MS Morgan Stanley

By Justin Baer 

In the Federal Reserve's most-recent battery of stress tests, Morgan Stanley proved it can take a punch.

No bank's capital ratios absorbed a bigger hit during the nine-quarter stretch the Fed used to look at how 33 banks would fare in a hypothetical recession. Morgan Stanley's common equity Tier 1 ratio fell more than 7 percentage points from the test's starting point to its low. That is a steeper drop than any other firm's ratio endured during the latest exam.

The good news for Morgan Stanley shareholders hopeful the results will lead to higher dividend payouts and a bigger stock-buyback: the firm's key capital ratios never dipped below the minimums required by the Fed.

The firm's common equity Tier 1 ratio fell to 9.1% at the low point of the hypothetical recession. That was well above the 4.5% minimum and was far higher than the 6.3% level the firm posted in last year's test.

Morgan Stanley's Tier 1 leverage ratio, though, proved a closer call. The firm's leverage ratio, which measures high-quality capital as a share of all assets, dipped to 4.9% during the stress tests. The Fed's minimum is 4%. But there is good news: that was still up on last year, when the ratio was 4.5%.

The stress tests simulate a world-wide recession. The results were under the Fed's "severely adverse" scenario of financial stress, which this year includes a 10% U.S. unemployment rate, significant losses in corporate- and commercial-real-estate-lending portfolios, and negative rates on short-term U.S. Treasury securities.

The results will factor into the Fed's decision next week about whether to approve the bank's plan for rewarding shareholders with dividends or potential share buybacks. Banks whose capital ratios dropped close to minimum levels may choose to scale back their dividend or buyback plans before the Fed announces its final decision Wednesday. That day the banks can choose to announce whether they are raising their dividends or buying back more shares, important for enhancing shareholder returns.

Morgan Stanley's own stress tests had reached slightly more optimistic conclusions.

The firm's common equity Tier 1 ratio touched a 9.4% minimum, while its Tier 1 leverage ratio fell to 5.8%, Morgan Stanley said Thursday in a report published on its website. A Morgan Stanley spokesman declined to comment on the Fed's results.

Morgan Stanley increased both its dividend and stock buyback request last year, and analysts have expected the firm to step up with an even bigger capital-return plan following the 2016 tests.

The Fed approved Morgan Stanley's capital plan last year. That occurred after the firm revised its initial plan request because of its performance on the first part of the stress-test results. This involved it scrapping plans to buy back some $5 billion in preferred shares.

Write to Justin Baer at justin.baer@wsj.com

(END) Dow Jones Newswires

June 23, 2016 18:22 ET (22:22 GMT)

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