June 1, 2018 11:45 PM GMT - macrobusiness.com.au · Morgan Stanley does and seeks to do business...

Update: Bitcoin, Cryptocurrencies and Blockchain James Faucette, Betsy Graseck, Sheena Shah June 1, 2018

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

June 1, 2018 11:45 PM GMT

BITCOIN DECRYPTED! A BRIEF TEACH-IN AND IMPLICATIONS

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2 JUNE 2018

Source and Footnotes Guideline

1. Bitcoin believers fracturing: Maximalists vs. Diversifiers

2. Bitcoin/Crypto prices fall—Results:

a) Not surprising: trading volumes fall (generally), new funds formation slows, news flow/interest growth slows

b) May look surprising but shouldn’t be: electricity consumption increases, still active ICO market (but moving to unregulated geos)

c) Surprising: Existing funds continue to beef up, futures grow

3. ICO’s are largely failing, and failing fast. But not going to $0. Nobody seems to be noticing accumulating massive losses.

4. Blockchain trials spread within financial services, but benefits mainly unclear

5. Early blockchain application successes: cross-border transfers, shipping and trade finance, reinsurance.

Summary of the Last 6 Months







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3 JUNE 2018


Maximalists vs. Diversifiers and the Incrementals

Maximalists think that Bitcoin will eventually win over all other crypto/digital/fiat currencies and view work on anything else as a distraction and waste of resources.

Diversifiers are looking for there to be wide range of digital currencies, etc.

It feels like the incremental participant in the space is either a blatant opportunist or harbors extreme political ideologies and sees cryptos as a path to realization.

Noteworthy that sophisticated investors willing to give up traditional investor rights for potentially faster liquidity.

The Bitcoin/Crypto Factionalization

I. What has happened with Bitcoin







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4 JUNE 2018


• Bitcoin and Ethereum Value

Size of the Cryptocurrency market and liquidity

Source: blockchain.info, Morgan Stanley Research

II. Bitcoin’s Market & Liquidity

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Ethereum value ($)







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5 JUNE 2018


• Trading volumes falling with prices




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6 JUNE 2018


• 39% of total cryptocurrency value is in Bitcoin

• Over $300bn spread over 1,300 coins


Source: blockchain.info, CryptoCompare.com, Morgan Stanley Research


# Name Symbol Price (USD) Total Float (USDbn)

Volume 24h (USDmn) Supply (USDmn) Supply (%

max)Max coins (mn) Mined?

1 Bitcoin BTC $7,430.05 127 3140 17 81% 21 Y

2 Ethereum ETH $558.77 56 1000 100 NA No Y

3 Ripple XRP $0.59 23 259 38,306 38% 100,000 N

4 Bitcoin Cash BCH $980.62 17 455 17 82% 21 Y

5 Eos EOS $12.07 12 1060 1,000 100% 1,000 Y

6 Litecoin LTC $119.01 7 234 57 68% 84 Y

7 Stellar XLM $0.28 5 49 18,579 19% 100,000 N

8 Cardano ADA $0.20 5 118.9 25,927 58% 45,000 Y

9 Iota IOT $1.59 4 91.1 2,780 100% 2,780 N

10 Tron TRX $0.06 6 244.4 100,000 100% 100,000 N







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7 JUNE 2018


Fiat 60%

Crypto 40%

Still mainly Asia but increasingly vs other cryptocurrencies

What is bitcoin traded against?

Source: CryptoCompare, Morgan Stanley Research








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8 JUNE 2018


Bitcoin is the price setter for the broader market. Correlations with other tokens/coins is very high

Expanding alt-coin market

Source: CryptoCompare, Morgan Stanley Research


JPY, 35.4%

USD, 17.4%

USDT, 14.4%

ETH, 9.8%

BCH, 6.4%

KRW, 3.4%

LTC, 3.3%

EUR, 2.6%

Others, 7.2%

Bitcoin trading by currency (28-May-18, 1m av)







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9 JUNE 2018


Bitcoin bear market: nothing new

Source: CryptoCompare, Bloomberg, Macrobond, Morgan Stanley Research


6001100160021002600310036004100460051005600

Nasdaq composite

Nasdaq

Bitcoin

02000400060008000

100001200014000160001800020000

Bitcoin (left axis)

Historical bear markets

Still tracking the peaks and troughs from Nasdaq

in the year 2000







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10 JUNE 2018


Key elements of Bitcoin thesis continue to breakdown (evolve?)

• Investment tenet: Limited quantity—21M

– Why it is failing: Anybody can create a “hard fork” of the open source code, which in turn can create a new currency for those that already hold Bitcoin. We view these hard forks as being like stock splits or new class creations.

– Bitcoin’s Hard Forks: • 1 Aug 2017—Bitcoin Cash • 24 Oct 2017—Bitcoin Gold • 24 Nov 2017—Bitcoin Diamond • 12 Dec 2017—UnitedBitcoin • 12 Dec 2017—Bitcoin X • 12 Dec 2017—Super Bitcoin • 28 Feb 2018—Bitcoin Private

– But unlike a stock split, the fork is not lowering the price per Bitcoin

Bitcoin Questions

III. Unanticipated problems/limits







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11 JUNE 2018


Key elements of Bitcoin thesis continue to breakdown (evolve?)

• Investment tenet: New electronic payment system for underbanked—only need a phone.

– Why it is failing: Financial inclusion is of increasing priority for all payment players. The new QR-based payment schemes in India show that reaching the underbanked can be done much less expensively than Bitcoin.

• Investment tenet: Become part of the global financial system fabric.

– Why it is failing: the high costs of operating a fully trustless system is pushing early players to balkanize systems into trusted blockchains/distributed ledgers.

Bitcoin Questions








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12 JUNE 2018


Current compromises Bitcoin and SRI: Mutually Exclusive

Source: blockchain.info, Morgan Stanley Research estimates


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Total Energy Consumption (Megawatts)

Electricity Consumption of 3-4 million US homes

Note: Energy consumption estimated based on global mining hash rate multiplied by average Joule/gigahash/s energy usage, which we assume declines linearly from 1.5 in2014 to 0.16 in May 2018

Electricity Consumption in a year based on estimated chip orders = Monthly power consumption of 14-16 mn US homes

Electricity Consumption a year from now based on Bitcoin value at $10K =Consumption of ~5mn US homes







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13 JUNE 2018


Current compromises Falling equipment prices: Predictable. And will drive electricity use higher.

Source: camelcamelcamel.com, Morgan Stanley Research








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14 JUNE 2018


Transaction costs growing

• Transaction cost over $70, FX spread varies widely by exchange, from 0.25% - 3%+

Current compromises



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Cost per Transaction ($)







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15 JUNE 2018


Current compromises Virtually no acceptance among US eCommerce merchants

Source: Morgan Stanley Research

5 5 5 5 3 3 3 4 40

100

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500

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18

Bitcoin acceptance among top 500 eCommerce merchants








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16 JUNE 2018


The unintended consequences

• Frequency: Every ~9 minutes

• Concentration: 82% of mined transactions done by 6 mining pools (AntPool, BTC.COM, BTC.TOP, SlushPool, ViaBTC, and F2Pool)

• Transaction costs: $72/txn+ in transaction fees to miners (vs. $21 last year)

• Frequency: ~3 transactions / second (About 2,500 txns fit in a “block”)

• Cold Storage: 98% of Coinbase customer funds stored “offline”; USB drives and paper in boxes and vaults (the literal kind)

Current compromises









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17 JUNE 2018


Hacks and losses

V. Unanticipated problems/limits

Sorry about that, no recourse • WSJ flagged 271 ICOs, which cumulatively raised over $1bn, for having plagiarized

investment documents, missing/fake executive teams, etc. Investors have claimed $273mn of losses in these projects.

• Titanium, April 2018, $21mn

• LoopX, Feb 2018, $4.5mn

• PlexCoin, Dec 2017, $15mn

• NiceHash, Dec 2017, $63mn

• Bitfinex, Aug 2016, $72mn

• Bitstamp, Jan 2015, $5.2mn

• Mt. Gox, Feb 2014, $487mn

Over $630mn total, not including other cryptocurrencies







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18 JUNE 2018


Volatility is creating many of the unintended consequences, questions

Volatility

Source: bitcoinity.org, Morgan Stanley Research


0%2%4%6%8%

10%12%14%16%

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Average daily BTC/USD change (30 day trailing average)







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19 JUNE 2018


• No Regulatory Oversight

• No Safety and Soundness Measures

• No Recourse in the Event of Mistaken or Misallocated Transactions

• High Cyber Risk

• No Deposit Insurance

Bitcoin Risks Remain

IV. Regulatory view on Bitcoin







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20 JUNE 2018


Degree of regulation varies significantly, with the US seeing moderate levels

Regulation of ICOs and Cryptocurrencies Globally


Note: Green area represent country where government has not provided guidance on regulation. Red area indicates that country has prohibited blockchain in some capacity. Source: Medium







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21 JUNE 2018


Exchanges are legally moving to Malta (they call themselves Blockchain Island)

Crypto activity driven by regulation


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Cryptocurrency trading volume by legal location of exchange (USDmn)

Data as of April 2018

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Number of cryptocurrency exchanges by legal location of exchange

Source: CountMarketCap.com, company websites, Morgan Stanley Research. For the left chart Binance is in Malta and OKEx in Belize. Volume from one day in April but the relative exchange rankings are still comparable if several days are averaged







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22 JUNE 2018


• “ (I am) very optimistic that developments in financial technology will help facilitate capital formation,” but “promoters of ICOs and cryptocurrencies” are creating “significant risks” by failing to comply with securities laws”. SEC staff have been instructed “to be on high alert for approaches to ICOs that may be contrary to the spirit of our securities laws.” -- Jay Clayton, SEC Chairman

• The CFTC has issued new guidance to exchanges and other trading platforms that are interested in listing bitcoin futures and other cryptocurrency derivatives products. “CFTC staff is providing this information, in part, to aid market participants in their efforts to design risk management programs that address the new risks imposed by virtual currency products.” -- Brian Bussey, Director of CFTC’s Clearing and Risk division

• “They (cryptocurrencies) are speculative markets. They are not a currency. If you have money you really need, do not put it in these markets.” -- Raphael Bostic, President, Federal Reserve Bank of Atlanta

Regulators Watching Closely… in the US








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23 JUNE 2018


• “This (cryptocurrency) is a global phenomenon and it’s important there is an international follow-up at the global level. We do not exclude the possibility to move ahead (by regulating cryptocurrencies) at the EU level if we see, for example, risks emerging but no clear international response emerging.” -- Valdis Dombrovskis, the EU’s Financial Chief.

• Cryptocurrencies do not threaten “financial stability” at the moment, but they could after more consumers get involved. It is time to incorporate the cryptocurrency ecosystem into the rest of the financial system, applying to it the same regulatory approach and the same “rigorous standards” -- Mike Carney, Bank of England Governor

• It could be more efficient to prohibit banks and other financial institutions from holding and selling cryptocurrencies, than to directly regulate crypto. -- Andrea Enria, Chairperson, European Banking Authority

Regulators Watching Closely… in Europe








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24 JUNE 2018


• “Some complainants claimed that cryptocurrency exchanges had misappropriated their assets or manipulated the market, or that technical breakdowns of the exchanges’ platforms had caused them significant losses. Several complaints against ICO issuers alleged unlicensed or fraudulent activities. We will continue to police the market and enforce when necessary. ” -- Ashley Alder, Chief Executive, Securities and Futures Commission, Hong Kong

• “When it comes to money laundering or terrorism financing, Singapore’s laws do not make any distinction between transactions effected using fiat currency, virtual currency or other novel ways of transmitting value. ” MAS will seek to impose anti-money laundering and anti-terrorist financing requirements on intermediaries that exchange fiat for virtual currencies – such as exchanges and brokers. -- Tharman Shanmugaratnam, Deputy Prime Minister and Chairman of the Monetary Authority of Singapore

• “Virtual Currencies (VCs), also variously referred to as crypto currencies and crypto assets, raise concerns of consumer protection, market integrity and money laundering, among others. Reserve Bank has repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies.” Entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs. Regulated entities which already provide such services shall exit the relationship within a specified time. -- Jose J. Kattoor, RBI Chief General Manager

Regulators Watching Closely… Asia








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25 JUNE 2018


• Monetary policy: Several central banks are actively debating whether or not to introduce a digital version of paper notes and coins (cash). These include countries with managed exchange rates or seeing low cash usage in the economy.

• Financial stability: Crypto-assets are not considered to be a financial stability risk today as financial slows are small.

• Countries investigating digital coins, blockchain and new payment networks include China, Sweden, Russia and Switzerland.

• One country is already launching a digital coin. The Marshall Islands will issue 24 million SOV units that will be legal tender along with the USD. Their goal was to raise funding for the government and make transactions transparent.

Central bank response

V. Bank/Institutional efforts







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26 JUNE 2018


Central bank digital currencies (CBDC)


Source: BIS, Morgan Stanley Research







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27 JUNE 2018


High service-driven economies more likely to invest in blockchain

Why a Country May Be Interested in Digital Currency

Source: Macrobond, Morgan Stanley Research; Countries are labelled using their local currencies. Note that high service-driven economies tend to also be wealthier so may invest more in the first place








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28 JUNE 2018


Bank’s Response to Bitcoin: Limited


GS • On a case-by-case basis • Requires 100% margin for some trades • Exploring the potential for market-making

ABN Amro • Only for certain clients who request

approval in writing • Assesses client’s trading systems and track

record in meeting risk limits Interactive Brokers

• Allows investors to take a short position Wedbush Securities

Yes

JPM BAC C RBC SocGen

No / Still Reviewing

Who clears Bitcoin futures?







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29 JUNE 2018


Pull back has paused new funds…

• Over $3.5bn in estimated AUM from over 250 crypto-dedicated funds

Institutionalization of Crypto Trading

Source: Autonomous Next, Morgan Stanley Research


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Number of cryptocurrency funds created







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30 JUNE 2018


Bitcoin Futures Trading

Source: CME Group, Morgan Stanley Research


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Daily CME Exchange Futures Volume

• Contract Unit: 5 bitcoins • Price Quotation: USD per BTC • Final Settlement Procedure: Delivery is by cash settlement by reference to the Final Settlement

Price, equal to the CME CF Bitcoin Reference Rate (BRR) on the Last Day of Trading







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31 JUNE 2018


Initial Margin on Bitcoin Futures are Significantly Higher

Source: Bloomberg, Morgan Stanley Research


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Initial Margin as a % of Notional







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32 JUNE 2018


VCs Recognizing FinTech Reality/Shifting to ICOs

Source: Token Economy, KPMG, Morgan Stanley Research

VI. Investment case

96 4

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ICOs

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33 JUNE 2018


Crypto/ICO Interest Remains High

Source: Token Economy, Morgan Stanley Research

VI. Investment case

0200400600800

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Estimated ICO Capital Raised Over Month (USDmn)

2017 2018







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34 JUNE 2018


• Approximately 32% of ICOs failed after raising money in 2017. They managed to raise $1.3B.

Success of ICOs is Low

Source: DigRate, Morgan Stanley Research

VI. Investment case

Active ICOs36%

Failed at Funding

32%

Failed since ICO32%

2017 ICOs by Status

$5.85B

$9.39B

$1.30B

$1.62B

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35 JUNE 2018


• Approximately 64% of potential ICOs failed before or after their ICOs in 2017. This is a higher failure rate than seen among startups in the first year.

ICO vs. VC Failure Rate

Source: DigRate, Morgan Stanley Research

VI. Investment case

25%

71%-75%

64%

?

0% 20% 40% 60% 80% 100%

Fail within the first year

Fail over 10-yr period

ICOs vs. Startups

ICOs*

Startups

Startups

Note: ICO failures includes ICOs who failed at funding and those that failed after their ICOs

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Number of ICOs that Failed Before/After ICO

ICOs that Failed at Funding Later Defunct Coins







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36 JUNE 2018


Value of Top “Dead” ICOs Not Zero

Source: DigRate, CoinCodex, Morgan Stanley Research

VI. Investment case







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37 JUNE 2018


Bitcoin Correlation to S&P 500

Source: bitcoinity.org, Thomson Reuters, Morgan Stanley Research

VI. Investment case

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39 JUNE 2018


Where Blockchain Works Best, First

VII. Blockchain as a disruptor

• Trusted/known participants on both sides of transaction – e.g. B2B payments

• Transaction fee rates at risk from more efficient technology – Cross-border payments

• Trade settlement

• Client data handling – KYC, Client Onboarding etc. (although APIs may be more efficient)







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40 JUNE 2018


Incumbents Take the Lead

Source: Morgan Stanley Research


VCs IncreaseInvestment in Fintech

VCs Scale Backon Fintech

Incumbents Scale Back R&D;

Redirect Focus to Partnerships/M&A

Incumbents Accelerate R&D

B. Some Winners, but Mostly Losers

Excessive spend hurts returns for all

A. Paid to Wait

Startups create, and incumbents try to mimic. Some instances of disruption

D. Forget the Hype

Spend on innovation slows as it becomes clear Fintech ROI is generally lower than first assumed

C. IncumbentsTake the Reins

Incumbent investment restrains VCs, and

industry benefits from better efficiencies

Incumbent Spend

VC

Spend

Where we're

headed

Where we've been







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41 JUNE 2018


Banks’ Experiments with Blockchain


Europe Use case Status

ABN Amro Escrow management solution Commercially launched

Allied Irish Bank Domestic interbank payments Pilot

BNP Paribas Trade finance Pilot

Credit Suisse Syndicated loans Commercial launch expected in 2018

Deutsche Bank Know Your Customer Proof of concept

Societe Generale Agricultural commodity trade Successful testing

North America Use case Status

Bank of America Trade finance Proof of concept

Bank of New York Mellon US Treasury bond settlement Rolled out

Citigroup Digital payment solution for private securities Pilot

Goldman Sachs Equity swap trading Testing

JP Morgan Cross-border payments Patent filed

Wells Fargo Private label MBS securitization Testing

Asia Use case Status

HSBC Trade finance Successful testing

Hana Financial Group Digital loyalty network Building

Korean Banks Customer identification Pilot

Mizuho FG Derivatives trading Successful testing

Woori Cross border transaction processing Pilot







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42 JUNE 2018


Banks’ Response to Blockchain: Proofs of Concept Proliferate


• Who: JPM • What: enables encrypted P2P messaging between banks to

address compliance issues in cross-border payments • When: Launched in Oct. 2017

Interbank Information Network

• Who: BNP, BNY Mellon, HSBC, ING, State Street • What: blockchain-based online marketplace for syndicated

loans, offering real-time credit agreement, etc. directly from agent bank loan servicing platforms to lenders

• When: Became commercially available in Apr. 2018

Fusion LenderComm

• Who: BNP, Commerzbank, ING, TradeIX, R3 • What: a solution for post-shipment trade financing powered by

the TiX platform from TradeIX and R3 Corda blockchain technology

• When: Announced intentions to pilot

Marco Polo Initiative

• Who: GS, JPM, Citi • What: tracks swaps contracts post execution, record

amendments or terminations of the deals, stock splits and dividends.

• When: Completed pilot

Distributed Ledge for Swap Trading

Major Examples Spearheaded by Banks







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43 JUNE 2018


• Cryptocurrency: Why a Country May Be Interested in Digital Currency (8 May, 2018)

• Crypto Mining: After the Gold Rush (1 May, 2018)

• Cryptocurrency: Where are Exchanges Based? (25 April, 2018)

• Cryptocurrency: Features of a Bitcoin Bear Market (March 19, 2018)

• Global Utilities: Bitcoin demand > EV demand? (10 Jan 2018)

• Global Payments, Banking, and Technology: Bitcoin Decrypted: A Brief Teach-in and Implications (18 Dec 2017)

• Brokers: Will Bitcoin Futures on CME & CBOE Open the Door for Discount Brokers? (7 Dec 2017)

• Freight Transportation: Blockchain in Freight Transportation: Early Days Yet but Worth the Hype (24 Nov 2017)

• Payments and Processing: Bitcoin, Ethereum, XRP: Decrypted! Takeaways (21 Sep 2017)

• Payments and Processing: Decrypted! 9 Key Questions Going into our Crypto/Blockchain Event (18 Sep 2017)

• MasterCard Inc: AI vs. Bitcoin: Buzzword Battle for Supremacy. Or eventual cooperation? (21 Aug 2017)

• Western Union Co: Circle and Ripple Bringing the Blockchain Risk (19 Jun 2017)

• Global Financials and Payments: Blockchain: Unchained? (16 Jun 2017)

• Global Financials and Payments: Fintech – A Gauntlet to Riches (17 May 2017)

MS Research on Cryptos/Blockchain

VIII. MS Research coverage

https://ny.matrix.ms.com/eqr/article/webapp/e1115b70-47ab-11e8-adef-6a0a1ce82510?ch=rpint&sch=ar

https://ny.matrix.ms.com/eqr/article/webapp/21b6e6e0-f62b-11e7-a199-e952e118a8a5?ch=rpint&sch=ar



https://ny.matrix.ms.com/eqr/article/webapp/6d6a1952-125c-11e8-b486-4f602178b9fa?ch=rpint&sch=sr

https://ny.matrix.ms.com/eqr/article/webapp/11d8a6c8-f081-11e7-8cdb-6e28b48ebbd3?ch=rpint&sch=cm

https://ny.matrix.ms.com/eqr/article/webapp/16d625b2-e440-11e7-ac86-d8cb34fed4a4?ch=rpint&sch=sr



https://ny.matrix.ms.com/eqr/article/webapp/39d3a9f6-d6ce-11e7-a833-5ec790ed3a6d?ch=rpint&sch=tr

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The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. LLC, and/or Morgan Stanley C.T.V.M. S.A., and/or Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., and/or Morgan Stanley Canada Limited. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. LLC, Morgan Stanley C.T.V.M. S.A., Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., Morgan Stanley Canada Limited and their affiliates as necessary. For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. For valuation methodology and risks associated with any recommendation, rating or price target referenced in this research report, please contact the Client Support Team as follows: US/Canada +1 800 303-2495; Hong Kong +852 2848-5999; Latin America +1 718 754-5444 (U.S.); London +44 (0)20-7425-8169; Singapore +65 6834-6860; Sydney +61 (0)2-9770-1505; Tokyo +81 (0)3-6836-9000. Alternatively you may contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: James E Faucette; Vasundhara Govil; Betsy L. Graseck, CFA. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies As of April 30, 2018, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Automatic Data Processing Inc, Citigroup Inc., Discover Financial Services, Goldman Sachs Group Inc, J.P.Morgan Chase & Co., LendingClub Corp, MasterCard Inc, Square Inc, Visa Inc.. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of BB&T Corporation, BNY Mellon, Capital One Financial Corporation, Citigroup Inc., Discover Financial Services, First Data Corp., MasterCard Inc, PNC Financial Services, Regions Financial Corp, SunTrust, Synchrony Financial, U.S. Bancorp, Wells Fargo & Co., Worldpay Inc.

Disclaimer







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45 JUNE 2018


Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Ally Financial Inc, Automatic Data Processing Inc, Bank of America, BB&T Corporation, BNY Mellon, Capital One Financial Corporation, Discover Financial Services, First Data Corp., Goldman Sachs Group Inc, J.P.Morgan Chase & Co., MasterCard Inc, PayPal Holdings, Inc., PNC Financial Services, Regions Financial Corp, SunTrust, Synchrony Financial, U.S. Bancorp, Wells Fargo & Co., Worldpay Inc. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Ally Financial Inc, American Express Company, Automatic Data Processing Inc, Bank of America, BB&T Corporation, BNY Mellon, Capital One Financial Corporation, Citigroup Inc., Discover Financial Services, Evertec Inc, First Data Corp., Fleetcor Technologies Inc, Global Payments Inc, Goldman Sachs Group Inc, Green Dot Corp, J.P.Morgan Chase & Co., LendingClub Corp, MasterCard Inc, MoneyGram International Inc, Northern Trust Corp., On Deck Capital Inc, Paychex Inc, PayPal Holdings, Inc., PNC Financial Services, Regions Financial Corp, Santander Consumer USA Holdings Inc, Square Inc, State Street Corporation, SunTrust, Synchrony Financial, Total System Services Inc., TriNet Group Inc, U.S. Bancorp, Visa Inc., Wells Fargo & Co., Western Union Co, Worldpay Inc. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Ally Financial Inc, American Express Company, Automatic Data Processing Inc, Bank of America, BB&T Corporation, BNY Mellon, Capital One Financial Corporation, Citigroup Inc., Discover Financial Services, First Data Corp., Fleetcor Technologies Inc, Goldman Sachs Group Inc, J.P.Morgan Chase & Co., MasterCard Inc, Northern Trust Corp., Paychex Inc, PayPal Holdings, Inc., PNC Financial Services, Regions Financial Corp, State Street Corporation, SunTrust, U.S. Bancorp, VeriFone Systems Inc., Wells Fargo & Co., Western Union Co, WEX Inc, Worldpay Inc. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Ally Financial Inc, American Express Company, Automatic Data Processing Inc, Bank of America, BB&T Corporation, BNY Mellon, Capital One Financial Corporation, Citigroup Inc., Discover Financial Services, Evertec Inc, First Data Corp., Fleetcor Technologies Inc, Global Payments Inc, Goldman Sachs Group Inc, Green Dot Corp, J.P.Morgan Chase & Co., LendingClub Corp, MasterCard Inc, MoneyGram International Inc, Northern Trust Corp., On Deck Capital Inc, Paychex Inc, PayPal Holdings, Inc., PNC Financial Services, Regions Financial Corp, Santander Consumer USA Holdings Inc, Square Inc, State Street Corporation, SunTrust, Synchrony Financial, Total System Services Inc., TriNet Group Inc, U.S. Bancorp, Visa Inc., Wells Fargo & Co., Western Union Co, Worldpay Inc. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Ally Financial Inc, American Express Company, Automatic Data Processing Inc, Bank of America, BB&T Corporation, BNY Mellon, Capital One Financial Corporation, Citigroup Inc., Discover Financial Services, First Data Corp., Fleetcor Technologies Inc, Goldman Sachs Group Inc, J.P.Morgan Chase & Co., LendingClub Corp, MasterCard Inc, MoneyGram International Inc, Northern Trust Corp., Paychex Inc, PayPal Holdings, Inc., PNC Financial Services, Regions Financial Corp, State Street Corporation, SunTrust, Synchrony Financial, TriNet Group Inc, U.S. Bancorp, VeriFone Systems Inc., Visa Inc., Wells Fargo & Co., Western Union Co, WEX Inc, Worldpay Inc.

Disclaimer (cont’d)







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An employee, director or consultant of Morgan Stanley is a director of LendingClub Corp. This person is not a research analyst or a member of a research analyst's household. Morgan Stanley & Co. LLC makes a market in the securities of Ally Financial Inc, American Express Company, Automatic Data Processing Inc, Bank of America, BB&T Corporation, BNY Mellon, Capital One Financial Corporation, Citigroup Inc., Discover Financial Services, Evertec Inc, Fleetcor Technologies Inc, Global Payments Inc, Goldman Sachs Group Inc, Green Dot Corp, J.P.Morgan Chase & Co., LendingClub Corp, MasterCard Inc, Northern Trust Corp., On Deck Capital Inc, Paychex Inc, PayPal Holdings, Inc., PNC Financial Services, Regions Financial Corp, Santander Consumer USA Holdings Inc, Square Inc, State Street Corporation, SunTrust, Synchrony Financial, Total System Services Inc., TriNet Group Inc, VeriFone Systems Inc., Visa Inc., Wells Fargo & Co., Western Union Co, WEX Inc, Worldpay Inc. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Equity Research analysts' or strategists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Morgan Stanley trades or may trade as principal in the debt securities (or in related derivatives) that are the subject of the debt research report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.








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STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of May 31, 2018) The Stock Ratings described below apply to Morgan Stanley's Fundamental Equity Research and do not apply to Debt Research produced by the Firm. For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.








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Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Due to rounding off of decimals, the percentages provided in the "% of total" column may not add up to exactly 100 percent. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.








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Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index. Important Disclosures for Morgan Stanley Smith Barney LLC Customers Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website at www.morganstanley.com/online/researchdisclosures. For Morgan Stanley specific disclosures, you may refer to www.morganstanley.com/researchdisclosures. Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest.








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Other Important Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Ally Financial Inc, American Express Company, Automatic Data Processing Inc, Bank of America, BNY Mellon, Capital One Financial Corporation, Citigroup Inc., Goldman Sachs Group Inc, J.P.Morgan Chase & Co., LendingClub Corp, MasterCard Inc, PayPal Holdings, Inc., PNC Financial Services, Square Inc, Synchrony Financial, U.S. Bancorp, Visa Inc., Wells Fargo & Co., Western Union Co. As of June 1, 2018, State Street Corporation beneficially owned 5% or more of a class of common equity securities of Morgan Stanley. Morgan Stanley Research policy is to update research reports as and when the Research Analyst and Research Management deem appropriate, based on developments with the issuer, the sector, or the market that may have a material impact on the research views or opinions stated therein. In addition, certain Research publications are intended to be updated on a regular periodic basis (weekly/monthly/quarterly/annual) and will ordinarily be updated with that frequency, unless the Research Analyst and Research Management determine that a different publication schedule is appropriate based on current conditions. Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Matrix at http://www.morganstanley.com/matrix. Morgan Stanley Research is provided to our clients through our proprietary research portal on Matrix and also distributed electronically by Morgan Stanley to clients. Certain, but not all, Morgan Stanley Research products are also made available to clients through third-party vendors or redistributed to clients through alternate electronic means as a convenience. For access to all available Morgan Stanley Research, please contact your sales representative or go to Matrix at http://www.morganstanley.com/matrix. Any access and/or use of Morgan Stanley Research is subject to Morgan Stanley's Terms of Use (http://www.morganstanley.com/terms.html). By accessing and/or using Morgan Stanley Research, you are indicating that you have read and agree to be bound by our Terms of Use (http://www.morganstanley.com/terms.html). In addition you consent to Morgan Stanley processing your personal data and using cookies in accordance with our Privacy Policy and our Global Cookies Policy (http://www.morganstanley.com/privacy_pledge.html), including for the purposes of setting your preferences and to collect readership data so that we can deliver better and more personalized service and products to you. To find out more information about how Morgan Stanley processes personal data, how we use cookies and how to reject cookies see our Privacy Policy and our Global Cookies Policy (http://www.morganstanley.com/privacy_pledge.html). If you do not agree to our Terms of Use and/or if you do not wish to provide your consent to Morgan Stanley processing your personal data or using cookies please do not access our research.








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Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the circumstances and objectives of those who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments. The fixed income research analysts, strategists or economists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitabi lity or revenues of particular trading desks. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons. With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.








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Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management. Morgan Stanley may make investment decisions that are inconsistent with the recommendations or views in this report. To our readers based in Taiwan or trading in Taiwan securities/instruments: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Any non-customer reader within the scope of Article 7-1 of the Taiwan Stock Exchange Recommendation Regulations accessing and/or receiving Morgan Stanley Research is not permitted to provide Morgan Stanley Research to any third party (including but not limited to related parties, affiliated companies and any other third parties) or engage in any activities regarding Morgan Stanley Research which may create or give the appearance of creating a conflict of interest. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments. Morgan Stanley is not incorporated under PRC law and the research in relation to this report is conducted outside the PRC. Morgan Stanley Research does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves. Neither this report nor any part of it is intended as, or shall constitute, provision of any consultancy or advisory service of securities investment as defined under PRC law. Such information is provided for your reference only. Morgan Stanley Research is disseminated in Brazil by Morgan Stanley C.T.V.M. S.A.; in Mexico by Morgan Stanley México, Casa de Bolsa, S.A. de C.V which is regulated by Comision Nacional Bancaria y de Valores. Paseo de los Tamarindos 90, Torre 1, Col. Bosques de las Lomas Floor 29, 05120 Mexico City; in Japan by Morgan Stanley MUFG Securities Co., Ltd. and, for Commodities related research reports only, Morgan Stanley Capital Group Japan Co., Ltd; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents) and by Morgan Stanley Asia International Limited, Hong Kong Branch; in Singapore by Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research) and by Morgan Stanley Asia International Limited, Singapore Branch (Registration number T11FC0207F); in Australia to "wholesale clients" within the meaning of the Australian Corporations Act by Morgan








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Stanley Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents; in Australia to "wholesale clients" and "retail clients" within the meaning of the Australian Corporations Act by Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Indonesia by PT. Morgan Stanley Sekuritas Indonesia; in Canada by Morgan Stanley Canada Limited, which has approved of and takes responsibility for its contents in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main and Morgan Stanley Private Wealth Management Limited, Niederlassung Deutschland, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that Morgan Stanley Research has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the US by Morgan Stanley & Co. LLC, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized by the Prudential Regulatory Authority and regulated by the Financial Conduct Authority and the Prudential Regulatory Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. RMB Morgan Stanley Proprietary Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley Proprietary Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited. The information in Morgan Stanley Research is being disseminated by Morgan Stanley Saudi Arabia, regulated by the Capital Market Authority in the Kingdom of Saudi Arabia , and is directed at Sophisticated investors only. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at Professional Clients only, as defined by the DFSA. The financial products or financial services to which this research relates will only be made available to a customer who we are satisfied meets the regulatory criteria to be a Professional Client. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA.








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As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided exclusively to persons based on their risk and income preferences by the authorized firms. Comments and recommendations stated here are general in nature. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. The following companies do business in countries which are generally subject to comprehensive sanctions programs administered or enforced by the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC") and by other countries and multi-national bodies: MasterCard Inc. The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.


June 1, 2018 11:45 PM GMT - macrobusiness.com.au · Morgan Stanley does and seeks to do business...

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