Morgan Stanley (MS) on Q2 2021 Results - Earnings Call Transcript

Operator: Good morning. On behalf of Morgan Stanley, I will begin the call with the following disclaimer. During today's presentation, we will refer to our earnings release and financial supplements, copies of which are available at morganstanley.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release. James Gorman: Hi, good morning everyone, and thank you for joining us. As the firm delivered another strong quarter and a record first-half, with year-to-date revenues in excess of $30 billion. We had strong inflows across Wealth and Investment Management, and in the first 6 months of the year, we added over $250 billion of net new assets, across both of those businesses. We now have over 13 million unique relationships in Wealth Management, and in Investment Management, our assets makes us increasingly diverse and well-positioned, in key secular growth areas, such as customization, private alternatives, and sustainability. Finally, Institutional Securities also had a tremendous performance. Equity remains a preeminent leader in the industry, fixed income has maintained share gains, and our leading investment banking franchise performed strongly. Our business is further enhanced by our acquisitions of E-Trade and Eaton Vance and the progress on our integration. Since the respective announcement of each acquisition, both businesses have performed better than we expected. Not only did the standard merger metrics such as synergies and funding benefits read positive, but much more importantly, we're seeing long-term business growth driven by exceptional client engagement. This quarter, our ROTCE was 19% and year-to-date, we're over 20%. Obviously, we are exceeding our longer-term targets of 7, 8% plus. We intend to formerly revisit our goals next January. While we will not revisit targets mid-year, I want to assure you we are as focused on delivering top performance as ever. Though we're always subject to the broader macroenvironment, we will strive for continued outperformance. Now let me talk about the decision we announced 2 weeks ago on further capital distribution. During the financial crisis, we reduced our buyback to 0, and cut our dividend quarterly to $0.05 per share. Over the past decade, it has been a slow, steady path of improvement as we grew our dividend from $0.05 ultimately to $0.35, and increased our buyback from 0 to $5 billion. I have said for a number of years that Wealth and Investment Management contribute durable earnings that enable us to pay our shareholders substantially, and that is what we are doing. As a result, we reset our dividend, doubling it to $0.70 per share, and also increased our buyback for up to $12 billion over the next 12 months. We made this decision because of the confidence we have in our business model and our performance over the past 3 Federal Reserve stress tests. Sharon Yeshaya: Thank you, and good morning. The Firm produced revenues of $14.8 billion in the Second Quarter, representing one of the top 3 quarters on record. Performance continued to be very strong, reflecting high levels of client activity across our businesses. Excluding integration-related expenses, our EPS was $1.89. Our ROTCE was 19%. Year-to-date revenues of $30.5 billion were a new record, highlighting the power of our firm which has been further enhanced by our recent acquisitions. Investing for growth remains a priority, while also managing our expense base. On a year-to-date basis, total expenses were $20.6 billion, of which, non-compensation expenses were $7.4 billion and compensation expenses were $13.2 billion. The increase in expenses versus the prior year reflects the addition of E-Trade and Eaton Vance, and the integration-related costs. Year-to-date, our firm efficiency ratio declined to 67%, excluding integration-related expenses, underscoring the operating leverage of our business. Now, to the businesses. Institutional Securities revenue of over $7 billion demonstrates the power of the integrated investment bank. Revenues declined by 14% from the exceptionally strong prior year. Higher revenues in investment banking and equities were offset by lower fixed income results. Underwriting was particularly robust, as issuance remained elevated. And despite lower volatility across asset classes, our sales and trading clients remained engaged. We ended the period on a strong footing, as clients were active through June. Investment banking revenues were $2.4 billion. The 16% increase from the prior year was driven by advisory and continued strength in equity underwriting. Operator: Thank you. In the interest of time, we ask that you please limit yourself to 1 question and 1 follow-up. Our first question comes from the line of Glenn Schorr with Evercore. Your line is now open. Glenn Schorr: Hi. Thanks very much. You peaked my interest. You made the comments drawn on investing for growth remains a priority. We've seen so much that you've done across Asset Wealth management type. My question is in ISG. You're as good as it gets I think in equities and M&A. Where do you see opportunities to invest and/or capture share across ISG right now? James Gorman: Hey, Glenn. I think firstly, I wouldn't -- I certainly wouldn't, and I'll come back to it in a minute, discount growth opportunities across IM and Wealth, even though we've just done these huge acquisitions. I'll come back to that. In the institutional business, listen, there's more consolidation going on in prime brokerage. We're the market leader in that. We will pick up share over time. Clearly in M&A, there's opportunity for us to grow. I think that a lot of the middle-market M&A spaces are very fertile. There are different parts in the world we still think we could punch higher above our weight. I actually think both of those, the Equities business as good as it is, and M&A as good as it is, I should think there's a real upside in both of those. In the Fixed Income space, our aspiration years ago was to to do $1.24 billion. We raised it to $1.5 billion. And here we are in a sort of so-so quarter with $1.7 billion. As rates normalized and as the fixed income fee pool will inevitably grow, I see a lot of space there in the SVG credit side. We've got a world-class business there, again, continuing to grow share. And our commodities business is doing very well. So, the IC Franchise has gone from sort of running at $5.25 billion to this quarter, it was $7 billion. It was frankly better than we'd expected coming into it, which is terrific, but it's very interesting, that the share gains across -- and it's not just us. Some of the other big players in the U.S. are real and I think enduring. And as the global economies recover and the people increases, you'll just see more of that. I feel very confident about the ISG business. Glenn Schorr: I appreciate that. And I hear you loud and clear on Asset and Wealth Management. I do have a quick follow-up. Within Wealth Management, obviously share works as this enormous opportunity. Wonder if you could just give us a little mark-to-market in terms of what's going on in terms of conversions in the core business, and then what is going on in terms of leading towards repaying business within the Morgan Stanley platform? Sharon Yeshaya: I didn't hear the last part of your question, but I think you said referrals throughout and how the integration on workplace is going, Glenn? Glenn Schorr: Yes. Sharon Yeshaya: So the -- I'd say that you're sort of starting with infrastructure, it's going very well, as James said. But the core is start with infrastructure, make sure that everyone has Companion accounts as you go through. We've said we're at 50% right now, where clients have Companion accounts. By the back half of next year, we should be around 90%. And we've started pilot programs where you do have that Companion account, and we do see it working. We see the retention of assets, we see clients moving over to actually get advise when they look and want advice. So we're working with the clients and we're trying out new technologies, and we'll go from there. So it's really about conversion of clients and then the retention of assets. But it all seems to be working very well. James Gorman: I'd just say something. So I'll piece it a little bit here because it wasn't your question, but you've given me an opportunity to comment based on share works. I think every now and then in business, you look and you sort of see a wave coming, and you catch the wave, and it's a beautiful thing. The whole workplace space, to me, is the next major growth area in financial services. I think over the next 10 years, we'll look back at that Solium transaction, which at the time, some people thought was expensive and it was. I think we spent 800 or 900 on a might have been Canadia $, so somewhere around there, and it was trading at about 500 value. That gave us the opportunity to do the E*TRADE transaction with confidence because we knew we could merge the workplace businesses and create Shareworks. And I really believe that this is very fertile ground and convert those millions of Indiscernible into being Morgan Stanley and E*TRADE clients as we have the accounts to fold into our own house accounts. That's one wave. Parametrics, the customization space, I think is the second wave. Calvert funds and everything we've done through our own sustainability and street efforts, combined with now Calvert 's products. And then the digitalization and how we're going to take the E*TRADE platform both domestically and internationally, I think there's incredible opportunity. It's pretty rare to sit here, and having done this for a little while, there are a lot of things that you can do to just improve your business, but these are things where I think we have fundamental market forces pushing these waves and we're right on top of them. So it's very exciting. Operator: Thank you. Our next question comes from the line of Brennan Hawken with UBS. Your line is now open. Brennan Hawken: Good morning. Thanks for taking my questions. And I'd like to just start by saying congrats to Sharon. Welcome to the calls in a different role, the quarterly. Dan 's here. Congrats. Sharon Yeshaya: Thank you. Brennan Hawken: Sure. I'd like to maybe start with the integrations and sort of taking a step back. You've got two pretty substantial deals under your belt. They've now closed and so you're working on integrating those businesses. What are the milestones that we should think about as you proceed with that work? What kind of timeframe should we think about around updates? Is -- are we going to just get back to the annual strategic update where it's the Fourth Quarter call or are they going to be more regular updates where we're going to be able to hear about the work that you're doing. James, you made reference to the workplace, which is obviously a key part of E-Trade. But how should we think about those from here? I know it's kind of a broad question, but just wanted to try and level this out. Sharon Yeshaya: Sure. I think that it's a fair question. And in terms of where that comes out, it will likely be the next step, will be the annual deck. But then from that point on, I think, there'll be a more regular cadence. Obviously, most investors here know, know, Jensen for example, who can begin to take us through some of that workplace. But there is also, I think, the goal will eventually be to better understand where there are participant migration. So how do you think about the question that Glenn asked, which is referrals. How do you see that referral channel going through, in terms of $, et cetera. How are you thinking about proceeds and the proceeds following through from those Companion accounts. But the integration is a three-year process, which we put out there at the very beginning. So I think right now what we're looking to do is make sure that the pilot programs are going well and understand the client reaction as you think about some of the technology and what is working and what isn't working. So to give you the thing as a piecemeal or to give it a little bit too early, I think would also be a mistake because we'd like to ensure that it is the right client experience and that's what we're focused on right now. Brennan Hawken: Okay. Thanks for that. And then, when we think about net new assets, the growth there has been really, pretty impressive. We have seen some acceleration across the industry though, and I think most investors think it's going to slow. This past year has been a little unusual. But when we look at what's been happening at Morgan Stanley, things already were accelerating before we entered into this period. And so, one of the debates that has been coming up more regularly has been, what is the right growth rate for the wealth business on a go-forward basis? I'll maybe throw out a range. And from my perspective, it feels like somewhere in the mid-upper single-digits, 5-7% feels fair on a long run basis. But number 1, I'd love to hear your reaction to that. And then number 2, how do you think about that growth rate? Do you guys have something in mind? Is there something that you're targeting? Any color on that would be really helpful. James Gorman: And Sharon starting up and got a few thoughts about this. Sharon Yeshaya: Yeah. I think where we started, Brennan, if we look back to the beginning of the year, we gave you guys a very long historical average chart, and then we showed you the 7% of the pro forma when you included E*TRADE. Now what we have said is we don't think we'd go back to a 3-4% on a sustainable basis. That 5-6% is where James spoke to this audience at the beginning of the year when we talked about the deck. Obviously as you look forward though, we're doing a lot, both on net asset consolidation, net recruiting, and all of these new channels. And so, I don't think we -- the same way that James level set with the targets at the beginning of his introductory remarks, I'd say we don't -- that's probably the same way you can think about this, where 5-6% maybe that's the right place to start, but we're obviously not going to try to underachieve that number. James Gorman: Yeah. Brennan, it's really the -- it's the question. Because if we can generate growth in the high teens, i mean, I think we're at -- what are we, 9% year-to-date organic. I mean, this is just -- we've never seen this. And I've been doing this for a very long time. The 3 industry segments, basically the wire houses, the independent/ RIA s, and the direct channel, for years, the direct has grown. The RIAs have grown in a large part because they've taken advisers, have moved out of the traditional channel, into the RIA channels. So part of the growth has just been a shift, if you will, out of it being organic. And the the white houses have sort of struggled. And it struggled for a couple of reasons : 1 is poor training, 2 is very high attrition, 3 is lack of gluing the clients in through the mortgage and the banking products that the banks have, etc. And I think what you are seeing now, we think we're kind of creating a, not to be arrogant about it, but a new mouse trap. We're creating an advisor channel, which actually has deep organic growth flavors in it. And if you look at our attrition numbers and the weekly hiring numbers, I mean they are fantastic. And with that, we're getting tremendous asset growth. And then you combine that with having the direct platform, and then combine that with having the workplace platform. You've got 3 legitimate channels pouring assets into the house. And it wasn't so long ago that if we did 10 billion a quarter, we thought we're pretty good. And we just had a $70 billion quarter during tax season, and it's good. It's very good. But we don't think it was a fluke. I don't know where the ultimate number is going to settle. I think our assets in wealth are now around a little over 4.5 trillion. That was 500 billion 12, 14 years ago. We're at 4.5 trillion. We've gone up 9 times. Compounding on a big number is a pretty potent force as you know. I don't know if it's going to -- it won't be below 5%. I mean, in any individual quarter you have stuff going on, but it won't be below 5%. Whether it's 6, 7, 8, where we land on that, we'll Steve over a few years but it feels good. Operator: Thank you. Our next question comes from the line of Steven Chubak with Wolfe Research. Your line is now open. Steven Chubak: Hi, good morning. And welcome, Sharon. Nice to have you on the call. Wanted to start off with just a two-parter on Wealth Management NII. You noted that the E*TRADE funding synergies have been captured for 2021. The deposit costs in Wealth Management still feels a bit elevated at 16 bps, especially when benchmarking versus peers. Just wondering if there's potential to drive those funding costs lower if rates remain at 0? And then just as a second part, maybe just speak to the environmental factors supporting such strong SBL growth and the sustainability of that trend. Sharon Yeshaya: Sure. I would just mention that we did see the planned runoff right of wholesale deposits. And we continue to expect another 13 billion of wholesale deposits to runoff by year-end, as we see some of that higher cost funding roll down. So just to note there, I don't have an exact target on BDP cost, if that will give you a sense. In addition to that, I would just highlight the SPL question that you asked. That product is resonating with our clients. So that's the point there. And as James has always said, it's a product in which you lend wealthy clients their money back. And this is something that is resonating, it's structured very well. We've historically seen minimal losses and it has a 37% LTV right now in that portfolio. So from that perspective, I think it's a good product to offer and it's also something that works especially in a season like this where you generally see a lot of that product in tax season. And so there is an elevated number in the Second Quarter, generally speaking. Steven Chubak: Just for my follow-up on capital management, the dividend increase that we saw was much higher than anticipated. Looks like you're now running with the highest dividend yield amongst all of the Gsaves. I know, James, you had alluded to the improved stress test outcomes, the higher contribution from recurring revenues. But just remind us of the philosophy around setting the dividend and buyback, and where you're comfortable running on your capital ratios on it through the cycle basis. James Gorman: I mean, there's a lot in that Steve, so it might take a little while. Get yourself a cup of coffee, put your feet up on the stool. Let's just start with -- I think we're a Company that is going to produce durable revenues forever, unless we go and screw it up, basically. If you look at the daily numbers coming out of the fee-based businesses, and the Wealth business, and the fee-based businesses, and Asset Management, they're for real and they're everyday. And they're not 10 million, they're 100 million. You locked in a $25 billion business right from day 1 in the beginning of the year. And our view on that is, unless we spend our way into trouble on it, it will generate very consistent earnings. And just philosophically, it doesn't mean I'm right, but my view was Certainly the Wealth Business and the Fee-based part of the Asset Management Business, which is so predictable, if we think of it as like a yield stock, and the Investment Banking and Trading Businesses and Capital Markets Businesses and some of the carrier businesses in Asset Management of what we think as like the -- not that the other businesses in a growth stock, but that provides the capital to fund the engine, to do buybacks, et cetera, et cetera. We've been carrying a buffer CET1 of over 17%. We have to be, I think, the latest CECL 13.2-ish. I don't know what the exact buffer we should carry internally, as we've said, 50 basis points. It wouldn't be less than that. But just pretend that 80 basis points, you're at 14. You've got 300+ basis points to play with. We're generating Net Income in the first half of this year of 7 billion. Assume we are less than that in the second half, just because who knows. But we're certainly not going to be under 10 billion for the year, and probably not under 12 billion. You're talking about a buyback of 5 --- of 12 billion, a dividend of 5, that gets you to 17. You're generating at least 12. You're in the hole for 5, but you've got 300 basis points of excess. It's going to take a bunch of years to eat into that. And we felt as shareholders deserve to get the earnings stream up the predictability of the businesses. So we've got -- we're not a traditional investment bank as traditional investment banks used to be and the vast majority of them, if not all of them, went out of business or emerged. We are a combined investment bank with a massive wealth and asset management business. So we think shareholders should get the benefit of that very different profile. 14 points, whatever it was, 8 billion in revenue this quarter, a little over 7 of it was institutional, little over 7 of it was wealth and asset management. So it's exactly what we hoped, this sort of balance. That's the philosophy now. It would take us a bunch of years, unless SICAD changes dramatically for us to get close to our buffer. And we're buying the stock back and the stock's over $90. We are very happy buying at this level but at some point, obviously, that gets expensive. We do think we can do more deals over time, and we'll actively look at that, and we want to keep investing in the business, but the reality is, and this is the ultimate conundrum, we can do all four : buyback, dividend, invest, and acquisitions, and still run an excess buffer. And the only way out of that problem is not to have good earnings and that's not my solution currently. Let's play this out over a few years. I'm really happy we got the dividend, as we quoted a reset. And we had the authorization from the board for up to 12 billion, and we'll go hard at that, particularly for stock whether -- if we saw a big move in the market. But that's how I'm thinking about it, and how the board's thinking about it. Operator: Thank you. Our next question comes from the line of Matt O'Connor with Deutsche Bank. Your line is now open. Matthew O'Connor: Hi, good morning. This is actually Bernie Vanges (ph) sitting on for Matt. My questions are on Investment Management and the inclusion of Eaton Vance. In the last quarter's 10-Q, you noted that certain Eaton Vance products have lower average fee rates than the standalone, Morgan Stanley Investment Management platform. I know you made some revisions today on disclosures, and Eaton Vance only had one month of performance in the data in 1Q. Could you just talk about the expectations on fee rate in the combined Asset Management platform as you diversify the product mix? Sharon Yeshaya: I think that that's right. Obviously, that's in some of the overlay products, for example, will have lower fee rates. It will obviously be a mixed product. Also, if you if you think about it just across the platform, you might see other gives and takes. But I think that what we're focused on is not necessarily the fee rate of one individual product, it's creating an ability to service the client more broadly. So while the overall fee rate might come down as was disclosed, there are secular growth trends that should continue to bring assets to the platform, which would offset parts of that on a total basis, right? A rate times volume kind of concept. In particular, you have the parametric product which we discussed, which is obviously -- has its own secular growth trends, the caliber of product. And then there are cyclical trends that could eventually turn into secular trends, i.e ESG, i.e, what's going on with changes to tax legislation and how people think about customized portfolios. All of those things are reasons that we might see changes in growth in AUM. And in addition to that, I think that the fixed income products offered the clients an ability to bring their entire portfolio to Morgan Stanley. And so, from that perspective, again, rate times volume over time, and so there will be a difference in those fees more broadly on the portfolio. But our assets should continue to come in. Matthew O'Connor: Okay, thank you. That's helpful. And then just with my follow-up. Again, I know it's just the First Full Quarter of Eaton Vance just combined on the platform. But just any color you can share about the integration efforts around putting Eaton Vance 's products on your international distribution channel, and then vice versa, putting some of your core products on Eaton Vance 's domestic retail platform? Just trying to get a sense of anything with the net flows showed up. Sharon Yeshaya: We have -- I'd say we've aligned the sales forces. But as you noted, it has not been that long. We're working through it. I think we see and we expect to invest in the various businesses to deliver the customization for a better client experience, but also open the new workplaces. So not just international, but also as it relates to workplace, etc. So we're still working through that and we should have an update over the course of the rest of the year. James Gorman: But the short answer on the flows is zero of the flows, to my knowledge, are a result of exactly what you just said ; putting the Eaton Vance product in international and putting our products through the wholesalers in Eaton Vance. They're terrific teams. There'll be a lot of upside on that going forward, but zero of it has appeared yet. Operator: Thank you. Our next question comes from the line of Christian Bolu with Autonomous. Your line is now open. Christian Bolu: Good morning, James and Sharon. And just to echo the sentiments, a big congrats to you, Sharon. James, let me ask you a couple of follow-ups on things you've said on prior questions. I think you just said, maybe a couple of questions before, that you mentioned you can do more M&A deals. Just trying to get a sense of what you're thinking there. Is that the doubling down on Wealth Management, or is it consolidating traditional asset management space as you look to grow to potential?in? client assets? James Gorman: Christian, good morning. We've done I think five deals acquisition since the crisis, and we've had a lot of dispositions, disposals, I guess. TransMontaigne, Hidemar, we spun-off MSCI, obviously. Before this, we spun off Discover, PDT, to set our business prompt point we shot. So folks have focused on the acquisition side, but we've also done a huge number of deals in getting rid of businesses that are better owned by somebody else or just wanted to fit. Now, Asesores in Spain as I remember, a quarter in the UK, European private banking business we sold, etc. So on the deal side, we've done -- Smith Barney obviously was the big one and Mesa West was the first sort of toe in the water in investment management, then the Solium deal in the workplace space, followed by E-Trade and Eaton Vance. So all I'm saying is, we don't have big transactions in line of sight at this point in time, but we're a big enough Company, we're generating, I don't know, we're running -- run rate, I guess, is 60 billion of revenues this year, 170 plus billion market cap. Finding the right things to fit in, particularly internationally, and particularly on the digital and technology side is very interesting to us. Now, pricing is always, you've got to be disciplined, but it's something that we're very watchful of, and we're not shy about it. But major transactions are highly unlikely to happen. These are more bolt-ons as they feel right. Christian Bolu: Great, thanks. And just a follow-up, you keep mentioning international. I think you said E*TRADE, you want to expand that internationally? Which I don't think I've heard before. And if I remember correctly, in the past, you were always cautious about Wealth Management, international expansion, and maybe you just said you divested Quilter, and E*TRADE covered about eight international businesses post financial crisis. So, can you just talk more about how you think about international, how you would expand E*TRADE. What's the sort of like vision here? James Gorman: Sure. I'll try and be brief. The International Wealth business is complicated because while the U.S. market is 300 million people and Europe is about 300 million people, Europe is multiple jurisdictions within that, even though its Eurozone. Asia people look at it, so it's some monolith. It's not -- Vietnam is not Indonesia, Malaysia is not Thailand, the Philippines is not Australia, Korea is not China, etc. You've got to -- it's very hard to get scale in these markets, so issue number 1. Issue number 2, they tend to be very heavy equities trading markets. They're not well-diversified traditional financial planning market. You might look at Japan, the velocity of asset in Japan, compared to the U.S. That's night and day. And thirdly, obviously, know your client ; money laundering, all of the things that one has to be careful about cross-border type money flows. The bar is very high, and we're a conservative institution. We just are. So my view has been, for a long time' that you trade very carefully. You go where you've got scale. We've done that in Latham because we basically run it out of Miami and New York. So we run it as a region, as to think from single countries. And you go and we've done it in Hong Kong where we deal with a lot of wealthy Asian clients out of Hong Kong and Singapore, little bit in Australia, but basically, you go where you have scale. So the more attractive path forward is likely to be through digital electronic under the brand and with good products rather than trying to build up thousands of people in, I don't know, Malaysia and Indonesia. Hence, E-Trade becomes a very interesting platform for that. Early days that the new strategy team is taking a look at what we can do internationally, but that's something I'd be very excited about. Operator: Thank you. Our next question comes from the line of Mike Mayo with Wells Fargo Securities. Your line is now open. Mike Mayo: Hi. This is the first call since you announced the partnership with Microsoft to accelerate your cloud development. Can you talk about what you hope to achieve with that with any concrete metrics possible, and ultimately, how much do you expect to have of your processing on the public cloud or a private cloud and otherwise on-premise? James Gorman: Yeah. I don't think I have off the top of my head all of those details, Mike. We do have a major deal with Microsoft, but we're also working with other Cloud providers. I won't name them on the call, but we have a long-term contract we've just done with Microsoft. It's all part of the reimagination of our technology organization. And it's come through some programs that we put in place internally around Agile and something we called Pace that are basically designed to move this organization into this century, which I think they've done a fantastic job of. We created a group of what we call the Distinguished Engineers. And interestingly, and people don't think of it this way, but I think we've done the biggest move in technology of any of the large banks, maybe in the world, by spending $13 billion on a technology Company called E*TRADE, which is basically technology and brand. The Microsoft deal is a very important one, but it's not the whole enchilada for what we're doing with our tech platform. It's just a necessary step to move a large part of our business into the cloud. And we've got, I think 3 different providers. We just happened to have the largest contract went to Microsoft on this occasion. Mike Mayo: Okay. And then a separate question on culture. I think it was like 6 or 7 years ago, you made some pretty harsh comments on compensation, and people had to take stock and they were all upset, and I guess that was the right move for you and for them. And recently, you made some other tough comments as relates to employees needing to be back in the office. And there's a big debate out there ; should you have a hybrid solution? Should people be back in the office? If you work outside the office, you'd be paid less. So perhaps just my question saying, well you were right, whenever that was, 6 or 7 years ago about being -- taking the hard stance short-term for the long-term. Can you elaborate on those comments you made recently? James Gorman: Well, that's certainly not connected, and I think it was 9 years ago, I think it was 2012. We were barely profitable. We cut the dividend to $0.05. We We had 0 buyback and we had an ROE of about 2%. And somebody asked me in a TV interview, how would I feel about people complaining about their bonuses. And I said what I said at the time. If you don't reward your shareholders at some point, as you've reminded us over the years, Mike, when our ROE was well below 10%, they picked up their bat and ball and go home. Given we were paying employees a lot in stock, it was in their self-interest to hang tough, get a lot of stock very cheap, and they'd be rewarded. And I'm very, very happy for our employees that that's in fact what's transpired, and the stock has gone from obviously, a very low number, to where we are today. The comment I made about the workplace, I fundamentally believe that the way you and I, and others sitting in this room, Sharon and John, have developed their careers is by being mentored by, and watching and experiencing the professional skills of those who come before us. It's certainly dramatically affected my career. And I don't think you can do that sitting at home by yourself. I think there's a limit to how far as good as the Zoom technology is, how far they can take you. So what I said was, that I wanted people to start coming back in the office and certainly by Labor Day. But I also said, which wasn't picked up in the media, that we would be flexible where flexibility was called for. What we've learned through COVID is that under certain circumstances, having people work from home makes great sense. There are individuals who have health issues, there are individuals who looking after family members. In past years, we would have said, well, that sort of too bad. Now if you have to move to be with your family for a couple of months to look after a health issue or a family issue, we can manage that. Some people have extraordinary commutes. We can manage some flexibility around that. So -- but the basic premise and right at the beginning of COVID in February of -- what was it, 2020, I think I said when I was asked "How would this end up?" I think I said that I felt 80% of all employee hours worked, would be done in one of our offices. And that's probably where it's going to end up. Not 100%, but not 0%. Operator: Thank you. Our next question comes from the line of Ebrahim Poonawala with Bank of America. Your line is now open. Ebrahim Poonawala: Good morning. I just had a question around the -- I know you mentioned earlier in terms of a bidding dispute and on your return 17% plus return outlook early next year. I was wondering if you can talk about, as you think about the next 5 years and just the competitive forces, talk to us in how you're thinking about main -- budgeting some investment spend as it relates to R&D or more experimental-type investments that could allow you to better compete and gain market share? James Gorman: You know, I -- that would take a lot longer than we probably have on this call. Why don't we hold that until we get to the strategy discussion next year because I'd much rather tie budgeting and investment discussions to actual initiatives that were undertaken, rather than just do it in the abstract here, if you don't mind. Operator: Thank you. Our next question comes from the line of Gerard Cassidy with RBC Capital Markets. Your line is now open. Gerard Cassid: Good morning, Sharon and James. Can you guys share with us, you talked about wallet share gains in the ISG Group. And I was wondering if you could elaborate on how you think you're achieving it. Some of your peers have said the same thing. Is it because of your people or the amount you've invested in technology, your size, or is it some of your competitors are just weaker and have other issues to deal with, which gives you this opening to take wallet share gains? Sharon Yeshaya: Hi Gerard. It's nice to hear from you. I'd say it's all of the above. But more importantly, I also think that there is something that we've said which is in periods of crisis, which I think you saw over the course of 2020, oftentimes times, those that you are closest to from a relationship perspective end up being your closest Regulation. And you are gaining share in that regard. Very similar to what we've talked a lot about on this call about asset consolidation in a Wealth Management relationship. I think the same goes for the asset -- the relationship consolidation if you think about Institutional Securities. So be that on the equity underwriting, for example, be that in coming to the equity business. But not forgetting what we've done in fixed income, which is really gained shares since 2015 to be a really credible player in that marketplace. All of those things, I think technology and leveraging technology with the beginning of?MSAT? in equities moving over to the right places in fixed income where it makes sense, that investment continues. And I think it's helped us gain share as well from, like you said, probably the Europeans and others that have retreated in certain market places. Operator: Thank you. Our next question comes from the line of Jeremy Sigee with BNP Paribas. Your line is now open. Jeremy Sigee: Thank you. Just really a quick follow-up on that interest income in Wealth Management. I just wondered whether in your view whether sort of asset sustainable base level here and NII should now grow in line with the volumes that are coming through or are there any further moving parts that you expect to affect that? Sharon Yeshaya: Well, I would say that the fundamental moving part is rates. So if you think about it, obviously, there are certain things where when we look at giving you guidance or presenting a base case, the base case is what's priced into the marketplace. And so we use that as the guide. And that's why I think for this quarter, what we mentioned was the medium part of the curve did move more than I think that most had expected or predicted. But as you go forward right now, at least for 2020, the build is really going to come from the actual lending which we've talked about, which is a 2020 number as what we've just given you, and we said that that ran around $18 billion for that year. So that's $4-5 billion a quarter, that you can think of for the growth in lending per quarter through the end of the year. Operator: Thank you. Our last question comes from the line of Dan Fannon with Jefferies. Your line is now open. Dan Fannon: Thanks. Good morning. I have a couple of questions just on the Investment Management and Eaton Vance. Curious, I know you mentioned that you're just integrating the sales forces for the distribution platforms, but curious about which products do you think have the most potential to be sold through the Morgan Stanley distribution on the global side as you look at the Eaton Vance product lineup today. And then within ESG, you have multiple capabilities now with Calvert and what was Legacy Morgan Stanley. How do you think about integrating that more broadly across the Investment Management segment, given the demand you're seeing? We're seeing across the industry for those types of products Sharon Yeshaya: Sure. So I would say, sort of, similar to my last answer, which is all of the above, I think all products. But particularly, we've talked a lot about the customization of parametric. I don't think that's just wealth management, I think that's a workplace product as well over time, so not just an advisor-led product. Alternatives, private credit is one where I think we've seen an interest and we continue to see interest in alternatives from the Wealth Management franchises more broadly, not just our own. And as you think about ESG, we had always talked about Eaton Vance and the old Anthem being a "perfect fit" in terms of the two. And I think a lot of that came from the distribution and the complementary distribution that you had. So ESG products and Calvert was an Eaton Vance product with a U.S. domestic sales force. We have a strong international sales force. And obviously, a lot of the interest in the ESG and sustainability products are also coming from Europe and abroad, and so that's where we think that that distribution can really help thinking about taking those products elsewhere. Operator: Thank you. There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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Morgan Stanley Shines with Strong Q4 Results, Shares Up 3%

Morgan Stanley (NYSE:MS) exceeded analyst expectations for the fourth quarter, delivering robust earnings and revenue growth across its core business segments. Following the release, the investment bank's stock gained more than 3% intra-day today.

The firm reported adjusted earnings per share of $2.22, well above the Street consensus of $1.64. Quarterly revenue surged to $16.2 billion, beating estimates of $14.76 billion and representing a 26% jump compared to $12.9 billion in the same period last year.

Key divisions contributed significantly to the strong results. Institutional Securities, Morgan Stanley's trading and investment banking arm, reported a 47% year-over-year revenue increase to $7.3 billion. Within this segment, equity trading revenue surged 51% to $3.3 billion, while fixed income trading revenue climbed 35% to $1.9 billion.

The Wealth Management division also delivered impressive growth, with revenue rising 13% to $7.5 billion, fueled by record asset management fees and higher transactional activity. Investment Management revenue rose 12% to $1.6 billion, supported by increased average assets under management.

For the full year 2024, the bank reported net revenues of $61.8 billion, a significant increase from $54.1 billion in 2023. Net income applicable to the firm rose to $13.4 billion, or $7.95 per diluted share, compared to $9.1 billion, or $5.18 per share, in the prior year.

Morgan Stanley's Upcoming Earnings Report: A Comprehensive Analysis

  • Morgan Stanley (NYSE:MS) is anticipated to showcase strong earnings for Q4 2024, driven by increased investment banking activities and robust trading performance.
  • The company's financial ratios, such as the price-to-earnings (P/E) ratio of 17.68 and price-to-sales ratio of 3.57, offer insights into its valuation and market position.
  • Concerns arise from the negative enterprise value to operating cash flow ratio of -13.46, indicating potential challenges in generating cash flow relative to its enterprise value.

Morgan Stanley (NYSE:MS) is a leading global financial services firm providing investment banking, securities, wealth management, and investment management services. As a major player in the financial industry, it competes with other giants like Goldman Sachs and JPMorgan Chase. The company is set to release its quarterly earnings on January 16, 2025, with Wall Street analysts estimating an earnings per share (EPS) of $1.62 and projected revenue of $14.7 billion.

Analysts are closely examining Morgan Stanley's performance for the fourth quarter of 2024, focusing on key metrics beyond just revenue and EPS. The company is expected to report strong earnings, driven by a surge in investment banking activities and solid trading performance. Lower interest rates are also likely to bolster its financial results, as highlighted by analysts.

Morgan Stanley's financial ratios provide further insights into its performance. The price-to-earnings (P/E) ratio is approximately 17.68, indicating the price investors are willing to pay for each dollar of earnings. The price-to-sales ratio stands at about 3.57, suggesting the company's market value relative to its sales. These ratios help investors assess the company's valuation.

The enterprise value to sales ratio is around 8.11, reflecting Morgan Stanley's total valuation compared to its revenue. However, the enterprise value to operating cash flow ratio is negative at approximately -13.46, which may indicate challenges in generating cash flow relative to its enterprise value. This could be a point of concern for investors.

Morgan Stanley's earnings yield is approximately 5.66%, providing insight into the earnings generated from each dollar invested. Additionally, the company has a debt-to-equity ratio of about 3.05, highlighting its use of debt financing relative to its equity. This ratio is important for understanding the company's financial leverage and risk.

Morgan Stanley’s Robust Third-Quarter Results Push Stock Up 7%

Morgan Stanley (NYSE:MS) third-quarter performance exceeded Wall Street expectations, driving its stock up by over 7% intra-day on Wednesday. With solid results across key business segments, the company showcased the resilience and effectiveness of its diversified approach to financial services.

For the quarter, Morgan Stanley reported an EPS of $1.88, surpassing the anticipated $1.59. Revenue hit $15.4 billion, significantly outpacing forecasts of $14.32 billion and marking a 15.8% increase from the same period last year.

Morgan Stanley’s Institutional Securities division posted a 20.2% year-over-year increase in net revenues, reaching $6.8 billion. This was fueled by robust performances in both Equity and Fixed Income trading, alongside notable progress in Investment Banking. The Investment Banking unit, in particular, saw revenues climb 56% from a year prior, driven by substantial gains in equity and fixed income underwriting.

The Wealth Management segment also delivered record-breaking net revenues, reaching $7.3 billion, a 13.5% year-over-year boost. This growth reflected strong asset management and transaction-based income, with the division attracting an additional $64 billion in net new assets. Total client assets in the division now stand at an impressive $6 trillion.

CEO Ted Pick highlighted the firm’s strategic success, noting that the third-quarter results underscored Morgan Stanley’s capacity to generate solid returns and build capital in a favorable market environment. Through the first three quarters of 2024, the firm reported a return on tangible common equity (ROTCE) of 18.2%.

Closing out the quarter, Morgan Stanley recorded a Common Equity Tier 1 (CET1) capital ratio of 15.1%, adding $2.1 billion in CET1 capital during the period.

Morgan Stanley's Strategic Shift Towards Stable Revenue Streams

  • Morgan Stanley (NYSE:MS) is diversifying its revenue by focusing more on Wealth Management and Investment Management, reducing reliance on volatile capital markets.
  • The firm's financial health is strong, with quarterly revenue of $15.02 billion and net income of $3.08 billion, highlighting the success of its strategic initiatives.
  • Despite challenges like rising expenses, Morgan Stanley's solid financial performance and strategic partnerships, such as with Mitsubishi UFJ Financial Group, Inc. (MUFG), position it well for future growth.

Morgan Stanley (NYSE:MS) is a global financial services firm that is making significant strides in diversifying its revenue streams. Historically known for its strong presence in capital markets, the company is now shifting its focus towards operations that promise more stable revenue sources, such as Wealth Management (WM) and Investment Management (IM). This strategic pivot is evident in the increased contributions of these segments to the firm's net revenues, which have risen dramatically to nearly 57% in 2023 from 26% in 2010. This shift underscores Morgan Stanley's commitment to reducing its reliance on the more volatile capital markets sector.

The firm's latest financial results highlight the success of these strategic initiatives. With a quarterly revenue of $15.02 billion and a net income of $3.08 billion, Morgan Stanley demonstrates robust financial health. The growth in the WM and IM segments is further supported by the impressive growth of total client assets and total assets under management over the past five years. This continued momentum into the first half of 2024 suggests that the firm's strategic focus on these areas is paying off, contributing significantly to its overall financial performance.

However, Morgan Stanley's journey is not without its challenges. The firm faces rising expenses, with a three-year compound annual growth rate (CAGR) of 7.7% from 2018 to 2023, primarily due to higher compensation costs, inflation, and investments in growth efforts. Despite these challenges, the firm's solid financial performance, as evidenced by operating income and EBITDA both standing at $4.15 billion for the quarter, indicates that it is managing these costs effectively while continuing to grow its revenue base.

In response to the evolving financial landscape, Morgan Stanley has also strengthened its partnership with Mitsubishi UFJ Financial Group, Inc. (MUFG). This collaboration is expected to bolster the firm's profitability, especially within its Japanese brokerage joint ventures. Additionally, the firm's proactive measures, such as increasing its quarterly dividend by 8.8% to 92.5 cents per share and reauthorizing a new multi-year share repurchase program of up to $20 billion, reflect its strong liquidity position and confidence in its earnings strength.

Despite the uncertain performance of its Institutional Securities (IS) segment, Morgan Stanley's strategic expansion into more stable revenue sources, coupled with its impressive financial results, positions the firm well for future growth. The company's ability to navigate rising expenses and leverage strategic partnerships underscores its resilience and adaptability in a changing economic and geopolitical environment.

Morgan Stanley Warns: Path to a Goldilocks Scenario is Narrowing

Morgan Stanley Warns: Path to a Goldilocks Scenario is Narrowing

Morgan Stanley has recently highlighted concerns regarding the market's path to a "Goldilocks" scenario, where economic conditions are just right—not too hot and not too cold. The firm’s latest analysis suggests that achieving this balanced economic environment is becoming increasingly challenging. Here’s an overview of what this means for investors.

Key Takeaways from Morgan Stanley’s Analysis

  1. Narrowing Path to a Goldilocks Scenario: Morgan Stanley’s report indicates that the ideal economic conditions for a Goldilocks scenario are becoming less attainable. Factors such as economic growth rates, inflation pressures, and interest rates are contributing to this narrowing path.

  2. Economic Conditions: A Goldilocks scenario typically involves moderate growth, low inflation, and stable interest rates. However, current economic indicators show volatility and uncertainty, making it difficult for markets to maintain this delicate balance.

  3. Market Implications: The potential deviation from a Goldilocks scenario could lead to increased market volatility and uncertainty. Investors might face challenges in navigating these conditions, requiring careful analysis and strategic adjustments to their portfolios.

  4. Investment Strategy: In light of these developments, investors should consider reassessing their strategies. Diversification, risk management, and staying informed about economic trends will be crucial in adapting to changing market conditions.

  5. Future Outlook: While the ideal Goldilocks scenario may be elusive, monitoring economic indicators and central bank policies will be essential for understanding potential market shifts. Staying updated on expert analyses and economic forecasts can provide valuable insights.

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Morgan Stanley Beats Q2 Earnings Expectations, Shares Rise 2%

Morgan Stanley (NYSE:MS) shares rose more than 2% intra-day today after the company reported strong second-quarter results, surpassing analyst expectations with an EPS of $1.82, beating the estimated $1.65.

The company also saw a significant revenue increase, reporting $15 billion compared to the consensus estimate of $14.32 billion. This is a notable improvement from the $13.5 billion reported in the same quarter last year.

CEO Ted Pick attributed the strong performance to an improving capital markets environment, leading to a first-half 2024 revenue of $30.2 billion and an EPS of $3.85.

Morgan Stanley's strategy has shown success, with total client assets rising to $7.2 trillion. Pick also announced a quarterly common stock dividend increase to $0.925 per share, highlighting the company's financial health and commitment to shareholders.

Morgan Stanley Stock Gains 3% Following Q1 Earnings Beat

Morgan Stanley (NYSE:MS) reported a significant increase in its first-quarter earnings and revenue, outperforming analyst forecasts, which led to a 3% rise in its shares intra-day today. The financial services firm posted net revenues of $15.1 billion for the quarter, marking a 4.1% increase from $14.5 billion in the same period the previous year. The adjusted earnings per share (EPS) was $2.02, well above the analyst prediction of $1.67.

Ted Pick, the Chief Executive Officer, attributed the firm's strong performance to the substantial growth in client assets across Wealth and Investment Management, which now stand at $7 trillion, and robust activities in Institutional Securities, especially in equity and underwriting.

Institutional Securities reported net revenues of $7.0 billion, up from $6.8 billion year-over-year, with pre-tax income increasing to $2.4 billion from $1.9 billion. Wealth Management saw its net revenues rise to $6.9 billion from $6.6 billion the previous year, with a pre-tax margin of 26.3%. Furthermore, Investment Management's net revenues grew to $1.4 billion from $1.3 billion year-over-year, with pre-tax income climbing to $241 million from $166 million.

Morgan Stanley also reported an expense efficiency ratio of 71%, demonstrating operating leverage in an improving market environment, while the standardized Common Equity Tier 1 capital ratio stood at 15.1%.