Dominion Bond Rating Service has confirmed its ratings of Morgan Stanley, following the announcement that it has decided not to sell the Discover Financial Services division, but will sell its non-core aircraft-leasing business.

The long-term rating trend remains Negative however, “primarily reflecting the uncertainty surrounding management’s ability to execute on its strategy, including successfully dealing with recent issues related to departures in a variety of senior-level institutional securities positions, maintaining the current level of profitability of the credit card business in the long term, and closing the pre-tax margin gap in the retail brokerage between its peers in three years.” Due to the number of senior management changes over the past several months, DBRS says it remains unsure of the timing and success of this team to effect change at Morgan Stanley.

The decision to retain Discover positively impacts the earnings profile of the company through increased diversification, DBRS says. Discover is considered to be meaningful in lowering the overall business risk as it contributed close to 20% of core operating net income and is a relatively stable source of earnings.

Despite the long-term Negative trend, DBRS notes that the company continues to have a superior global institutional securities franchise, a large investment management franchise that delivers annuity-like earnings, and a large retail distribution and asset gathering network using Morgan Stanley’s approximately 10,000 global representatives. Other considerations include respectable positions in areas such as balance sheet strength, risk management, and the overall risk profile of the organization, including value-at-risk and illiquid asset levels.

Fitch Ratings is also keeping the brokerage firm on Rating Watch Negative, and its ratings of Discover Bank are downgraded. Fitch says it views the announcement by the board of directors as having a net positive impact on the long-term credit ratings for Morgan Stanley and its subsidiaries. However, some uncertainties remain, necessitating the continuation of the Rating Watch Negative.

The ratings of Discover Bank were downgraded one notch, with Fitch saying, “While the plans for spin-off have been terminated, there is little integration or strategic synergy between the credit services business and other businesses of Morgan Stanley. Credit Services is expected to be supported with necessary funding but remains on its own in terms of developing and implementing strategic initiatives.”

Fitch says that expansion of the retail credit products is expected both by customer segment and by geography, largely in Europe. “These efforts should improve earnings growth and enhance revenue diversification, both of which may make the franchise more attractive to sell or spin off in the future,” it notes.

Resolving the Rating Watch Negative will depend on its view of the firm’s strategic direction, including capital allocation to various business segments, definitive terms for the sale of the aircraft lease finance business confirming a loss similar to stated expectations, and further demonstration of stability in the Institutional franchise in terms of earnings, market share, and key personnel, Fitch concludes.