Fitch Affirms Morgan Stanley's IDRs at 'A/F1'; Downgrades Banking Subsidiaries' IDRs to Equal Parent

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A/F1' long- and short-term Issuer Default Ratings (IDRs) for Morgan Stanley (MS). The IDRs of two MS banking subsidiaries have been downgraded to 'A' from 'A+'. The Outlook remains Stable. A complete list of ratings follows at the end of this release.

The ratings affirmation acknowledges the company's solid liquidity, lower leverage and high competitive position in key capital markets. The ratings also incorporate an expectation of variable earnings. Note that pending financial reforms could mute revenue prospects in certain business lines and pressure ratings.

Ratings of the operating banks have been downgraded to the equivalent of parent Morgan Stanley. This is to recognize the interdependence of funding, risk, management and operations under the current bank holding company structure.

The company has executed on a number of fronts to reposition the franchise for future growth: non-core businesses have been shed, as key business lines expand. The main businesses have been restructured to incorporate a more conservative risk profile. In doing so, greater emphasis is on investment in fee generating businesses. Management has raised capital, reduced exposures to high risk assets and tempered its risk profile.

Profitability has been weak throughout the recent global downturn, in both absolute terms and compared to peers. But 1H'10 performance has been stronger, with higher contributions from a broader mix of Institutional Securities businesses.

With regards to liquidity, the company has significantly reduced its balance sheet, while increasing the proportion of cash and cash equivalent assets. The Global Liquidity Reserve has been bolstered. The banks' access to funding will reduce some reliance on wholesale funding, but it is not expected to satisfy all strategic funding needs.

Significant resources are being allocated to the Global Wealth Management group (GWM) with the goal of developing a source of consistent core revenues to complement investment banking revenues. In this vein, the integration of the Morgan Stanley Smith Barney joint venture is proceeding. Fitch believes it may be several years, however, before ongoing contributions by GWM are proportionately significant, given the highly competitive, fluid wealth management market.

The Stable Outlook reflects expectations that Morgan Stanley's demonstrated ability to manage through very difficult markets will persist in spite of the challenging global economy and evolving regulatory landscape. Ratings may be negatively affected if profitability from continuing operations falter, leverage trends regress, and/or the risk profile deteriorates.

Total assets decreased to $809 billion as of June 30, 2010, versus $820 billion in the prior quarter. The company's funding profile remained fairly stable. In 2Q'10, MS funded its balance sheet through deposits ($61.3 billion) and equity ($51 million, excluding non controlling interest), supplemented by capital markets instruments, such as commercial paper and other short-term borrowings ($3.8 billion), secured funding ($359 billion) and long-term debt ($182 billion). Internal capital generation has helped elevate capital levels over the past few periods. This combined with lower asset balances in 2Q'10 resulted in improved capital ratios. Tangible common equity rose to $34 billion in 2Q'10 from $31 billion in 1Q'10. The Tier 1 capital ratio increased to 16.5% from 15.1% on a linked quarter basis. Likewise, the Tier 1 common ratio was 9.2% at the end of the second quarter of 2010, up from 8.3% sequentially.

Morgan Stanley is a global financial services firm that provides products and services in three business segments: Institutional Securities, Global Wealth Management, and Asset Management. The company became a financial holding company in September 2008 and is now regulated by the U.S. Federal Reserve System.

Fitch has affirmed the following ratings:

Morgan Stanley

--Long-term IDR at 'A';

--Long-term Senior Unsecured Debt at 'A';

--Subordinated Debt at 'A-';

--Preferred Debt at 'BBB+';

--Short-term IDR at 'F1';

--Short-term Debt at 'F1';

--Individual at 'B/C';

--Support at '5';

--Support Floor at 'NF'.

Morgan Stanley Bank N.A.

--Short-term IDR at 'F1';

--Short-term Deposits at 'F1+';

--Individual at 'B/C';

--Support at '1'.

Morgan Stanley Australia Finance Ltd

--Long-term IDR at 'A';

--Long-term Senior Unsecured Debt at 'A';

--Short-term IDR at 'F1';

--Short-term Debt at 'F1'.

Morgan Stanley Canada Ltd

--Short-term IDR at 'F1';

--Short-term Debt at 'F1'.

Morgan Stanley International Finance SA

--Short-term Debt at 'F1'.

Bank Morgan Stanley AG

--Short-term IDR at 'F1';

--Individual at 'B/C';

--Support at '1'.

Morgan Stanley Capital Trust II-VIII

--Preferred Debt at 'BBB+'.

Morgan Stanley Capital Securities Series A, B, C

--Preferred Debt at 'BBB+'.

Fitch downgrades the following ratings:

Morgan Stanley Bank N.A.

--Long-term IDR to 'A' from 'A+';

--Long-term Deposits to 'A+' from 'AA-';

Bank Morgan Stanley AG

--Long-term IDR to 'A' from 'A+';

The Rating Outlook is Stable.

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

Related Research:

--'Global Financial Institutions Rating Criteria' (Aug. 16, 2010);

--'Rating Criteria for Securities Firms' (Dec. 30, 2009);

--'U.S. Financial Institutions Financial Reform: Five Issues to Watch' (March 26, 2010).

Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685

Rating Criteria For Securities Firms - Financial Institutions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493276

U.S. Financial Institutions Financial Reform: Five Issues to Watch

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506348

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CONTACT:

Fitch Ratings, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com
or
Primary Analyst
Leslie S. Bright, +1-212-908-0622
Senior Director
One State Street Plaza
New York, NY 10001
or
Secondary Analyst
Fabrice Toka, +1-212-908-0369
Senior Director
or
Committee Chairperson
Sharon Haas, +1-212-908-0362
Managing Director

KEYWORDS:   United States  North America  New York

INDUSTRY KEYWORDS:   Professional Services  Banking  Finance

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