Q4 2019 Earnings Call
We're really.
Please refer to our nobody says regarding forward looking statements and non-GAAP measures that appear in the earnings release and strategic update.
This presentation may not be duplicated or reproduced without our consent within the strategic update our reported results for 2014 has been adjusted to exclude several significant intermittent item.
Which were highlighted in our 2014 annual report on Form 10-K .
Likewise, our reported EPS and ROTC he metrics for 2019 have been adjusted to exclude the impact of intermittent net discrete tax benefits.
These adjustments were made to provide a transparent and comparative view of 2014 and 2019 operating performance against our strategic objective.
A reconciliation of these non-GAAP adjusted operating performance metrics are included in the notes to the presentation.
Well now turn the call over to Chairman and Chief Executive Officer, James Gorman.
Thank you try and good morning, everyone. Thank you for joining us.
2019, with the strong year, representing one of the best in our history results were within our target ranges with contributions from each of our business funds.
John will discuss the detail to 2019 in a moment, but first let me take you through our annual strategic update presentation.
Please turn to slide three.
I think about Uptimes transformation in five year increment.
The first five year period, we worked aggressively to clean up the issues from the financial crisis.
They belies the fact.
Integrated Smith, Barney into our franchise and reset our strategy.
Over the next five years, we made significant investments in that business run digitalization technology talent and the balance sheet. We grew revenues by 20% well, we managed expenses tightly doubled net income.
Generally increased capital return.
ROTC now stands at nearly 13% and EPS is more than doubled excluding intermittent discrete tax benefits.
Today, we will discuss the next phase of evolution.
The goal continues to be the shift that business further emphasizing more durable sources of revenue within institutional securities and from wealth and investment management.
The continuation of this evolution shouldn't by design helps support a base level of profitability during periods of market disruption.
Drilling a little deeper into this throughout this decade long journey, we defended and expanded our institutional securities footprint, which we show on slide four.
Outbrain is closely tied to our institutional presence and leading integrated investment bank.
Our Premier institution franchise remains a key competitive advantage, which has allowed us to take share and grow revenues. Despite a shrinking wallet.
At the same time the contribution from wealth and investment management continues to grow as shown on slide five.
The last five years, we've increased the profitability about wealth management business, while still making investments in the U.S. banks in our modern wealth platform.
Of particular note.
100% of business days, we have revenues greater than or equal to $60 million nearly three times that which was five years ago.
We also invested in our investment management platform, we put together new growth oriented leadership team and focused on client solutions and new products.
We highlight the growth in long term net flows which reflects strong long term performance.
With combined revenues of approximately 21 billion.
Our wealth and investment management businesses are among the largest platforms in the world and now we have an untapped opportunity to further scale, our wealth management channel throughout workplace offering.
[noise] meeting these ambitions for future growth would not be possible without a strong culture and a cohesive team.
On slide six we describe that culture and the tenure of our leadership team.
We have an eight year track record of stating in meeting various public goals.
We continue to invest many cleanup co trend diverse diversity efforts to ensure we remain an employer of choice tread top talent.
And further moving sending spend at the forefront of sustainable finance.
We found that global sustainable Finance group over a decade ago with the mission to accelerate the adoption of sustainable investing across capital markets.
I want to spend most of my time, providing a bit more detail about the future opportunities very excited about and that we see across our franchise.
Across our segments, we applied phones at scale benefits and wait position for growth, let's start with institutional securities on slide seven.
Our institutional footprint in fact truck franchise is extremely strong.
In the face of a declining while that we've gained share over the last five years across our institutional businesses and we have reasonably these gains is sustainable.
Our business has benefited from the stability of the leadership and commitment to global client footprint.
We expect to continue to hold and gain share across the division.
On slide eight we take a deeper look at wealth management.
2020 marks a new chapter now wealth management strategy.
The significant investments we make in the digital space the acquisition Solyom position us to fig efficiently serve as the mass affluent population and capture new clients and assets through the workplace.
Moreover, we can leverage the corporate relationships built through our institutional offering as we look to add new corporate clients.
We've completed the Morgan Stanley at work offering to span.
Beyond just share works by Morgan Stanley as stock planned administration platform for enhancing the best Sina financial wellness and retirement offerings.
This more fulsome suite of products allows us to deliver services to an even larger base of employees and this will help ensure that touch points not limited to stock plan participants.
As illustrated on this slide we're continuing to win new mandates. The combination the stated the Shandwick's platform and the Morgan Stanley wealth management capabilities is being very well received in the marketplace.
We expect to fully convert all of our existing corporate clients to the Mogens anyway model by the end of 2021.
To date, nearly 40% of those plants on the legacy Morgan Stanley system have been transition to share works and the remainder will be accomplished by year end 2020.
And by the end of 21 individual employees about corporate clients will gain access to financial coaching exclusive educational content and our self directed brokerage offering providing them with an introduction to our wealth management services.
Over the next five to seven years, we expect to convert over 1 million employee participants to Ida wealth management digital or advisory channels, adding to the more than three mean client relationships we have today.
Well be able to provide a compelling offering for all that relationships servicing the ultra high and high net worth segment with financial advisors and more mass affluent clients without virtual advisor or digital solutions.
Moving to slide nine.
We've been clear that we believe that supporting a buzz is cutting edge technology, and enabling them to deliver unique product instead of services declines will be our competitive advantage going forward.
The investments made with that digital initiatives have been embraced by our advisors and anecdotally. These tools is supporting asset consolidations.
Additionally of course, we've seen over 250 billion of assets flows into buys you have the last four years and continue to believe that at least half of that client assets will migrate to advisory over the medium term.
Let's talk about investment management on slide 10.
The asset management sector is but very large and extremely fragmented.
Lending itself to opportunities for growth in areas, where we believe we can deliver differentiated value to our clients.
And the me one of the most exciting things we've done to capture this opportunity is product innovation.
Illustrated by the number of new products we've developed.
These products abroad, no revenue base made us more relevant across the client spectrum and translated into material revenue and asset growth.
Since 2016, we've launched many new products successfully leveraging our global client franchise.
We've already seen significant contribution from these products generating 19 being of incremental assets under management and almost 500 million of incremental revenue in 2019 versus 2016.
These strategies can take continued new product launches and investments in our client franchise more broadly will be a very important component.
Due to growth.
Another key driver of growth is our existing diverse alternatives Cline client franchise.
See on slide 11, our attendance con platform is at scale.
And there is strong secular growth in private alternatives.
In addition to new private no 10, new product launches noted on the Pride page, we're seeing strong organic growth in our existing high performing private funds.
For example, our infrastructure number three fund, which closed in the in the fourth quarter is 50% larger than infrastructure to raising five unhappy and of institutional capital versus 3.6 billion respectively.
Further we can see continued to see very strong organic growth and a premier Institute institutional core real estate strategy.
Our elfa products across both private and public markets as well as our world class Global solutions capabilities will be critical contributors to investment management revenue growth.
And that public active equity strategies as strong performance and global client footprint has driven robust net flows.
We believe we ranked number one in organic growth since 2017, among the top publicly traded active equity managers.
Let's turn to slide 12.
We expect that these in all our other growth initiatives along with expense discipline will drive further ROTC expansion.
In 2015, we communicated the we believe we would capital sufficient.
It since that time, we've continued to deploy that capital to meet our strategic objectives.
We look forward to the transition to the new capital regime, and expect Mogens Sandy will be able to return excess capital to shareholders, while continuing to invest for future growth.
Our robust capital position will enable us to pursue opportunities to invest in the franchise and return capital.
We're confident in our ability to deliver a two year ROTC expansion to 13% to 15%.
I will conclude with our updated strategic objectives.
The targets, we expect to achieve in 2021 as well as our longer term aspirational targets as shown on slide 13.
We have meaningfully and within 10 transform this business into what it is today.
As we execute on the next phase of defense journey, the objectives listen here, assuming a normal market environment should result, as a natural consequence.
We believe than that in 2021 wealth management will be 20% to 30% pre tax margin business.
And we'll exceed 30% over time.
This business has compelling scale benefits.
Between core competency observing ultra high and high net worth individuals in our near expansion into the workplace.
There is clearly room to grow from here.
Yeah on wealth management, we're making number numerous investments across all about platforms to enhance the digitalization meth.
And overall technological capabilities, giving given our scale and other efficiencies.
We have largely been able to self fund these investments.
Between this some revenue growth, we expect to achieve an efficiency ratio, 70% to 72% in 2021 and below 70 in the long term.
As a result of these and all the other efforts we expect our return on tangible common equity to rise to 13% to 15% in 2021.
And over the long term, we aspire to have a return on tangible common equity 15% to 70%.
Given our established track record our competitive positioning that continued investment into our business. We're confident in our ability to achieve each of these objectives I'll now turn the call over to John who will discuss at fourth quarter, an annual results and then together we would take all of your question. Thank you.
Thank you and good morning.
The from produced a record level of revenues in 2019, we had strong momentum through the quarter and finished the year on solid ground in the fourth quarter from revenues were $10.9 billion, increasing 8% sequentially contributing to full year revenues of $41.4 billion.
Fourth quarter PBT was 2.7 billion, an EPS was $1.30, resulting in an era, we have 11.3% and ROTC of 13%.
In the fourth quarter severance expenses of $172 million related to a December employee action and intermittent net discrete tax benefits of $158 million largely offset each other.
For the full year, Aro HBV was 11.7% and ROTC was 13.4.
Total non interest expenses were $30.1 billion for the year.
Non compensation expenses were essentially flat to 2018 at $11.3 billion, demonstrating our ability to self fund incremental costs related to absorbing and integrated integrating solyom and increased technology investments through continued discipline over our more controllable expenses, particularly.
Marketing and business development and professional services.
We continue to actively review efficiency opportunities, including optimization of our global workforce through reduce dependence on contingent workers and leveraging our global and how centers.
We also see opportunities for vendor consolidation across the firm over time.
This focus will result in continued momentum to control our non compensation expenses and help us achieve the objective that James just discussed.
Compensation expenses increased 7% on a full year basis. This rise included severance charges and significant movements in deferred compensation plans as well as increased revenues.
Our full year expense efficiency ratio was 72.7% below our 73% target.
Now to the businesses.
Our institutional securities business reported revenues of $5.1 billion, marking the best fourth quarter and over 10 years results were driven by strength in investment banking, especially advisory.
Additionally, we did not see the seasonal slowdown in sales and trading or underwriting typical of a fourth quarter.
For the full year I asked GE revenues were $20.4 billion slightly below last year's record level.
The compensation ratio for the quarter rose to 40.7%, reflecting $124 million of severance related to the December action and the impacts of movements in investments associated with an employee deferred compensation plans.
After considering the impact of these items the fourth quarter compensation ratio was approximately 36% and looking at the full year again after considering these adjustments the compensation ratio was under 35%.
DCP create some volatility in this ratio, but as we have said many times in the past it has a very limited impact to the bottom line.
Investment banking had the strongest fourth quarter in a decade generating revenues of $1.6 billion the sequential increase.
To me the sequential increase was driven by strength in advisory and seasonally robust results for underwriting.
Overall pipelines are healthy across products the pace of M&A remains strong and we would expect the period of activity to extend the global equity pipeline remains robust as many issuers target capital raises in the first half of 2020, particularly across healthcare consumer and technology as it.
He said before the conversion from pipeline to realize remains dependent on market condition.
In equity sales and trading we retained our leadership position and our number one globally for the sixth consecutive year.
Fourth quarter revenues were $1.9 billion down 4% sequentially strength in the Americas was offset by declines in EMEA and Asia.
In cash we continued to expand our share across regions, which partially offset the impact of glow our global market volumes.
Prime brokerage performed well as client activity rose during the quarter with equity markets trending higher and derivative revenues declined sequentially as lower volatility weighed on results.
Fixed income sales and trading produced revenues of $1.3 billion down 11% from robust third quarter.
We continue to deepen our relationships with our client base results were driven by strong performance across the credit complex.
Micro produced another solid quarter with well diversified performance.
Healthy levels of client engagement supported results, we continue to invest in our secured lending businesses, which performed well and witnessed increased client interest from commercial real estate products.
Balance sheet velocity remains a focus in this business and on a full year basis improved from the prior year.
Macro results declined versus the third quarter due to lower client activity.
Commodities revenues also declined sequentially, however, client activity and further geographical diversification of the revenue mix supported results.
On a full year basis fixed income was up 11% strong performance in micro outweighed the decline in macro were difficult environment weighed on results in FX and rates.
Turning to wealth management.
We reported fourth quarter revenues of $4.6 billion and pre tax profit of $1.2 billion, resulting in a PBT margin for the quarter of 25.4%.
Strong revenues were offset by higher seasonal expenses as well as a $37 million severance charge, which had an 80 basis point impact on the margin.
On a full year basis, the PBT margin was 27.2% representing 100 basis point expansion over last year.
The business continues to illustrate the benefits of scale, while investing in this business and absorbing the solyom expenses non compensation expenses declined 3% from 2018.
Transactional revenues were $829 million up 39% sequentially.
Results were principally driven by gains.
And investments associated with employee deferred compensation plans as well as improved retail engagement.
Asset management revenues were essentially flat versus the prior quarter.
On a full year basis asset management revenues were also flat as a large market decline in Q4 2018 impacted first quarter results.
Total client assets of 2.7 trillion increased 5% sequentially and 17% versus the prior year reflective a broader market movements.
Over the last several sheet several years, we have seen net new assets of approximately 4% a beginning period client assets.
While these flows or an indicator of the health of the business. We continue to believe fee based flows are more relevant driver of near term results.
We had $25 billion a fee based flows in the fourth quarter a record.
The shift towards advisory continued and fee based assets now represent 47% of total client assets up from 45% last year.
Loan growth continues to be strong across products lending balances increased to $80 billion or 11% versus the prior year.
We continue to see strong receptivity and our lending offering our investments into technology had better enabled our advisors to identify clients, who would benefit from our lending product suite. This has been especially effective in securities based lending.
We expect to continue to see strong receptivity, resulting in loan growth.
Mid single digits in 2020.
Total deposits rose, 5% sequentially within our bank deposit program, we have seen stable deposit level since may but the seasonal uptick in the fourth quarter, we continue to invest in new banking products and our high yield savings product has also continued to gain traction our new money savings campaign has.
Raised close to $14 billion since its March launch.
Net interest income was inline with last quarter.
On a full year basis, Eni was up slightly including the impact of prepayment amortization.
Over the next year, we would expect the full impact of 2019 three rate cuts the realization of the forward curve and the continued diversification of our deposits to offset the benefit of our lending growth.
As James discussed, we will continue to invest in our workplace offering and also build out our us banks to drive further growth.
That being said, we would expect the margin to rebound nicely in Q1 from its fourth quarter seasonal low.
Investment management reported revenues of $1.4 billion in the fourth quarter for the full year revenues were $3.8 billion, representing a 1 billion dollar increase from the prior period.
Total AUM rose, 9% to $552 billion of which long term AUM was 356 billion.
We continue to generate strong positive net flows across major high conviction active strategies.
Long term net flows were $6.7 billion the strongest in eight years.
And we had another strong capital.
Raising year capped off with the close of our 5.5 billion dollar infrastructure three fund.
Asset management fees or $736 million grew 11% versus the third quarter.
Recall, a significant amount of performance fees are recognized in the fourth quarter.
Performance fees for the quarter were driven by strong results in our coal core real estate strategy and management fees increased on higher average AUM.
On a full year basis asset management fees increased 7% to $2.6 billion.
Investment revenues were up $565 million in the quarter and $1 billion for the year.
This line is primarily driven by carried interest which is earned from clients who are invested in our private private funds.
The increased this quarter and year was primarily due to an underlying investments IPO subject to sales restrictions within in Asia private equity fund.
This event generated a significant amount of accrued interest revenue the ultimate realization.
We will depend on the monetization of the underlying position in the fund.
As we have previously said this line is lumpy.
Other revenues were impacted by an impairment of a legacy equity method investment and a third party asset manager.
Total expenses increased 52% sequentially in particular higher compensation costs are reflective of higher accrued carried interest compensation, which was primarily related to the event I just discussed.
Non compensation expenses were driven by higher BC any expenses related to the launching of new products and reflecting our continued investment into this business.
This business continues to grow and we expect it will be an increasingly meaningful contributor to total from earnings. We continue to look for organic and inorganic opportunities to grow this business too and to effectively meet the needs of our clients.
During the fourth quarter, we repurchased approximately 31 million shares or $1.5 billion, a common stock and our board declared a 35 cents dividend per share.
After considering 158 million and $348 million of intermittent net discrete tax benefits, our tax rates were 21.4% and 21.3% for the fourth quarter and full year respectively.
We expect our 2020 tax rate to be slightly higher or approximately 22% 23%.
And will exhibit some quarter to quarter volatility.
Taken info, we're pleased with the firm's results this year.
We enter 2020 with asset levels at new highs healthy pipelines constructive markets in good engage clients and a rightsized expense base with that we will now open up the line to questions.
Thank you ask a question you will need to press star one on your telephone.
The which I question the pound.
And just the time, we ask that you. Please limit yourself to one question and one follow up.
Next question comes from Glenshire with Evercore ISI.
Line is now open.
Hi, Thanks very much.
Just curious within your two year objectives what.
Particularly on the ROTC what capital return assumptions are incorporated into that is that steady state now or any changes from what we've seen the last couple of years.
Well I guess just from a tactic technical standpoint is we havent seen the new proposals.
Which we think are forthcoming it's sort of hard to say what the future return profile looks like other than it will be consistent with what we've done prior until we have more information.
Okay.
Fair enough on the gain.
And that investment management, I guess IPO out of a private equity fund I'm assuming there's.
Standard lockup and illiquidity discount.
Can you tell us what what's that.
Company is so we can track at so we don't have surprise ups and downs every quarter.
I'll give you some more information on that but first I'd clarify there is no illiquidity discount there.
The company is public and its mark to the stock price on a daily basis.
And you mentioned it is in the Asia, one of our Asia PE funds. It was an investment we made.
More than six years ago, or the fund made more than six years ago into a China consumer products company.
The company has been quite successful and grown quite nicely and it went public in the fourth quarter on the Hong Kong exchange and the IPO has performed quite nicely.
To give you some.
Sort of context around the round numbers.
The investment that we made was less than $50 million and the current investment value added approximately 2 billion.
So we have not only the carried interest we also have a small LP and investment in the fund and so the ownership and carry is going to be fluctuating until we have the underlying.
Investment monetized.
So as a as of today, we're comfortably above the preferred return threshold in that fund, but as I said before it's an unrealized gains. So we'll have more volatility if there is volatility in the stock price.
So just to sum up given the size and given that its public we would expect a little bit more volatility in that investment line and I am.
I would also expect corresponding volatility in the I am compensation line as the investment team has about half of the carry typically.
Thank you. Our next question comes from Christian Bolu with Autonomous your line is Alex.
Okay.
Good morning.
Maybe a question on wealth management I believe you made you recently made some changes to the calm grid that should be beneficial to wealth management measurement management margins certainly next year.
I think longer to the question is longer term can you keep pulling the comp lever and I guess I look at the industry and what's happened over the last decade whatever its.
The warehouse consolidation.
The demise of the Brocal protocol.
More clients stickiness because of lending then technology. It feels like you can do that support but curious to get your thoughts on usan ease into grids to arm to drive margins over time.
Well, let us I'll take that when we're not we're not using the grid to drive margins, we use the grid to drive behavior to help us, but do better dealt with our clients. So.
Most of the changes of the grid over the last decade of being designed to do exactly that they have supported.
As a based accounts of support of working with the most sophisticated complex clients.
Supported larger produces soup and growing their business so.
I don't think of the grid as an expense item I think of the grid as frankly, what what really reflects what we're trying to do with the business and the best advisors embrace that and.
Okay, great stability among the top advisors as a result, but so Christian the the changes this year were modest and but within the changes that are under the covers their most significant changes as you move.
Compose effectively from one set of behaviors to another and ultimately the goal is to continue to professionalize.
The financial by so workflows, which is fantastic group of people.
And being transformed in the last decade from producing something like 300000.
Revenue do over a million revenue per person and that the grids got to be aligned with their interest as well and that's that's something Andy in the team a very focused on.
Okay. Thanks.
Maybe just to get back to the question I think glad asked earlier on because because to the ROTC target does stand out to 15, 17%. It is it does catch ones I.
Can you just maybe just help clarify.
What's the level of capital you assumed you assume like the absolute dollar of capital level will go down over time and Thats, how you get to 15% to 17% I just would be great to get that sort of like clarification.
Yes, I'm, probably going to disappoint you Christian to not give you exactly what you need for your model to produce that answer.
We run the business based upon a myriad of things that we see from global economic growth to market share we have in each of our businesses to the capital we using to prosecute our earnings in those businesses, our ability to drive efficiencies across the group net of investments that we're making and we're currently running in ROTC around 13%.
And so the two year objectives feel like it's there's no compelling reason why would go below that.
In any individual quarter of course, these things bounce around as you've seen in our numbers over many many years, but over over that time period. We think the fit into 15 is a very reasonable expectation and assuming normal market condition, we will deliver on that the longer term aspirations are really speaking to where we see embedded scale, we haven't at various businesses.
While the longer term growth projection looks like our ability to manage our expenses, you'll see a non comp year over year were essentially flat this year.
Rich.
Mostly is pretty impressive given that we are investing a lot of parts of the business. So if you just if you just roll the math for to make reasonable capital assumptions, you get to those ROTC numbers of 15% to 17%.
There is as always through the seeker and the capital process I kind of wildcard how much do asphalt.
What's the stock trading at when Youre doing your buybacks do increase the dividend.
Are we going to make other acquisitions or investments along the way there are lot of things that drive the longer term, but what we're trying to set when we said longer term is what do we believe.
The potential for this businesses many many years ago, when our wealth management margins around 10 or 11%.
We set a target, 15% and I said publicly I thought they could get to 20% and obviously, we exceeded that and the whole transformations business helped on that many years ago. We said in our we target of 10% when I think our we was around two 4% and we are constantly outs on this call when you're going to get there like the kids in the back seat.
In the causing when are we going to get there when are we going to get there and we kind of got there and feeling now is there is no compelling reason with normal economic growth.
And good discipline around expense management, and the bit embedded Scotland businesses and the strength of the coccia why these returns shouldn't be achievable over a longer term period.
Thank you. Our next question comes from Brennan Hawken with.
Your line is now open.
Good morning, Thanks for taking the question.
Question on the pretax margin target here in wells over the next two years.
Good to see you guys expecting a nice step up could you talk a little about the market and revenue assumptions embedded within that target and.
This point you guys seem to have implied generally.
Especially with your comments, just just a minute ago, James that about non comp flattening out here in 2019 that.
We should be expecting self funding of investment.
More stability in the Noncomp as opposed to the growth of prior years is that fair.
There's a couple a couple of questions in there I think when we think about.
Our budgets, we generally use can sort a consensus views on markets and rates.
And that's what we've done here.
28% to 30% margin target is as you said is as it is a nice improvement and continues to trend.
It also gives us the flexibility to continue to invest in.
In this business, which we will continue to do around our share works platform in the Morgan Stanley at work.
Yeah.
We've done a lot of work around the digitalization, which James talked about which is critically important to the customer experience in the client experience and we'll continue to make investments there and so I don't think.
There is any outsized expectations around markets, where rates just what we see in the consensus you going forward I.
I think brand and where I think that we finished the or a 27, two obviously the fourth quarter and somebody probably ask us about it. So I'll address the write up was 25 and change.
There's some seasonality we had some severance expenses in the DCP and other stuff so.
As I said before these things will bounce around quarter to quarter I can't guarantee with the first quarter is going to be the second quarter to quarter, but but over full year, where 27, two with normal economic growth, what we've done with the business I think the 28%.
I'd be disappointed if we noted that I'll, just put that out that kind of beehive and thats why we put a range on a do we think it's going to be over 30%. The next two years no we do not.
I think we've got to we've got to be responsible when we set these targets about what we think is a is a likely outcome not.
Hi.
Three standard deviation outcome, what is the likely outcome and coming off a 27.2 margin 26.2, I think the year before.
Exactly 25.
It's kind of grinding high wise it granting high well as you bring incremental revenues in the incremental margin on the incremental dollar revenue is higher than the embedded margin. So it will grant.
Sure sure Thats.
That makes a lot of sense clearly this OEM should also assume acquisition and integration should also help to appreciate that.
I think you made reference James in his comments too.
What the underlying margin might have been.
In the fourth quarter.
No I think John you said 80 basis points from severance and well. So that gets you to 27, there was some DCP, but I don't think you talked about what impact that would would have had on wealth management margin. If you could please let us know that and just a request maybe I know it doesn't impact the bottom line, but the DCP creates some noise around.
Some of the underlying metrics, which makes it it can blur investor visibility into the underlying trends it'd be really helpful. If you could disclose that are considered disclosing that going forward.
Yes.
So just I appreciate the comment and we continue to give further thought to that.
We do give.
A reasonable amount disclosure in the K around that we try to highlight it.
To you when it's a meaningful contributor based on meaningful swings in the marketplace.
Across all the businesses as I've said before that PBT impact is not material generally speaking and dollar event revenue versus the dollar of comp expense.
Our fourth quarter comment, though we generated 25.4, I think you said with the 80 basis points, we'd be at 27, obviously, we'd be a 26.2 and then by definition.
When you look at all of these ratios.
They are negatively impacted by that dynamic is effectively one for one it's not precise but thats, what we to simplify had been using and.
Again appreciate the comment and we'll we'll we'll give it some thought but we obviously feel very comfortable with the with the new targets that we laid out at 28 to 30 on that margin.
Brent and you make a good pointed it creates noise I mean, I remember the old days when we just after the deal with the VA on these calls which would move I think one year moves $6 billion.
And that sort of bizarre impacted head on financials. Fortunately, we got we managed to clean that up.
The DCP I mean, the funny thing is it's kind of good news story right.
You actually wanted to be missing with the numbers side. This in a positive way because it means the stock has done well, which people invested in and the markets are doing well. This was the aware what was the S&P was up 25 and the stock. It was up 20, 829%, so pretty unusual year and Thats why I think we're seeing the outsized on this year I wouldn't.
I mean listen if that happens in 2020, I'll be delighted and I don't mind the noise. If we could if we get that outcome, but.
Ill leave it to the accounting and controlling team to figure out what the right disclosures, but that's where we are.
Thank you. Our next question comes from Steven Chubak with Wolfe Research. Your line is now open hi, good morning.
Morning.
Appreciate it some of the additional disclosure on the wealth management conversion target.
Share work, certainly that's an area, where they're significant interest poses solyom deal I recognize it's a five to seven year goal. So you certainly have a lot time to execute on that conversion target I was hoping that you can maybe help us frame. How we can think about either the incremental revenue or even just a you and growth opportunity over that horizon.
If you ultimately execute on that goal and just separately do you expect the pace of onboarding to be somewhat linear or is it going to be more back end loaded.
Let me let me try.
To answer that I mean, a couple of things one first of all we had so it was only in our results for eight months. This year I think we've mentioned before that it was dilutive to PBT. So obviously dilutive to margin will have the full effect of the of the acquisition.
This year, which will also be dilutive to margin.
And to PBT and then we would expect it to turn.
Potentially pbteen neutral to positive and then to build over time and improve the margin.
The conversions are those several stages as James mentioned, there is just making sure that we get all of.
The corporate clients onto the share works platform, that's accelerating that should be done.
This year and then integrating into the Morgan Stanley at work.
Morgan Stanley at work platform will take another year I.
I think we'll see sort of an acceleration.
Lets slow build if you will have converting.
Our Morgan Stanley at where clients into either the digital or advisory channel, but we think a million incremental customers on our current base.
Be quite attractive and a real nice growth engine.
Obviously, the potential for the different dynamics around the size of that client.
Whether its mass affluent versus ultra high net worth or high net worth will have an impact the asset levels and cash levels.
Net new assets, but again incrementally if we think we can bring on another million customers in five to seven years on top of our current.
This thing a base, it's why we're so excited about the opportunity.
Got it and just one follow up for me I was hoping you could speak to some of the underlying assumptions just specifically on the macro and maybe industry fee pool outlooks, particularly on trading and I'd be just supporting some of the near and long term return objectives.
Im sorry trading when you say are just now.
I'd be transatlantic investment banking fee pools, as well as some of the underlying macro assumptions underlying some of that return targets yet again, so I think that.
We'll obviously have to see where the pools come out this year when everyone finishes reporting and we get the data it looks like the polls are pretty stable I think from.
Budgeting I think from a budgeting standpoint, we generally think about those types of pools.
Growing with sort of GDP, so sort of very limited or sort of a couple of percentage point type growth in the pool.
Then we couple that with our view on investment dollars and share and share points. So thats generally the macro backdrop that we use.
For the for the budgeting, which will obviously track consensus views on GDP and us growth and so and so forth.
I'd just add I mean, we don't we don't talk.
Ironically as much about the institutional securities business, which is sort of being a core and now lineage.
Since our founding 85 years ago, but in each is that we have aside in there that shows in each of the five businesses.
Our debt underwriting equity underwriting advisory M&A equities and fixed income.
They are able to gain share over that five year period and this year. They delivered the fourth consecutive 5 billion revenue quarter. We've never had a year, where we've had full 5 billion dollar quotas I mean, what this business has been characterized by.
You know at least one and sometimes two pretty volatile and difficult quotas. Each year now we caught and it's obviously more vulnerable to market swings.
But I think what the team has done in balancing out the business.
Ted on the group have made it a much more stable.
Okay, and Ization I think within within fixed income the way that's been turned around.
Its ability to Sam and his team.
See it's it gives us more comfort that we've got a lot more stability embedded in the business from prime brokerage financing through to the M&A, which remains very stable.
Obviously, you're going to have volatility, but we think the shares a sustainable some places we could grow share.
But it's really a function of stability as well I'm very focused on for this business because the capital on the balance sheet.
I would say is stable it stays there so we need the revenues to be stable and thats what they delivered.
Thank you. Our next question comes from Mike Mayo with Wells Fargo. Your line is now open.
Hi.
Multi I'm wondering if your minimum targets are high enough.
Slide 711.
To highlight.
What you expect institutional securities.
And should continue wealth management can increase.
Clients there by one third I will be over longer timeframe, and Thats managed and new products, yet digital initiatives on comps.
I'm going well and reported 13% RTC.
Last year on year look for a minimum RTC at 13% so why not raise.
Minimum floor.
Mike.
We now go back a long way and I'd have to say your model of consistency.
I think I'm not sure we've ever had a call when you have an asphalt targets and.
It's hard to field defensive when we're talking about wealth management margins above 28% efficiencies at 70 plus percent an era tcs at 13% to 15%.
Listen to our job is to be as transparent and realistic as we can.
These targets have won significant caveat, which is the markets. If the world collapses, they will be very difficult to meet and we will not be the only financial institution struggling with meeting whatever public targets. They have out there. We don't run this place on the basis. The world is about to collapse and we have no evidence the 2020.
It's going to be a difficult economic it difficult politically potentially geopolitically, but certainly the economic outlook remains very very stable. So when we do the math and put the targets together, we do a based upon a balance between what is that downside in a normal scenario.
And what is a realistic upside over the near term longer term.
Great that's sort of its fun and it's interesting at its sort of saying what could we deliver aspirationally and that's probably where youre headed in the longer term part of that child, the right hand side.
But in terms of running the business and in terms of thinking through our capital deployment, a dividend strategy our compensation all of our investments that we're making we really focus frankly on the two year objectives and what I've always tried to do with these targets is set a range where the bottom of the range is what we should we should be able to deliver in.
All normal circumstances, the top of the ranges, obviously, a little most sporty so listen I would love.
For us to deliver on Youll more aspirational abuse, each year, but we can't we caught reliably.
We can't reliably project that so I don't think we should reliably predict it and if you folks want to model in different numbers. That's obviously your decisions, but we've got to do what we think's right.
And just to follow up slide seven any one is the expectation to continue to gain share I guess share gains in the European banks that your expectations for that to continue.
On the wealth management side.
The massive fluent you're going down market to the teeth.
Zero Commission for well and.
After a number of years.
Moving back from the lower end clients suggested you could address those two specific areas. Thanks.
Yes, well I think the way we use was sustainable share, we certainly don't see share going backwards in these businesses and there is clearly and different parts of the institutional business. We think we can gain share in certain regions in the world, where we're looking forward to getting out full China license, there and continuing to grow at our Asia presence for.
Sample.
So I feel I feel good about the sheer numbers.
You point out there there are different parts of the industry that are going through larger transitions now those kinds of things we were doing several years ago. So there is potential share upside no question about that we count model that because.
That would be that would be pretty aggressive, but you can certainly we certainly have from that the shale. We have now with that as is stable.
Normal market environment growth that obviously translate into higher revenues and we think there's some upside on share on the going down market I think about differently.
And for show a commission pricing has been going to zero in small trades for long time and there have been examples of that in the digital space for years, I think the move but that.
Schwab.
Made just accelerated what was something that have been happening for long time and their business models are not built around the secondary commission revenues that.
You and you and I understand.
I don't think about there's so much as going down market I think about it is opening up a new segment to Morgan Stanley .
There are basically three ways in which people.
Had their wealth management is through some sort of advice whether its.
Full service private Bank Trust Bank.
Independent financial plan, our financial advisors, and so on and we had very dominant that space. The second is direct digital.
And there are a whole set of new platforms, but there was some very established at scale players in that space and the third is the workplace and the workplace remains.
There are certain players have been very dominant then it but we think this is also very interesting space Solem gave us a leg into it.
We see a lot of financial wellness financial buys financial planning that can be brought to employees. If they are into a default digital account when they stopped plan service for example.
That's code of that's relatively easy for us to to drive on a digital in direct platform. So I see it less sort of characterize into is going down market them. All characterized since just expanding the universe declines there there are lot of people out there working companies, making good money.
Through the shape plans, they do not want or need one about large financial advisory teams that's for sure but that doesn't mean, they can have access to what Morgan Cindy can deliver.
Okay.
Thank you. Our next question comes from Matt O'connor with Deutsche Bank. Your line is now open.
Good morning.
I realize you don't want to give all the details on the expense adjustments related to deferred comp, but I guess I'm trying to get a sense of the for your efficiency ratio of 73.
As I think about kind of getting the 70 to 72.
It would be helpful. It's as you give us kind of the clean base for this year.
I'd now or I.
I guess is probably coming the K, but it would be helpful. Just to get that base and I guess my question is if you don't want you guys really just as we think about the efficiency improvement can you just elaborate a bit on the drivers obviously, it's a little bit of revenue growth.
As you talked about a little bit of growth and wallet in some of the efforts of the wells.
But just maybe elaborate on is there opportunity to bring the comp rate down.
And on the non comp is that about keeping it flat or.
On an absolute basis. Thank you.
So I think I've, given the comments and we've given the comments and we hear you on the DCP, So I'm just going to.
Yes, you can see from our targets that we've lowered the efficiency ratio, we had a little bit of.
Had a little bit of severance in there and again, the DCP adjustment would would be.
I would also impact that ratio slightly but I think when we think about expenses and expense discipline, we're talking about expense discipline across.
All categories of expenses, both comp and non Tom.
We allocate resources at the firm level, which is why we have a from efficiency ratio target. Some of these ratios get a lot of attention.
To them when they are if you think about the comp ratio with an eye SG, that's only 40% or less than 40% of our comp versus the totality.
The firm, we constantly have been focused on being disciplined on top and non comp what we will say.
We have been disciplined on comp if you.
The only things that we continue to try to do and we have done quite successfully is to pay our people competitively across all of our businesses and we tried to attract and retain talent.
But we're disciplined across all those categories when we get to the non comps we've been very focused on professional services at as we've grown our businesses and we've grown some of the digital and technology and digitalization in the firm as well as complying with the regulatory agenda, we rely.
On sort of contingent workers and consultants to help us build out this practice and as all of that has matured and turn more into DBA you. We've been able to rely more efficiently on employees, which is why you seem to head count grow.
Even after the December action and so we've been able to take out some expenses, there and optimize the workforce I mentioned vendor consolidation, we've done data consolidation in the past. So we're constantly looking for opportunities in the non comp space to continue to self fund and drive efficiencies and those types.
Of categories are the ones that I would say that we'll continue to focus on in the future and we all we have finally scene.
Some productivity gains around the significant investments that we've made in technology and digital and that's led to some of the actions we've taken as well.
I would just say something about the comp ratio and I think it's important to said.
Years ago, when we started on this journey the ice tea comp ratio was 62% I think if memory serves me in wealth management I forget what does but those will end. The sixth season, we had long term aspiration. Good I think wealth management down to 55 57.
And ultimately I see to 40, we the last time, we publicly said a comp ratio goal for US I think was in 2015, which was 37% and we've managed in the last three or four used to be under that sometimes 34%.
This past year was little higher and we had some stuff going on as we've all talked about but we also have started moving we've had a lot of contractors and contingence round the world working for us tens of thousands actually and we've decided as part of our restructuring offshoring would move some of those folks in as permanent employees more.
Stability with that we'd prefer a lot of reasons I don't need to go into this coal that then becomes part of the comfortable so.
I don't want to be tied to a comp.
Ratio when we really managing the firm for overall expenses, that's what we're going to manage for and there's a reason you're not seen new compressed shows in these numbers, but you're seeing a pretty aggressive efficiency ratio. We want the ability of many suffered for shareholders on best basis, and that's too.
Had the best people working most efficiently so.
When you will not see you know you're never going to see comp ratios in the 40% denies cig and that's it's you know we're not can do that.
But we just want to maintain flexibility to run the business and and not do goofy stuff like not make contingents employees, because we're worried that will affect the compressed show when in fact, it brings down the non comp ratios. So that's we're going to run the business on that basis, and we've been doing that for a couple of years, but I just wanted to be explicit about it.
Okay. That's helpful color. Thank you.
Thank you next question comes from Michael Carrier with Bank of America. Your line is now open.
Good morning, just a quick one for me just an investment management. So you guys have done well.
From product development and kind of growing that business. It does seem like on the private side. It's more of your assets. We can see it in the performance fees in the carry carried interest.
If you can quantify maybe how much of the LME now has the potential to generate carrier performance fees, just something thats, obviously hard to model, but you also probably don't get much credit.
Because we don't have kind of the magnitude of that so any more clarity around that.
Yes.
I would now again.
The different categories that we break out obviously the alternatives generally our where we're going to have carried interest or performance fees. We tried to give you some more information on that in this stacking.
Again, it's hard to model.
Because as we said that there is some lumpiness to it but we've had some really good performance across all of the strategy.
Within with it within I am we've also seen stable fee rates.
Across the across the platform so as the UN has grown.
We've we've seen that fee based revenue number.
Grow as again, a year over year comparison that was up 7%, which is quite healthy in this industry given what you're seeing across the complex. So again, we've tried to to to give you the information to do it but as even with with perfect information. These things are very difficult to to project and model out.
Okay. Thanks, a lot.
Thank you. Our next question comes from Gerard Cassidy with RBC capital markets. Your line is now open.
Hi, guys. This is Steve done in four Gerard.
Are there any products product areas within your businesses that you'd like to complement with acquisitions.
I.
I don't think I don't know that we can really talked about products and acquisitions I mean, there most of the product gaps we have we try and fill organically.
Acquisitions, we tend to do for broader strategic reasons, either build scale in a business open up a new vertical.
Expand geographically really would we do a significant acquisition or even a small acquisition on a pure product it's more more platform.
Or a business units. So I think the short answer is no.
I understood.
And just last question. We appreciate your targets for the next couple of years.
Recognizing that you guys have changed considerably since the last time Weve had a sustained bear market can you share with us the tools that you used to mitigate revenue shortfalls that are likely in a bear market to try to help reach these goals should a beverage market at the occur the next two or three years.
Expenses.
I mean basically that that's you tool.
Good news is with the Behr marquee just stock slow you buying back motion is your.
EPS is growing because you share counts down a share count peaked at about $2 billion somewhere around 1.6 now so we bought back nearly I think nearly 100 million niches last year.
In the suffers trading around 38, a couple of months ago. So that was little gift that God gave us.
So I.
I think.
It's very it's very hard to find the market if you're in a sustainable bear market you got to restructure your organization to reflect that your as you become smaller more nimble and more efficient and when will that competitors would have to go through that you comp plan. The business based upon a bid market. Obviously you got to plan the business based upon a normal market not a bull market.
And that's that's where we set of goals from but as I've been very clear enough finish on this note. These goals are always subject to a normal market environment.
If we have an abnormal market environment, one way or the other than the numbers will be what they'll be but they probably won't be what what's on this page.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.