Morgan Stanley’s RWAs skip higher as lending grows

Loans in the institutional securities and wealth management units rose 3% and 4% quarter-on-quarter

Morgan Stanley’s risk-weighted assets grew in Q2 2019 on the back of higher derivatives and lending activity. 

The bank's RWAs, calculated using the regulator-set standardised approach (SA), rose 4% to $393 billion, up from $378 billion the quarter prior. The same assets measured using the bank’s own internal models grew by 5% to $384 billion, from $366 billion the previous quarter. 

Over the same period, the bank’s Common Equity Tier 1 capital rose 1.3% to $64.1 billion.

The RWA increase contributed to a drop in the bank’s CET1 capital ratio, which fell 40 basis points to 16.3% under the SA, and by 57bp to 16.7% under the advanced approach.

Total loans in the institutional securities division rose 3% quarter-on-quarter to $57.9 billion, and loans in the wealth management unit grew 4% over the same period, to $74.1 billion. 

Morgan Stanley also reported a 2% quarterly increase in the amount of total assets, which stood at $892 billion, from $876 billion three months prior. The bank's RWA density, calculated as standardised RWAs divided by total assets, hit 44% at end-June, up 83bp on end-March. 

What is it?

Risk-weighted assets determine the minimum amount of regulatory capital a bank must hold, based on a risk assessment for each type of bank asset. The riskier the asset, the higher its RWA value and the more capital is needed to be held against it.

RWA density is one means of measuring the riskiness of a bank. It expresses the ratio of RWAs to total assets: the higher the ratio, the more risky assets the bank has as a proportion of its total balance sheet.

Why it matters

Despite its lower CET1 ratio, Morgan Stanley’s capital buffer maintains lofty headroom above the regulatory minimum, meaning the bank can afford to shed a few basis points without sparking concerns among regulators and shareholders alike. 

The latter will be cheered by an increased quarterly dividend, and the share buyback programme the bank announced after it successfully passed this year’s Fed stress tests. 

We will get a clearer picture of the drivers behind the increase in Morgan Stanley’s RWAs when its second-quarter Pillar 3 report is released later this month.

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