Following the announcement by Morgan Stanley MS to acquire E*TRADE Financial Corporation ETFC, Moody's Investors Service has placed the ratings of the former and its subsidiaries under review for upgrade. Notably, Moody's affirmed the Prime-1 short-term ratings and Prime-1(cr) short-term assessments of its subsidiaries.
Last week, Morgan Stanley signed an all-stock acquisition deal to acquire E*TRADE for $13 billion. With this deal, Morgan Stanley will be well positioned as a leader in the Wealth Management industry across all channels and wealth segments, with significant increase in the scale and breadth of its franchise. (Read More: Morgan Stanley to Acquire E*TRADE for $13 Billion)
The ratings agency has placed Morgan Stanley's short- and long-term ratings (A3 senior/Prime-2) under review. Also, the long-term ratings and assessments of subsidiaries have been placed under review for upgrade.
Per Moody’s, the acquisition of E*TRADE is likely to positively affect Morgan Stanley’s credit quality. Also, post competition of the buyout, Morgan Stanley’s wealth and investment management segments would account for approximately 57% of total pretax income, up from 51% reported in 2019.
Thus, the ratings agency feels that shift in Morgan Stanley's business mix toward wealth management to be a tailwind, as it is a more reliable source of revenues. Also, post-merger, it finds scope for business development opportunities across the broad spectrum of both the companies’ respective financial advisory and self-directed investor categories, and in their workplace stock plan management activities.
Moody’s expects the deal to boost Morgan Stanley’s revenues and improve wealth management profit margins above 30%. Also, it expects substantial cost-saving opportunities in combining and consolidating personnel, systems, and physical locations.
The company’s Baseline Credit Assessment reflects slight downward adjustment due to credit risk associated with opacity and complexity of global operations. Moody’s review also incorporates effectiveness of Morgan Stanley’s risk-management practices in the higher-risk Institutional Securities unit. Also, the agency would closely monitor the company’s regulatory stress testing.
What Can Lead to a Rating Upgrade?
Ratings could be upgraded if the company is successful in completing the acquisition as planned and is able to maintain the trend of improving the quality and stability of its profitability, along with maintaining a solid capital and liquidity position. Moreover, if the firm can demonstrate strong risk-management controls and improved results in regulatory stress testing, there is a possibility that its ratings could be upgraded.
What Can Trigger a Rating Downgrade?
A rating downgrade can take place if there is significant deterioration in loan credit quality or loan underwriting standards or an increase in portfolio concentrations, and deterioration in Morgan Stanley’s liquidity profile.
Shares of Morgan Stanley have gained 30.5% over the past six months compared with 21.9% growth recorded by the industry it belongs to.
Currently, the stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Recently, Moody's Investors Service placed the ratings of Legg Mason LM under review for upgrade, following the company’s announcement to acquire Franklin Resources BEN in an all-cash deal.
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