Morgan Stanley 2014 Annual Report Download - page 67

restructure its economy away from reliance on exports and investments and toward more sustainable growth
driven by domestic consumption.
Overview of 2014 Financial Results.
Consolidated Results. The Company recorded net income applicable to Morgan Stanley of $3,467 million on
net revenues of $34,275 million in 2014 compared with net income applicable to Morgan Stanley of
$2,932 million on net revenues of $32,493 million in 2013.
Net revenues in 2014 included positive revenues due to the impact of DVA of $651 million compared with
negative revenues of $681 million in 2013. In addition, net revenues in 2014 included a charge of approximately
$468 million related to the implementation of Funding Valuation Adjustments (“FVA”) (see “Critical
Accounting Policies” herein and Note 2 to the Company’s consolidated financial statements in Item 8), which
was recorded in the Company’s Institutional Securities business segment. Non-interest expenses were
$30,684 million in 2014 compared with $27,935 million in 2013. Compensation expenses increased 10% to
$17,824 million in 2014 compared with $16,277 million in 2013, primarily driven by compensation expense
adjustments of approximately $1.1 billion related to changes in discretionary incentive compensation deferrals
(see “Business Segments—Compensation Expense—Discretionary Incentive Compensation” herein). Non-
compensation expenses increased 10% to $12,860 million in 2014 compared with $11,658 million in 2013,
primarily due to higher legal expenses.
Diluted EPS and diluted EPS from continuing operations were $1.60 and $1.61, respectively, in 2014 compared
with $1.36 and $1.38, respectively, in 2013. The diluted EPS calculation for 2013 included a negative adjustment
of approximately $151 million, or $0.08 per diluted share, related to the purchase of the retail securities joint
venture between the Company and Citigroup Inc. (“Citi”) (the “Wealth Management JV”), which was completed
in June 2013.
Excluding the impact of DVA, net revenues were $33,624 million and diluted EPS from continuing operations
were $1.39 per share in 2014 compared with $33,174 million and $1.61 per share, respectively, in 2013. The
presentation of net revenues excluding the impact of DVA is a non-GAAP financial measure that the Company
considers useful for the Company and investors to allow further comparability of period-to-period operating
performance.
The Company’s effective tax rate from continuing operations was a benefit of 2.5% and a provision of 19.8% for
2014 and 2013, respectively. The results for 2014 and 2013 included discrete net tax benefits of $2,226 million
and $407 million, respectively. Excluding these discrete net tax benefits, the effective tax rates from continuing
operations for 2014 and 2013 would have been 59.5% and 28.7%, respectively. The increase in the tax rate is
mainly attributable to higher non-deductible expenses related to litigation and regulatory matters and, to a lesser
extent, the geographic mix of earnings. For a discussion of the net discrete tax benefits, see “Other Matters—
Income Tax Matters” herein.
Institutional Securities. Income (loss) from continuing operations before taxes was $(58) million in 2014
compared with $946 million in 2013. Net revenues for 2014 were $16,871 million compared with $15,519
million in 2013. The results in 2014 included positive revenues due to the impact of DVA of $651 million
compared with negative revenues of $681 million in 2013. Investment banking revenues increased 19% from
2013 to $5,203 million in 2014, reflecting increases across equity and fixed income underwriting and advisory
revenues. Equity sales and trading net revenues, excluding the impact of DVA, increased 4% from 2013 to
$6,903 million in 2014, primarily due to higher revenues in the prime brokerage business driven by higher client
balances partially offset by a decrease in derivatives revenues, reflecting unfavorable volatility movement.
Excluding the impact of DVA, fixed income and commodities sales and trading net revenues decreased 10%
from 2013 to $3,795 million in 2014 as lower fixed income product results, which included a charge of $466
million related to the implementation of FVA, were partially offset by higher commodity net revenues. Non-
interest expenses increased 16% from $14,573 million in 2013 to $16,929 million in 2014, primarily due to
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