¹ Source: Thomson Reuters – for the period of January 1, 2016 to June 30, 2016 as of July 1, 2016.

 

² The Firm prepares its Consolidated Financial Statements using accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”).  From time to time, Morgan Stanley may disclose certain “non-GAAP financial measures” in the course of its earnings releases, earnings conference calls, financial presentations and otherwise.  The Securities and Exchange Commission (SEC) defines a “non-GAAP financial measure” as a numerical measure of historical or future financial performance, financial positions, or cash flows that is subject to adjustments that effectively exclude, or include amounts from the most directly comparable measure calculated and presented in accordance with U.S. GAAP.  Non-GAAP financial measures disclosed by Morgan Stanley are provided as additional information to investors and analysts in order to provide them with greater transparency about, or 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 with non-GAAP financial measures used by other companies.  Whenever we refer to a non-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 non-GAAP financial measure we reference and such comparable GAAP financial measure.

 

³ Pre-tax margin is a non-GAAP financial measure that the Firm considers useful for investors and analysts to assess operating performance. Pre-tax margin represents income (loss) from continuing operations before taxes divided by net revenues, two U.S. GAAP reported amounts without adjustment.

 

⁴ On June 29, 2016, the Firm announced that it received no objection from the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) to the Firm’s 2016 capital plan (“Capital Plan”).  The Capital Plan includes the repurchase of up to $3.5 billion of outstanding common stock for the four quarters beginning in the third quarter of 2016 through the end of the second quarter of 2017, an increase from $2.5 billion for the comparable four quarter period in the 2015 Capital Plan, as well as an increase in the Firm’s quarterly common stock dividend to $0.20 per share from the current $0.15 per share, beginning with the common stock dividend declared in the third quarter of 2016.  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.  Share repurchases under the Firm’s existing program authorized by the Board of Directors will be exercised from time to time through June 30, 2017, at prices the Firm deems appropriate subject to various factors, including the Firm’s capital position and market conditions.

 

⁵ Effective January 1, 2016, the Firm early adopted the provision of new accounting guidance that requires unrealized gains and losses from Morgan Stanley’s debt-related credit spreads and other credit factors (Debt Valuation Adjustments, or DVA) to be presented in Other comprehensive income as opposed to net revenues and net income.  Results for 2015 are not restated pursuant to that guidance.

 

⁶ Includes preferred dividends and other adjustments related to the calculation of earnings per share for the second quarter of 2016 and 2015 of approximately $157 million and $142 million, respectively.  Refer to page 13 of Morgan Stanley’s Financial Supplement accompanying this release for the calculation of earnings per share.

 

 

⁷ Excluding DVA from net income applicable to Morgan Stanley and earnings (loss) per diluted share amounts are non-GAAP financial measures that the Firm considers useful for investors and analysts to allow better comparability of period-to-period operating performance.  The reconciliation of net income (loss) applicable to Morgan Stanley, earnings (loss) per diluted share applicable to Morgan Stanley common shareholders from a GAAP to non-GAAP basis is as follows (Net income (loss) reconciliation and average diluted shares are presented in millions):

 

 

⁸ Annualized return on average common equity (ROE) is a non-GAAP financial measure that the Firm considers useful for investors and analysts to allow better comparability of period-to-period operating performance.  The calculation of ROE uses net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity.

 

⁹ Institutional Securities net revenues and pre-tax income (loss), excluding DVA, is a non-GAAP financial measure that the Firm considers useful for investors and analysts to allow for better comparability of period-to-period operating performance. The reconciliation of net revenues and pre-tax income (loss) from a GAAP to non-GAAP basis is as follows (amounts are presented in millions - also see footnote 5):

 

 

 

¹⁰ Sales and trading net revenues, including Fixed Income & Commodities (FIC) and Equity sales and trading net revenues excluding DVA are non-GAAP financial measures that the Firm considers useful for investors and analysts to allow better comparability of period-to-period operating performance.  The reconciliation of sales and trading, including FIC and Equity sales and trading net revenues from a GAAP to non-GAAP basis is as follows (amounts are presented in millions – also see footnote 5):

 

 

¹¹ VaR represents the loss amount that one would not expect to exceed, on average, more than five times every one hundred trading days in the Firm’s trading positions if the portfolio were held constant for a one-day period.  Further discussion of the calculation of VaR and the limitations of the Firm’s VaR methodology is disclosed in Part II, Item 7A “Quantitative and Qualitative Disclosures about Market Risk” included in the 2015 Form 10-K.  Refer to page 6 of Morgan Stanley’s Financial Supplement accompanying this release for the VaR disclosure.

 

¹² Transactional revenues include investment banking, trading, and commissions and fee revenues.

 

¹³ Wealth Management client liabilities reflect U.S. Bank lending and broker dealer margin activity.

 

¹⁴ The Firm’s binding risk-based capital ratios for regulatory purposes under U.S. Basel III are the lower of the capital ratios computed under the (i) standardized approaches for calculating credit risk 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”). At June 30, 2016, the binding ratio is based on the Advanced Approach transitional rules. For information on the calculation of regulatory capital and ratios for prior periods, please refer to Part II, Item 7 “Liquidity and Capital Resources - Regulatory Requirements” in the Firm’s 2015 10-K and Part I, Item 2 “Liquidity and Capital Resources – Regulatory Requirements” in the Firm’s 10-Q for the quarter ended March 31, 2016.

 

¹⁵ The pro forma fully phased-in Common Equity Tier 1 risk-based capital ratio (Common Equity Tier 1) and pro forma fully phased-in Supplementary Leverage Ratio (SLR) are non-GAAP financial measures that the Firm considers to be useful measures for investors and analysts to evaluate compliance with new regulatory capital requirements that have not yet become effective.

 

¹⁶ U.S. Basel III requires the Firm to disclose information related to its supplementary leverage ratio beginning on January 1, 2015, which through to the end of 2017 will include the effects of transitional provisions. The supplementary leverage ratio will become effective as a capital standard on January 1, 2018. Specifically, beginning on January 1, 2018, the Firm must 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 least 5%), in order to avoid limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers. The Firm’s pro forma Supplementary Leverage Ratio estimate utilizes a fully phased-in U.S. Basel III Tier 1 capital numerator and a denominator of approximately $1.07 trillion. The Firm’s 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 the Firm’s supplementary leverage ratios or earnings, assets or exposures will actually be at future dates. See “Risk Factors” in Part I, Item 1A in the 2015 Form 10-K for a discussion of risks and uncertainties that may affect the future results of the Firm.

 

 

¹⁷ Tangible common equity and tangible book value per common share are non-GAAP financial measures that the Firm considers to be useful measures of capital adequacy for investors and analysts.  Tangible common equity equals common equity less goodwill and intangible assets net of allowable mortgage servicing rights deduction.  Tangible book value per common share equals tangible common equity divided by period end common shares outstanding.