OREANDA-NEWS. Morgan Stanley's (MS) fourth quarter 2015 (4Q15) earnings were again impacted by challenging market conditions particularly within the company's fixed income currency and commodities (FICC) businesses, according to Fitch Ratings.

MS's 4Q15 earnings of $908 million were down 11% from the sequential quarter, but up from the year-ago quarter, as the year-ago quarter reflected a loss due to a large litigation charge related to legacy residential mortgage-backed securities (RMBS) matters.

The company's 4Q15 earnings equated to a 4.4% annualized return on average common equity (ROAE), below both company targets and the Fitch's long-term cost of equity assumption for the company.

On a full year basis, MS's 2015 ROAE was 8.5%, up from 4.8% in the prior year, though the prior year's result was inclusive of the litigation charge noted above.

Fitch calculated pre-tax profits which exclude CVA/DVA and various other gains/losses amounted to $1.56 billion, or a 0.79% adjusted pre-tax return on assets (ROA). The Fitch adjusted pre-tax income changed primarily due to swings in CVA/DVA, as the reported pre-tax income number was down just slightly from the sequential quarter. However, the adjusted ROA ticked up due to a 5.5% decline in the company's asset base to $788 million.

In MS's Institutional Securities Group (ISG) continued strength in advisory net revenues as well as good performance in equity sales & trading net revenue was largely offset by the aforementioned weaknesses in FICC.

As a result, management is planning some continued restructuring of its FICC businesses. Towards the end of 2015 the company reduced 25% of its FICC related staff, which resulted in a $155 million severance and restructuring charge in 4Q15, as well as appointing a new leadership team to oversee the FICC businesses.
Management further indicated that it plans to continue to right size these businesses and anticipates reducing FICC related risk-weighted assets (RWA) by an additional $50 billion.

Additionally, management plans to look for ways to make these businesses more efficient by more significantly using technology to reduce costs and drive revenue.

Fitch notes that this RWA reduction and efficiency initiative is potentially credit positive over a longer-term time horizon as it should continue balance sheet de-risking, free up capital that can be deployed elsewhere or returned to shareholders, as well as improve overall earnings performance closer to peer levels as well as Fitch estimated long-term cost of equity for the company of around 10%.

MS's other key business segments, wealth management and asset management performed satisfactorily during the quarter. During the quarter the wealth management segment benefited from higher net interest income (NII) offset by lower transactional based net revenues. Nevertheless the pre-tax margin in this segment was still good at 20%, though below last quarter's pre-tax margin of 23%.

As the company continues to grow wealth management and its lending businesses as well as it continues to optimize its other businesses noted above, Fitch would expect wealth management earnings to add more stability to the firm's overall earnings profile over time. This viewpoint is already incorporated in Fitch's ratings and Rating Outlook for the company.

MS's capital and liquidity position continues to be good and is supportive to the company's rating. MS's total deposits grew to $156bn, up 6% from the sequential quarter and 17% from the year-ago quarter. The company's global liquidity reserve was similarly good $203.3 billion. MS's fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the advanced approach was higher at 14.1%, given the balance sheet shrinkage noted above.

Fitch would expect capital ratios to continue to grow given the balance sheet de-risking noted above. MS may be able to return more of that capital to shareholders via buybacks or dividends, depending on how it fares in the annual CCAR stress tests in the coming months.