(By Mani) The Moody's downgrade on Morgan Stanley (NYSE:MS
) is expected any day now, but the investment banking firm has taken a confident tone that the downgrade will not have an outsized impact on the firm.
Morgan Stanley has focused on the work it has done to improve its capital, funding, and liquidity positions over the last few years, and highlighted the fact that clients are less reliant on rating agencies, choosing instead to do their own credit work.
"We continue to expect MS will face the full three-notch downgrade, but recent comments from CEO James Gorman that this outcome would be "stunning" suggests that senior management believes it has made a convincing argument to Moody's that the proposed downgrade is not warranted," UBS analyst Brennan Hawken wrote in a note to clients.
Hawken added that the downgrade is largely priced in to the stock, which could result in significant upside if the result is less severe than feared.
Meanwhile, the primary segment the company expects to be impacted by the downgrade is in long- dated, un-collateralized interest rate derivatives, a business which it has already de-emphasized.
In addition, the company said rates and forex have grown in recent years to roughly 55 percent of its revenue from fixed income currencies and commodities (FICC) unit. Rates are a larger business for Morgan Stanley than forex, and the former is estimated to account for about a third of Morgan Stanley's total FICC business. The unit's first quarter revenue rose 33 percent to $2.6 billion, excluding debt valuation adjustments.
"We estimate that about 40% of MS's FICC derivatives have a maturity greater than 3 years, but it is our sense that contracts in the rates business tend to be shorter duration than the overall derivatives book," Hawken added.
Therefore, if a third of rates contracts are long dated, this would mean roughly 10-12 percent of total FICC revenues would be at risk, using relatively conservative estimates. If half of these revenues are lost, it represents about 5 percent of FICC revenue.