Q3 2019 Earnings Call
Good morning. This is you're on your <unk> head of Investor Relations. During today's presentation, we will refer to our earnings release in financial supplement copies of which are available at Morgan Stanley Dot 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 ordinary says regarding forward looking statements.
non-GAAP measures that appear in the earnings release, this presentation may not be duplicated or reproduced without our consent.
I'll now turn the call over to Chairman and Chief Executive Officer, James Gorman.
Morning, everyone and thank you for joining us.
Oh, the fence results in the third quarter was strong fee based client assets lending balances continued to build in wealth management contributing to a 28% margin.
Institutional securities revenues of $5 billion with solid performance across all divisions, Despite a mix trading backdrop and investor management assets under management suppose top a tree and a strong performance continues to attract positive long term net flows.
In aggregate the phone produced an hour, we and our TC of 11.2, St and 12.9% for the quarter.
Before John takes you through our results and answers your questions. Let me share a couple of thoughts.
The wealth management business is powerful the 2.6 screen baskets annualizing over 70 billion revenues imagines that historic highs the business is clearly stabilizing the phone.
I'm convinced they remain several meaningful avenues for growth. The biggest is we look to aggregate I said total way.
Core client segment should see significant asset growth over the next decade.
Further expansion about services across across the world spectrum from the highest and family offices to employees through Morgan semi at work provides us with the potential four trillion dollar assets that opportunity.
Well, so international opportunities, particularly in Asia and continued growth about loan portfolios are among the exciting opportunity to that remained in this business.
But the most attractive pod is every incremental dollar revenue is arriving at a high margin and the margin at the existing business.
And while you may not see this expansion of rainy individual quarter over time, the business will grow and the margin will expand.
Or institutional securities business makes has proven to be very resilient.
Against a relatively difficult trading environment characterized by some seasonality in volatile markets, we performed well.
This segment made five being dealt with some revenues and for the fifth time out of the line seven quotas and it underscores the strength about client franchise in all three lines of the business investment banking fixed income and equities.
We've been a beneficiary of Klein share consolidation today and expect this to continue as competitive dynamics Ebola.
Finally, our asset management business is well positioned in the most attractive growth segments in the public and private markets with a leading active equity strategies and significant alternatives and solutions platforms.
The growth in that said some profitability at the last two years are a testament to the refocus on this business and as I said only we pass top a trillion dollars in total assets with positive net long term flows.
One ongoing challenge about continued pursuit of higher are weak performance has been the amount of equity we required to hold despite how we've repositioned the firm to benefit from the most stable revenue streams.
To address capital, which of course drives how are we at current constrained as the leverage ratio.
As the Federal reserve adjusts the capital framework, we expect the focus will transition to see T, one which should benefit us in the aggregate.
Given global competitive dynamics the strengthened the brand the stability. The institution. There's reason to believe we can gain share in several about businesses the culmination of growth stability and potential for share gains lisi with confidence that they remain tremendous upside here.
Overall, we remain cautious today as trade talk swell in interest rate pounds continued to be debated, but expect us to look beyond the next few months and focus on continuing to enhance the stability the franchise and growing the business.
Our job is to continue to manage this institution for the long term.
All that said I don't want to take away from the strength of the quarter and I'll now turn it over to John to discuss the results in greater detail John .
Thank you James and good morning in the third quarter from revenues were $10 billion, representing the fifth quarter with revenues over $10 billion out of the last seven and our highest third quarter and over a decade, the 2% sequential revenue decline from the prior quarter is reflective of seasonal trends.
PBT was $2.7 billion, an EPS was $1.27, resulting in an hour or we have 11.2% and an ROTC of 12.9% year.
Year to date or are we at ROTC or 11.8, and 13.5% respectively.
Total noninterest expenses were $7.3 billion in the third quarter on a year to date basis total noninterest expenses declined 1% and our efficiency ratio was 72%.
As we continue to invest in technology workplace enhancements and the integration of Solyom, we remain focused on controlling more discretionary expenses, particularly marketing and business development and professional services now to the businesses.
Institutional security revenues were strong, particularly in September .
Despite a mixed market backdrop, Sammy revenues of $5 billion were the highest for third quarter. Excluding DVA in 10 years Noncompensation expenses were $1.9 billion for the quarter, increasing 5% sequentially on higher volume related costs driven by increased client activity.
Our compensation to net revenue ratio remained at 35%.
In the context of fluid markets, including trade and political uncertainty economic growth concerns and central Bank responses, we remain focused on serving our clients while actively managing our risk.
Investment banking revenues were $1.5 billion, increasing 4% sequentially.
The quarter over quarter increase was driven by improvement in fixed income underwriting and advisory, particularly in the Americas.
Notably fixed income underwriting produced record revenues as issuance activity accelerated.
Advisory revenues increased 9% quarter over quarter to $550 million completed M&A industry volumes increased supported by larger strategic transactions.
Underwriting results were robust well equity underwriting saw sequential decline it was more than offset by the strength and share gains in our debt capital markets business.
Equity underwriting revenues declined 27% to $401 million.
Following a particularly strong second quarter IPO issuance witnessed a notable decline partially offset by convertible issuances.
Fixed income underwriting increased 39% sequentially to $584 million on the strength across both investment grade and leverage loan issuance.
Activity was particularly strong in September issuers took advantage of the rate environment and the summer backlog of event driven transactions was executed.
Overall, our pipelines remain healthy.
Those are engaged in confident and strategic activity is supporting both our advisory and underwriting businesses.
However conversion from pipeline to realize remains highly dependent on market conditions.
In equity sales and trading we retained our leadership position and expect to be number one globally. The quarter was strong with revenues of $2 billion. The 7% sequential decline was consistent with seasonal trends.
Brokerage revenues rose sequentially higher financing revenues supported by an increase in average client balances were partially offset by regional seasonality.
Cash revenue saw slight decline versus the prior quarter on lower global volumes. However, revenues year were resilient as we have increased share and a consolidating market.
Volatile market conditions weighed on derivatives performance.
Fixed income sales and trading revenues increased 26% sequentially to $1.4 billion driven by the strength in the credit complex.
Mike results were robust across all major business lines, particularly securitized products.
Activity levels were high and balance sheet velocity remains an area of focus and has improved versus last year.
While macro revenues increased sequentially absolute performance was impacted by a challenging environment, particularly over the first after the quarter.
Sequential results benefited from increased client activity, including structured transactions.
Commodities revenues improved quarter over quarter, driven by North American power and gas.
Investments declined $212 million sequentially.
The prior quarter benefited from realized gains associated with it investments IPO and subsequent mark to market gains on remaining holdings, which partially reversed in the third quarter.
Wealth management revenues in pre tax profit were $4.4 billion and $1.2 billion respectively.
Business produced the PBT margin of 28.4%, while continuing to absorb expenses related to technology investments and the Solyom integration.
On a year to date basis, the PBT margin was 27.9%.
Asset management revenues were $2.6 billion up 4% quarter over quarter benefiting from the improved asset levels. We saw at prior quarter's end.
Total client assets ended the quarter at 2.6 trillion dollars inline with the prior quarter.
Net fee based flows were strong at $16 billion fee based assets now comprise 46% of total client assets up from 45%.
Expect the secular increase in the allocation of assets towards advisory to continue.
Transactional revenues were $595 million down 18% from the second quarter.
Transactional activity remains subdued.
Seasonally slower client activity, a weaker equity calendar and negative movements in our deferred compensation plan investments impacted results.
Retail investors remain cautious given the continued uncertainty around the outlook.
Net interest income was $1 billion up 3% sequentially.
On a year to date basis net interest income was unchanged, excluding the impacts of mortgage prepayment expense and on a year to date is up mid single digits.
Loan growth was strong as balances are up 3% sequentially and 8% versus last year.
We continue to see good receptivity of our lending products and expect loan balances to continue to grow at a similar pace annually.
We saw a stable BDP levels this quarter and continued success at raising deposits.
Putting these eni components together strong loan growth and more stable deposits will be more than offset however by the current and expected rate path.
Total expenses were essentially unchanged compared to the second quarter. Despite the integration of Solyom.
The impact of higher compensable revenues, largely offset the movements related to our deferred compensation plans non compensation expenses were effectively unchanged.
Our target margin is 26% to 28% this quarter, we pierced the high end of that range as always there can be movements quarter over quarter, but full year results will be solidly within our range.
Investment management produced revenues of $764 million.
The business saw strong and broad base positive net flows and assets under management surpassed the half a trillion dollars.
The growth story for this business remains intact year to date revenues are up 17% and the business is running nearly $1 billion more revenues versus 2016 levels.
Investment environment remains constructive as investment revenues were $105 million as we've previously said this line has the potential to be lumpy, though we continue to see the benefits of broad based performance across our private funds.
Total AUM increased to $507 billion of which long term AUM was 335 billion.
Positive net flows drove the higher at U.M.
Our equity strategies continue to deliver strong investment performance driven by driving net inflows and we're beginning to see the benefits of the investments we've made into our fixed income platform with the second consecutive quarter of net inflows asset management fees of $664 million increased 8% sequentially, but.
Formats fees were aided by a nonrecurring realization in the quarter. Additionally management fees benefited from rising average AUM.
Turning to the balance sheet total spot assets rose to $903 billion driven by increased client activity, which also drove growth in RW ways. As a result, our common equity tier one ratio declined to 16.2%.
During the third quarter, we repurchased approximately $1.5 billion of common stock or 36 million shares at an average price of 40 192, and our board declared a 35 cents dividend per share.
Our tax rate in the quarter was 21.4%, excluding $89 million of Internet intermittent net discrete tax benefits.
These discrete tax items added approximately six cents to EPS in 50 basis points are always.
We continue to expect our full year tax rate will be inline with the 2018 tax rate, excluding intermittent discrete items.
As we look ahead, we're cognizant of the seasonal patterns of a fourth quarter, but we are encouraged by client engagement and activity levels and are off to a good start.
We're pleased with our competitive positions as the industries continue to see share consolidation and we are executing on our growth strategies with that we will now open the line to questions.
Yes.
The press Star one on your telephone.
To withdraw your question pressed upon key.
In the interest of time, we ask that you. Please limit yourself to one question and one follow up.
Our first question comes from Mike Mayo with Wells Fargo.
Your line is now open hi.
Hey, Mike.
You certainly making progress over time with the.
ROTC, 13%.
But you're doing that.
When you look at year over year, where expenses grew faster than revenues and I know, it's just one quarter, but non comp expenses were up 7%.
Accomplice up a little bit.
What's sort of confidence you had at revenues will grow faster than expenses, if not just for the quarter, but for the next year and how are you thinking about that relationship.
Mike Firstly.
That's what we are paid to do.
For in a business, where we're growing expenses for most of the revenues long term, we're not going I'm very good business. So.
Maniacal focus on it and you're right on any given quarter, obviously, you want to see.
Bumps and bounces a little bit we had saw the high litigation this quarter relating to some stuff way way back.
10 years ago from the crisis and some of that just sort of makes its way through the pipes at different moment, so and the BC was quite active given the activity, particularly in September .
Some of the integration stuff relating to sold and various other things some of the take spend we've been doing.
Developing AD tech platform, but I'm not the frankly, I Wilson I wasn't concerned about that and I would say.
Certainly not concerned about of the next year, we we intend to maintain the disciplined approach. This place the last several years and that's not going to change.
Alright, and then just as a follow up I guess, so I guess, there are some onetime or she didnt really specify the amount but.
So just generally as it relates to technology and improving efficiency, where can you see the efficiency ratio going over the next one or two years.
Well I'm not going to get ahead of what we do have the earnings call in January where we lay out our expense targets I think we've taken the efficiency ratio forget where we started this but it was certainly in the in the eighties and target originally was 79.
Since on the dollar than 70, 775, and I think we've been last year was this is 73.
We listen we are generating scale economics look at the wealth management business I think known comps were down about 10 or $20 million.
Including some cost so we're absorbing relating to the integration.
There's no reason why those non comp numbers need to grow in that business. We've made a lot of investment philosophy is starting to realize the benefit of those.
Rubber and he is leading a major Reformation about technology platform internally and it has the full focus for the organization and while we're having to and wanting to spend on some of the new technologies that are obviously coming into the market.
We're also.
Taking costs out from what has been the legacy system that hasn't been terribly efficient over the last 20 years. So.
I think I'm not going to give you an expense ratio number now that's obviously premature, but but we clearly we clearly focused on the long term scale leverage in this business.
Thank you and our next question comes from Brennan Hawken with.
Your line is now open.
Good morning, Thanks for taking the questions.
So this quarter, we saw a pretty significant move by.
Discount brokers moving commissions to zero.
Obviously transactional revenues easiest part commoditized, but there are some investors that are concerned that the next move that they could make could be against advice.
Do you consider that a threat and do you think that your recent tech investments have placed you well or is there still wood to chop on that front.
What I have ago, this and Joe may want to add something.
Firstly I wasn't surprise that the online brokers went to zero commissions I was surprised that the timing.
Frankly, I think given the backdrop with where rates are.
It was curious timing, but it is what it is.
As and as you point out Brennan I think the Commission commission activity of buying selling stocks and bonds in that wealth management businesses, a very small percentage now that business and obviously half of that for the whole from given that slips and that's about 40% of the from wealth management.
So for us it's a whole different discussion you rightly questioning will they be pricing pressure on advice I mean.
At the level that clients are paying I think it's in the mid 70 basis points channel correct me for advice on on dollars of assets.
It's a great value equation I mean, the buys pricing holds up as relevancy with clients are getting value when you put together the research.
The trade execution, the financial planning time people in with their long term charitable giving the there.
Trust and estate planning working with their accountants.
It's complicated stuff I'm being wrong on this and the tax implications of me wrong, absolutely overwhelm a few basis points on the fees. So having high quality advises giving high quality advice is in my view a winning strategy. The real question is for what level of assets is irrelevant.
And you've seen in our business HSPA households between zero and 100000 in the last 10 years has dropped precipitously that is not an accident. That's by design, we basically price I'd sigman out of the core channel into the online channel for reason somebody with $39000 as I've said, many many times does not need to financial advisor monk at the attention of fund.
Lovaza, but households, with more than $10 million, just with us and bearing on those households tend to have to the tree relationship side that have grown dramatically over the last decade and that is the sweet spot for what we're doing pad business between one and 10 and more than $10 million, that's where the growth is and in my view that is where the advice.
Fee is very fair and very reasonable given the value created.
Thanks for all that color James that's helpful and very extensive.
One follow up here.
You guys recently bought Solyom, you're in the process of integrating you guys made reference to that.
With the your comments around Morgan Stanley at work.
That might be a platform that is a little closer to where the discount brokers are.
It is this do you think this might impact that business do you think that might impact a little bit of the potential returns on that investment or was this part of the scenario planning that you guys undertook when you made the acquisition that eventually commissions would head in this direction and competitive pressure would take you there. Thank you.
Yes, so Brian and its John .
It's still very excited about to so im acquisition, it's very early days, but the integration is going well, we're continuing to put money in investment behind the integration.
The receptivity of the product Morgan Stanley at work has been quite good we've actually seen a pick up and new client wins. We've we've won about 265 clients corporate clients since the closing.
Of that transaction and the product receptivity is quite high this combination of sort of state of the art.
Technology and platform for stock plan administration, with financial education, and tools for and invest in investing in savings is going over quite well.
Additionally, we continue to convert our business onto their platform and Thats going well so early signs and early days, but the integration is going well and in terms of the economics and how we think about this business. It was really to get access to a younger in different client base, it's a direct channel.
James mentioned Theres about two and a half million employees in these companies with a 1 billion or excuse me a trillion to half of assets away and we're going to start using our digital tools, our virtual advisors to provide service.
For those for those clients and there will be priced competitively and we still think the economics of that channel and getting into that business is a very attractive one for us. So early days going well and we're still really excited about it.
Thank you and our next question comes from Gerard Cassidy with RBC capital markets. Your line is now open.
Thank you good morning, James you touched on capital with the leverage ratio being your binding constraint and you also indicated that as the fed adjusts its capital framework it will shift to the CE CE tier one ratio.
When do you think that shift may take place and then when you look at your Cetone ratio clearly, it's the highest amongst all your peers at over 16%. What's a good number that you think is more appropriate once we move to the cetone ratio.
Gerrard earlier, you're asking me to Stefano aligned pity era.
[laughter].
Listen I think the fit as being really constructive and stepping back and looking at.
What's happened with the regulatory framework it was obviously critical too.
Have the banks recapitalize raise their liquidity and build disciplined around that and I think the health of the US banking system. If you look at the results of it appears in the last week is clearly reflective of that I think all of them are in dramatically better shape than they were 10 years ago, including Morgan Stanley .
I think I've argued for a long time publicly and privately that a simple leverage ratio was a constraint when it's not looking at what is the intrinsic quality and liquidity the asset on the balance sheet does not make sense.
Levering the liquid security versus a treasury it doesn't make sense in terms of treating those equal and and much more irrelevant to the businesses, where our risk weighted assets lie. So I think this change.
She has been.
Advertise by the Federal reserve as as the likely in I should say, it's up to the fit in there on rulemaking I'm not going to presume a but as the likely outcome. This transition.
Seems to me to be sensible and most people would agree with that.
It certainly gives investors and rating agencies and regulators a much better sense of where the risk slides within the firms that said none of us want to get back to the Precrisis leverage ratio with banks will ever 30 to 60 times.
So as to the specific timing I don't know.
And I don't want to I don't want to previous that but it's not years. It's in the sort of months period is my guess.
And what that what that translates for US again, I think it's it's probably it's a little early.
To get into that I just think its.
It's hard for me to see a scenario where capital would stay flat or go up.
So I start off that simple premise. Therefore, there is only one alternative how much change that delivers depends on will be SCB buffer is in a bunch of other.
Bunch of other factors that would go into the new the new regime, so little bit wait and see and once we see what we're dealing with then we will act accordingly as an institution.
Great I appreciate your insights and then John you talked about on the equity trading that the cash revenues the consolidating market helped boost the cash revenues.
What's driving that is it just economies of scale is it the technology that youve guys have on your desk, that's driving more business that way and then when you look at your cash equities relative to prime brokerage or derivatives is that the largest contributor to the equity trading number.
So.
The answer to your first question is really yes, and yes, it's economies of scale and its technology. Additionally.
We're seeing some people step away from that business. We've got a really good technology kit. Obviously here, we've seen an increase in our percentage of the trading volume the volumes down a little bit, but as I said, it's been pretty resilient and we think that you'll continue to see consolidation of share.
In that business and that's an opportunity for us.
In terms of the different businesses, obviously prime brokerage is our bid is our biggest business, it's sort of the center of the machine a few well we've got a really nice mix of both people and intellectual capital and technology that sort of drives the entire plant and as I said, we're number one and the globe there for about the last five years. So.
It's a very strong and and powerful business.
Between cash and derivatives that a bounce around quarter to quarter based on client activities, but the PB business is clearly the biggest.
Thank you and our next question comes from Jim Mitchell with Buckingham Research. Your line is now open.
Hey, good morning.
Maybe just talk a little bit about.
Wealth management flows I think fee based asset flows of 16 billion were pretty strong relative to what we saw one of your competitors.
Much of that is being driven by just the shift from brokerage into fee based.
This is really just solid.
Organic growth that you're driving through I guess I'm more focused.
Franchise.
Yes.
Yes, we were pleased with the flows and we continue to think that were.
Very focused on attracting both new assets and we're continuing to see that secular trend.
People wanting to convert their their accounts into the fee based.
The fee based format because of the service, it's provided and the value proposition. So it was a good mix.
Of the different dynamics, new assets as well as flows from our brokerage and we expect to continue to see that we're now at about 46% that number has been creeping up we expect it to continue to creep up.
Overtime here.
All right and maybe just regulatory question now that we have a final multiple volcker rule.
Any thoughts on the impact you guys doesnt seem like it's big but just whether its expenses.
Revenues, how do we think about that at all.
Yes men again, there is there's a final rule out, but theres still some additional incremental adjustments it will be made but from our perspective, it's not really havent material impact its clarified a few things for us maybe simplified it a little bit but no real impact.
Thank you and our next question comes from Christian Bolu with Autonomous Research. Your line is now open.
Good morning.
Maybe just on equities.
And this one might be bit of an effect question given to the good job Ted and team have done in that business, but I'll ask anyway.
If I look at market share relative to the U.S. peers. It looks like it peaked at the end of 2017, and that's basically steadily drifted down so curious kind of if any color on what's driving this sort of the leverage constraints.
Alluded to an issue and maybe or anything else you seen on the competitive front in that business.
I'm not sure I know, what what you're referencing when we look at the global market. We've had we've grown share over the last couple of years and it's stabilized over the last year or two and sort of the 2020, 1% share type numbers, we do think theres opportunity to grow that we're not going to see the lockstep jump that we've seen him.
Darkly, but there are share consolidation going on particularly in the cash market, we think theres opportunities in derivatives.
As well as as James mentioned Asia continues to be an interesting market as people divert more capital into that market. So again, we're very pleased with the results.
It's a competitive market, it's always been a competitive market I think you've seen over a long period of time are real shift.
From the or a consolidation into the top two or three providers. Most of that has come from probably the European peers. So we're very pleased with the performance Im very pleased with the position.
You might also be referring to there has been shipped obviously from the European into the us banks.
In some of the prime brokerage balances.
And other parts the equities business.
We always look at business opportunity in terms, what kind of returns we can get so we're not just trying to drive share we're trying to drive profitable share.
And as John said, what we what we look at a global numbers not no regional numbers frankly.
Okay, I can that I mean, when I look at your relative to the U.S.P. as you about 31% in Fourq, you and it's down to 27%, but what I hear your point on fund.
Global versus Europe , maybe switch into wealth management.
Just on as it were commission discussion on the online brokers know.
No trying to get exposure here I do appreciate at its probably small but it just be helpful. If you could detail how much you make on ticket charges and if you'll hear any pressure from the field to sort of would use any sort of trade.
Treat ticket charges.
I mean.
I don't have the details on how much we make but taken we don't really we don't really look at it that way because obviously Christian as you know very different types of businesses within it whether it's for.
300 million dollar family office somebody liquidating, a large concentrated position or the average investor.
Selling a million dollars of stock.
Or 100000 of stock or whatever.
So it's it's just not that's not really the way we focused on the certainly I've heard nothing John have you had anything from the field nothing I don't think on noise from the field and again I think that the business model is different here and you know our clients are looking for more than zero dollars trades, they're looking for the value proposition that we put forth and.
We havent heard anything really from the field advisor, who is working hard and is paying but being paid by commission rather than by management fee. Once you get paid I mean, that's that's the deal right.
It's not a not for profit so they're not exactly calling up in saying take away our revenues from us.
I want to get paid fairly for the job that they're doing so I'd be very surprised if.
We had any feedback on that.
Thank you next question comes from Glenshire with Evercore ISI group.
And is now open.
Thank you first one on wealth management please.
So the four trillion held the way I get the Solyom piece straightforward and then motion of the two and a half ish held the way in wealth management accounts I'm curious if you could talk to some of this more specific things you're doing to incent clients to consolidate with you I mean, we're seeing part of it but each quarter, but that's it.
Drop in the really big buckets I'm, just curious on the tactics.
Sure I.
I mean, it's really around again, the volume value proposition, but also a lot of the technology investments.
That that we've made clearly portfolio construction and execution costs have been commoditized.
And so we're trying to provide financial planning and service to our clients.
We're really doing it with our technology around four places.
Hi.
Service relationship management and asset acquisition on the asset acquisition side I would say the best.
Are the most impactful technology, we have is really around both asset aggregation and our risk analytics.
Allows us to do stress scenarios in testing real time, so it's not paper based.
On different scenarios and look at concentrations and once we have a much better picture of all our clients assets with our asset aggregation tools. We found that we've had an ability to attract more of their assets. So it's really around the technology that where we're developing to try to drive that asset acquisition and then we've enhanced our digital experience.
We're enhancing our client experience and we think all that leads to a better.
Better ability to attract those those assets. The other last point I'd make is those assets in the and the high wealth or the high net worth bucket are actually growing quite fast as well. So it's not only the incremental assets. They have outside of the firm, but there are assets inside of the firm and their wealth of growing quite quite quickly.
And our use are you still periodically.
Doing specials, if you will on on cash management products to to bring over assets in a low rate environment do you still have room to reduce wholesale funding and bring in.
Some more deposits.
Yes, we do I'm not we're not really your comment around specials.
We've developed a new high yield savings account.
Which more tracks.
Sort of fed funds, if you will we've seen great receptivity to that.
I think about $12 billion of new money is flowed into into Morgan Stanley in the last two quarters.
And that does come in at an attractive rate relative to the wholesaler the CD market. So there's a good spread there so.
We continue to develop the products and we've seen really good receptivity.
Thank you. Our next question comes from Steven Chubak with Wolfe Research. Your line is now open hi, good morning.
So.
Wanted to start with a question on the capital strategy and James you have to indulge me I'm going ask step have been deeper into that hit by the head of the FCB implementation and big sticking point with many investors is the higher CTG, one burden, which at 16%. It's 250 Bips above your next Pierre that gap translates into roughly a two.
Hundred basis point drag on your returns so certainly hasn't material impact on the valuation I know you've spent many in occasion talking about the shortcomings in the models, we looked at Pryor transcripts, I think going back as far as 2014 publicly but despite those efforts, we really haven't seen the progress.
Given the slow progress as ever that if the fed doesn't seem receptive to the changes I'm wondering can give us some context as to what alternative actions you can take to potentially reduce that capital burden.
Well I Steve.
I think you want to give the fed a little bit of credit here I mean, they're actually has been progress the.
Just the the change in the rules around and I'm not talking specifically on Morgan, sending from us, but the changing rules around.
Which banks.
Designated as systemically important.
The change in the qualitative.
Yes to the taking away the sort of qualitative hurdle and just relying on annual supervisory led as the changes that have taken place in the Volcker rule more transparency that came through the last see car proposal the openness of the fed to consider not counting buybacks and dividends against that.
Capital basis.
And the potential removal of the leverage ratio was sort of the gating constraint on firms capital positions.
The movement towards CNCB structure.
And when we see how will this plays out and as I said earlier I forget to us.
The question I think it was gerrard, how we sold is playing out.
We will then we'll have a better sense of what our capital needs are as I said, they know coming up that much.
Confident about and I don't think this thing flat and then you look at iOS and critically at Morgan Stanley Obviously were affected by the leverage ratio were also affected by the PPNR modeling in the expense.
Structure within the models where.
As I sit on the last call.
We find quite a disconnect between what we.
Doing on what the models would suggest our expenses were doing a time of systemic stress and Thats a discussion, we're having very openly with the fed them for the first time. This year, we have some transparency as to where the source of that differences, which enables us to dig in on it.
There is a different openness for 10 years into this for addressing some of these issues at the Federal reserve obviously, there's different.
Leadership on the supervisory side from the last 10 years, and I think it's prudent to step back and and fair whats right for the industry. The financial sector is critical to the health of the economy, having banks propylene Capoulas Samad overcapitalized is essential for them to grow their balance sheets and provide lending capability to businesses and individuals. So.
I'm not going to again I'm not going to take you bait and try and get into you know what if the next because I don't know where are we going to be in the next couple of months I'd, rather wait and see that.
We have shown a willingness to adjust our business model over time, and I think the build out of the wealth management, which is was clearly part of that strategy build out of asset management as part of that strategy and the stabilizing revenues within the institutional businesses, we've gone away from the prop trading on the mobile auto parts of the.
Fixed income franchise so I.
It may not set aside, but I'm not going to get into a guessing game I'd, rather see with the results are and so we're dealing with and then deal with it.
Okay Fair enough I appreciate all that color James and just one follow up for me on that I.
Based on the forward curve its pricing and roughly two cuts through 2020 I'm. Just wondering if you can give us some expectation for what that I trajectory might look like for four to you and 2020.
Why don't I try to take that and I think for Fourq you.
Given that we've already had to rate cuts last quarter.
The benefits of the higher loan growth or excuse me the higher loan balances as well as the stabilization of the BDP will be more than offset.
By where rates are in terms of the absolute level in terms of next so thats a fourth quarter look so a negative bias towards Eni and then obviously as we get into the fourth excuse me when we get into next year we'll.
We will give you some more thoughts around it there's just a lot of variables right now, but clearly a low rate and a declining rate environment puts negative pressure on anti.
Yes.
Our next question comes from Devin Ryan with JMP Securities. Your line is now open.
Okay great.
Just I guess first one following up on Stephen's question. If Eni is moving lower how should we think about I guess the comp ratio in wealth management all else equal just given.
The positive comp dynamics that creates.
I think as we mentioned in the in my script Compensable revenues, it ticked up a little bit as a percentage in so that will.
Impact the comp ratio, but we're very disciplined obviously across the platform.
Specifically in wealth management around comp.
I think you'll see sort of some stabilization, but the mix is the mix is important.
Okay, Thanks, John and that I, just a follow up here just within investment banking. So you mentioned in the script backlogs are healthy.
It does seem that the equity underwriting backlog, it's been stronger, but some of that keeps getting pushed forward and then the M&A outlook still seems seems constructive but as we move closer to us election, Im curious if you're hearing anything around corporate sentiment. There. So maybe if you can just talk a bit more about the tone within the various investment bank.
Businesses right now and anything else you can add around for the near term an intermediate term outlook as we move into 2020.
No it's John .
And that in as seen Divas, a former investment bank.
I guess, you're always going to both right.
So.
I mean, the discussion Ceos there are obviously concerned about the direction of the trade talks and that this stays within sort of guardrails of reasonableness.
Nobody wants to see global economic slowdown.
On the other hand financing is cheap.
People remain confident about the us economy and transactions getting done and I think there is that the backlog as being healthy the advisory numbers was strong.
As you pointed out some bcm numbers.
With some of the deals of came to market of the last several months and things that got pulled that that has put a little bit of up.
Dampener on that on the other hand, we made a major push and with that DCM business and I think you saw results I think I share was around 14, 14%. This year this quarter.
Which is the best share we've had for so many is so.
I think there is there's still a sense where.
Despite all the nice thing and all the news and all the pundits. The reality is the US economy is in good shape.
And the consumer balance sheets are in good shape people continuing to spend the earnings come out in the last week also demonstrated.
Very solid performance across the board so I.
I think it remains stable John I didn't know if you disagree on the yes, or no I would agree and I think.
As James mentioned CEO still feel pretty good about where they are.
And at some point you just can't wait for every unknown to settle down and what we've seen a ceos have strategic imperatives and initiatives that they want to execute on.
And they're doing that because some markets are constructive.
M&A market continues to be active we think we'll have probably another three and a half trillion dollar type year, which is a very healthy M&A market and there's the potential to do that again next year. The lot of the ingredients behind M&A around a search for growth and scale and synergies.
Elbow and sponsor activity all thats still intact. So.
Healthy environment now, we can have a dislocation or break.
And the market, but right now the healthy pipelines are healthy and the market is constructive.
Thank you. Our next question comes from my carrier with Bank of America. Your line is now open.
Hi, Thanks, good morning.
As you mentioned upfront from the market share opportunity that you still see you provided some color on the four trillion wealth management.
Yes, just on the institutional Securities you guys have done well over time, what initiatives in place now to increase year, whether it's on the banking side or the trading side.
Yes, I think as in the simplest you've sort of highlighted our growth strategy is right. We're clearly trying to grow assets. Both in the investment management and the wealth management business and where we're looking to grow share and I SG and I think it's just a lot around execution, we continue to see opportunities in Asia.
We continue to see opportunities within investment banking to consolidate share and as I mentioned in and equities, we continue to see more share go.
To the to the to the top providers, who offer a differentiated service. So we feel good about the momentum in that business, we've gained probably three or four points in and share and all of the I.S.G. business combined in the last several years, we like the momentum and assuming the market stays constructive we believe we could.
Venue to build share across all three segments.
Hi, just a quick follow up on the last question just on confidence and activity levels, you mentioned trade.
On the Brexit side, we get some follow through here.
And on the news this morning.
How much of that weighed on activity, particularly in Europe versus the trade issues.
Brexit specifically you know, it's probably most impactful in the UK.
We did see some softness they are not dramatic.
It would be nice to get something resolved obviously the market doesn't like uncertainty. So hopefully this story. This this deal will get approved and we'll get well get executed and that will be taken off the table I think though the European results were probably more impacted just about the global growth dynamic.
And what's going on an individual countries and Brexit per se.
Thank you, ladies and gentlemen that concludes your conference call for today. Thank you for your participation.