 | $ | 964 | |||||||||||||
AA | 1,412 | 2,096 | 2,944 | 11,209 | (12,512 | ) | 5,149 | 2,589 | ||||||||||||||||||||
A | 6,173 | 5,756 | 4,489 | 20,006 | (28,091 | ) | 8,333 | 4,921 | ||||||||||||||||||||
BBB | 4,040 | 2,552 | 2,385 | 12,474 | (15,094 | ) | 6,357 | 4,812 | ||||||||||||||||||||
Non-investment grade | 2,490 | 1,798 | 2,107 | 2,099 | (4,510 | ) | 3,984 | 2,080 | ||||||||||||||||||||
Total | $ | 14,305 | $ | 12,626 | $ | 12,446 | $ | 49,191 | $ | (63,732 | ) | $ | 24,836 | $ | 15,366 | |||||||||||||
| Fair Value at December 31, 20161 | ||||||||||||||||||||||||||||
| Contractual Years to Maturity | Cross-Maturity and Cash Collateral | Net Amounts Post-cash Collateral | Net Amounts Post- collateral3 | |||||||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | ||||||||||||||||||||||||
Credit Rating4 | ||||||||||||||||||||||||||||
AAA | $ | 150 | $ | 428 | $ | 918 | $ | 2,931 | $ | (3,900 | ) | $ | 527 | $ | 485 | |||||||||||||
AA | 3,177 | 2,383 | 2,942 | 10,194 | (11,813 | ) | 6,883 | 4,114 | ||||||||||||||||||||
A | 9,244 | 6,676 | 5,495 | 21,322 | (31,425 | ) | 11,312 | 6,769 | ||||||||||||||||||||
BBB | 4,423 | 3,085 | 2,434 | 13,023 | (16,629 | ) | 6,336 | 4,852 | ||||||||||||||||||||
Non-investment grade | 2,283 | 1,702 | 1,722 | 1,794 | (4,131 | ) | 3,370 | 1,915 | ||||||||||||||||||||
Total | $ | 19,277 | $ | 14,274 | $ | 13,511 | $ | 49,264 | $ | (67,898 | ) | $ | 28,428 | $ | 18,135 | |||||||||||||
| 1. | Fair values shown represent the Firm’s net exposure to counterparties related to its OTC derivative products. |
| 2. | Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category, where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists. |
| 3. | Fair value is shown, net of collateral received (primarily cash and U.S. government and agency securities). |
| 4. | Obligor credit ratings are determined internally by the Credit Risk Management Department. |
Credit Risk-Related Contingencies
In connection with certain OTC trading agreements, the Firm may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating downgrade of the Firm.
The following table presents the aggregate fair value of certain derivative contracts that contain credit risk-related contingent features that are in a net liability position for which the Firm has posted collateral in the normal course of business.
Net Derivative Liabilities and Collateral Posted
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Net derivative liabilities with credit risk-related contingent features | $ | 20,202 | $ | 22,939 | ||||
Collateral posted | 15,672 | 17,040 | ||||||
The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by
contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Global Ratings (“S&P”).The following table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event ofone-notch ortwo-notch downgrade scenarios based on the relevant contractual downgrade triggers.
Incremental Collateral or Termination Payments upon Potential Future Ratings Downgrade
| $ in millions | At March 31, 20171 | |
One-notch downgrade | $ 1,231 | |
Two-notch downgrade | 517 |
| 1. | Amounts include $998 million related to bilateral arrangements between the Firm and other parties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral downgrade arrangements are used by the Firm to manage the risk of counterparty downgrades. |
| 61 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
Credit Derivatives and Other Credit Contracts
The Firm enters into credit derivatives, principally through credit default swaps, under which it receives or provides protection against the risk of default on a set of debt obligations issued by a specified reference entity or entities. A majority of the Firm’s counterparties for these derivatives are banks, broker-dealers, and insurance and other financial institutions.
For further information on credit derivatives and other credit contracts, see Note 4 to the consolidated financial statements in the 2016 Form10-K.
Protection Sold and Purchased with Credit Default Swaps
| At March 31, 2017 | ||||||||||||||||
| Protection Sold | Protection Purchased | |||||||||||||||
| $ in millions | Notional | Fair Value Liability | Notional | Fair Value Liability | ||||||||||||
Credit default swaps |
| |||||||||||||||
Single name | $ | 238,136 | $ | (1,560 | ) | $ | 245,347 | $ | 1,807 | |||||||
Index and basket | 149,364 | 246 | 146,154 | (617 | ) | |||||||||||
Tranched index and basket | 31,813 | (801 | ) | 73,925 | 2,403 | |||||||||||
Total | $ | 419,313 | $ | (2,115 | ) | $ | 465,426 | $ | 3,593 | |||||||
Single name andnon-tranched index and basket with identical underlying reference obligations | $ | 387,259 | — | $ | 390,127 | — | ||||||||||
| At December 31, 2016 | ||||||||||||||||
| Protection Sold | Protection Purchased | |||||||||||||||
| $ in millions | Notional | Fair Value Liability | Notional | Fair Value Liability | ||||||||||||
Credit default swaps |
| |||||||||||||||
Single name | $ | 266,918 | $ | (753 | ) | $ | 269,623 | $ | 826 | |||||||
Index and basket | 130,383 | 374 | 122,061 | (481 | ) | |||||||||||
Tranched index and basket | 32,429 | (670 | ) | 78,505 | 1,900 | |||||||||||
Total | $ | 429,730 | $ | (1,049 | ) | $ | 470,189 | $ | 2,245 | |||||||
Single name andnon-tranched index and basket with identical underlying reference obligations | $ | 395,536 | — | $ | 389,221 | — | ||||||||||
| March 2017 Form 10-Q | 62 |
Notes to Consolidated Financial Statements (Unaudited) | |
Credit Ratings of Reference Obligation and Maturities of Credit Protection Sold
| At March 31, 2017 | ||||||||||||||||||||||||
| Maximum Potential Payout/Notional | Fair Value (Asset)/ Liability1 | |||||||||||||||||||||||
| Years to Maturity | ||||||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | Total | |||||||||||||||||||
Single name credit default swaps2 | ||||||||||||||||||||||||
Investment grade | $ | 74,614 | $ | 61,540 | $ | 29,165 | $ | 11,198 | $ | 176,517 | $ | (1,300 | ) | |||||||||||
Non-investment grade | 29,931 | 21,966 | 8,241 | 1,481 | 61,619 | (260 | ) | |||||||||||||||||
Total single name credit default swaps | 104,545 | 83,506 | 37,406 | 12,679 | 238,136 | (1,560 | ) | |||||||||||||||||
Index and basket credit default swaps2 | ||||||||||||||||||||||||
Investment grade | 26,694 | 20,430 | 37,091 | 23,647 | 107,862 | (862 | ) | |||||||||||||||||
Non-investment grade | 25,381 | 22,829 | 11,314 | 13,791 | 73,315 | 307 | ||||||||||||||||||
Total index and basket credit default swaps | 52,075 | 43,259 | 48,405 | 37,438 | 181,177 | (555 | ) | |||||||||||||||||
Total credit default swaps sold | $ | 156,620 | $ | 126,765 | $ | 85,811 | $ | 50,117 | $ | 419,313 | $ | (2,115 | ) | |||||||||||
Other credit contracts | 52 | 1 | — | 199 | 252 | (7 | ) | |||||||||||||||||
Total credit derivatives and other credit contracts | $ | 156,672 | $ | 126,766 | $ | 85,811 | $ | 50,316 | $ | 419,565 | $ | (2,122 | ) | |||||||||||
| At December 31, 2016 | ||||||||||||||||||||||||
| Maximum Potential Payout/Notional | Fair Value (Asset)/ Liability1 | |||||||||||||||||||||||
| Years to Maturity | ||||||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | Total | |||||||||||||||||||
Single name credit default swaps2 | ||||||||||||||||||||||||
Investment grade | $ | 79,449 | $ | 70,796 | $ | 34,529 | $ | 10,293 | $ | 195,067 | $ | (1,060 | ) | |||||||||||
Non-investment grade | 34,571 | 25,820 | 10,436 | 1,024 | 71,851 | 307 | ||||||||||||||||||
Total single name credit default swaps | $ | 114,020 | $ | 96,616 | $ | 44,965 | $ | 11,317 | $ | 266,918 | $ | (753 | ) | |||||||||||
Index and basket credit default swaps2 | ||||||||||||||||||||||||
Investment grade | $ | 26,530 | $ | 21,388 | $ | 35,060 | $ | 9,096 | $ | 92,074 | $ | (846 | ) | |||||||||||
Non-investment grade | 26,135 | 22,983 | 11,759 | 9,861 | 70,738 | 550 | ||||||||||||||||||
Total index and basket credit default swaps | $ | 52,665 | $ | 44,371 | $ | 46,819 | $ | 18,957 | $ | 162,812 | $ | (296 | ) | |||||||||||
Total credit default swaps sold | $ | 166,685 | $ | 140,987 | $ | 91,784 | $ | 30,274 | $ | 429,730 | $ | (1,049 | ) | |||||||||||
Other credit contracts | 49 | 6 | — | 215 | 270 | — | ||||||||||||||||||
Total credit derivatives and other credit contracts | $ | 166,734 | $ | 140,993 | $ | 91,784 | $ | 30,489 | $ | 430,000 | $ | (1,049 | ) | |||||||||||
| 1. | Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting. |
| 2. | In order to provide an indication of the current payment status or performance risk of the CDS, a breakdown of CDS based on the Firm’s internal credit ratings by investment grade andnon-investment grade is provided. Internal credit ratings serve as the Credit Risk Management Department’s assessment of credit risk and the basis for a comprehensive credit limits framework used to control credit risk. The Firm uses quantitative models and judgment to estimate the various risk parameters related to each obligor. |
| 63 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
The following tables present information about the Firm’s AFS securities, which are carried at fair value, and HTM securities, which are carried at amortized cost. The net unrealized gains or losses on AFS securities are reported on anafter-tax basis as a component of AOCI.
AFS and HTM Securities
| At March 31, 2017 | ||||||||||||||||
| $ in millions | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
AFS debt securities | ||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||
U.S. Treasury securities | $ | 26,631 | $ | 2 | $ | 495 | $ | 26,138 | ||||||||
U.S. agency securities1 | 22,884 | 31 | 250 | 22,665 | ||||||||||||
Total U.S. government and agency securities | 49,515 | 33 | 745 | 48,803 | ||||||||||||
Corporate and other debt: | ||||||||||||||||
Commercial mortgage-backed securities: | ||||||||||||||||
Agency | 1,648 | 1 | 45 | 1,604 | ||||||||||||
Non-agency | 2,186 | 10 | 13 | 2,183 | ||||||||||||
Auto loan asset-backed securities | 1,271 | — | 2 | 1,269 | ||||||||||||
Corporate bonds | 3,528 | 10 | 16 | 3,522 | ||||||||||||
Collateralized loan obligations | 540 | — | — | 540 | ||||||||||||
FFELP student loan asset- backed securities2 | 3,264 | 6 | 32 | 3,238 | ||||||||||||
Total corporate and other debt | 12,437 | 27 | 108 | 12,356 | ||||||||||||
Total AFS debt securities | 61,952 | 60 | 853 | 61,159 | ||||||||||||
AFS equity securities | 15 | — | 8 | 7 | ||||||||||||
Total AFS securities | 61,967 | 60 | 861 | 61,166 | ||||||||||||
HTM securities | ||||||||||||||||
U.S. government securities: | ||||||||||||||||
U.S. Treasury securities | 7,664 | 6 | 261 | 7,409 | ||||||||||||
U.S. agency securities1 | 12,274 | 7 | 208 | 12,073 | ||||||||||||
Corporate and other debt: | ||||||||||||||||
Commercial mortgage-backed securities: | ||||||||||||||||
Non-agency | 35 | — | — | 35 | ||||||||||||
Total HTM securities | 19,973 | 13 | 469 | 19,517 | ||||||||||||
Total Investment securities | $ | 81,940 | $ | 73 | $ | 1,330 | $ | 80,683 | ||||||||
| At December 31, 2016 | ||||||||||||||||
| $ in millions | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
AFS debt securities | ||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||
U.S. Treasury securities | $ | 28,371 | $ | 1 | $ | 545 | $ | 27,827 | ||||||||
U.S. agency securities1 | 22,348 | 14 | 278 | 22,084 | ||||||||||||
Total U.S. government and agency securities | 50,719 | 15 | 823 | 49,911 | ||||||||||||
Corporate and other debt: | ||||||||||||||||
Commercial mortgage- backed securities: | ||||||||||||||||
Agency | 1,850 | 2 | 44 | 1,808 | ||||||||||||
Non-agency | 2,250 | 11 | 16 | 2,245 | ||||||||||||
Auto loan asset-backed securities | 1,509 | 1 | 1 | 1,509 | ||||||||||||
Corporate bonds | 3,836 | 7 | 22 | 3,821 | ||||||||||||
Collateralized loan obligations | 540 | — | 1 | 539 | ||||||||||||
FFELP student loan asset- backed securities2 | 3,387 | 5 | 61 | 3,331 | ||||||||||||
Total corporate and other debt | 13,372 | 26 | 145 | 13,253 | ||||||||||||
Total AFS debt securities | 64,091 | 41 | 968 | 63,164 | ||||||||||||
AFS equity securities | 15 | — | 9 | 6 | ||||||||||||
Total AFS securities | 64,106 | 41 | 977 | 63,170 | ||||||||||||
HTM securities | ||||||||||||||||
U.S. government securities: | ||||||||||||||||
U.S. Treasury securities | 5,839 | 1 | 283 | 5,557 | ||||||||||||
U.S. agency securities1 | 11,083 | 1 | 188 | 10,896 | ||||||||||||
Total HTM securities | 16,922 | 2 | 471 | 16,453 | ||||||||||||
Total Investment securities | $ | 81,028 | $ | 43 | $ | 1,448 | $ | 79,623 | ||||||||
| 1. | U.S. agency securities consist mainly of agency-issued debt, agency mortgage pass-through pool securities and collateralized mortgage obligations. |
| 2. | FFELP—Federal Family Education Loan Program. Amounts are backed by a guarantee from the U.S. Department of Education of at least 95% of the principal balance and interest on such loans. |
| March 2017 Form 10-Q | 64 |
Notes to Consolidated Financial Statements (Unaudited) | |
Investment Securities in an Unrealized Loss Position
| At March 31, 2017 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| $ in millions | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||
AFS debt securities | ||||||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||||||
U.S. Treasury securities | $ | 23,809 | $ | 495 | $ | — | $ | — | $ | 23,809 | $ | 495 | ||||||||||||
U.S. agency securities | 13,419 | 250 | — | — | 13,419 | 250 | ||||||||||||||||||
Total U.S. government and agency securities | 37,228 | 745 | — | — | 37,228 | 745 | ||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||
Commercial mortgage-backed securities: | ||||||||||||||||||||||||
Agency | 1,165 | 45 | — | — | 1,165 | 45 | ||||||||||||||||||
Non-agency | 594 | 9 | 564 | 4 | 1,158 | 13 | ||||||||||||||||||
Auto loan asset-backed securities | 1,047 | 2 | 103 | — | 1,150 | 2 | ||||||||||||||||||
Corporate bonds | 1,601 | 15 | 112 | 1 | 1,713 | 16 | ||||||||||||||||||
Collateralized loan obligations | 178 | — | 240 | — | 418 | — | ||||||||||||||||||
FFELP student loan asset-backed securities | 2,321 | 32 | — | — | 2,321 | 32 | ||||||||||||||||||
Total corporate and other debt | 6,906 | 103 | 1,019 | 5 | 7,925 | 108 | ||||||||||||||||||
Total AFS debt securities | 44,134 | 848 | 1,019 | 5 | 45,153 | 853 | ||||||||||||||||||
AFS equity securities | 7 | 8 | — | — | 7 | 8 | ||||||||||||||||||
Total AFS securities | 44,141 | 856 | 1,019 | 5 | 45,160 | 861 | ||||||||||||||||||
HTM securities | ||||||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||||||
U.S. Treasury securities | 5,328 | 261 | — | — | 5,328 | 261 | ||||||||||||||||||
U.S. agency securities | 10,585 | 208 | — | — | 10,585 | 208 | ||||||||||||||||||
Total HTM securities | 15,913 | 469 | — | — | 15,913 | 469 | ||||||||||||||||||
Total Investment securities | $ | 60,054 | $ | 1,325 | $ | 1,019 | $ | 5 | $ | 61,073 | $ | 1,330 | ||||||||||||
| 65 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
| At December 31, 2016 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| $ in millions | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||
AFS debt securities | ||||||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||||||
U.S. Treasury securities | $ | 25,323 | $ | 545 | $ | — | $ | — | $ | 25,323 | $ | 545 | ||||||||||||
U.S. agency securities | 16,760 | 278 | 125 | — | 16,885 | 278 | ||||||||||||||||||
Total U.S. government and agency securities | 42,083 | 823 | 125 | — | 42,208 | 823 | ||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||
Commercial mortgage-backed securities: | ||||||||||||||||||||||||
Agency | 1,245 | 44 | — | — | 1,245 | 44 | ||||||||||||||||||
Non-agency | 763 | 11 | 594 | 5 | 1,357 | 16 | ||||||||||||||||||
Auto loan asset-backed securities | 659 | 1 | 123 | — | 782 | 1 | ||||||||||||||||||
Corporate bonds | 2,050 | 21 | 142 | 1 | 2,192 | 22 | ||||||||||||||||||
Collateralized loan obligations | 178 | — | 239 | 1 | 417 | 1 | ||||||||||||||||||
FFELP student loan asset-backed securities | 2,612 | 61 | — | — | 2,612 | 61 | ||||||||||||||||||
Total corporate and other debt | 7,507 | 138 | 1,098 | 7 | 8,605 | 145 | ||||||||||||||||||
Total AFS debt securities | 49,590 | 961 | 1,223 | 7 | 50,813 | 968 | ||||||||||||||||||
AFS equity securities | 6 | 9 | — | — | 6 | 9 | ||||||||||||||||||
Total AFS securities | 49,596 | 970 | 1,223 | 7 | 50,819 | 977 | ||||||||||||||||||
HTM securities | ||||||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||||||
U.S. Treasury securities | 5,057 | 283 | — | — | 5,057 | 283 | ||||||||||||||||||
U.S. agency securities | 10,612 | 188 | — | — | 10,612 | 188 | ||||||||||||||||||
Total HTM securities | 15,669 | 471 | — | — | 15,669 | 471 | ||||||||||||||||||
Total Investment securities | $ | 65,265 | $ | 1,441 | $ | 1,223 | $ | 7 | $ | 66,488 | $ | 1,448 | ||||||||||||
| March 2017 Form 10-Q | 66 |
Notes to Consolidated Financial Statements (Unaudited) | |
As discussed in Note 2 to the consolidated financial statements in the 2016 Form10-K, AFS and HTM securities with a current fair value less than their amortized cost are analyzed as part of the Firm’s ongoing assessment of temporary versus other-than-temporarily impaired at the individual securities level.
The Firm believes there are no securities in an unrealized loss position that are other-than-temporarily-impaired at March 31, 2017 and December 31, 2016 for the reasons discussed herein.
For AFS debt securities, the Firm does not intend to sell the securities and is not likely to be required to sell the securities prior to recovery of amortized cost basis. For AFS and HTM debt securities, the securities have not experienced credit losses as the net unrealized losses reported in the previous table are primarily due to higher interest rates since those securities were purchased.
Additionally, the Firm does not expect to experience a credit loss based on consideration of the relevant information (as discussed in Note 2 to the consolidated financial statements in the 2016 Form10-K), including for U.S. government and agency securities, the existence of an explicit and implicit guarantee provided by the U.S. government. The risk of credit loss on securities in an unrealized loss position is considered minimal because the Firm’s U.S. government and agency securities, as well as asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”) and collateralized loan obligations (“CLOs”), are highly rated and because corporate bonds are all investment grade.
For AFS equity securities, the Firm has the intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in market value.
See Note 12 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities,non-agency CMBS, auto loan ABS, CLO and FFELP student loan ABS.
Investment Securities by Contractual Maturity
| At March 31, 2017 | ||||||||||||
| $ in millions | Amortized Cost | Fair Value | Annualized Average Yield | |||||||||
AFS debt securities | ||||||||||||
U.S. government and agency securities: |
| |||||||||||
U.S. Treasury securities: | ||||||||||||
Due within 1 year | $ | 2,357 | $ | 2,353 | 0.8% | |||||||
After 1 year through 5 years | 18,857 | 18,672 | 1.2% | |||||||||
After 5 years through 10 years | 5,417 | 5,113 | 1.4% | |||||||||
Total | 26,631 | 26,138 | ||||||||||
U.S. agency securities: | ||||||||||||
Due within 1 year | 36 | 36 | 0.7% | |||||||||
After 1 year through 5 years | 4,563 | 4,560 | 0.7% | |||||||||
| At March 31, 2017 | ||||||||||||
| $ in millions | Amortized Cost | Fair Value | Annualized Average Yield | |||||||||
After 5 years through 10 years | 1,004 | 1,005 | 2.0% | |||||||||
After 10 years | 17,281 | 17,064 | 1.8% | |||||||||
Total | 22,884 | 22,665 | ||||||||||
Total U.S. government and agency securities | 49,515 | 48,803 | 1.4% | |||||||||
Corporate and other debt: | ||||||||||||
Commercial mortgage-backed securities: |
| |||||||||||
Agency: | ||||||||||||
Due within 1 year | 94 | 93 | 1.1% | |||||||||
After 1 year through 5 years | 216 | 215 | 1.5% | |||||||||
After 5 years through 10 years | 446 | 446 | 1.2% | |||||||||
After 10 years | 892 | 850 | 1.6% | |||||||||
Total | 1,648 | 1,604 | ||||||||||
Non-agency: | ||||||||||||
After 5 years through 10 years | 36 | 35 | 2.5% | |||||||||
After 10 years | 2,150 | 2,148 | 2.0% | |||||||||
Total | 2,186 | 2,183 | ||||||||||
Auto loan asset-backed securities: |
| |||||||||||
Due within 1 year | 21 | 21 | 1.2% | |||||||||
After 1 year through 5 years | 1,220 | 1,218 | 1.5% | |||||||||
After 5 years through 10 years | 30 | 30 | 1.7% | |||||||||
Total | 1,271 | 1,269 | ||||||||||
Corporate bonds: | ||||||||||||
Due within 1 year | 830 | 828 | 1.3% | |||||||||
After 1 year through 5 years | 2,142 | 2,142 | 2.1% | |||||||||
After 5 years through 10 years | 556 | 552 | 2.5% | |||||||||
Total | 3,528 | 3,522 | ||||||||||
Collateralized loan obligations: | ||||||||||||
After 5 years through 10 years | 362 | 362 | 1.5% | |||||||||
After 10 years | 178 | 178 | 2.4% | |||||||||
Total | 540 | 540 | ||||||||||
FFELP student loan asset-backed securities: | ||||||||||||
After 1 year through 5 years | 103 | 102 | 0.7% | |||||||||
After 5 years through 10 years | 874 | 865 | 0.9% | |||||||||
After 10 years | 2,287 | 2,271 | 1.0% | |||||||||
Total | 3,264 | 3,238 | ||||||||||
Total corporate and other debt | 12,437 | 12,356 | 1.6% | |||||||||
Total AFS debt securities | 61,952 | 61,159 | 1.4% | |||||||||
AFS equity securities | 15 | 7 | — % | |||||||||
Total AFS securities | 61,967 | 61,166 | 1.4% | |||||||||
HTM securities | ||||||||||||
U.S. government securities: | ||||||||||||
U.S. Treasury securities: | ||||||||||||
Due within 1 year | 300 | 300 | 0.7% | |||||||||
After 1 year through 5 years | 4,038 | 4,035 | 1.4% | |||||||||
After 5 years through 10 years | 2,599 | 2,447 | 1.6% | |||||||||
After 10 years | 727 | 627 | 2.3% | |||||||||
Total | 7,664 | 7,409 | ||||||||||
U.S. agency securities: | ||||||||||||
After 10 years | 12,274 | 12,073 | 2.4% | |||||||||
Total | 12,274 | 12,073 | ||||||||||
Corporate and other debt: | ||||||||||||
Commercial mortgage-backed securities: |
| |||||||||||
Non-agency: | ||||||||||||
After 5 years through 10 years | 18 | 18 | 3.5% | |||||||||
After 10 years | 17 | 17 | 4.0% | |||||||||
Total | 35 | 35 | ||||||||||
Total HTM securities | 19,973 | 19,517 | 2.1% | |||||||||
Total Investment securities | $ | 81,940 | $ | 80,683 | 1.6% | |||||||
| 67 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
Gross Realized Gains and Losses on Sales of AFS Securities
| Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Gross realized gains | $ | 4 | $ | 14 | ||||
Gross realized (losses) | (2 | ) | (2 | ) | ||||
Total | $ | 2 | $ | 12 | ||||
Gross realized gains and losses are recognized in Other revenues in the consolidated income statements.
6. Collateralized Transactions
The Firm enters into securities purchased under agreements to resell, securities sold under agreements to repurchase, securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance its inventory positions. For further discussion of the Firm’s collateralized transactions, see Note 6 to the consolidated financial statements in the 2016 Form10-K.
Offsetting of Certain Collateralized Transactions
| At March 31, 2017 | ||||||||||||||||||||
| $ in millions | Gross Amounts1 | Amounts Offset | Net Amounts Presented | Amounts Not Offset2 | Net Amounts | |||||||||||||||
Assets | ||||||||||||||||||||
Securities purchased under agreements to resell | $ | 184,289 | $ | (79,466) | $ | 104,823 | $ | (91,105) | $ | 13,718 | ||||||||||
Securities borrowed | 122,158 | (10,355 | ) | 111,803 | (107,461 | ) | 4,342 | |||||||||||||
Liabilities | ||||||||||||||||||||
Securities sold under agreements to repurchase | $ | 135,991 | $ | (79,466 | ) | $ | 56,525 | $ | (48,271 | ) | $ | 8,254 | ||||||||
Securities loaned | 29,289 | (10,355 | ) | 18,934 | (18,814 | ) | 120 | |||||||||||||
| At December 31, 2016 | ||||||||||||||||||||
| $ in millions | Gross Amounts1 | Amounts Offset | Net Amounts Presented | Amounts Not Offset2 | Net Amounts | |||||||||||||||
Assets | ||||||||||||||||||||
Securities purchased under agreements to resell | $ | 182,888 | $ | (80,933) | $ | 101,955 | $ | (93,365) | $ | 8,590 | ||||||||||
Securities borrowed | 129,934 | (4,698 | ) | 125,236 | (118,974 | ) | 6,262 | |||||||||||||
Liabilities | ||||||||||||||||||||
Securities sold under agreements to repurchase | $ | 135,561 | $ | (80,933 | ) | $ | 54,628 | $ | (47,933 | ) | $ | 6,695 | ||||||||
Securities loaned | 20,542 | (4,698 | ) | 15,844 | (15,670 | ) | 174 | |||||||||||||
| 1. | Amounts include transactions that are either not subject to master netting agreements or are subject to such agreements but the Firm has not determined the agreements to be legally enforceable as follows: $12.7 billion of Securities purchased under agreements to resell, $1.1 billion of Securities borrowed, $7.3 billion of Securities sold under agreements to repurchase and $0.1 billion of Securities loaned at March 31, 2017 and $7.8 billion of Securities purchased under agreements to resell, $2.6 billion of Securities borrowed, $6.5 billion of Securities sold under agreements to repurchase and $0.2 billion of Securities loaned at December 31, 2016. |
| 2. | Amounts relate to master netting agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance. |
For information related to offsetting of derivatives, see Note 4.
Maturities and Collateral Pledged
Gross Secured Financing Balances by Remaining Contractual Maturity
| At March 31, 2017 | ||||||||||||||||||||
| $ in millions | Overnight and | Less 30 Days | 30-90 Days | Over 90 Days | Total | |||||||||||||||
Securities sold under agreements to repurchase1 | $ | 41,761 | $ | 32,591 | $ | 24,413 | $ | 37,226 | $ | 135,991 | ||||||||||
Securities loaned1 | 15,040 | 1,159 | 3,002 | 10,088 | 29,289 | |||||||||||||||
Gross amount of secured financing included in the offsetting disclosure | $ | 56,801 | $ | 33,750 | $ | 27,415 | $ | 47,314 | $ | 165,280 | ||||||||||
Trading liabilities—Obligation to return securities received as collateral | 20,041 | — | — | — | 20,041 | |||||||||||||||
Total | $ | 76,842 | $ | 33,750 | $ | 27,415 | $ | 47,314 | $ | 185,321 | ||||||||||
| At December 31, 2016 | ||||||||||||||||||||
| $ in millions | Overnight and | Less 30 Days | 30-90 Days | Over 90 Days | Total | |||||||||||||||
Securities sold under agreements to repurchase1 | $ | 41,549 | $ | 36,703 | $ | 24,648 | $ | 32,661 | $ | 135,561 | ||||||||||
Securities loaned1 | 9,487 | 851 | 2,863 | 7,341 | 20,542 | |||||||||||||||
Gross amount of secured financing included in the offsetting disclosure | $ | 51,036 | $ | 37,554 | $ | 27,511 | $ | 40,002 | $ | 156,103 | ||||||||||
Trading liabilities—Obligation to return securities received as collateral | 20,262 | — | — | — | 20,262 | |||||||||||||||
Total | $ | 71,298 | $ | 37,554 | $ | 27,511 | $ | 40,002 | $ | 176,365 | ||||||||||
| 1. | Amounts are presented on a gross basis, prior to netting in the consolidated balance sheets. |
| March 2017 Form 10-Q | 68 |
Notes to Consolidated Financial Statements (Unaudited) | |
Gross Secured Financing Balances by Class of Collateral Pledged
| $ in millions | At March 31, | At December 31, | ||||||
Securities sold under agreements to repurchase1 |
| |||||||
U.S. government and agency securities | $ | 43,798 | $ | 56,372 | ||||
State and municipal securities | 579 | 1,363 | ||||||
Other sovereign government obligations | 59,625 | 42,790 | ||||||
Asset-backed securities | 1,418 | 1,918 | ||||||
Corporate and other debt | 8,164 | 9,086 | ||||||
Corporate equities | 21,393 | 23,152 | ||||||
Other | 1,014 | 880 | ||||||
Total securities sold under agreements to repurchase | $ | 135,991 | $ | 135,561 | ||||
Securities loaned1 | ||||||||
Other sovereign government obligations | 10,779 | 4,762 | ||||||
Corporate and other debt | 31 | 73 | ||||||
Corporate equities | 18,368 | 15,693 | ||||||
Other | 111 | 14 | ||||||
Total securities loaned | $ | 29,289 | $ | 20,542 | ||||
Gross amount of secured financing included in the offsetting disclosure | $ | 165,280 | $ | 156,103 | ||||
Trading liabilities—Obligation to return securities received as collateral |
| |||||||
Corporate equities | 20,030 | 20,247 | ||||||
Other | 11 | 15 | ||||||
Total Trading liabilities—Obligation to return securities received as collateral | $ | 20,041 | $ | 20,262 | ||||
Total | $ | 185,321 | $ | 176,365 | ||||
| 1. | Amounts are presented on a gross basis, prior to netting in the consolidated balance sheets. |
Trading Assets Pledged
The Firm pledges its trading assets to collateralize securities sold under agreements to repurchase, securities loaned, other secured financings and derivatives. Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets (pledged to various parties) in the consolidated balance sheets. At March 31, 2017 and December 31, 2016, the carrying value of Trading assets that have been loaned or pledged to counterparties, where those counterparties do not have the right to sell or repledge the collateral, was $44.4 billion and $41.4 billion, respectively.
Collateral Received
The Firm receives collateral in the form of securities in connection with securities purchased under agreements to resell, securities borrowed and derivative transactions, customer margin loans and securities-based lending. In many cases, the Firm is permitted to sell or repledge these securities held as collateral and use the securities to secure securities sold under agreements to repurchase, to enter into securities lending and derivative transactions or for delivery to counterparties to cover short positions.
The Firm additionally receives securities as collateral in connection with certainsecurities-for-securities transactions. In instances where the Firm is the lender and permitted to sell or repledge these securities, it reports the fair value of the collateral received and the related obligation to return the collateral included in Trading assets and Trading liabilities, respectively, in its consolidated balance sheets.
At March 31, 2017 and December 31, 2016, the total fair value of financial instruments received as collateral where the Firm is permitted to sell or repledge the securities was $567.8 billion and $561.2 billion, respectively, and the fair value of the portion that had been sold or repledged was $446.9 billion and $430.9 billion, respectively.
Customer Margin Lending and Other
The Firm engages in margin lending to clients that allows the client to borrow against the value of qualifying securities. Margin loans are included within Customer and other receivables in the consolidated balance sheets. Under these agreements and transactions, the Firm receives collateral, including U.S. government and agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. Customer receivables generated from margin lending activities are collateralized by customer-owned securities held by the Firm. The Firm monitors required margin levels and established credit terms daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or reduce positions, when necessary. At March 31, 2017 and December 31, 2016, the amounts related to margin lending were approximately $26.2 billion and $24.4 billion, respectively.
For a further discussion of the Firm’s margin lending activities, see Note 6 to the consolidated financial statements in the 2016 Form10-K.
The Firm has additional secured liabilities. For a further discussion of other secured financings, see Note 10.
| 69 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
Cash and Securities Deposited with Clearing Organizations or Segregated
| $ in millions | At March 31, | At December 31, 2016 | ||||||
Securities1 | $ | 19,776 | $ | 23,756 | ||||
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements | 36,027 | 33,979 | ||||||
Total | $ | 55,803 | $ | 57,735 | ||||
| 1. | Securities deposited with clearing organizations or segregated under federal and other regulations or requirements for the Firm’s U.S. broker-dealers are sourced from Securities purchased under agreements to resell and Trading assets in the consolidated balance sheets. |
7. Loans and Allowance for Credit Losses
Loans
The Firm’s loans held for investment are recorded at amortized cost, and its loans held for sale are recorded at the lower of cost or fair value in the consolidated balance sheets. For a further description of these loans, refer to Note 7 to the consolidated financial statements in the 2016 Form10-K. See Note 3 for further information regarding Loans and lending commitments held at fair value.
Loans Held for Investment and Held for Sale by Loan Type
| At March 31, 2017 | ||||||||||||
| $ in millions | Loans Held for Investment | Loans Held for Sale | Total Loans | |||||||||
Corporate loans | $ | 25,229 | $ | 11,216 | $ | 36,445 | ||||||
Consumer loans | 25,042 | — | 25,042 | |||||||||
Residential real estate loans | 25,036 | 53 | 25,089 | |||||||||
Wholesale real estate loans | 8,292 | 1,382 | 9,674 | |||||||||
Total loans, gross | 83,599 | 12,651 | 96,250 | |||||||||
Allowance for loan losses | (297 | ) | — | (297 | ) | |||||||
Total loans, net | $ | 83,302 | $ | 12,651 | $ | 95,953 | ||||||
| At December 31, 2016 | ||||||||||||
| $ in millions | Loans Held for Investment | Loans Held for Sale | Total Loans | |||||||||
Corporate loans | $ | 25,025 | $ | 10,710 | $ | 35,735 | ||||||
Consumer loans | 24,866 | — | 24,866 | |||||||||
Residential real estate loans | 24,385 | 61 | 24,446 | |||||||||
Wholesale real estate loans | 7,702 | 1,773 | 9,475 | |||||||||
Total loans, gross | 81,978 | 12,544 | 94,522 | |||||||||
Allowance for loan losses | (274 | ) | — | (274 | ) | |||||||
Total loans, net | $ | 81,704 | $ | 12,544 | $ | 94,248 | ||||||
Loans toNon-U.S. Borrowers
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Loans, net of allowance | $ | 8,372 | $ | 9,388 | ||||
Loans by Interest Rate Type
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Fixed | $ | 12,076 | $ | 11,895 | ||||
Floating or adjustable | $ | 83,877 | $ | 82,353 | ||||
Credit Quality
For a further discussion about the Firm’s evaluation of credit transactions and monitoring and credit quality indicators, see Note 7 to the consolidated financial statements in the 2016 Form10-K.
Loans Held for Investment before Allowance by Credit Quality
| At March 31, 2017 | ||||||||||||||||||||
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real | Total | |||||||||||||||
Pass | $ | 23,716 | $ | 25,039 | $ | 24,997 | $ | 7,882 | $ | 81,634 | ||||||||||
Special mention | 324 | 3 | — | 220 | 547 | |||||||||||||||
Substandard | 1,121 | — | 39 | 190 | 1,350 | |||||||||||||||
Doubtful | 68 | — | — | — | 68 | |||||||||||||||
Loss | — | — | — | — | — | |||||||||||||||
Total | $ | 25,229 | $ | 25,042 | $ | 25,036 | $ | 8,292 | $ | 83,599 | ||||||||||
| At December 31, 2016 | ||||||||||||||||||||
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real | Total | |||||||||||||||
Pass | $ | 23,409 | $ | 24,853 | $ | 24,345 | $ | 7,294 | $ | 79,901 | ||||||||||
Special mention | 288 | 13 | — | 218 | 519 | |||||||||||||||
Substandard | 1,259 | — | 40 | 190 | 1,489 | |||||||||||||||
Doubtful | 69 | — | — | — | 69 | |||||||||||||||
Loss | — | — | — | — | — | |||||||||||||||
Total | $ | 25,025 | $ | 24,866 | $ | 24,385 | $ | 7,702 | $ | 81,978 | ||||||||||
Allowance for Credit Losses and Impaired Loans
For factors considered by the Firm in determining the allowance for loan losses and impairments, see Notes 2 and 7 to the consolidated financial statements in the 2016 Form10-K.
| March 2017 Form 10-Q | 70 |
Notes to Consolidated Financial Statements (Unaudited) | |
Impaired Loans Before Allowance by Product Type
| At March 31, 2017 | ||||||||||||
| $ in millions | Corporate | Residential Real | Total | |||||||||
With allowance | $ | 143 | $ | — | $ | 143 | ||||||
Without allowance1 | 128 | 34 | 162 | |||||||||
Unpaid principal balance2 | 280 | 35 | 315 | |||||||||
| At December 31, 2016 | ||||||||||||
| $ in millions | Corporate | Residential Real | Total | |||||||||
With allowance | $ | 104 | $ | — | $ | 104 | ||||||
Without allowance1 | 206 | 35 | 241 | |||||||||
Unpaid principal balance2 | 316 | 38 | 354 | |||||||||
| 1. | At March 31, 2017 and December 31, 2016, no allowance was recorded for these loans as the present value of the expected future cash flows (or, alternatively, the observable market price of the loan or the fair value of the collateral held) equaled or exceeded the carrying value. |
| 2. | The impaired loans unpaid principal balance differs from the aggregate amount of impaired loan balances with and without allowance due to various factors, including charge-offs and net deferred loan fees or costs. |
Select Loan Information by Region
| At March 31, 2017 | ||||||||||||||||
| $ in millions | Americas | EMEA | Asia- Pacific | Total | ||||||||||||
Impaired loans | $ | 283 | $ | 10 | $ | 12 | $ | 305 | ||||||||
Allowance for loan losses | 265 | 30 | 2 | 297 | ||||||||||||
| At December 31, 2016 | ||||||||||||||||
| $ in millions | Americas | EMEA | Asia- Pacific | Total | ||||||||||||
Impaired loans | $ | 320 | $ | 9 | $ | 16 | $ | 345 | ||||||||
Allowance for loan losses | 245 | 28 | 1 | 274 | ||||||||||||
EMEA—Europe, Middle East and Africa
Allowance for Credit Losses on Lending Activities
Loans—Current Quarter
Allowance for Loan Losses Rollforward
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real Estate | Total | |||||||||||||||
December 31, 2016 | $ | 195 | $ | 4 | $ | 20 | $ | 55 | $ | 274 | ||||||||||
Recoveries | 1 | — | — | — | 1 | |||||||||||||||
Provision for (release of) loan losses | 13 | — | — | 9 | 22 | |||||||||||||||
March 31, 2017 | $ | 209 | $ | 4 | $ | 20 | $ | 64 | $ | 297 | ||||||||||
Loan Loss Allowance by Impairment Methodology
| At March 31, 2017 | ||||||||||||||||||||
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real Estate | Total | |||||||||||||||
Inherent | $ | 142 | $ | 4 | $ | 20 | $ | 64 | $ | 230 | ||||||||||
Specific | 67 | — | — | — | 67 | |||||||||||||||
Total | $ | 209 | $ | 4 | $ | 20 | $ | 64 | $ | 297 | ||||||||||
Loans by Impairment Methodology1
| At March 31, 2017 | ||||||||||||||||||||
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real Estate | Total | |||||||||||||||
Inherent | $ | 24,958 | $ | 25,042 | $ | 25,002 | $ | 8,292 | $ | 83,294 | ||||||||||
Specific | 271 | — | 34 | — | 305 | |||||||||||||||
Total | $ | 25,229 | $ | 25,042 | $ | 25,036 | $ | 8,292 | $ | 83,599 | ||||||||||
Loans—Prior Year Quarter
Allowance for Loan Losses Rollforward
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real Estate | Total | |||||||||||||||
December 31, 2015 | $ | 166 | $ | 5 | $ | 17 | $ | 37 | $ | 225 | ||||||||||
Provision for (release of) loan losses | 109 | (1 | ) | 2 | 2 | 112 | ||||||||||||||
Other | (7 | ) | — | — | — | (7 | ) | |||||||||||||
March 31, 2016 | $ | 268 | $ | 4 | $ | 19 | $ | 39 | $ | 330 | ||||||||||
Loan Loss Allowance by Impairment Methodology
| At March 31, 2016 | ||||||||||||||||||||
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real Estate | Total | |||||||||||||||
Inherent | $ | 160 | $ | 4 | $ | 19 | $ | 39 | $ | 222 | ||||||||||
Specific | 108 | — | — | — | 108 | |||||||||||||||
Total | $ | 268 | $ | 4 | $ | 19 | $ | 39 | $ | 330 | ||||||||||
Loans by Impairment Methodology1
| At March 31, 2016 | ||||||||||||||||||||
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real Estate | Total | |||||||||||||||
Inherent | $ | 24,499 | $ | 22,174 | $ | 21,762 | $ | 6,816 | $ | 75,251 | ||||||||||
Specific | 627 | — | 18 | — | 645 | |||||||||||||||
March 31, 2016 | $ | 25,126 | $ | 22,174 | $ | 21,780 | $ | 6,816 | $ | 75,896 | ||||||||||
| 71 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
Commitments—Current Quarter
Allowance for Lending Commitments Rollforward
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real Estate | Total | |||||||||||||||
December 31, 2016 | $ | 185 | $ | 1 | $ | — | $ | 4 | $ | 190 | ||||||||||
Provision for lending commitments | 3 | — | — | — | 3 | |||||||||||||||
March 31, 2017 | $ | 188 | $ | 1 | $ | — | $ | 4 | $ | 193 | ||||||||||
Lending Commitments Allowance by Impairment Methodology
| At March 31, 2017 | ||||||||||||||||||||
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real Estate | Total | |||||||||||||||
Inherent | $ | 186 | $ | 1 | $ | — | $ | 4 | $ | 191 | ||||||||||
Specific | 2 | — | — | — | 2 | |||||||||||||||
Total | $ | 188 | $ | 1 | $ | — | $ | 4 | $ | 193 | ||||||||||
Lending Commitments by Impairment Methodology1
| At March 31, 2017 | ||||||||||||||||||||
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real Estate | Total | |||||||||||||||
Inherent | $ | 62,942 | $ | 5,898 | $ | 339 | $ | 501 | $ | 69,680 | ||||||||||
Specific | 218 | — | — | — | 218 | |||||||||||||||
Total | $ | 63,160 | $ | 5,898 | $ | 339 | $ | 501 | $ | 69,898 | ||||||||||
Commitments—Prior Year Quarter
Allowance for Lending Commitments Rollforward
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real Estate | Total | |||||||||||||||
December 31, 2015 | $ | 180 | $ | 1 | $ | — | $ | 4 | $ | 185 | ||||||||||
Provision for lending commitments | 15 | — | — | 1 | 16 | |||||||||||||||
March 31, 2016 | $ | 195 | $ | 1 | $ | — | $ | 5 | $ | 201 | ||||||||||
Lending Commitments Allowance by Impairment Methodology
| At March 31, 2016 | ||||||||||||||||||||
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real Estate | Total | |||||||||||||||
Inherent | $ | 184 | $ | 1 | $ | — | $ | 5 | $ | 190 | ||||||||||
Specific | 11 | — | — | — | 11 | |||||||||||||||
Total | $ | 195 | $ | 1 | $ | — | $ | 5 | $ | 201 | ||||||||||
Lending Commitments by Impairment Methodology1
| At March 31, 2016 | ||||||||||||||||||||
| $ in millions | Corporate | Consumer | Residential Real | Wholesale Real Estate | Total | |||||||||||||||
Inherent | $ | 65,682 | $ | 5,066 | $ | 327 | $ | 380 | $ | 71,455 | ||||||||||
Specific | 136 | — | — | — | 136 | |||||||||||||||
Total | $ | 65,818 | $ | 5,066 | $ | 327 | $ | 380 | $ | 71,591 | ||||||||||
| 1. | Loan balances are gross of the allowance for loan losses, and lending commitments are gross of the allowance for lending commitments. |
Troubled Debt Restructurings
Impaired loans and lending commitments classified as held for investment within corporate loans include troubled debt restructurings as shown in the following table.
Troubled Debt Restructurings
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Loans | $ | 46 | $ | 67 | ||||
Lending commitments | $ | 31 | $ | 14 | ||||
Allowance for loan losses | $ | 4 | $ | — | ||||
These restructurings typically include modifications of interest rates, collateral requirements, other loan covenants and payment extensions.
Employee Loans
Employee loans are granted in conjunction with a program established in the Wealth Management business segment to retain and recruit certain employees. These loans are recorded in Customer and other receivables in the consolidated balance sheets. These loans are full recourse, generally require periodic payments and have repayment terms ranging from 1 to 20 years. The Firm establishes an allowance for loan amounts it does not consider recoverable, and the related provision is recorded in Compensation and benefits expense.
Employee Loans
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Balance | $ | 4,351 | $ | 4,804 | ||||
Allowance for loan losses | (82 | ) | (89 | ) | ||||
Balance, net | $ | 4,269 | $ | 4,715 | ||||
| March 2017 Form 10-Q | 72 |
Notes to Consolidated Financial Statements (Unaudited) | |
Overview
The Firm’s investments accounted for under the equity method of accounting (see Note 1 to the consolidated financial statements in the 2016 Form10-K) are included in Other assets—Other investments in the consolidated balance sheets. Income (loss) from equity method investments is included in Other revenues in the consolidated income statements.
Equity Method Investment Balances
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Investments | $ | 2,899 | $ | 2,837 | ||||
| Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Income | $ | 9 | $ | 15 | ||||
Japanese Securities Joint Venture
Included in the equity method investments is the Firm’s 40% voting interest (“40% interest”) in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”). Mitsubishi UFJ Financial Group, Inc. (“MUFG”) holds a 60% voting interest. The Firm accounts for its equity method investment in MUMSS within the Institutional Securities business segment. The Firm records income from its 40% interest in MUMSS within Other revenues in the consolidated income statements.
| Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Income from investment in MUMSS | $ | 48 | $ | 34 | ||||
In addition to MUMSS, the Firm held other equity method investments that were not individually significant.
Deposits
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Savings and demand deposits | $ | 150,612 | $ | 154,559 | ||||
Time deposits1 | 1,497 | 1,304 | ||||||
Total2 | $ | 152,109 | $ | 155,863 | ||||
Deposits subject to FDIC insurance | $ | 125,032 | $ | 127,992 | ||||
Time deposits that equal or exceed the FDIC insurance limit | $ | 23 | $ | 46 | ||||
Interest Bearing Deposit Maturities at March 31, 2017
| $ in millions | Savings and Demand Deposits | Time Deposits1 | ||||||
Demand | $ | 150,590 | $ | — | ||||
2017 | — | 1,263 | ||||||
2018 | — | 99 | ||||||
2019 | — | 47 | ||||||
2021 | — | 8 | ||||||
Thereafter | — | 80 | ||||||
| FDIC—Federal | Deposit Insurance Corporation |
| 1. | Certain time deposit accounts are carried at fair value under the fair value option (see Note 3). |
| 2. | Deposits were primarily held in the U.S. |
The vast majority of deposits in Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”) are sourced from Wealth Management customer accounts.
10. Long-Term Borrowings and Other Secured Financings
Long-Term Borrowings
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Senior | $ | 162,433 | $ | 154,472 | ||||
Subordinated | 10,255 | 10,303 | ||||||
Total | $ | 172,688 | $ | 164,775 | ||||
Weighted average maturity in years based upon stated maturity dates | 6.4 | 5.9 | ||||||
Other Secured Financings
Other secured financings include the liabilities related to transfers of financial assets that are accounted for as financings rather than sales, consolidated VIEs where the Firm is deemed to be the primary beneficiary, pledged commodities, certain equity-linked notes and other secured borrowings. These liabilities are generally payable from the cash flows of the related assets accounted for as Trading assets.See Note 12 for further information on Other secured financings related to VIEs and securitization activities.
Other Secured Financings by Original Maturity and Type
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Secured Financings | ||||||||
Original maturities: | ||||||||
Greater than one year | $ | 10,080 | $ | 9,404 | ||||
One year or less | 1,467 | 1,429 | ||||||
Failed sales1 | 305 | 285 | ||||||
Total | $ | 11,852 | $ | 11,118 | ||||
| 1. | For more information on failed sales, see Note 12. |
| 73 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
11. Commitments, Guarantees and Contingencies
Commitments
The Firm’s commitments are summarized in the following table by years to maturity. Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
Commitments
| Years to Maturity at March 31, 2017 | ||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | Total | |||||||||||||||
Lending: | ||||||||||||||||||||
Corporate1 | $ | 15,190 | $ | 25,080 | $ | 46,118 | $ | 4,156 | $ | 90,544 | ||||||||||
Consumer | 5,891 | 3 | — | 4 | 5,898 | |||||||||||||||
Residential real estate | 65 | 11 | 99 | 230 | 405 | |||||||||||||||
Wholesale real estate | 145 | 293 | 27 | 68 | 533 | |||||||||||||||
Forward-starting secured financing receivables2 | 105,364 | — | — | — | 105,364 | |||||||||||||||
Underwriting | 989 | — | — | — | 989 | |||||||||||||||
Investment activities | 509 | 143 | 21 | 258 | 931 | |||||||||||||||
Letters of credit and other financial guarantees | 167 | 1 | 1 | 41 | 210 | |||||||||||||||
Total | $ | 128,320 | $ | 25,531 | $ | 46,266 | $ | 4,757 | $ | 204,874 | ||||||||||
| 1. | Due to the nature of the Firm’s obligations under the commitments, these amounts include certain commitments participated to third parties of $6.2 billion. |
| 2. | Represents forward-starting securities purchased under agreements to resell and securities borrowed agreements, of which $89.3 billion settled within three business days. |
For a further description of these commitments, refer to Note 12 to the consolidated financial statements in the 2016 Form10-K.
Guarantees
Obligations under Guarantee Arrangements at March 31, 2017
| Maximum Potential Payout/Notional | ||||||||||||||||||||
| Years to Maturity | ||||||||||||||||||||
| $ in millions | Less than 1 | 1-3 | 3-5 | Over 5 | Total | |||||||||||||||
Credit derivatives | $ | 156,620 | $ | 126,765 | $ | 85,811 | $ | 50,117 | $ | 419,313 | ||||||||||
Other credit contracts | 52 | 1 | — | 199 | 252 | |||||||||||||||
Non-credit derivatives | 1,485,521 | 770,781 | 321,268 | 544,342 | 3,121,912 | |||||||||||||||
Standby letters of credit and other financial guarantees issued1 | 789 | 833 | 1,381 | 5,588 | 8,591 | |||||||||||||||
Market value guarantees | 38 | 149 | 70 | — | 257 | |||||||||||||||
Liquidity facilities | 2,950 | — | — | — | 2,950 | |||||||||||||||
Whole loan sales guarantees | — | — | 2 | 23,300 | 23,302 | |||||||||||||||
Securitization representations and warranties | — | — | — | 57,302 | 57,302 | |||||||||||||||
General partner guarantees | 5 | 28 | 120 | 233 | 386 | |||||||||||||||
| $ in millions | Carrying Amount (Asset)/ Liability | Collateral/ Recourse | ||||||
Credit derivatives2 | $ | (2,115 | ) | $ | — | |||
Other credit contracts | (7 | ) | — | |||||
Non-credit derivatives2 | 49,826 | — | ||||||
Standby letters of credit and other financial guarantees issued1 | (170 | ) | 6,786 | |||||
Market value guarantees | 1 | 4 | ||||||
Liquidity facilities | (5 | ) | 5,113 | |||||
Whole loan sales guarantees | 8 | — | ||||||
Securitization representations and warranties | 90 | — | ||||||
General partner guarantees | 44 | — | ||||||
| 1. | These amounts include certain issued standby letters of credit participated to third parties, totaling $0.6 billion of notional and collateral/recourse, due to the nature of the Firm’s obligations under these arrangements. |
| 2. | Carrying amounts of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting. For further information on derivative contracts, see Note 4. |
| March 2017 Form 10-Q | 74 |
Notes to Consolidated Financial Statements (Unaudited) | |
The Firm has obligations under certain guarantee arrangements, including contracts and indemnification agreements, that contingently require the Firm to make payments to the guaranteed party based on changes in an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index, or the occurrence ornon-occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Also included as guarantees are contracts that contingently require the Firm to make payments to the guaranteed party based on another entity’s failure to perform under an agreement, as well as indirect guarantees of the indebtedness of others.
For more information on the nature of the obligation and related business activity for market value guarantees, liquidity facilities, whole loan sales guarantees and general partner guarantees related to certain investment management funds, as well as the other products in the previous table, see Note 12 to the consolidated financial statements in the 2016 Form10-K.
Other Guarantees and Indemnities
In the normal course of business, the Firm provides guarantees and indemnifications in a variety of transactions. These provisions generally are standard contractual terms. Certain of these guarantees and indemnifications related to indemnities, exchange/clearinghouse member guarantees and merger and acquisition guarantees are described in Note 12 to the consolidated financial statements in the 2016 Form10-K.
In addition, in the ordinary course of business, the Firm guarantees the debt and/or certain trading obligations (including obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or trading counterparties. The activities of the Firm’s subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the consolidated financial statements.
Finance Subsidiary
The Parent Company fully and unconditionally guarantees the securities issued by Morgan Stanley Finance LLC, a 100%-owned finance subsidiary.
Contingencies
Legal. In the normal course of business, the Firm has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or
threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress. These actions have included, but are not limited to, residential mortgage and credit-crisis related matters.
Over the last several years, the level of litigation and investigatory activity (both formal and informal) by governmental and self-regulatory agencies has increased materially in the financial services industry. As a result, the Firm expects that it will continue to be the subject of elevated claims for damages and other relief and, while the Firm has identified below any individual proceedings where the Firm believes a material loss to be reasonably possible and reasonably estimable, there can be no assurance that material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be probable or possible and reasonably estimable losses.
The Firm contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the consolidated financial statements and the Firm can reasonably estimate the amount of that loss, the Firm accrues the estimated loss by a charge to income.
In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where a loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.
For certain legal proceedings and investigations, the Firm cannot reasonably estimate such losses, particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or governmental entities seek substantial or indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to the proceedings or investigations in question, before a loss or additional loss or range of loss or additional range of loss can be reasonably estimated for a proceeding or investigation.
For certain other legal proceedings and investigations, the Firm can estimate reasonably possible losses, additional
| 75 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
losses, ranges of loss or ranges of additional loss in excess of amounts accrued, but does not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on the Firm’s consolidated financial statements as a whole, other than the matters referred to in the following paragraphs.
On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Firm, styledChina Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million credit default swap referencing the super senior portion of the STACK2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Firm misrepresented the risks of the STACK2006-1 CDO to CDIB, and that the Firm knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Firm’s motion to dismiss the complaint. Based on currently available information, the Firm believes it could incur a loss in this action of up to approximately $240 million pluspre- and post-judgment interest, fees and costs.
On August 7, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust2006-4SL and Mortgage Pass-Through Certificates, Series2006-4SL against the Firm styledMorgan Stanley Mortgage Loan Trust2006-4SL, et al. v. Morgan Stanley Mortgage Capital Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $303 million, breached various representations and warranties. The complaint seeks, among other relief, rescission of the mortgage loan purchase agreement underlying the transaction, specific performance and unspecified damages and interest. On August 8, 2014, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On December 2, 2016, the Firm moved for summary judgment and the plaintiff moved for partial summary judgment. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $149 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, pluspre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On August 8, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-14SL, Mortgage Pass-Through Certificates, Series 2006-14SL, Morgan Stanley Mortgage Loan Trust2007-4SL and Mortgage Pass-Through Certificates, Series2007-4SL against the Firm styledMorganStanley Mortgage Loan Trust 2006-14SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trusts, which had original principal balances of approximately $354 million and $305 million respectively, breached various representations and warranties. The complaint seeks, among other relief, rescission of the mortgage loan purchase agreements underlying the transactions, specific performance and unspecified damages and interest. On August 16, 2013, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On August 16, 2016, the Firm moved for summary judgment and the plaintiffs moved for partial summary judgment. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $527 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, pluspre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On September 28, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-13ARX against the Firm styledMorgan Stanley Mortgage Loan Trust 2006-13ARX v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc., pending in the Supreme Court of NY. The plaintiff filed an amended complaint on January 17, 2013, which asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $609 million, breached various representations and warranties. The amended complaint seeks, among other relief, declaratory judgment relief, specific performance and unspecified damages and interest. By order dated September 30, 2014, the court granted in part and denied in part the Firm’s motion to dismiss the amended complaint, which plaintiff appealed. On August 11, 2016, the Appellate Division, First Department reversed in part the trial court’s order that granted the Firm’s motion to dismiss. On December 13, 2016, the Appellate Division granted the Firm’s motion for leave to appeal to the New York Court of Appeals. The Firm filed its opening letter brief with the Court of Appeals on February 6, 2017. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $170 million, the total original
| March 2017 Form 10-Q | 76 |
Notes to Consolidated Financial Statements (Unaudited) | |
unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, pluspre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On January 10, 2013, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-10SL and Mortgage Pass-Through Certificates, Series 2006-10SL against the Firm styledMorgan Stanley Mortgage Loan Trust 2006-10SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $300 million, breached various representations and warranties. The complaint seeks, among other relief, an order requiring the Firm to comply with the loan breach remedy procedures in the transaction documents, unspecified damages, and interest. On August 8, 2014, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On December 2, 2016, the Firm moved for summary judgment and the plaintiff moved for partial summary judgment. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $197 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, pluspre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On May 3, 2013, plaintiffs inDeutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al.filed a complaint against the Firm, certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Firm to plaintiff was approximately $644 million. The complaint alleges causes of action against the Firm for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. The Firm perfected its appeal from that decision on June 12, 2015. At March 25, 2017, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $242 million, and the certificates had incurred actual losses of approximately $86 million. Based on currently available
information, the Firm believes it could incur a loss in this action up to the difference between the $242 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Firm, or upon sale, pluspre- and post-judgment interest, fees and costs. The Firm may be entitled to be indemnified for some of these losses.
On July 8, 2013, U.S. Bank National Association, in its capacity as trustee, filed a complaint against the Firm styled U.S. Bank National Association, solely in its capacity as Trustee of the Morgan Stanley Mortgage Loan Trust2007-2AX (MSM2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC, asSuccessor-by-Merger to Morgan Stanley MortgageCapital Inc. and GreenPoint Mortgage Funding, Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $650 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages and interest. On August 22, 2013, the Firm filed a motion to dismiss the complaint, which was granted in part and denied in part on November 24, 2014. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $240 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, pluspre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On December 30, 2013, Wilmington Trust Company, in its capacity as trustee for Morgan Stanley Mortgage Loan Trust2007-12, filed a complaint against the Firm styledWilmington Trust Company v. MorganStanley Mortgage Capital Holdings LLC et al., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $516 million, breached various representations and warranties. The complaint seeks, among other relief, unspecified damages, attorneys’ fees, interest and costs. On February 28, 2014, the defendants filed a motion to dismiss the complaint, which was granted in part and denied in part on June 14, 2016. The plaintiff filed a notice of appeal of that order on August 17, 2016. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $152 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus attorney’s fees, costs and interest, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
| 77 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
On April 28, 2014, Deutsche Bank National Trust Company, in its capacity as trustee for Morgan Stanley Structured Trust I2007-1, filed a complaint against the Firm styledDeutsche Bank National Trust Companyv. Morgan Stanley Mortgage Capital Holdings LLC, pending in the United States District Court for the Southern District of New York. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $735 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified compensatory and/or rescissory damages, interest and costs. On April 3, 2015, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $292 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, pluspre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On September 19, 2014, Financial Guaranty Insurance Company (“FGIC”) filed a complaint against the Firm in the Supreme Court of NY, styledFinancial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al.relating to a securitization issued by Basket of Aggregated Residential NIMS2007-1 Ltd. The complaint asserts claims for breach of contract and alleges, among other things, that the net interest margin securities (“NIMS”) in the trust breached various representations and warranties. FGIC issued a financial guaranty policy with respect to certain notes that had an original balance of approximately $475 million. The complaint seeks, among other relief, specific performance of the NIMS breach remedy procedures in the transaction documents, unspecified damages, reimbursement of certain payments made pursuant to the transaction documents, attorneys’ fees and interest. On November 24, 2014, the Firm filed a motion to dismiss the complaint, which the court denied on January 19, 2017. On February 24, 2017, the Firm filed a notice of appeal of the court’s order. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $126 million, the unpaid balance of these notes, pluspre- and post-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future.
On September 23, 2014, FGIC filed a complaint against the Firm in the Supreme Court of NY styledFinancial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. etal. relating to the Morgan Stanley ABS Capital I Inc. Trust
2007-NC4. The complaint asserts claims for breach of contract and fraudulent inducement and alleges, among other things, that the loans in the trust breached various representations and warranties and defendants made untrue statements and material omissions to induce FGIC to issue a financial guaranty policy on certain classes of certificates that had an original balance of approximately $876 million. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential and punitive damages, attorneys’ fees and interest. On January 23, 2017, the court denied the Firm’s motion to dismiss the complaint. On February 24, 2017, the Firm filed a notice of appeal of the court’s order. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and FGIC that the Firm did not repurchase, pluspre- and post-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future. In addition, plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On January 23, 2015, Deutsche Bank National Trust Company, in its capacity as trustee, filed a complaint against the Firm styledDeutsche Bank National Trust Company solely in its capacity as Trustee of the Morgan Stanley ABS Capital I Inc. Trust2007-NC4 v. Morgan Stanley Mortgage Capital Holdings LLC asSuccessor-by-Merger to Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.05 billion, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential, rescissory, equitable and punitive damages, attorneys’ fees, costs and other related expenses, and interest. On December 11, 2015, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On February 11, 2016, plaintiff filed a notice of appeal of that order. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and a monoline insurer that the Firm did not repurchase, pluspre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
| March 2017 Form 10-Q | 78 |
Notes to Consolidated Financial Statements (Unaudited) | |
12. Variable Interest Entities and Securitization Activities
Overview
For a discussion of the Firm’s VIEs, the determination and structure of VIEs and securitization activities, see Note 13 to the consolidated financial statements in the 2016 Form10-K.
Consolidated VIEs
Assets and Liabilities by Type of Activity
| At March 31, 2017 | At December 31, 2016 | |||||||||||||||
| $ in millions | VIE Assets | VIE Liabilities | VIE Assets | VIE Liabilities | ||||||||||||
Credit-linked notes | $ | 301 | $ | — | $ | 501 | $ | — | ||||||||
Other structured financings | 465 | 6 | 602 | 10 | ||||||||||||
Asset-backed securitizations1 | 40 | 22 | 397 | 283 | ||||||||||||
Other2 | 931 | 36 | 910 | 25 | ||||||||||||
Total | $ | 1,737 | $ | 64 | $ | 2,410 | $ | 318 | ||||||||
| 1. | Asset-backed securitizations include transactions backed by residential mortgage loans, commercial mortgage loans and other types of assets, including consumer or commercial assets. The value of assets is determined based on the fair value of the liabilities of and the interests owned by the Firm in such VIEs because the fair values for the liabilities and interests owned are more observable. |
| 2. | Other primarily includes certain operating entities, investment funds and structured transactions. |
Assets and Liabilities by Balance Sheet Caption
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 88 | $ | 74 | ||||
Trading assets at fair value | 696 | 1,295 | ||||||
Customer and other receivables | 13 | 13 | ||||||
Goodwill | 18 | 18 | ||||||
Intangible assets | 171 | 177 | ||||||
Other assets | 751 | 833 | ||||||
Total | $ | 1,737 | $ | 2,410 | ||||
Liabilities | ||||||||
Other secured financings at fair value | $ | 29 | $ | 289 | ||||
Other liabilities and accrued expenses | 35 | 29 | ||||||
Total | $ | 64 | $ | 318 | ||||
Consolidated VIE assets and liabilities are presented in the previous tables after intercompany eliminations. The assets owned by many consolidated VIEs cannot be removed unilaterally by the Firm and are not generally available to the Firm.
The related liabilities issued by many consolidated VIEs arenon-recourse to the Firm. In certain other consolidated VIEs, the Firm either has the unilateral right to remove assets or provide additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.
In general, the Firm’s exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE’s net assets recognized in its financial statements, net of amounts absorbed by third-party variable interest holders. At March 31, 2017 and December 31, 2016, noncontrolling interests in the consolidated financial statements related to consolidated VIEs were $198 million and $228 million, respectively. The Firm also had additional maximum exposure to losses of approximately $81 million and $78 million at March 31, 2017 and December 31, 2016, respectively, primarily related to certain derivatives, commitments, guarantees and other forms of involvement.
Non-consolidated VIEs
The following tables include all VIEs in which the Firm has determined that its maximum exposure to loss is greater than specific thresholds or meets certain other criteria and exclude exposure to loss from liabilities due to immateriality. Most of the VIEs included in the following tables are sponsored by unrelated parties; the Firm’s involvement generally is the result of its secondary market-making activities, securities held in its Investment securities portfolio (see Note 5) and certain investments in funds.
Non-consolidated VIE Assets, Maximum and Carrying Value of Exposure to Loss
| At March 31, 2017 | ||||||||||||||||||||
| $ in millions | MABS | CDO | MTOB | OSF | Other | |||||||||||||||
VIE assets (unpaid principal balance) | $ | 100,587 | $ | 7,839 | $ | 4,993 | $ | 4,028 | $ | 38,136 | ||||||||||
Maximum exposure to loss |
| |||||||||||||||||||
Debt and equity interests | $ | 10,502 | $ | 1,259 | $ | 59 | $ | 1,710 | $ | 6,111 | ||||||||||
Derivative and other contracts | — | — | 2,950 | — | 42 | |||||||||||||||
Commitments, guarantees and other | 640 | 669 | — | 181 | 232 | |||||||||||||||
Total | $ | 11,142 | $ | 1,928 | $ | 3,009 | $ | 1,891 | $ | 6,385 | ||||||||||
Carrying value of exposure to loss—Assets |
| |||||||||||||||||||
Debt and equity interests | $ | 10,502 | $ | 1,259 | $ | 59 | $ | 1,137 | $ | 6,111 | ||||||||||
Derivative and other contracts | — | — | 5 | — | 29 | |||||||||||||||
Total | $ | 10,502 | $ | 1,259 | $ | 64 | $ | 1,137 | $ | 6,140 | ||||||||||
| 79 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
| At December 31, 2016 | ||||||||||||||||||||
| $ in millions | MABS | CDO | MTOB | OSF | Other | |||||||||||||||
VIE assets (unpaid principal balance) | $ | 101,916 | $ | 11,341 | $ | 4,857 | $ | 4,293 | $ | 39,077 | ||||||||||
Maximum exposure to loss |
| |||||||||||||||||||
Debt and equity interests | $ | 11,243 | $ | 1,245 | $ | 50 | $ | 1,570 | $ | 4,877 | ||||||||||
Derivative and other contracts | — | — | 2,812 | — | 45 | |||||||||||||||
Commitments, guarantees and other | 684 | 99 | — | 187 | 228 | |||||||||||||||
Total | $ | 11,927 | $ | 1,344 | $ | 2,862 | $ | 1,757 | $ | 5,150 | ||||||||||
Carrying value of exposure to loss—Assets |
| |||||||||||||||||||
Debt and equity interests | $ | 11,243 | $ | 1,245 | $ | 49 | $ | 1,183 | $ | 4,877 | ||||||||||
Derivative and other contracts | — | — | 5 | — | 18 | |||||||||||||||
Total | $ | 11,243 | $ | 1,245 | $ | 54 | $ | 1,183 | $ | 4,895 | ||||||||||
MABS—Mortgage- and asset-backed securitizations
CDO—Collateralized debt obligations
MTOB—Municipal tender option bonds
OSF—Other structured financings
Non-consolidated VIE Mortgage- and Asset-Backed Securitization Assets
| At March 31, 2017 | At December 31, 2016 | |||||||||||||||
| $ in millions | Unpaid Principal Balance | Debt and Equity Interests | Unpaid Principal Balance | Debt and Equity Interests | ||||||||||||
Residential mortgages | $ | 5,896 | $ | 418 | $ | 4,775 | $ | 458 | ||||||||
Commercial mortgages | 55,333 | 2,680 | 54,021 | 2,656 | ||||||||||||
U.S. agency collateralized mortgage obligations | 15,069 | 2,800 | 14,796 | 2,758 | ||||||||||||
Other consumer or commercial loans | 24,289 | 4,604 | 28,324 | 5,371 | ||||||||||||
Total | $ | 100,587 | $ | 10,502 | $ | 101,916 | $ | 11,243 | ||||||||
The Firm’s maximum exposure to loss presented above often differs from the carrying value of the variable interests held by the Firm. The maximum exposure to loss presented above is dependent on the nature of the Firm’s variable interest in the VIEs and is limited to the notional amounts of certain liquidity facilities, other credit support, total return swaps,
written put options, and the fair value of certain other derivatives and investments the Firm has made in the VIEs. Liabilities issued by VIEs generally arenon-recourse to the Firm. Where notional amounts are utilized in quantifying maximum exposure related to derivatives, such amounts do not reflect fair value write-downs already recorded by the Firm.
The Firm’s maximum exposure to loss presented above does not include the offsetting benefit of any financial instruments that the Firm may utilize to hedge these risks associated with its variable interests. In addition, the Firm’s maximum exposure to loss presented above is not reduced by the amount of collateral held as part of a transaction with the VIE or any party to the VIE directly against a specific exposure to loss.
Securitization transactions generally involve VIEs. Primarily as a result of its secondary market-making activities, the Firm owned additional VIE assets mainly issued by securitization SPEs for which the maximum exposure to loss is less than specific thresholds. These additional assets totaled $11.8 billion and $11.7 billion at March 31, 2017 and December 31, 2016, respectively.
These assets were either retained in connection with transfers of assets by the Firm, acquired in connection with secondary market-making activities, held as AFS securities in its Investment securities portfolio (see Note 5), or held as investments in funds. At March 31, 2017 and December 31, 2016, these assets consisted of securities backed by residential mortgage loans, commercial mortgage loans or other consumer loans, such as credit card receivables, automobile loans and student loans, CDOs or CLOs, and investment funds.
The Firm’s primary risk exposure is to the securities issued by the SPE owned by the Firm, with the highest risk on the most subordinate class of beneficial interests. These assets generally are included in Trading assets—Corporate and other debt, Trading assets—Investments or AFS securities within its Investment securities portfolio and are measured at fair value (see Note 3). The Firm does not provide additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees or similar derivatives. The Firm’s maximum exposure to loss generally equals the fair value of the assets owned.
Transactions with SPEs in which the Firm, acting as principal, transferred financial assets with continuing involvement and received sales treatment are shown in the following tables.
| March 2017 Form 10-Q | 80 |
Notes to Consolidated Financial Statements (Unaudited) | |
Transfers of Assets with Continuing Involvement
| At March 31, 2017 | ||||||||||||||||
| $ in millions | Residential Mortgage Loans | Commercial Mortgage Loans | U.S. Agency Collateralized Mortgage Obligations | Credit- Other1 | ||||||||||||
SPE assets (unpaid principal balance)2 | $ | 18,373 | $ | 48,839 | $ | 8,305 | $ | 12,190 | ||||||||
Retained interests |
| |||||||||||||||
Investment grade3 | $ | — | $ | 40 | $ | 540 | $ | 6 | ||||||||
Non-investment grade (fair value) | 3 | 85 | — | 635 | ||||||||||||
Total | $ | 3 | $ | 125 | $ | 540 | $ | 641 | ||||||||
Interests purchased in the secondary market (fair value) |
| |||||||||||||||
Investment grade | $ | 4 | $ | 167 | $ | 127 | $ | — | ||||||||
Non-investment grade | 38 | 82 | — | — | ||||||||||||
Total | $ | 42 | $ | 249 | $ | 127 | $ | — | ||||||||
Derivative assets (fair value) | $ | — | $ | 1 | $ | — | $ | 89 | ||||||||
Derivative liabilities (fair value) | — | — | — | 437 | ||||||||||||
| At December 31, 2016 | ||||||||||||||||
| $ in millions | Residential Mortgage Loans | Commercial Mortgage Loans | U.S. Agency Collateralized Mortgage Obligations | Credit- Other1 | ||||||||||||
SPE assets (unpaid principal balance)2 | $ | 19,381 | $ | 43,104 | $ | 11,092 | $ | 11,613 | ||||||||
Retained interests (fair value) |
| |||||||||||||||
Investment grade | $ | — | $ | 22 | $ | 375 | $ | — | ||||||||
Non-investment grade | 4 | 79 | — | 826 | ||||||||||||
Total | $ | 4 | $ | 101 | $ | 375 | $ | 826 | ||||||||
Interests purchased in the secondary market (fair value) |
| |||||||||||||||
Investment grade | $ | — | $ | 30 | $ | 26 | $ | — | ||||||||
Non-investment grade | 23 | 75 | — | — | ||||||||||||
Total | $ | 23 | $ | 105 | $ | 26 | $ | — | ||||||||
Derivative assets (fair value) | $ | — | $ | 261 | $ | — | $ | 89 | ||||||||
Derivative liabilities (fair value) | — | — | — | 459 | ||||||||||||
| 1. | Amounts include CLO transactions managed by unrelated third parties. |
| 2. | Amounts include assets transferred by unrelated transferors. |
| 3. | Amounts include $550 million of investment grade retained interests at fair value. |
| At March 31, 2017 | ||||||||||||
| $ in millions | Level 2 | Level 3 | Total | |||||||||
Retained interests (fair value) | ||||||||||||
Investment grade | $ | 544 | $ | 6 | $ | 550 | ||||||
Non-investment grade | 4 | 719 | 723 | |||||||||
Total | $ | 548 | $ | 725 | $ | 1,273 | ||||||
Interests purchased in the secondary market (fair value) |
| |||||||||||
Investment grade | $ | 291 | $ | 7 | $ | 298 | ||||||
Non-investment grade | 109 | 11 | 120 | |||||||||
Total | $ | 400 | $ | 18 | $ | 418 | ||||||
Derivative assets (fair value) | $ | 89 | $ | 1 | $ | 90 | ||||||
Derivative liabilities (fair value) | 70 | 367 | 437 | |||||||||
| At December 31, 2016 | ||||||||||||
| $ in millions | Level 2 | Level 3 | Total | |||||||||
Retained interests (fair value) | ||||||||||||
Investment grade | $ | 385 | $ | 12 | $ | 397 | ||||||
Non-investment grade | 14 | 895 | 909 | |||||||||
Total | $ | 399 | $ | 907 | $ | 1,306 | ||||||
Interests purchased in the secondary market (fair value) |
| |||||||||||
Investment grade | $ | 56 | $ | — | $ | 56 | ||||||
Non-investment grade | 84 | 14 | 98 | |||||||||
Total | $ | 140 | $ | 14 | $ | 154 | ||||||
Derivative assets (fair value) | $ | 348 | $ | 2 | $ | 350 | ||||||
Derivative liabilities (fair value) | 98 | 361 | 459 | |||||||||
Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the consolidated income statements. The Firm may act as underwriter of the beneficial interests issued by these securitization vehicles. Investment banking underwriting net revenues are recognized in connection with these transactions. The Firm may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are included in the consolidated balance sheets. Any changes in the fair value of such retained interests are recognized in the consolidated income statements.
Proceeds from New Securitization Transactions and Retained Interests in Securitization Transactions
| Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
New transactions | $ | 5,997 | $ | 2,713 | ||||
Retained interests | 430 | 631 | ||||||
Net gains on sale of assets in securitization transactions at the time of the sale were not material for all periods presented.
The Firm has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Firm (see Note 11).
| 81 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
Proceeds from Sales to CLO Entities Sponsored byNon-Affiliates
| Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Proceeds from sale of corporate loans sold to CLO SPEs | $ | 179 | $ | 31 | ||||
Net gains on sale transactions of corporate loans to CLO entities at the time of sale were not material for all periods presented.
The Firm also enters into transactions in which it sells equity securities and contemporaneously enters into bilateral OTC equity derivatives with the purchasers of the securities, through which it retains the exposure to the securities as shown in the following table.
Carrying and Fair Value of Assets Sold and Retained Interest Exposure
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Carrying value of assets derecognized at the time of sale and gross cash proceeds | $ | 17,266 | $ | 11,209 | ||||
Fair value | ||||||||
Assets sold | 17,461 | 11,301 | ||||||
Derivative assets recognized in the consolidated balance sheets | 216 | 128 | ||||||
Derivative liabilities recognized in the consolidated balance sheets | 21 | 36 | ||||||
Failed Sales
For transfers that fail to meet the accounting criteria for a sale, the Firm continues to recognize the assets in Trading assets at fair value, and the Firm recognizes the associated liabilities in Other secured financings at fair value in the consolidated balance sheets (see Note 10).
The assets transferred to certain unconsolidated VIEs in transactions accounted for as failed sales cannot be removed unilaterally by the Firm and are not generally available to the Firm. The related liabilities are alsonon-recourse to the Firm. In certain other failed sale transactions, the Firm has the right to remove assets or provide additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.
Carrying Value of Assets and Liabilities Related to Failed Sales
At March 31, 2017 | At December 31, 2016 | |||||||||||||||
| $ in millions | Assets | Liabilities | Assets | Liabilities | ||||||||||||
Failed sales | $ | 305 | $ | 305 | $ | 285 | $ | 285 | ||||||||
Regulatory Capital Framework
For a discussion of the Firm’s regulatory capital framework, see Note 14 to the consolidated financial statements in the 2016 Form10-K.
Regulatory Capital Requirements
The Firm is required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital, risk-weighted assets (“RWAs”) and transition provisions follows.
Regulatory Capital
The Firm’s binding risk-based capital ratios for regulatory purposes are the lower of the capital ratios computed under the (i) standardized approaches for calculating credit risk RWAs and market risk RWAs (the “Standardized Approach”) and (ii) applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “Advanced Approach”).
Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total 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. Certain of these adjustments and deductions are also subject to transitional provisions.
In addition to the minimum risk-based capital ratio requirements, on a fullyphased-in basis by 2019, the Firm will be subject to:
A greater than 2.5% Common Equity Tier 1 capital conservation buffer;
The Common Equity Tier 1 global systemically important bank capital surcharge, currently at 3%; and
Up to a 2.5% Common Equity Tier 1 countercyclical capital buffer, currently set by banking regulators at zero (collectively, the “buffers”).
In 2017, thephase-in amount for each of the buffers is 50% of the fullyphased-in buffer requirement. Failure to maintain the buffers will result in restrictions on the Firm’s ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.
| March 2017 Form 10-Q | 82 |
Notes to Consolidated Financial Statements (Unaudited) | |
The methods for calculating each of the Firm’s risk-based capital ratios will change through January 1, 2022 as aspects of the capital rules are phased in. These changes may result in differences in the Firm’s reported capital ratios from one reporting period to the next that are independent of changes to its capital base, asset composition,off-balance sheet exposures or risk profile.
For a further discussion of the Firm’s calculation of risk-based capital ratios, see Note 14 to the consolidated financial statements in the 2016 Form10-K.
The Firm’s Regulatory Capital and Capital Ratios
At March 31, 2017 and December 31, 2016, the Firm’s binding ratios are based on the Advanced Approach transitional rules.
Regulatory Capital
| At March 31, 2017 | ||||||||||||
| $ in millions | Amount | Ratio | Minimum Ratio1 | |||||||||
Common Equity Tier 1 capital | $ | 60,414 | 17.4 | % | 7.3% | |||||||
Tier 1 capital | 69,136 | 19.9 | % | 8.8% | ||||||||
Total capital | 79,675 | 22.9 | % | 10.8% | ||||||||
Tier 1 leverage2 | — | 8.5 | % | 4.0% | ||||||||
Total RWAs | $ | 347,472 | N/A | N/A | ||||||||
Adjusted average assets3 | 816,077 | N/A | N/A | |||||||||
| At December 31, 2016 | ||||||||||||
| $ in millions | Amount | Ratio | Minimum Ratio1 | |||||||||
Common Equity Tier 1 capital | $ | 60,398 | 16.9 | % | 5.9% | |||||||
Tier 1 capital | 68,097 | 19.0 | % | 7.4% | ||||||||
Total capital | 78,642 | 22.0 | % | 9.4% | ||||||||
Tier 1 leverage2 | — | 8.4 | % | 4.0% | ||||||||
Total RWAs | $ | 358,141 | N/A | N/A | ||||||||
Adjusted average assets3 | 811,402 | N/A | N/A | |||||||||
N/A—Not Applicable
| 1. | Percentages represent minimum regulatory capital ratios under the transitional rules. |
| 2. | Tier 1 leverage ratios are calculated under the Standardized Approach transitional rules. |
| 3. | Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidatedon-balance sheet assets under U.S. GAAP during the calendar quarter ended March 31, 2017 and December 31, 2016, respectively, adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments. |
U.S. Bank Subsidiaries’ Regulatory Capital and Capital Ratios
The Firm’s U.S. Bank Subsidiaries are subject to similar regulatory capital requirements as the Firm. Failure to meet
minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the U.S. Bank Subsidiaries’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each of the U.S. Bank Subsidiaries must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certainoff-balance sheet items as calculated under regulatory accounting practices.
Each U.S. depository institution subsidiary of the Firm must be well-capitalized in order for the Firm to continue to qualify as a financial holding company and to continue to engage in the broadest range of financial activities permitted for financial holding companies. Under regulatory capital requirements adopted by the U.S. federal banking agencies, U.S. depository institutions must maintain certain minimum capital ratios in order to be considered well-capitalized. At March 31, 2017 and December 31, 2016, the Firm’s U.S. Bank Subsidiaries maintained capital at levels sufficiently in excess of the universally mandated well-capitalized requirements to address any additional capital needs and requirements identified by the U.S. federal banking regulators.
At March 31, 2017 and December 31, 2016, the U.S. Bank Subsidiaries’ binding ratios are based on the Standardized Approach transitional rules.
MSBNA’s Regulatory Capital
| At March 31, 2017 | ||||||||||||
| $ in millions | Amount | Ratio | Required Capital Ratio1 | |||||||||
Common Equity Tier 1 capital | $ | 13,859 | 17.6 | % | 6.5% | |||||||
Tier 1 capital | 13,859 | 17.6 | % | 8.0% | ||||||||
Total capital | 14,140 | 17.9 | % | 10.0% | ||||||||
Tier 1 leverage | 13,860 | 10.7 | % | 5.0% | ||||||||
| At December 31, 2016 | ||||||||||||
| $ in millions | Amount | Ratio | Required Capital Ratio1 | |||||||||
Common Equity Tier 1 capital | $ | 13,398 | 16.9 | % | 6.5% | |||||||
Tier 1 capital | 13,398 | 16.9 | % | 8.0% | ||||||||
Total capital | 14,858 | 18.7 | % | 10.0% | ||||||||
Tier 1 leverage | 13,398 | 10.5 | % | 5.0% | ||||||||
| 1. | Capital ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes. |
| 83 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
MSPBNA’s Regulatory Capital
| At March 31, 2017 | ||||||||||||
| $ in millions | Amount | Ratio | Required Capital Ratio1 | |||||||||
Common Equity Tier 1 capital | $ | 5,721 | 26.0 | % | 6.5% | |||||||
Tier 1 capital | 5,721 | 26.0 | % | 8.0% | ||||||||
Total capital | 5,758 | 26.1 | % | 10.0% | ||||||||
Tier 1 leverage | 5,721 | 10.8 | % | 5.0% | ||||||||
| At December 31, 2016 | ||||||||||||
| $ in millions | Amount | Ratio | Required Capital Ratio1 | |||||||||
Common Equity Tier 1 capital | $ | 5,589 | 26.1 | % | 6.5% | |||||||
Tier 1 capital | 5,589 | 26.1 | % | 8.0% | ||||||||
Total capital | 5,626 | 26.3 | % | 10.0% | ||||||||
Tier 1 leverage | 5,589 | 10.6 | % | 5.0% | ||||||||
| 1. | Capital ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes. |
Broker-Dealer Regulatory Capital Requirements
Morgan Stanley & Co. LLC (“MS&Co.”) is a registered U.S. broker-dealer and registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Commodity Futures Trading Commission (“CFTC”). MS&Co. has consistently operated with capital in excess of its regulatory capital requirements. MS&Co.’s net capital totaled $10,154 million and $10,311 million at March 31, 2017 and December 31, 2016, respectively, which exceeded the amount required by $7,948 million and $8,034 million, respectively. MS&Co. is required to hold tentative net capital in excess of $1 billion and net capital in excess of $500 million in accordance with the market and credit risk standards of Appendix E of SEC Rule15c3-1. In addition, MS&Co. is required to notify the SEC in the event that its tentative net capital is less than $5 billion. At March 31, 2017 and December 31, 2016, MS&Co. had tentative net capital in excess of the minimum and the notification requirements.
Morgan Stanley Smith Barney LLC (“MSSB LLC”) is a registered U.S. broker-dealer and introducing broker for the futures business and, accordingly, is subject to the minimum net capital requirements of the SEC. MSSB LLC has consistently operated with capital in excess of its regulatory capital requirements. MSSB LLC’s net capital totaled $4,172 million and $3,946 million at March 31, 2017 and December 31, 2016, respectively, which exceeded the amount required by $4,024 million and $3,797 million, respectively.
Morgan Stanley & Co. International plc (“MSIP”), a London-based broker-dealer subsidiary, is subject to the capital requirements of the Prudential Regulation Authority, and
Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”), a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Agency. MSIP and MSMS have consistently operated with capital in excess of their respective regulatory capital requirements.
Other Regulated Subsidiaries
Certain other U.S. andnon-U.S. subsidiaries of the Firm are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated with capital in excess of their local capital adequacy requirements.
Dividends and Share Repurchases
The Firm repurchased approximately $750 million of our outstanding common stock as part of our share repurchase program during the current quarter and $625 million during the prior year quarter.
In March 2017, the Firm received anon-objection from the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to the Firm’s resubmitted 2016 capital plan.
For a description of the 2016 capital plan, see Note 15 to the consolidated financial statements in the 2016 Form10-K.
Preferred Stock
For a description of Series A through Series K preferred stock issuances, see Note 15 to the consolidated financial statements in the 2016 Form10-K. Dividends declared on the Firm’s outstanding preferred stock were $90 million during the current quarter and $78 million during the prior year quarter. On March 15, 2017, the Firm announced that the Board declared a quarterly dividend for preferred stock shareholders of record on March 31, 2017 that was paid on April 17, 2017. The Firm is authorized to issue 30 million shares of preferred stock. The preferred stock has a preference over the common stock upon liquidation. The Firm’s preferred stock qualifies as Tier 1 capital in accordance with regulatory capital requirements (see Note 13).
Series K Preferred Stock.The Series K Preferred Stock offering (net of related issuance costs) resulted in proceeds of approximately $994 million. On March 15, 2017, the Firm announced that the Board declared a quarterly dividend of $304.69 per share of Series K Preferred Stock.
| March 2017 Form 10-Q | 84 |
Notes to Consolidated Financial Statements (Unaudited) | |
Preferred Stock Outstanding
| $ in millions, except per share data | Shares Outstanding | Liquidation | Carrying Value | |||||||||||||
| At March 31, 2017 | At March 31, 2017 | At December 31, 2016 | ||||||||||||||
Series | ||||||||||||||||
A | 44,000 | $ | 25,000 | $ | 1,100 | $ | 1,100 | |||||||||
C1 | 519,882 | 1,000 | 408 | 408 | ||||||||||||
E | 34,500 | 25,000 | 862 | 862 | ||||||||||||
F | 34,000 | 25,000 | 850 | 850 | ||||||||||||
G | 20,000 | 25,000 | 500 | 500 | ||||||||||||
H | 52,000 | 25,000 | 1,300 | 1,300 | ||||||||||||
I | 40,000 | 25,000 | 1,000 | 1,000 | ||||||||||||
J | 60,000 | 25,000 | 1,500 | 1,500 | ||||||||||||
K | 40,000 | 25,000 | 1,000 | — | ||||||||||||
Total |
| $ | 8,520 | $ | 7,520 | |||||||||||
| 1. | Series C is composed of the issuance of 1,160,791 shares of Series C Preferred Stock to MUFG for an aggregate purchase price of $911 million, less the redemption of 640,909 shares of Series C Preferred Stock of $503 million, which were converted to common shares of approximately $705 million. |
Comprehensive Income (Loss)
Accumulated Other Comprehensive Income (Loss)
| $ in millions | Foreign Currency Translation Adjustments | AFS Securities | Pensions, Postretirement and Other | DVA | Total | |||||||||||||||
December 31, 2016 | $ | (986 | ) | $ | (588 | ) | $ | (474 | ) | $ | (595 | ) | $ | (2,643 | ) | |||||
OCI during the period1 | 107 | 84 | — | 2 | 193 | |||||||||||||||
March 31, 2017 | $ | (879 | ) | $ | (504 | ) | $ | (474 | ) | $ | (593 | ) | $ | (2,450 | ) | |||||
December 31, 2015 | $ | (963 | ) | $ | (319 | ) | $ | (374 | ) | $ | — | $ | (1,656 | ) | ||||||
Cumulative adjustment for accounting change relate to DVA2 | — | — | — | (312 | ) | (312 | ) | |||||||||||||
OCI during the period1 | 132 | 395 | 1 | 202 | 730 | |||||||||||||||
March 31, 2016 | $ | (831 | ) | $ | 76 | $ | (373 | ) | $ | (110 | ) | $ | (1,238 | ) | ||||||
| 1. | Amounts net of tax and noncontrolling interests. |
| 2. | In accordance with the early adoption of a provision of the accounting updateRecognition and Measurement of Financial Assets and Financial Liabilities, a cumulativecatch-up adjustment was recorded as of January 1, 2016 to move the cumulative unrealized DVA amount, net of noncontrolling interests and tax, related to outstanding liabilities under the fair value option election from Retained earnings into AOCI. See Note 2 to the consolidated financial statements in the 2016 Form10-K for further information. |
Period Changes in OCI Components
Three Months Ended March 31, 2017 | ||||||||||||||||||||
| $ in millions | Pre-tax gain (loss) | Income tax benefit (provision) | After-tax gain (loss) | Non- controlling | Net | |||||||||||||||
Foreign currency translation adjustments |
| |||||||||||||||||||
OCI activity | $ | 43 | $ | 107 | $ | 150 | $ | 43 | $ | 107 | ||||||||||
Reclassified to earnings | — | — | — | — | — | |||||||||||||||
Net OCI | $ | 43 | $ | 107 | $ | 150 | $ | 43 | $ | 107 | ||||||||||
Change in net unrealized gains (losses) on AFS securities |
| |||||||||||||||||||
OCI activity | $ | 137 | $ | (52 | ) | $ | 85 | $ | — | $ | 85 | |||||||||
Reclassified to earnings1 | (2 | ) | 1 | (1 | ) | — | (1 | ) | ||||||||||||
Net OCI | $ | 135 | $ | (51 | ) | $ | 84 | $ | — | $ | 84 | |||||||||
Change in net DVA |
| |||||||||||||||||||
OCI activity | $ | 7 | $ | (1 | ) | $ | 6 | $ | 7 | $ | (1 | ) | ||||||||
Reclassified to earnings1 | 4 | (1 | ) | 3 | — | 3 | ||||||||||||||
Net OCI | $ | 11 | $ | (2 | ) | $ | 9 | $ | 7 | $ | 2 | |||||||||
| Three Months Ended March 31, 20162 | ||||||||||||||||||||
| $ in millions | Pre-tax gain (loss) | Income tax benefit (provision) | After-tax gain (loss) | Non- controlling interests | Net | |||||||||||||||
Foreign currency translation adjustments |
| |||||||||||||||||||
OCI activity | $ | 71 | $ | 115 | $ | 186 | $ | 54 | $ | 132 | ||||||||||
Reclassified to earnings | — | — | — | — | — | |||||||||||||||
Net OCI | $ | 71 | $ | 115 | $ | 186 | $ | 54 | $ | 132 | ||||||||||
Change in net unrealized gains (losses) on AFS securities |
| |||||||||||||||||||
OCI activity | $ | 636 | $ | (234 | ) | $ | 402 | $ | — | $ | 402 | |||||||||
Reclassified to earnings1 | (12 | ) | 5 | (7 | ) | — | (7 | ) | ||||||||||||
Net OCI | $ | 624 | $ | (229 | ) | $ | 395 | $ | — | $ | 395 | |||||||||
Pension, postretirement and other |
| |||||||||||||||||||
OCI activity | $ | (1 | ) | $ | 3 | $ | 2 | $ | — | $ | 2 | |||||||||
Reclassified to earnings1 | (1 | ) | — | (1 | ) | — | (1 | ) | ||||||||||||
Net OCI | $ | (2 | ) | $ | 3 | $ | 1 | $ | — | $ | 1 | |||||||||
Change in net DVA |
| |||||||||||||||||||
OCI activity | $ | 364 | $ | (135 | ) | $ | 229 | $ | 1 | $ | 228 | |||||||||
Reclassified to earnings1 | (41 | ) | 15 | (26 | ) | — | (26 | ) | ||||||||||||
Net OCI | $ | 323 | $ | (120 | ) | $ | 203 | $ | 1 | $ | 202 | |||||||||
| 1. | Amounts reclassified to earnings related to: realized gains and losses from sales of AFS securities are classified within Other revenues in the consolidated income statements; Pension, postretirement and other are classified within Compensation and benefits expenses in the consolidated income statements; and realization of DVA are classified within Trading revenues in the consolidated income statements. |
| 2. | Exclusive of 2016 cumulative adjustment for accounting change related to DVA. |
| 85 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
Noncontrolling Interests
Noncontrolling interests were $1,160 million and $1,127 million at March 31, 2017 and December 31, 2016, respectively. The increase in noncontrolling interests was primarily due to the increase in net income and currency translation adjustment attributable to noncontrolling interests, partially offset by deconsolidation of certain investment management funds sponsored by the firm.
Calculation of Basic and Diluted Earnings per Common Share (“EPS”)
| Three Months Ended March 31, | ||||||||
| in millions, except for per share data | 2017 | 2016 | ||||||
Basic EPS | ||||||||
Income from continuing operations | $ | 1,993 | $ | 1,160 | ||||
Income (loss) from discontinued operations | (22 | ) | (3 | ) | ||||
Net income | 1,971 | 1,157 | ||||||
Net income applicable to noncontrolling interests | 41 | 23 | ||||||
Net income applicable to Morgan Stanley | 1,930 | 1,134 | ||||||
Less: Preferred stock dividends and other | (90 | ) | (79 | ) | ||||
Earnings applicable to Morgan Stanley common shareholders | $ | 1,840 | $ | 1,055 | ||||
Weighted average common shares outstanding | 1,801 | 1,883 | ||||||
Earnings per basic common share | ||||||||
Income from continuing operations | $ | 1.03 | $ | 0.56 | ||||
Income (loss) from discontinued operations | (0.01 | ) | — | |||||
Earnings per basic common share | $ | 1.02 | $ | 0.56 | ||||
Diluted EPS | ||||||||
Earnings applicable to Morgan Stanley common shareholders | $ | 1,840 | $ | 1,055 | ||||
Weighted average common shares outstanding | 1,801 | 1,883 | ||||||
Effect of dilutive securities: | ||||||||
Stock options and RSUs1 | 41 | 32 | ||||||
Weighted average common shares outstanding and common stock equivalents | 1,842 | 1,915 | ||||||
Earnings per diluted common share | ||||||||
Income from continuing operations | $ | 1.01 | $ | 0.55 | ||||
Income (loss) from discontinued operations | (0.01 | ) | — | |||||
Earnings per diluted common share | $ | 1.00 | $ | 0.55 | ||||
| 1. | Restricted stock units (“RSUs”) that are considered participating securities are treated as a separate class of securities in the computation of basic EPS, and, therefore, such RSUs are not included as incremental shares in the diluted EPS computations. The diluted EPS computations also do not include weighted average antidilutive RSUs and antidilutive stock options of 15 million shares for the prior year quarter. |
16. Interest Income and Interest Expense
| Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Interest income1 | ||||||||
Investment securities | $ | 326 | $ | 236 | ||||
Loans | 748 | 647 | ||||||
Interest bearing deposits with banks | 55 | 50 | ||||||
Securities purchased under agreements to resell and Securities borrowed2 | (18 | ) | (78 | ) | ||||
Trading assets, net of Trading liabilities3 | 463 | 582 | ||||||
Customer receivables and Other4 | 391 | 310 | ||||||
Total interest income | $ | 1,965 | $ | 1,747 | ||||
Interest expense1 | ||||||||
Deposits | $ | 11 | $ | 22 | ||||
Short-term and Long-term borrowings | 1,022 | 965 | ||||||
Securities sold under agreements to repurchase and Securities loaned5 | 248 | 264 | ||||||
Customer payables and Other6 | (87 | ) | (403 | ) | ||||
Total interest expense | $ | 1,194 | $ | 848 | ||||
Net interest | $ | 771 | $ | 899 | ||||
| 1. | Interest income and Interest expense are recorded within the consolidated income statements depending on the nature of the instrument and related market conventions. When interest is included as a component of the instrument’s fair value, interest is included within Trading revenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense. |
| 2. | Includes fees paid on Securities borrowed. |
| 3. | Interest expense on Trading liabilities is reported as a reduction to Interest income on Trading assets. |
| 4. | Includes interest from customer receivables and cash deposited with clearing organizations or segregated under federal and other regulations or requirements. |
| 5. | Includes fees received on Securities loaned. |
| 6. | Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers’ short positions. |
The Firm sponsors various retirement plans for the majority of its U.S. andnon-U.S. employees. The Firm provides certain other postretirement benefits, primarily health care and life insurance, to eligible U.S. employees.
Components of the Net Periodic Benefit Expense (Income) for Pension and Other Postretirement Plans
| Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Service cost, benefits earned during the period | $ | 4 | $ | 4 | ||||
Interest cost on projected benefit obligation | 37 | 38 | ||||||
Expected return on plan assets | (29 | ) | (30 | ) | ||||
Net amortization of prior service credit | (4 | ) | (4 | ) | ||||
Net amortization of actuarial loss | 4 | 3 | ||||||
Net periodic benefit expense (income) | $ | 12 | $ | 11 | ||||
| March 2017 Form 10-Q | 86 |
Notes to Consolidated Financial Statements (Unaudited) | |
The Firm is under continuous examination by the Internal Revenue Service (the “IRS”) and other tax authorities in certain countries, such as Japan and the United Kingdom (“U.K.”), and in states in which it has significant business operations, such as New York. The Firm is currently at various levels of field examination with respect to audits by the IRS, as well as New York State and New York City, for tax years 2009-2012 and 2007-2013, respectively. The Firm believes that the resolution of these tax matters will not have a material effect on the consolidated balance sheets, although a resolution could have a material impact on the consolidated income statements for a particular future period and the effective tax rate for any period in which such resolution occurs.
In April 2016, the Firm received a notification from the IRS that the Congressional Joint Committee on Taxation approved the final report of an Appeals Office review of matters from tax years 1999-2005, and the Revenue Agent’s Report reflecting agreed closure of the 2006-2008 tax years. In March 2017, the Firm filed claims with the IRS to contest certain items, associated with tax years 1999-2005, the reso-
lution of which is not expected to have a material impact on the effective tax rate or the consolidated financial statements.
During 2017, the Firm expects to reach a conclusion with the U.K. tax authorities on substantially all issues through tax year 2010, the resolution of which is not expected to have a material impact on the effective tax rate or the consolidated financial statements.
The Firm has established a liability for unrecognized tax benefits that it believes is adequate in relation to the potential for additional assessments. Once established, the Firm adjusts liabilities for unrecognized tax benefits only when new information is available or when an event occurs necessitating a change.
It is reasonably possible that significant changes in the balance of unrecognized tax benefits may occur within the next 12 months related to certain tax authority examinations referred to herein. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the Firm’s effective tax rate over the next 12 months.
19. Segment and Geographic Information
Segment Information
For a discussion about the Firm’s business segments, see Note 21 to the consolidated financial statements in the 2016 Form10-K.
Selected Financial Information by Business Segment
| Three Months Ended March 31, 2017 | ||||||||||||||||||||
| $ in millions | Institutional Securities1 | Wealth Management1 | Investment Management2 | Intersegment Eliminations | Total | |||||||||||||||
Totalnon-interest revenues3 | $ | 5,379 | $ | 3,064 | $ | 608 | $ | (77 | ) | $ | 8,974 | |||||||||
Interest income | 1,124 | 1,079 | 1 | (239 | ) | 1,965 | ||||||||||||||
Interest expense | 1,351 | 85 | — | (242 | ) | 1,194 | ||||||||||||||
Net interest | (227 | ) | 994 | 1 | 3 | 771 | ||||||||||||||
Net revenues | $ | 5,152 | $ | 4,058 | $ | 609 | $ | (74 | ) | $ | 9,745 | |||||||||
Income from continuing operations before income taxes | $ | 1,730 | $ | 973 | $ | 103 | $ | 2 | $ | 2,808 | ||||||||||
Provision for income taxes | 459 | 326 | 30 | — | 815 | |||||||||||||||
Income from continuing operations | 1,271 | 647 | 73 | 2 | 1,993 | |||||||||||||||
Income (loss) from discontinued operations, net of income taxes | (22 | ) | — | — | — | (22 | ) | |||||||||||||
Net income | 1,249 | 647 | 73 | 2 | 1,971 | |||||||||||||||
Net income applicable to noncontrolling interests | 35 | — | 6 | — | 41 | |||||||||||||||
Net income applicable to Morgan Stanley | $ | 1,214 | $ | 647 | $ | 67 | $ | 2 | $ | 1,930 | ||||||||||
| 87 | March 2017 Form 10-Q |
Notes to Consolidated Financial Statements (Unaudited) | |
| Three Months Ended March 31, 2016 | ||||||||||||||||||||
| $ in millions | Institutional Securities | Wealth Management | Investment Management2 | Intersegment Eliminations | Total | |||||||||||||||
Totalnon-interest revenues3 | $ | 3,645 | $ | 2,837 | $ | 478 | $ | (67 | ) | $ | 6,893 | |||||||||
Interest income | 1,053 | 914 | 1 | (221 | ) | 1,747 | ||||||||||||||
Interest expense | 984 | 83 | 2 | (221 | ) | 848 | ||||||||||||||
Net interest | 69 | 831 | (1 | ) | — | 899 | ||||||||||||||
Net revenues | $ | 3,714 | $ | 3,668 | $ | 477 | $ | (67 | ) | $ | 7,792 | |||||||||
Income from continuing operations before income taxes | $ | 908 | $ | 786 | $ | 44 | $ | — | $ | 1,738 | ||||||||||
Provision for income taxes | 275 | 293 | 10 | — | 578 | |||||||||||||||
Income from continuing operations | 633 | 493 | 34 | — | 1,160 | |||||||||||||||
Income (loss) from discontinued operations, net of income taxes | (3 | ) | — | — | — | (3 | ) | |||||||||||||
Net income | 630 | 493 | 34 | — | 1,157 | |||||||||||||||
Net income (loss) applicable to noncontrolling interests | 39 | — | (16 | ) | — | 23 | ||||||||||||||
Net income applicable to Morgan Stanley | $ | 591 | $ | 493 | $ | 50 | $ | — | $ | 1,134 | ||||||||||
| 1. | Effective July 1, 2016, the Institutional Securities and Wealth Management business segments entered into an agreement, whereby Institutional Securities assumed management of Wealth Management’s fixed income client-driven trading activities and employees. Institutional Securities now pays fees to Wealth Management based on distribution activity (collectively, the “Fixed Income Integration”). Prior periods have not been recast for this new intersegment agreement due to immateriality. |
| 2. | The Firm waives a portion of its fees from certain registered money market funds that comply with the requirements of Rule2a-7 of the Investment Company Act of 1940. These fee waivers resulted in a reduction of fees of approximately $23 million for both the current quarter and the prior year quarter. |
| 3. | In certain management fee arrangements, the Firm is entitled to receive performance-based fees (also referred to as incentive fees and includes carried interest) when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fee revenues are accrued (or reversed) quarterly based on measuring account/fund performance to date versus the performance benchmark stated in the investment management agreement. The Firm’s portion of net unrealized cumulative performance-based fees (for which the Firm is not obligated to pay compensation) at risk of reversing if fund performance falls below stated investment management agreement benchmarks was approximately $430 million and $397 million at March 31, 2017 and December 31, 2016, respectively. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received. |
Total Assets by Business Segment
| $ in millions | At March 31, 2017 | At December 31, 2016 | ||||||
Institutional Securities | $ | 649,766 | $ | 629,149 | ||||
Wealth Management | 178,020 | 181,135 | ||||||
Investment Management | 4,605 | 4,665 | ||||||
Total1 | $ | 832,391 | $ | 814,949 | ||||
| 1. | Corporate assets have been fully allocated to the business segments. |
Geographic Information
For a discussion about the Firm’s geographic net revenues, see Note 21 to the consolidated financial statements in the 2016 Form10-K.
Net Revenues by Region
| Three Months Ended March 31, | ||||||||
| $ in millions | 2017 | 2016 | ||||||
Americas | $ | 7,088 | $ | 5,752 | ||||
EMEA | 1,489 | 1,129 | ||||||
Asia-Pacific | 1,168 | 911 | ||||||
Net revenues | $ | 9,745 | $ | 7,792 | ||||
The Firm has evaluated subsequent events for adjustment to or disclosure in the consolidated financial statements through the date of this report and has not identified any recordable or disclosable events, not otherwise reported in these consolidated financial statements or the notes thereto.
| March 2017 Form 10-Q | 88 |
Financial Data Supplement (Unaudited) Average Balances and Interest Rates and Net Interest Income | |
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||||||
| $ in millions | Average Daily Balance | Interest | Annualized Average Rate | Average Daily Balance | Interest | Annualized Average Rate | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest earning assets | ||||||||||||||||||||||||
Trading assets1: | ||||||||||||||||||||||||
U.S. | $ | 117,063 | $ | 452 | 1.5 | % | $ | 99,151 | $ | 468 | 1.9 | % | ||||||||||||
Non-U.S. | 98,160 | 74 | 0.3 | 107,577 | 100 | 0.4 | ||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||
U.S. | 79,948 | 289 | 1.4 | 62,745 | 211 | 1.4 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
U.S. | 90,628 | 692 | 3.0 | 77,686 | 552 | 2.9 | ||||||||||||||||||
Non-U.S. | 382 | 6 | 6.0 | 239 | 8 | 13.6 | ||||||||||||||||||
Interest bearing deposits with banks: | ||||||||||||||||||||||||
U.S. | 22,327 | 32 | 0.7 | 29,252 | 20 | 0.3 | ||||||||||||||||||
Non-U.S. | 1,666 | (2 | ) | (0.6 | ) | 922 | 9 | 4.0 | ||||||||||||||||
Securities purchased under agreements to resell and Securities borrowed2: | ||||||||||||||||||||||||
U.S. | 138,420 | (58 | ) | (0.2 | ) | 173,622 | (119 | ) | (0.3 | ) | ||||||||||||||
Non-U.S. | 84,881 | (60 | ) | (0.3 | ) | 85,061 | 20 | 0.1 | ||||||||||||||||
Customer receivables and Other3: | ||||||||||||||||||||||||
U.S. | 48,637 | 298 | 2.4 | 47,779 | 325 | 2.8 | ||||||||||||||||||
Non-U.S. | 22,162 | 11 | 0.2 | 28,811 | (143 | ) | (2.0 | ) | ||||||||||||||||
Total | $ | 704,274 | $ | 1,734 | 1.0 | % | $ | 712,845 | $ | 1,451 | 0.8 | % | ||||||||||||
Non-interest earning assets | 115,451 | 114,619 | ||||||||||||||||||||||
Total assets | $ | 819,725 | $ | 827,464 | ||||||||||||||||||||
Liabilities and Equity | ||||||||||||||||||||||||
Interest bearing liabilities | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
U.S. | $ | 151,485 | $ | 7 | — | % | $ | 141,726 | $ | 16 | — | % | ||||||||||||
Non-U.S. | 1,551 | 5 | 1.3 | 2,962 | 1 | 0.1 | ||||||||||||||||||
Short-term borrowings4: | ||||||||||||||||||||||||
U.S. | 159 | — | 0.2 | 1,300 | 2 | 0.6 | ||||||||||||||||||
Non-U.S. | 275 | (3 | ) | (4.0 | ) | 1,078 | 5 | 1.9 | ||||||||||||||||
Long-term borrowings4: | ||||||||||||||||||||||||
U.S. | 156,718 | 808 | 2.0 | 152,617 | 900 | 2.4 | ||||||||||||||||||
Non-U.S. | 9,119 | 9 | 0.4 | 7,343 | 8 | 0.4 | ||||||||||||||||||
Trading liabilities1: | ||||||||||||||||||||||||
U.S. | 28,217 | — | — | 30,693 | — | — | ||||||||||||||||||
Non-U.S. | 52,606 | — | — | 55,641 | — | — | ||||||||||||||||||
Securities sold under agreements to repurchase and Securities loaned5: | ||||||||||||||||||||||||
U.S. | 33,361 | 133 | 1.6 | 45,559 | 116 | 1.0 | ||||||||||||||||||
Non-U.S. | 33,487 | 95 | 1.1 | 33,032 | 138 | 1.7 | ||||||||||||||||||
Customer payables and Other6: | ||||||||||||||||||||||||
U.S. | 123,355 | (217 | ) | (0.7 | ) | 112,001 | (291 | ) | (1.1 | ) | ||||||||||||||
Non-U.S. | 60,404 | (106 | ) | (0.7 | ) | 68,251 | (206 | ) | (1.2 | ) | ||||||||||||||
Total | $ | 650,737 | $ | 731 | 0.5 | $ | 652,203 | $ | 689 | 0.4 | ||||||||||||||
Non-interest bearing liabilities and equity | 168,988 | 175,261 | ||||||||||||||||||||||
Total liabilities and equity | $ | 819,725 | $ | 827,464 | ||||||||||||||||||||
Net interest income and net interest rate spread | $ | 1,003 | 0.5 | % | $ | 762 | 0.4 | % | ||||||||||||||||
| |
| Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||||||
| $ in millions | Average Daily Balance | Interest | Annualized Average Rate | Average Daily Balance | Interest | Annualized Average Rate | Average Daily | Interest | Annualized Average | Average Daily | Interest | Annualized Average Rate | ||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest earning assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Trading assets1: | ||||||||||||||||||||||||||||||||||||||||||||||||
Investment securities1 | $ | 80,693 | $ | 326 | 1.6 | % | $ | 75,765 | $ | 236 | 1.3 | % | ||||||||||||||||||||||||||||||||||||
Loans1 | 95,364 | 748 | 3.2 | 86,614 | 647 | 3.0 | ||||||||||||||||||||||||||||||||||||||||||
Interest bearing deposits with banks1 | 20,289 | 55 | 1.1 | 31,842 | 50 | 0.6 | ||||||||||||||||||||||||||||||||||||||||||
Securities purchased under agreements to resell and Securities borrowed2: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. | $ | 106,082 | $ | 1,426 | 1.8 | % | $ | 98,668 | $ | 1,414 | 1.9 | % | 124,809 | 77 | 0.2 | 151,763 | (62 | ) | (0.2 | ) | ||||||||||||||||||||||||||||
Non-U.S. | 96,942 | 225 | 0.3 | 113,321 | 293 | 0.3 | 97,415 | (95 | ) | (0.4 | ) | 86,124 | (16 | ) | (0.1 | ) | ||||||||||||||||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. | 77,989 | 762 | 1.3 | 68,794 | 650 | 1.3 | ||||||||||||||||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||||||||||||||
Trading assets, net of Trading liabilities3: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. | 88,566 | 2,008 | 3.0 | 72,306 | 1,547 | 2.9 | 54,498 | 445 | 3.3 | 35,634 | 498 | 5.7 | ||||||||||||||||||||||||||||||||||||
Non-U.S. | 429 | 18 | 5.6 | 253 | 26 | 13.7 | 3,201 | 18 | 2.3 | 26,476 | 84 | 1.3 | ||||||||||||||||||||||||||||||||||||
Interest bearing deposits with banks: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. | 26,967 | 111 | 0.5 | 22,450 | 51 | 0.3 | ||||||||||||||||||||||||||||||||||||||||||
Non-U.S. | 1,362 | 23 | 2.3 | 1,000 | 23 | 3.1 | ||||||||||||||||||||||||||||||||||||||||||
Securities purchased under agreements to resell and Securities borrowed2: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. | 148,918 | (184 | ) | (0.2 | ) | 170,895 | (454 | ) | (0.4 | ) | ||||||||||||||||||||||||||||||||||||||
Non-U.S. | 84,802 | (131 | ) | (0.2 | ) | 83,061 | 50 | 0.1 | ||||||||||||||||||||||||||||||||||||||||
Customer receivables and Other3: | ||||||||||||||||||||||||||||||||||||||||||||||||
Customer receivables and Other4: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. | 47,723 | 838 | 2.3 | 55,778 | 596 | 1.4 | 50,387 | 293 | 2.4 | 47,806 | 236 | 2.0 | ||||||||||||||||||||||||||||||||||||
Non-U.S. | 22,209 | 52 | 0.3 | 27,217 | 125 | 0.6 | 23,093 | 98 | 1.7 | 23,382 | 74 | 1.3 | ||||||||||||||||||||||||||||||||||||
Total | $ | 701,989 | $ | 5,148 | 1.0 | % | $ | 713,743 | $ | 4,321 | 0.8 | % | $ | 549,749 | $ | 1,965 | 1.4 | % | $ | 565,406 | $ | 1,747 | 1.3 | % | ||||||||||||||||||||||||
Non-interest earning assets | 110,603 | 123,981 | ||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 812,592 | $ | 837,724 | ||||||||||||||||||||||||||||||||||||||||||||
Liabilities and Equity | �� | |||||||||||||||||||||||||||||||||||||||||||||||
Interest bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities and Equity Interest bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits1 | $ | 153,674 | 11 | — | % | $ | 158,951 | $ | 22 | 0.1 | % | |||||||||||||||||||||||||||||||||||||
Short-term and Long-term borrowings1, 5 | 171,000 | 1,022 | 2.4 | 160,057 | 965 | 2.4 | ||||||||||||||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase and Securities loaned6: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. | $ | 153,501 | $ | 33 | — | % | $ | 136,128 | $ | 48 | — | % | 33,900 | 172 | 2.1 | 31,431 | 140 | 1.8 | ||||||||||||||||||||||||||||||
Non-U.S. | 2,097 | 15 | 1.0 | 2,092 | 3 | 0.2 | 39,774 | 76 | 0.8 | 24,986 | 124 | 2.0 | ||||||||||||||||||||||||||||||||||||
Short-term borrowings4: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. | 489 | 1 | 0.2 | 1,195 | 3 | 0.3 | ||||||||||||||||||||||||||||||||||||||||||
Non-U.S. | 490 | 11 | 3.1 | 1,127 | 13 | 1.5 | ||||||||||||||||||||||||||||||||||||||||||
Long-term borrowings4: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. | 154,293 | 2,594 | 2.2 | 150,227 | 2,723 | 2.4 | ||||||||||||||||||||||||||||||||||||||||||
Non-U.S. | 8,202 | 27 | 0.4 | 7,686 | 26 | 0.5 | ||||||||||||||||||||||||||||||||||||||||||
Trading liabilities1: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. | 30,405 | — | — | 29,551 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Non-U.S. | 50,862 | — | — | 54,176 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase and Securities loaned5: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. | 32,183 | 424 | 1.8 | 58,306 | 341 | 0.8 | ||||||||||||||||||||||||||||||||||||||||||
Non-U.S. | 29,970 | 337 | 1.5 | 34,941 | 456 | 1.7 | ||||||||||||||||||||||||||||||||||||||||||
Customer payables and Other6: | ||||||||||||||||||||||||||||||||||||||||||||||||
Customer payables and Other7: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. | 124,000 | (826 | ) | (0.9 | ) | 115,150 | (1,154 | ) | (1.3 | ) | 121,923 | (86 | ) | (0.3 | ) | 117,917 | (376 | ) | (1.3 | ) | ||||||||||||||||||||||||||||
Non-U.S. | 60,402 | (283 | ) | (0.6 | ) | 63,739 | (194 | ) | (0.4 | ) | 58,556 | (1 | ) | — | 65,349 | (27 | ) | (0.2 | ) | |||||||||||||||||||||||||||||
Total | $ | 646,894 | $ | 2,333 | 0.5 | $ | 654,318 | $ | 2,265 | 0.5 | $ | 578,827 | $ | 1,194 | 0.8 | $ | 558,691 | $ | 848 | 0.6 | ||||||||||||||||||||||||||||
Non-interest bearing liabilities and equity | 165,698 | 183,406 | ||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 812,592 | $ | 837,724 | ||||||||||||||||||||||||||||||||||||||||||||
Net interest income and net interest rate spread | $ | 2,815 | 0.5 | % | $ | 2,056 | 0.3 | % | $ | 771 | 0.6 | % | $ | 899 | 0.7 | % | ||||||||||||||||||||||||||||||||
| 1. |
|
| 2. | Includes fees paid on Securities borrowed. |
| 3. | Trading assets, net of Trading liabilities excludenon-interest earning assets andnon-interest bearing liabilities, such as equity securities. |
| 4. | Includes interest from customer receivables and cash deposited with clearing organizations or segregated under federal and other |
The Firm also issues structured notes that have coupon or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities, which are recorded within Trading revenues (see Note 3 to the consolidated financial |
Includes fees received on Securities loaned. |
Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers’ short positions. |
Financial Data Supplement (Unaudited) Rate/Volume Analysis | |
Effect of Net Interest Income of Volume and Rate Changes on Net Interest Income
| Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | |||||||||||||||||||||||||||||||||||
versus Three Months Ended September 30, 2015 | versus Nine Months Ended September 30, 2015 | Three Months Ended March 31, 2017 versus Three Months Ended March 31, 2016 | ||||||||||||||||||||||||||||||||||
Increase (decrease) due to change in: | Increase (decrease) due to change in: | Increase (decrease) due to change in: | ||||||||||||||||||||||||||||||||||
| $ in millions | Volume | Rate | Net Change | Volume | Rate | Net Change | Volume | Rate | Net Change | |||||||||||||||||||||||||||
Interest earning assets | Interest earning assets |
| ||||||||||||||||||||||||||||||||||
Trading Assets: | ||||||||||||||||||||||||||||||||||||
Investment securities | $ | 15 | $ | 75 | $ | 90 | ||||||||||||||||||||||||||||||
Loans | 65 | 36 | 101 | |||||||||||||||||||||||||||||||||
Interest bearing deposits with banks | (18 | ) | 23 | 5 | ||||||||||||||||||||||||||||||||
Securities purchased under agreements to resell and Securities borrowed: | ||||||||||||||||||||||||||||||||||||
U.S. | $ | 85 | $ | (101 | ) | $ | (16 | ) | $ | 106 | $ | (94 | ) | $ | 12 | 11 | 128 | 139 | ||||||||||||||||||
Non-U.S. | (9 | ) | (17 | ) | (26 | ) | (42 | ) | (26 | ) | (68 | ) | (2 | ) | (77 | ) | (79 | ) | ||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||||||||||||||
U.S. | 58 | 20 | 78 | 87 | 25 | 112 | ||||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||
U.S. | 92 | 48 | 140 | 348 | 113 | 461 | ||||||||||||||||||||||||||||||
Non-U.S. | 5 | (7 | ) | (2 | ) | 18 | (26 | ) | (8 | ) | ||||||||||||||||||||||||||
Interest bearing deposits with banks: | ||||||||||||||||||||||||||||||||||||
U.S. | (5 | ) | 17 | 12 | 10 | 50 | 60 | |||||||||||||||||||||||||||||
Non-U.S. | 7 | (18 | ) | (11 | ) | 8 | (8 | ) | — | |||||||||||||||||||||||||||
Securities purchased under agreements to resell and Securities borrowed: | ||||||||||||||||||||||||||||||||||||
Trading assets, net of Trading liabilities: | ||||||||||||||||||||||||||||||||||||
U.S. | 24 | 37 | 61 | 58 | 212 | 270 | 264 | (317 | ) | (53 | ) | |||||||||||||||||||||||||
Non-U.S. | — | (80 | ) | (80 | ) | 1 | (182 | ) | (181 | ) | (74 | ) | 8 | (66 | ) | |||||||||||||||||||||
Customer receivables and Other: | Customer receivables and Other: |
| ||||||||||||||||||||||||||||||||||
U.S. | 6 | (33 | ) | (27 | ) | (86 | ) | 328 | 242 | 13 | 44 | 57 | ||||||||||||||||||||||||
Non-U.S. | 33 | 121 | 154 | (23 | ) | (50 | ) | (73 | ) | (1 | ) | 25 | 24 | |||||||||||||||||||||||
Change in interest income | $ | 296 | $ | (13 | ) | $ | 283 | $ | 485 | $ | 342 | $ | 827 | $ | 273 | $ | (55 | ) | $ | 218 | ||||||||||||||||
Interest bearing liabilities | Interest bearing liabilities |
| ||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||
U.S. | $ | 1 | $ | (10 | ) | $ | (9 | ) | $ | 6 | $ | (21 | ) | $ | (15 | ) | ||||||||||||||||||||
Non-U.S. | — | 4 | 4 | — | 12 | 12 | ||||||||||||||||||||||||||||||
Short-term borrowings: | ||||||||||||||||||||||||||||||||||||
U.S. | (2 | ) | — | (2 | ) | (2 | ) | — | (2 | ) | ||||||||||||||||||||||||||
Non-U.S. | (4 | ) | (4 | ) | (8 | ) | (7 | ) | 5 | (2 | ) | |||||||||||||||||||||||||
Long-term borrowings: | ||||||||||||||||||||||||||||||||||||
U.S. | 24 | (116 | ) | (92 | ) | 74 | (203 | ) | (129 | ) | ||||||||||||||||||||||||||
Non-U.S. | 2 | (1 | ) | 1 | 2 | (1 | ) | 1 | ||||||||||||||||||||||||||||
Deposits | $ | (1 | ) | $ | (10 | ) | $ | (11 | ) | |||||||||||||||||||||||||||
Short-term and Long-term borrowings | 66 | (9 | ) | 57 | ||||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase and Securities loaned: | ||||||||||||||||||||||||||||||||||||
U.S. | (31 | ) | 48 | 17 | (153 | ) | 236 | 83 | 11 | 21 | 32 | |||||||||||||||||||||||||
Non-U.S. | 2 | (45 | ) | (43 | ) | (65 | ) | (54 | ) | (119 | ) | 73 | (121 | ) | (48 | ) | ||||||||||||||||||||
Customer payables and Other: | Customer payables and Other: |
| ||||||||||||||||||||||||||||||||||
U.S. | (29 | ) | 103 | 74 | (89 | ) | 417 | 328 | (13 | ) | 303 | 290 | ||||||||||||||||||||||||
Non-U.S. | 24 | 76 | 100 | 10 | (99 | ) | (89 | ) | 3 | 23 | 26 | |||||||||||||||||||||||||
Change in interest expense | $ | (13 | ) | $ | 55 | $ | 42 | $ | (224 | ) | $ | 292 | $ | 68 | $ | 139 | $ | 207 | $ | 346 | ||||||||||||||||
Change in net interest income | $ | 309 | $ | (68 | ) | $ | 241 | $ | 709 | $ | 50 | $ | 759 | $ | 134 | $ | (262 | ) | $ | (128 | ) | |||||||||||||||
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The following new matters and developments have occurred since previously reporting certain matters in Morgan Stanley’s (the “Firm’s”)the Firm’s Annual Report on Form10-K for the year ended December 31, 20152016 (the “Form10-K”), the Firm’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016 (the “First Quarter Form 10-Q”), and the Firm’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016 (the “Second Quarter Form 10-Q”). See also the disclosures set forth under “Legal Proceedings” in Part I, Item 3 of the Form 10-K and Part II, Item 1 of the First Quarter Form 10-Q and the Second Quarter Form 10-Q.10-K.
Residential Mortgage and Credit Crisis Related Matters
Civil Litigation
On August 11, 2016,February 17, 2017, the Appellate Division, First Department reversedplaintiff in partFederal Housing Finance Agency, as Conservator for the trial court’s grantingFederal Home Loan Mortgage Corporation, on behalf of the Firm’s motion to dismiss inTrustee of the Morgan Stanley Mortgage LoanABS Capital I Inc. Trust, 2006-13ARXSeries2007-NC1 (MSAC2007-NC1) v. Morgan Stanley MortgageABS Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage CapitalI Inc.On September 9, 2016, the Firm filed a motion for reargument or, in the alternative, sought leave to appeal that decision.the Appellate Division’s affirmance of the partial dismissal of the complaint to the New York Court of Appeals.
On August 11, 2016,February 17, 2017, the plaintiff inFederal Housing Finance Agency, as Conservator for the Federal Home Loan Mortgage Corporation, on behalf of the Trustee of the Morgan Stanley ABS Capital I Inc. Trust, Series2007-NC3 (MSAC2007-NC3) v. Morgan Stanley ABS Capital I Inc. sought leave to appeal the Appellate Division, First Department affirmedDivision’s affirmance of the trial court’s order denying in partpartial dismissal of the Firm’scomplaint to the New York Court of Appeals.
On February 24, 2017, the Firm appealed the denial of its motion to dismiss the complaint relating to a securitization issued by Basket of Aggregated Residential NIMS2007-1 Ltd inIKB International S.A. in LiquidationFinancial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al.
On February 24, 2017, the Firm appealed the denial of its motion to dismiss the complaint relating to the Morgan Stanley ABS Capital I Inc. Trust2007-NC4 inFinancial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al.
On April 12, 2017, inRoyal Park Investments SA/NV v. Morgan Stanley et al.al
On August 16, 2016,., the Firm moved for summary judgment and the plaintiffs moved for partial summary judgment inMorgan Stanley Mortgage Loan Trust 2006-14SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, assuccessor in interest to Morgan Stanley Mortgage Capital Inc.
On September 15, 2016, the New YorkSupreme Court of Appeals denied the plaintiff’s motion for leave to appeal inDexia SA/NV, et al. v. Morgan Stanley, et al.
On September 21, 2016, the Firm filed a motion for summary judgment inFederal Home Loan Bank of San Francisco v. Deutsche Bank Securities, Inc., et al.
On September 30, 2016, the court inCalifornia v. Morgan Stanley, et al.granted the Firm’s demurrer, with leave to replead. On October 21, 2016, the California Attorney General filed an amended complaint.
Commercial Mortgage Related Matter
InThe BankState of New York Mellon Trust, National Association v. Morgan Stanley Mortgage Capital, Inc., a trial has been set for February 13, 2017.
Currency Related Matters
Class Action Litigation
On September 20, 2016, the court inIn Re Foreign Exchange Benchmark Rates Antitrust Litigationgranted in part and denied in part the Firm’s motion to dismiss the amended complaint.
European Matter
On September 29, 2016, a purported antitrust action was filed on behalf of indirect foreign exchange purchasersApril 15, 2017, the Firm and Land Salzburg agreed to resolve all claims in the United States District Court foractions styledLand Salzburg v. Morgan Stanley & Co. International plc andMorgan Stanley Capital Services LLC and Morgan Stanley & Co. International plc v. Land Salzburg, which agreement is subject to Land Salzburg parliamentary approval.
Other Litigation
On March 6, 2017, the Southern District of New York. The action, styledFirm and other defendants inBakerGeneseeCounty Employees’ Retirement System v. Bank of America Corporation et al., names filed a partial motion to dismiss the Firm and 15 other foreign exchange dealers as defendants, and asserts claims under state antitrust and consumer protection laws.second consolidated amended complaint.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth the information with respect to purchases made by or on behalf of the Firm of its common stock during the quarterly period ended September 30, 2016.March 31, 2017.
Issuer Purchases of Equity Securities
| $ in millions, except per share data | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1 | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1 | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||||||||||||||
Month #1 (July 1, 2016-July 31, 2016) | ||||||||||||||||||||||||||||||||
Month #1 (January 1, 2017—January 31, 2017) | ||||||||||||||||||||||||||||||||
Share Repurchase Program2 | 5,800,000 | $ | 28.96 | 5,800,000 | $ | 3,332 | 1,762,500 | $ | 42.93 | 1,762,500 | $ | 1,174 | ||||||||||||||||||||
Employee transactions3 | 961,220 | $ | 28.60 | — | — | 8,795,271 | $ | 42.16 | — | — | ||||||||||||||||||||||
Month #2 (August 1, 2016-August 31, 2016) | ||||||||||||||||||||||||||||||||
Month #2 (February 1, 2017—February 28, 2017) | ||||||||||||||||||||||||||||||||
Share Repurchase Program2 | 22,510,000 | $ | 29.43 | 22,510,000 | $ | 2,670 | 6,976,800 | $ | 44.83 | 6,976,800 | $ | 862 | ||||||||||||||||||||
Employee transactions3 | 37,638 | $ | 29.11 | — | — | 174,844 | $ | 44.04 | — | — | ||||||||||||||||||||||
Month #3 (September 1, 2016-September 30, 2016) | ||||||||||||||||||||||||||||||||
Month #3 (March 1, 2017—March 31, 2017) | ||||||||||||||||||||||||||||||||
Share Repurchase Program2 | 13,189,153 | $ | 31.82 | 13,189,153 | $ | 2,250 | 7,926,179 | $ | 45.62 | 7,926,179 | $ | 500 | ||||||||||||||||||||
Employee transactions3 | 22,604 | $ | 31.60 | — | — | 707,500 | $ | 45.64 | — | — | ||||||||||||||||||||||
Quarter ended at September 30, 2016 | ||||||||||||||||||||||||||||||||
Quarter ended at March 31, 2017 | ||||||||||||||||||||||||||||||||
Share Repurchase Program2 | 41,499,153 | $ | 30.12 | 41,499,153 | $ | 2,250 | 16,665,479 | $ | 45.00 | 16,665,479 | $ | 500 | ||||||||||||||||||||
Employee transactions3 | 1,021,462 | $ | 28.68 | — | — | 9,677,615 | $ | 42.45 | — | — | ||||||||||||||||||||||
| 1. | Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule10b5-1 plans or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Firm deems appropriate and may be suspended at any time. |
| 2. | The Firm’s Board of Directors has authorized the repurchase of the Firm’s outstanding stock under a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program is a program for capital management purposes that considers, among other things, business segment capital needs, as well as equity-based compensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date. Share repurchases by the Firm are subject to regulatory approval. In June 2016, the Firm received a conditionalnon-objection from the Federal Reserve to its 2016 capital plan, which included a share repurchase of up to $3.5 billion of the Firm’s outstanding common stock during the period beginning July 1, 2016 through June 30, 2017. During the quarter ended |
| 3. | Includes shares acquired by the Firm in satisfaction of the tax withholding obligations on stock-based awards and the exercise of stock options granted under the Firm’s stock-based compensation plans. |
On October 28, 2016, the Firm announced that James A. Rosenthal, Executive Vice President and Chief Operating Officer of the Firm, would be leaving his position at the end of 2016. Mr. Rosenthal will remain in his position through December 31, 2016, and will remain an employee of the Firm in the role of senior advisor through his anticipated termination date of July 31, 2017. The Firm’s Board of Directors approved the following material terms of a separation and release agreement with Mr. Rosenthal: Mr. Rosenthal’s discretionary bonus compensation with respect to 2016 will be comprised of a mix of current cash bonus, a deferred cash incentive compensation award and a deferred equity incentive compensation award in the form of restricted stock units; Mr. Rosenthal’s outstanding deferred cash and equity awards will not be modified and, in accordance with the award terms, such awards will vest on his date of termination and will be
subject to specified cancellation and clawback provisions until the applicable scheduled distribution or conversion date, and any stock options will remain outstanding and exercisable until the expiration of the original option term; if the Firm agrees to accelerate Mr. Rosenthal’s termination date, then he will receive the base remuneration that he would have been paid through July 31, 2017; Mr. Rosenthal will have continued access to office space and administrative support, and continued access to his primary care physician under the Firm’s Executive Health Program, through December 31, 2017; Mr. Rosenthal will remain subject to certain customary covenants in the agreement through December 31, 2017; and the agreement will have a general release and waiver of claims in favor of the Firm.
An exhibit index has been filed as part of this Report on PageE-1.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MORGAN STANLEY (Registrant) | ||
By: | /S/ JONATHAN PRUZAN | |
Jonathan Pruzan Executive Vice President and Chief Financial Officer | ||
By: | /S/ PAUL C. WIRTH | |
Paul C. Wirth Deputy Chief Financial Officer | ||
Date: November 2, 2016May 4, 2017
Morgan Stanley
Quarter Ended September 30, 2016March 31, 2017
| Exhibit No. | Description | |
| 12 | Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Earnings to Fixed Charges and Preferred Stock Dividends. | |
| 15 | Letter of awareness from Deloitte & Touche LLP, dated | |
| 31.1 | Rule13a-14(a) Certification of Chief Executive Officer. | |
| 31.2 | Rule13a-14(a) Certification of Chief Financial Officer. | |
| 32.1 | Section 1350 Certification of Chief Executive Officer. | |
| 32.2 | Section 1350 Certification of Chief Financial Officer. | |
| 101 | Interactive data files pursuant to Rule 405 of RegulationS-T: (i) the Consolidated | |
E-1