Ratings of Morgan Stanley (MS - Free Report) and its subsidiaries have been affirmed by the Moody's Investors Service, the rating arm of Moody's Corporation (MCO - Free Report) . The company’s senior debt rating has been affirmed at A3. Further, the outlook has remained stable.
Why the Ratings Were Reiterated
The ratings affirmation is indicative of Morgan Stanley’s consistent improvement in profitability in the past few years. This reflects strong growth in the company’s Wealth Management segment and its efforts to strengthen efficiency through efficient cost control.
Apart from these, rebound in Morgan Stanley’s fixed income sales and trading operations and robust capital markets related business performance despite low volatility across the industry support profitability. The rating agency anticipates that these factors along with lower tax rates will likely boost bottom-line growth over “the near-to-medium term.”
These credit positives are marginally offset by faster pace of growth in loan (mostly tied to low risk secured loans to Morgan Stanley’s wealth management clients), which is significantly “above the aggregate US bank loan growth rate or the growth rate of nominal US GDP.” Also, the company shows more vulnerability to stress as it has “experienced a greater decline in its capital ratios under the Federal Reserve's severely adverse DFAST stress test than has any of its closest US peers.”
Driven by this, Morgan Stanley has been gradually increasing its share repurchase authorization. But Moody’s anticipates the company to return more capital to the shareholders in the coming years as its profitability continues to improve. Though this will lower the company’s capital ratios, these are expected to “remain above than median of its global investment bank peers.”
What Could Make Moody's Change the Ratings
Ratings of Morgan Stanley are not likely to be upgraded in absence of considerable lower dependence of its earnings to the capital markets operation. Also, improvement in capital and liquidity ratios along with lower volatility in earnings will support the ratings upgrade.
However, Morgan Stanley’s ratings could be downgraded in case of deterioration in credit quality and a rise in illiquid risk assets. Further, worsening liquidity profile and any indications of control or risk management failures may lead to lowering of the company’s ratings.
The company’s shares have rallied 26.9% in the past year, outperforming 25.9% gain of the industry.
The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Notably, other than Morgan Stanley, the rating agency has affirmed ratings of some big banks including Goldman Sachs (GS - Free Report) and JPMorgan (JPM - Free Report) over the past few months.
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