Q1 2020 Earnings Call
[music].
Good morning, I won't be reading a statement on behalf of Morgan Stanley today's presentation, whether from Morgan Stanley their news release and financial supplement.
Copies of which are available at Morgan Stanley Dot Com. Today's presentation may include forward looking statements, but is subject to risk and uncertainties that may cause actual results could differ materially.
Before I turn notices regarding forward looking statements and non-GAAP measure that appear in the earnings release. This presentation may not be duplicated reproduced without our consent.
I'll now turn the call over to Chairman and Chief Executive Officer, James Gorman.
Thank you operate a good morning, everyone. Thank you for joining us a we sincerely hope that you are young families and your colleagues roll well on these very difficult times.
We're obviously in the middle of a public health crisis. The one that is devastating to many and along with it the world is being tested for my humanitarian economic and financial perspective.
As long as the duration and scale of the pandemic inept economic slowdown remains uncertain I expect markets will continue to be fried job.
The resulting stress on the global economy is real and will take time to recover.
The speed of the actions taken my policymakers has been remarkable.
Central banks acted swiftly around the globe.
The policies have been thoughtful fiscal stimulus measures and supports a small businesses and individuals have been put into place.
And unlike the global financial crisis, the banking system is being leveraged to be a critical part of the solution.
The Federal reserve another central banks are taking steps to support the economy and we wanted to do I pod.
In March we voluntarily suspended share repurchases.
We do not expect to restart these repurchases until we have a better understanding of the shape and debt the economic recovery.
Despite these extremely challenging times I've businesses held up remarkably well.
Of course, we saw an increase in a credit provisions and declines in the best revenues in the best management.
And then when natural consequences of the market turmoil, namely the decline in deferred compensation plan investments and increasing the amount of prepayment amortization.
Notwithstanding all of this the phone generated nine not being a revenues and an hour T C 9.7%.
Importantly, the operating plan function well.
The result serve as a testament to the stability of the business mix and the balance we booked dillon diligently to achieve over the last decade.
Only the outlook is much more important than the last couple of months.
Shoulder to the decline in asset prices zero interest rates into potential slowdown in activity levels will have an impact.
With respect to out strategic objectives, which we outlined out goals at the beginning to you. We said we assumed a normal market environment.
This environment is anything but normal.
Given the circumstances DDIC is we'll lay down would take longer do cheap.
We will have much greater visibility to discuss these objectives towards the end of this year.
Despite the short term challenges that franchise is strong as strategy clearing consistent.
Coming into this we would conservatively positioned in this remains true today.
Let me finish with a few words on how we've responded to this crisis.
All of our employees and I are working hard to do a best to support our clients in communities.
We benefited in this period from robust business planning and for me is an investment in technology infrastructure.
These teams and doing an unbelievable job in this environment.
<unk> debt to quickly do a new way of life over 90% of our employees. The currently working from home as we continued to serve our clients globally.
I frequently speak of the strength of Morgan Sandy's Cold Trina tenured leadership team.
During periods of crisis that Matt is even more.
Our operating committee has worked together in various ways for over a decade.
Nearly all of us for Morgan Stanley during the financial crisis.
The strength of those relationships enable that tend to react to recent events in an expedited coordinated manner, allowing us to quickly pivot to work from home model.
We will be equally thoughtful as we think about a path towards returning to work whenever that is deemed safe by health officials and our local governments.
I could not be proud over this fund it is during times like this that you take a measure of an organization and my seemed to moving Ciena is now even higher than it was from full.
We will get through this and we will all learned a great deal and in the meantime, we will continue to do I pod for broader society.
I'll now turn the call over to John to discuss the results of the first quarter in greater detail our perspectives on the outlook given the current environment and then take back quibble both answer your questions. Thank you John.
Thank you James and good morning, and the first quarter from revenues were $9.5 billion down 13% sequentially.
First quarter PBT was $2.1 billion, an M.P.S. was a dollar one resulting in an ROTC of 9.7%.
Our business mix AD strategy, which emphasizes more durable sources of revenues supported our results during the recent market disruption.
The quarter was invited into distinct periods January and February were characterized by brand risk assets rising markets and engage clients.
March proved to be unprecedented.
As a covert 19 virus spread globally and shelter in place orders became common we saw significant volatility volumes end market dysfunction.
Historical relationships broke down and liquidity dried up.
Clients reacted by reducing risk and raising cash.
The federal reserve in Central banks acted quickly and aggressively with large scale and targeted actions to restore market mechanics and liquidity.
During this time, we remain close to our clients as we all manage the challenges together.
We move swiftly to a work from home strategy, 60% of our employees were working from home by mid March and 90% plus today.
Over this time period volumes rose to 2.5 times average levels and margin calls rose to Fourx times the average levels.
Our technology and operations performed quite well.
During this period of volatility we also risk managed well.
But market function and liquidity essentially restored clients are weighing the major factors at play, including significant unemployment and economic disruption versus monetary and fiscal actions larger than any others in history.
During this period, the from extended credit and intermediate and trading responding to client needs and supporting open and functioning market.
First we extended credit to clients across the firm, we financed key transactions to help cove, it impacted clients across sectors, including transportation health care leisure and consumer among others we.
We also saw approximately $13 billion gross drawdowns $5 billion of new facilities in corporate lending and $3 billion you tell commitments.
We supported our clients by trading intermediate and trading, including managing record volumes across voice and M. set.
In March Morgan Stanley was an underwriter over $70 billion, a corporate and municipal bonds globally.
Additionally, we continue to work with clients to access the new Federal reserve and treasury programs to meet their financing needs.
We remain focused on managing our controllable expenses.
Total non interest expenses were $7.3 billion for the quarter non compensation expenses were 3.1 billion, while compensation expenses were 4.3.
Tightly managed professional services spend and saw declines in marketing business development, given the global shut that.
We continued our efforts to reduce dependence on contingent workers leveraging our global in house centers.
These efforts were more than offset by increases in activity related expenses, including BC any and transaction taxes.
Now to the businesses.
Our institutional Securities business reported revenues of $4.9 billion robust results in sales and trading were offset by markdowns on held for sale loans increased loan loss provision and lower levels of investment banking activity.
Non compensation expenses increased 14% driven by higher BCD and transaction taxes, an elevated sales and trading volumes at an H.C.L. on unfunded commitments of $115 million.
In the face of I'm certain markets, we supported our institutional clients with insightful content.
Our research team generated almost 1.5 million interactions through written pieces webcast and conference calls related to covert 19.
Clients remain engaged and since the markets have begun to stabilize their focus has shifted from macro somatic reads. The interest in single name Securities.
Our world class intellectual capital supported by innovative distribution remains a key differentiator when servicing clients.
Investment banking generated revenues of $1.1 billion, the environment weighed on results across products and regions.
First underwriting activity was impacted as the global shelter in place action started to roll across the world, followed by significant volatility, which dampened M&A dialogue and announcements.
Advisory revenues declined 45% sequentially, reflecting lower completed M&A industry volumes.
Equity underwriting revenues were also impacted declining 20% versus the previous quarter.
Industry activity fell off meaningfully with global IPO volumes declining by over 70% compared to the prior quarter.
This was partially offset by an increase in accelerated primary offerings and secondary activity as we help clients across the globe monetize equity Stakes.
Fixed income underwriting declined 11% versus the prior quarter.
Well event driven activity was limited investment grade bond issuance reached record levels, especially in March.
The spread of covered 19, a subsequent market volatility have disrupted deal activity. However, new issue markets are slowly opening with a few IPO is in high yield deals being completed over the last few weeks.
Issuers continue to evaluate financing needs looking to strengthen their balance sheets and raise liquidity.
We have a strong pipeline across products in equity underwriting at a robust pipeline investment grade and non investment grade business, which are dependent on market access.
We would expect IPO activity to remain muted and we'll have to see whether other markets continued to open around the globe.
Equity sales and trading is number one globally AD revenues increased 26% sequentially to $2.4 billion with strong performance across all business lines and particular strength in Asia.
Cash results for robust, reflecting the nearly 50% increasing global market volumes compared to the prior year.
Derivative revenues increased sequentially as we facilitate a client needs during periods of severe market dislocation.
Partially offsetting the results for losses on collateral calls and announcements in Europe of interruptions to dividends and March 40% of the arrow stocks announced dividend cuts or suspensions and 2020.
Prime brokerage performed well on higher levels of activity Tivity, partially offset by slightly lower average balances.
In mid February we reached a record level of gross balances only to then see a sharp reversal.
In late March we reached the recent low end balances as market levels declined and we saw client significantly de gross.
We ended the second quarter with lower spot balances down close to 30% at a more challenged environment in Europe.
Fixed income sales and trading produced revenues of $2.2 billion, increasing 73% from the prior quarter.
Strong client activity in macro and commodities drove robust results multi year efforts to reshape this business focusing on deepening client penetration increasing velocity of balance sheet and greater trading discipline contributed to the results.
Macro performance was very strong across products, particularly over the last week. So the corridor.
The business benefited from higher levels of client activity and wider bid offer spreads.
Micro revenues were more challenged and decline sequentially.
Performance was strong within credit corporates, which saw good velocity. However, this was offset by markdowns on inventory and munis and securitized products, which were negatively impacted by the dislocated market and significantly wider spreads.
Strong commodity results were supported by increased client activity driven by meaningful swings in energy and metal prices.
Other sales and trading increased significantly in the quarter.
This line includes economic hedges on our held for sale loans, which benefited from the spread widening.
This was partially offset by movements related to deferred cash compensation plans, which is also recognized in this line.
Losses in investments were driven by a markdown on a commodities investment there was impacted by movements in energy markets.
And losses within other revenues reflect mark to market adjustments on held for sale loans at a provision for credit losses for funded held for investment loans.
Looking across other sales and trading and other revenues three main factors drove approximately $1.1 billion of losses embedded in these two lines.
First.
Mark to market losses net of hedges on our 47 billion dollar held for sale portfolio.
Second Hcl associated with our $49 billion funded hfive portfolio.
Together, the Hcl provision and mark to market net of hedges accounted for approximately $900 million of the aforementioned loss.
And third losses from investments associated with employed deferred cash based compensation plans represent approximately $200 million of the loss.
Now I will give us some more color around our c. So provisioning for our 49 billion dollar held for investment loan portfolio.
Provisions for loan losses were $273 million at our March 31 allowance for loans was 529 billion.
This represents an 82% increase versus our day, one Cecil allowance.
We had approximately $32 million or charge offs are seven basis points, representing our first charge offs in the last 15 months.
And as you can see on page 10 of the financial supplement I see loans were $76 billion 64 billion designated as loans held for investment and 36 held for sale or fair value.
Held for investment loans were up $11 billion at 29% driven almost entirely by cop corporate drawdowns.
The Hfive portfolio $15 billion is corporate 7 billion as commercial real estate and 26 billion our secured lending facilities.
Our allowance for corporate loans is 1.7% and our allowance for CRH is 2.4%.
Looking at the entire portfolio, including the 53% secured lending facilities. Our total allowance is 1.1% our secured lending portfolio has attractive look through ltvs and structural protections and we are the sole lender on approximately two thirds of this portfolio.
Now turning to wealth management.
We reported first quarter revenues of $4 billion and pretax profit of 1.1 billion.
The pretax profit margin was 26.1%.
In the quarter. However results were materially impacted by two negative factors movements in investments associated with employee deferred comp cash based compensation plans and prepayment amortization. The combined impact was approximately $500 million to revenues at 150 basis points to margin.
The underlying fundamentals of this business remained quite strong.
As indicated in our form 10-K.
As of February 2020, we had granted approximately $3 billion of deferred compensation obligations for wealth management employees.
The notional value of these awards is allocated at our employees discretions, although subject to quarterly Reallocations generally 60% is held in equity investments.
Given the S&P index declined 20% in the first quarter the negative revenue impact was elevated while changes in compensation expense related to these investments will generally be offset by changes in revenue.
There can be some timing differences due to vesting schedules in a given period.
Transactional revenues were 399 million after excluding the impact of DCP transactional revenues was up more than 15% versus prior quarters.
Client activity was extremely strong reflecting high levels of engagement throughout the quarter as clients reposition portfolios and moved into cash and other short term securities.
Today clients hold approximately 23% of assets in cash and short term securities.
Asset management revenues increased slightly from the prior quarter.
Higher asset levels at the beginning of the first two months of the quarter helped insulate. These revenues from the subsequent market decline in March.
Total client assets at 2.4 trillion dollars declined 11% sequentially largely end market depreciation.
Positive flows partially offset these lower asset levels.
We had fee based flows of $18 billion and generated strong net new assets at a pace.
Bob our historical run rate highlighting the stability and health of this business.
We saw improvements and new asset flows over an already strong one to 19 from both existing and new retail clients. Our growth strategy is working as clients are seeking professional advice during turbulent times, particularly with increased complexity.
Strong loan growth continued in the first quarter lending balances increased 15% versus the prior year to $83 billion driven by tailored and mortgages.
The loan portfolio continues to perform extremely well.
We saw elevated margin calls in the quarter with limited losses. The mortgage portfolio had 90 day, plus delinquencies declined slightly to 21 basis points.
Currently we have had borrowers call for forbearance of $690 million in mortgage loans or less than 2%.
Our smallest portfolio the $14 billion Taylor book is also performing well with just a handful of special mentioned loans.
Net interest income declined 13% to 896 million the benefits of higher lending and a 31 billion dollar increase in BDP balances were more than offset by lower interest rates and the resulting higher projected mortgage prepayments.
In order to understand the impact of lower interest rates. It's helpful to look at our historical disclosures at year end, we disclose at 100 basis points instantaneous shock to interest rates would reduce eni for the us banks by approximately $640 million over the next 12 months.
While this discuss disclosure covers both banks some of which relates to I.S.G. The vast majority of the Eni is in wealth management.
Assuming road rates don't rise for the remainder of the year. The disclose figure is broadly representative of the impact of lower rates on wealth and I.
Total expenses were $3 billion. The sequential decline was driven by lower compensation expense principally related to the movements in DCP related investments.
Non compensation expenses also declined from the fourth quarter, reflecting typical seasonality.
Finally, we continue to make progress on the integration of Solyom now part of Morgan Stanley at work.
This offering is resonating with corporate clients in the quarter, we added over 100, new clients to the platform for stock plan and financial wellness services.
Bringing the total new clients since we announced the acquisition to over 455.
Investment management reported revenues of 692 million in the first quarter.
We had extensive engagement with our global clients throughout the quarter and the business continued to see strong net flows despite the challenging environment.
Total AUM rose, 6% to $584 billion long term net flows were 6.7 billion driven by capital being deployed within alternatives and inflows into public equity and fixed income funds.
Our global active concentrated equity strategies continue to outperform outperformed their benchmarks.
Total net flows of $57 billion benefited from a significant new long term client partnership and our liquidity business.
Asset management fees of $665 million declined 10% sequentially.
Higher management fees on higher average at U.M. were more than offset by lower performance fees.
As a reminder performance fees are mostly recognize in the fourth quarter.
Asset management fees were up 8% versus one Q 19.
Investment revenues were $63 million in the quarter.
We saw meaningful markdowns in reversals of carried interest in our real estate infrastructure and PE funds offset by a significant gain and an underlying investment subject to sales restrictions within our Asia private equity fund.
Also of note the business was able to see some successful monetizations despite the difficult environment.
Total expenses decreased 640% sequentially, largely driven by lower crude carried interest compensation.
Non compensation expenses also declined on lower BC, any and professional service expenses.
Turning to the balance sheet total spot assets rose to 948 billion as we deployed our balance sheet to support clients. During this challenging period and retail clients sought safety, increasing our deposits by $45 billion.
Advanced RW A's increased to 426 billion.
While standardized R.W. A's increased to 416 billion.
The increase in R.W. A's was driven primarily by increased client trading activity end market volatility as well as lending.
As a result, our advance common equity tier one ratio, which is our applicable ratio for the first quarter declined to 15.3.
As a reminder, our stress capital buffer will be calculated off of our standardized approach which was 15.7.
And the first quarter, we repurchased approximately 29 million shares or $1.3 billion of common stock and the board declared a 35 cent dividend per share.
Our tax rate was 18.5% for the quarter, excluding $31 million of intermittent net discrete tax benefits our tax rate will increase in subcom quit quarters, and we continue to expect our full year 2020 tax rate will be approximately 22% 23%.
With respect to our intent to acquire it trade the HSR waiting period has expired we filed our application with the federal reserve in March and we will soon file the proxy statement prospectus each trade will hold to shareholder vote. This summer and we remain on track to close the transaction in the fourth quarter.
Taken in full we're very pleased with the firm's results and stability of the business model.
We will continue to benefit from the significant repositioning of our balance sheet and business strategy over the last decade.
Our client driven model combined with strong capital and liquidity will help deliver relative earnings strength and this uncertain environment.
But there are several factors it will impact our earnings power in the near term, including lower asset values and balances interest rates near zero as well as volatility and economic uncertainty impacting capital markets and M&A volumes.
The second half of the year remains uncertain and the path of the economy will be driven by the time it takes to resolve the health crisis and the impact of the unprecedented fiscal and monetary response with that we will now open the line for questions.
Thank you ask a question you will need to press star one of your telephone.
Good question comes to turn key.
In the interest the time, we ask that you. Please limit yourself to one question and one follow up.
Our first question comes from Christian Bolu with Autonomous your line is now open.
Good morning, James and John and James is guys quick to you a wells.
Yes that.
Thank you Chris.
My first question.
And ROTC for the firm.
Well how to think about downside Tc.
I mean, given you have put it up 10% ROTC in what what is a very choppy backdrop.
How should investors now think about the downside case for the firm is a 10% to come to terms and ROTC no.
You will bottom line as opposed to a couple of years ago, where that was your actual long term targets.
Well Christian let me, let me take a go other than the by the way, we're all coordinating from different location too. So if John and I have a little logistical mess up forgive us, but I can see modest screen. So I think we'll we'll manage through.
We're in we're in a most.
Precedented environment, I mean, if you'd said three months ago that 90% of our employees would be working from home and the phenom it'd be functioning fine I'd say that is a test I'm not prepared to take because the downside of being wrong on that is massive.
If you'd said that every restaurant around the country would be shops over a two week period and remain closed I would say, it's just not physically possible.
So we're we're seeing you sold the jobs numbers the applications for unemployment benefits et cetra coming through where we're an extraordinary period.
So listen to.
What idle pad is how did the businesses perform.
Underlying in this environment, how do we trade trued up what was that risk exposure and how do we manage that weighted we take hits across the various parts of the plant and you're going to take them, whether it's in the margin book, whether it's in the.
That management portfolios, whether it's in the trading businesses and how did all of that look now we didnt have a full quarter of being in absolute crisis, we had a half quarter over two thirds of quota being absolute crisis, but boy it with it was an absolute prices and for this fund will come through that and generated nine being in revenue and that's.
Net of the deferred compensation plans potentially puts us.
But over 10 billion in revenue effectively flat to a year ago I thought was remarkable now maybe it's my job to think that's remarkable but I didn't think it was remarkable I think.
The stability and.
Great to the franchise the diversification.
Clearly showed that we have an underlying.
You know sort of backstop about performance I can't tell you, it's 10% ROTC.
I know coming into the second quarter, we'll have less market volume.
We have lower interest rates, we have lower asset prices at the moment.
Although we repriced rents it's every month.
We'll probably have lower noncomp expenses I suspect in the second quarter for variety of reasons. There will be there will be a lot of things going back and forth. So is 10% a bottom item I don't want to coal that now because I I just don't know how deep this recession is going to be but given what we went through to produce that.
Felt like a really resilient franchise.
Okay. Thank you.
Then my follow up maybe just one more for John.
On the deposits you had a pretty big surge in deposits and I'm trying to just maybe size.
Potential tailwind to funding cost over time, so can you remind us how much of you'll how much high cost deposits you still have on the books today.
Maybe what the blended cost of those high cost deposits are versus sort of the swift deposits that are coming in the door.
Sure and we did see a surge.
And deposits in March almost $30 billion in the month of March alone.
And the balances are up.
$45 billion for the quarter I'm not was generally are result of people shifting out of equities and going into cash in the wealth system.
You can see I think on page 11 of the supplement.
Christian.
The various balances in the banks.
Right now most of that.
Excess cash excuse me excess deposits is actually sitting.
In cash.
You can see we've we increased our loans.
Little bit we've increased our securities portfolio little bit, but most of that catch the cash is on deployed and we'll have to see around the resilience of that our expectations.
That will be pretty sticky for awhile, but again, depending on what.
Our clients do as investment options that might.
Come down a bit.
But it clearly puts us in a much better position I think our BDP, which is our cheapest source of deposits, which currently have a cost of one basis point.
As now about 65% of the portfolio it was.
Close it 60 or 58, a little while ago.
Our high cost deposits I think the blend between the Cds and some of the other products. We have in there is about 160 basis points.
And so obviously as we can shift more to BDP that will be significantly beneficial and I think our deposit cost at the end of the quarter or about 56 or 57 basis points.
No should come down a little bit as Weve, just repriced, our art savings product down.
In light of the.
Light of the rate environment. So I would say we should you know if we had the opportunity to deploy those deposits into loans will see a benefit there clearly, but we're going to be cautious and just see how those deposits behave for little while before we sort of fully deployed them.
That's it thank you.
Thank you. Our next question comes from Brennan Hawken would you be yes. Your line is now open.
Good morning, how you guys doing James.
Do you see on the call and did you hear that you're on the man I hope you're feeling better.
Thanks, Brian appreciate it.
So.
Could you speak a bit maybe John you gave some color on the.
49 billion dollar Hfive portfolio.
Which is helpful. Thanks.
Could you speak to the allocation of that portfolio to some of those sectors that are considered higher risk and if you've seen or or received any forbearance request from any of those bonds or you're seeing any other any kind of early indications of a of risk or more stress.
In any of those tied gengos lungs.
Sure I'll take I'll take a crack.
On the.
The allocation the corporate book.
The vulnerable sectors.
Those those are evolving.
Pretty rapidly in terms of which which sectors are being hit, but clearly energy auto air travel lodging leisure retail on our corporate.
On our corporate book, which is totals about $108 billion, we probably have 10 or $11 billion.
To those sectors, obviously there'll be different caliber in terms of the ratings across those 10 or $11 billion. You heard me talk about the increase in the reserve for the funded loans.
We increased.
For the quarter to bring our reserve level unfunded loans up to 1.7 there.
More skewed to investment grade about 45% of that was investment grade a third of it was double b. So very little single B exposure, there and on and a good chunk of the double b in some of what we the new stuff, we put out where we're actually secured and well collateralized. So.
We do so we have taken provisions there. We've also as that you heard from my comments Mark those loans that are held for sale.
We took about.
Net of our hedges about $600 million of marks on that on not held for sale portfolio and then the last point I would make is on the on the the forbearance, where we've seen some forbearance asks really have been in in the commercial real estate.
Book.
This is only.
It's about $11 billion in total.
20% of that is in hotels and retail we've had 16 requests or about 1 billion for of loans.
Request forbearance, we would expect that number to go up as we get into the May and June payments, but.
At this point, it's a very high quality portfolio, it's about 58% ltvs to the top tier borrowers.
In the end the real estate business and we have good protection.
In the assets, so that forbearances, mostly been brand in India, and the CR book to see our E book right now and then again a little bit in the and the residential mortgage that I mentioned.
Yeah. Okay. Thanks, Thanks for all that color really appreciate that John.
So.
Another question in my follow up.
You committed James.
There's not going to be any risk.
This year, which.
You can appreciate the idea that this would we assure your employees an extremely challenging time.
It makes a committing to ensure continued health coverage for your employees, which is tightening climbing in this country and given we're facing you can appreciate but.
And Europe, it hedged because of incentive compensation being a big part, but how is that going to come into play with controlling of expenses, which is obviously a big factor.
When you're coming into more likely coming or section here and and being part of.
A investment bank obviously.
Controlled becomes big so how do you.
Just from the things and what levers you thinking to pull on the expense side here as the revenue environment 15 revenue line continues to get difficult.
Hey, Brian and firstly I'd, just say you know as the CEO a year to make a lot of decisions you get some really really hub ones and you get some others I put this in one of these decisions I've ever made and by the way. It was unanimous cool about our operating committee.
You know we're in 100, you crisis right now and it's a health crisis first and foremost and the personally anxiety and stress to our employees into their families.
It can be overwhelming and we thought guaranteeing the jobs this year.
And getting to support that we have from our employees, 92% of them in previous survey subsidiary proud to wake of Morgan Stanley was a total no brainer and extremely shareholder friendly.
It was possible thing you can showing a crisis is a lack of leadership and support for the people on upon whom you depend to get the jumped on.
So this was to me a real easy cool if it means that you know expense ratio was one point higher for the year, which is.
You may be what it might have been but frankly, we done a rip you you have severance with rip. So the actual economics, you know through the year or not so won't be as the there in a short term favorable and given that we're in a sort of short term massive crisis on a longer term you know a recession of some kind of <unk> and we'll talk about that later on.
Sure.
Economically I'm just not sure would be good idea to do a major if this year, but psychologically anything would be a disaster. So you know we have other things we can do on the expenses and we'll be doing obviously and non comp expenses were extremely inflated a in the first quarter. A if you look at transaction taxes, if you look at BCD.
At the levels of volumes just drove that and so there was no way around.
As we get through the year do I think that that's going to hold up nicely done I think on non comps will be low through the year.
You know line and get back to sort of reasonable levels.
We you know had reasonable comp accruals for the first quarter, we did that because we.
We wanted to be sure that we can get through this year's safe clean selling keep the organization tanked as we get better visibility on the rents for the year.
Obviously will be to better position to judge those accruals, but we were very comfortable with what we did at this point. So we've been reasonably conservative on the expense side, meaning.
We we haven't tried to choose will the organization. The foods quoted didn't feel like the ride time, didnt feel necessary and I think long term even medium term is definitely the right cool for our shareholders and and I've had great support from them. It does to your personal story I had hundreds and hundreds and hundreds of emails.
On that decision and one of them was from a Lady who works here and what about support functions. They come on the not before her husband would.
Just being laid off from the small businesses working for she came home the both crying and they came in the next morning. She got the email from us, saying everybody's job as secure and cheat. She was just overwhelmed and those kinds of result city human level and we got to remember this isn't just about 13 weeks of earnings I'm much.
We'll focus on the integrity. This organization over the next decade or two decades, and this kind of thing.
It's set up so thank you for asking the question its opposed one but it's very important one.
Yeah.
And thanks for that Cogent.
Thank you.
And next question comes from Steven Chubak with Wolfe Research Your line is open.
Hi, good morning.
So.
So one and one of the start of the question on the loan loss provision I was hoping you could help us frame following the significant provision bill that we saw it is you. This quarter just how we should be thinking about the provision trajectory for the remainder this year and maybe just any additional color. You can do you have on some of the underlying macro assumptions that are embedded.
And your C. so model today.
Sure I'll try to do that.
In a coherent way, but you certainly know that CISO as as model based in its judgment based and there's a lot of things that go into it including multiple scenarios and multiple.
Multiple.
Rankings and ratings again, so scenarios as well as the qualitative and quantitative assessment.
You know, we will obviously, a and just the timing of all the events, we updated our models.
Yeah for what was going on at the time, when we got to the ended the quarter.
In light of what was what we were seeing and the rapidly changing sort of economic outlook, which at this point I would say and James as mentioned it a couple times, though the range of potential outcomes is the widest I've seen in quite some time in terms of what's going to happen in the future.
And so we relied heavily.
On the sort of qualitative in environmental reserve and we looked at the downgrades we looked at.
Loans, we thought would be downgraded distressed draw scenarios, we did some loss given default sensitivities, we looked at criticized asset trends and we factored all of that into our analysis that ultimately led.
To the $350 million reserve build on the on the entire portfolio or 74% increase from our day, one Cecil so yeah, the economic scenarios, they're going to impact people differently.
Across the plan as you know are.
The numbers I've, just giving you our institutional numbers, our retail and wealth business had very little reserve build given the performance in that ports in that portfolio and the company. We obviously don't have any exposure.
To credit cards or unsecured credit, so where is slightly different be since some of the other folks and.
The how the economic outlook plays out over the next couple of quarters and next couple of months, but clearly in July June June will have a lot more information to have a better sense of those models, but we think the qualitative adjustments that we made are appropriate and brought our reserves to an appropriate level.
Thanks, John quite helpful. James' question for who spoke of some of the risks the targets that you laid out at the started the year certainly not surprising given the world.
Your words is anything but normal but admittedly the message is a bit more cautious and maybe what you conveyed in your March shareholder lever letter and I was hoping you could speak to what macro market assumptions are informing your more cautious outlook I know theres a wide range of outcomes to consider but if we do see a U shape recovery beginning in 2000.
One is there a path to delivering on some of the targets that you outlined at the started the year.
Yes is the short answer.
You know the macro environment that I'm, making the assumption on loan I mean.
Take the 5 million below 5 million jump claims this morning.
For unemployment benefits I mean this is.
We're in we're in a while period, we're going to have negative GDP of I didn't know 30%.
So short term anybody.
You know I don't mean to disparage anybody, but a CEO who who's stands by the short term targets that was said right before this virus hit you know I don't know what planted there on.
Just you just you caught you can't predict that.
Over a two year period, you the targets we by the end of 21.
And there are the three targets a pre tax margin 20 to 30.
The ROTC I think at 13 to 15 in the efficiency ratio 70 tubes, then should we be there by the end of 2021 on on some of these targets definitely.
But you know we said in the boy said the Tiger three normalized environment. This is not a normalized environment.
We will not hit those targets in the second quarter that I can promise you we did not hit them in the first quarter.
But beyond that but let's see how this plays out at the equity markets recover a we're not going to mortgage pre pay a known pumps are going to be down obviously were affected by where interest rates are and if they change you know obviously, there's any move I put through 2021, that's enormously helpful.
And things start getting a lot more interesting you know 12 months from now than they are right now, but honestly it would be irresponsible of me.
Two recommit to those targets on this call now and the annual letter that was different what I've seen the annual letter was these were out of targets. We laid out in 2019, we not ignoring them would not hiding from them that what we believe the business will perform at in a normalized environment and it will I'm totally confident about that.
But for right now given we deal with an earnings call and Unix outlook right now those targets and not achievable in the second quoted they didn't want achieved in the first quota and it's too early to meet the call alone.
What 2021 looks like but you know Stephen to question as a possible. It's absolutely possible is a probable at this point you could nobody could say that it's probable you got to see what the mom that plays out it.
No. Thanks for that helpful context James.
Sure.
Thank you.
Our next question comes from Glenn Schorr with Evercore. Your line is now open.
Hi, Thanks.
Uh Huh, maybe one quick cleanup Hello there.
So you mentioned you mentioned.
Some losses on on collateral calls I'm just curious if it was any meaningful amount that we need to know about and more curious about.
You also almost nothing in a wait and maybe just.
Contextualize is this was this it just a sharper drop is it more produced by the quantum and.
Systematic trading side just curious.
If you can contextualize.
In the context of the de leveraging you mentioned.
Sure and the.
I wouldn't describe the they some of the losses that we took in that there is.
Trading businesses related to the de grossing.
We saw going on that actually other than the quantum and the size and the speed.
And the elevated volumes didnt necessarily lead to those types outcomes.
As you obviously saw during the quarter.
There were significant volatility in certain indices and indexes there were a historical relationships it totally broke down.
Went in different directions, so when people single strategy firms.
Struggle that their strategy wasn't working the numbers were not material, but we wanted to highlight that it wasn't all perfected throughout the plant as James said, you're going to take a and businesses where you trade input.
With your clients, there's the potential to take losses, and so we did take some losses in that area and then obviously the dividend cuts and the dividend business and the dividend season also had an impact so and you. We saw that are in that equities number but even despite those are those.
Losses, we still generated $2.4 billion and one number one in the world.
Great that maybe leads us to part B is with the grossing as being number one in the world.
Having a big Prime brothers five on Big hedge fund.
Business and seeds.
From a trading business.
Have you seen any room lead leveraging or is the amount of leveraging.
Consistent with how we should think about market adjustments your equity adjustments going forward, what I mean is there a linear relationship.
Not really a linear relationship, but I would say we have.
Our equity clients.
And.
Many of the hedge funds and.
And Quants actually performed reasonably well.
In this environment. Despite the volatility we have seen some of the gross balances rebound from the lows that we saw in the end of March.
Or some of that was just participation as the market went up but we have seen some some some people get backing engaged in the market, but it's not so it's not significantly Oh, hi off of those low points, but it has bounced back a little bit and obviously the the higher market levels helps address balances.
Gotcha, and maybe one really quick one at the high level on wealth management, you know when the results first come out Yahoo revenues down bill to some of the adjustments obviously, you spelled out the comp thing.
Well, we're revenue actually.
Well that's at high at the top adjustment I know, we got to deal with lower rates and lower levels going down, but I'm just trying to get the right topics.
You know the flows were good margins was that all things considered or you still in that $50 million to $80 million range on a daily basis, just looking for the right.
Big picture your view of wealth management.
Again I think.
James can jump in as well, but light mentioned $500 million a negative revenue so that puts the revenues in around four and a half billion I don't think thats, an actual a record but it certainly is a very healthy performance and then.
An incremental hundred 50 basis points on the 26, one that we reported as a very healthy margin.
And as I discussed the fundamentals of this business or are quite good.
We saw a lot of incremental net new assets into the from period to volatility like this generally we've seen our client base look for professional advice states consolidated their assets. The technology that we put into place has been really helpful and those initiatives. So again the business is fundamentally quite.
Strong, we'll obviously have be impacted by the lower asset values and where rates are but fundamentally this business is performing quite well.
Yes, I do think Glenn the.
The loan book performed unbelievably well, we have we have basically no problems in a huge margin book.
All the mortgage book in the other lending that we've done because you know it's a conservative business to people who are clients about who we know what they're going to sit in liquidity picture is so that was very pleased and this was a great tough test and it's about the comfortably.
Thanks to both.
Thank you.
Next question comes from Michael Carrier with Bank of America. Your line is now open.
Good morning, and Thanksgiving questions.
First I know you a tough to predict trading you mentioned some of the color around the equity trading balances on which makes sense based any significant change.
Yes, the age in the outlook there.
I'm sorry, the outlook on <unk>, you broke up a little bit I think it's our site.
Yeah, I was just staying on equity trading you provided some color around lower balances, which doesn't make sense I was just wondering it yet on the fixed slide in any significant changes that you've seen that business.
Try to gauge.
Hello.
You know again, it's very early in the quarter clients are still a.
Engaged.
There's a lot of policy debate going on there's a lot of debate around the time.
Of the you know the potential.
And at the health crisis and to the shelter in places.
There's still a lot of activity.
But volatility is clearly more subdued.
You will have an impact on the business volumes are still pretty healthy, but again, it's only.
Two weeks into the quarter and pretty hard to speculate what's going to happen over the next couple of months.
All right makes sense and then just doesn't fall investment management investment line and be more volatile. This backdrop I think you mentioned some gains that offset marks Vancouver verticals can you provide any color on some of those components. Just so we have maybe a good level you know to go off of.
Sure.
I'm just trying to find the line the line was minus.
The line was 60.
$3 million, I think and as I mentioned in my and my remarks, we had one.
Very substantial gain.
Oh that made that line positive similar to the gain we took in a similar same company that we took the gain from in the fourth quarter, but.
But we did see losses across a real estate as you are real estate portfolios.
As well as some of our infrastructure and private equity funds, obviously, the gain was larger than the losses.
It's a it's a it's a investment that we've made in a company that's gone public that we have shared with.
We're restricted from selling our stock.
But that hopefully will give you some some sense of the general sizes of those marks but clearly given what happened with risk assets and asset pricing is around asset prices around the globe.
You know, we did see broad based markdowns and most of the portfolios.
Yes.
Thank you.
Our next question comes from Nightmare with Wells Fargo Securities. Your line is that a little thing.
Hi, just a clarification. So you had 600 million mark to market losses were those realized or simply just mark to market and what was.
What were the the loans are securities.
Sure Mike.
It was mark to market, we sell have.
Those loans and the end that this in the.
And the and that the supplement you can see the investment I SG loan bucket is approximately 169 billion.
I mentioned in my remarks, there is about $47 billion that are held for sale.
The vast majority of the marks a came on the relationship book at the corporate loans.
There were also some marks on the secured.
Lending as well.
Secured lending facilities, but we had.
Those 600 million in losses were net of the.
Oh, the hedges we have on those on that relations ship portfolio. We also had a couple hundred million dollars related to.
Some of the event book, which is also held for sale and then a very little against the other the other two portfolios, but it was really the relationship or portfolio or the corporate portfolio that you see on page a part of that portfolio that you see in the a in the supplement.
And then just a separate question James good to have you back so I can.
Well I'm glad to see you healthy and so I can also asking questions on the call, but as someone who has had covered a now.
How do you frame that debate between saving lives and saving jobs and the economy. I mean, what are you advising your clients to do I mean, how do you think the economy could come back online and again I'm glad you're back with us.
Well, thanks, Mike I appreciate that and I.
On one of the one of the fortune of people to have had a but without.
Have you need to be hospitalized or.
Being any serious health.
Danger to my long, so I'm I'm very grateful for that unfortunately there.
Many many thousands of people know, who who do not have who did not have that kind of outcome and for them My how it goes out to them.
You know I'm I don't think it gives me any special expertise having been through this will you know what I think is.
You know will obviously be guided by the CDC in the state and federal authorities.
My assumption is the right way to do this has to have a staggered.
People going back to work and to do it by the by region or maybe by industry in pop but for now.
I think separate companies all deciding what to do on their own as a bad idea I think it should be government led and you know if it starts let's say the first they people are hitting back is June 1st then summer on do impose some June 15 to accenture through the summer so sort of a staggered approach.
There are clearly a lot of people who have had the virus, who now apparently not infectious including myself.
And there are lot of young folks, who do not appear particularly vulnerable to be as far as so that's probably where you'd start of your big.
Not a whole takes but I'll leave that in the into the health experts at Morgan Stanley.
I hope is we'd be able to test people to make sure that they are healthy and clean and we'd bring people back in to stay that way as soon as the government lets us through that we currently have Tim POSIDUR mirror employees still at work will be I'm sure rotating employees through the rest of the year everybody's got used to working home as I'm sure you folks have been Oh, you know we're only.
Adjusting so I don't know if that gives you a complete answer but I'm not really an expert so.
And alright, I guess brought wondering when you can test people and decide if they are clean and I'd say, we're all in the same boat, but you're in a better positioned to rely on the experts and again advising all the corporations around the world, where so many of them.
Any what's your best guess at that.
Of when people can be tested.
Yeah, I mean, everybody is doing studies and I know what I know, it's very difficult question, but you know Ceos need to make decisions about resource allocations et cetera. So what are you, telling yes, but wouldn't use that you advise.
Yeah, but I'm not advising them on when the you know the of.
Various testing for anti bodies is going to be coming through I mean, that's we're really in the hands to the government and I think we're all getting the same information I was on the President's Task Force.
Cool UBS Ceos, and you know I'm getting the information the white house and they're getting from the health authorities and the various pharmaceutical companies I know there's been a lot of work done Abbott labs is done and it has done some work the developing some testing so and obviously in other parts of the world Theyve got a faster testing for anybody so I just hope.
We go to to the U.S. and and its rapidly deployed which I think is what everybody's working on right now so Mike I'm, sorry, I'm, just not icon I don't abide Ceos and when the testing framework is going to happen.
Guys were going to take.
Just one more question I think because we're running where front over time and we've given you long answer is hopefully they've been helpful to those who haven't had a chance to ask a question I apologize for that but.
It's a fairly den sending school as you will appreciate and we hear as follow ups and through a shroyer new shop.
A head of Investor Relations, obviously, Jonah myself in the days and weeks ahead.
So we'll take one more question operator.
Thank you I final question comes down Gerard Cassidy with RBC. Your line is helping.
Thank you.
John can you share with us I think you'd mentioned that coming out at the ended the quarter in wealth management.
23% of your customers ask this were in cash how does that compared to the started the year and she will do you how do you see them, bringing that down little to some screen monks orders.
That's a great. That's a great question in terms of how how the our retail clients are going to reengage with the market. So let me just give you just some some facts the 23% as cash or cash equivalents.
Putting money market and short term fixed income securities.
That number is probably up three to four points.
In the last quarter or too and if you look at the totality of the money. The 2.4 trillion dollars a the equity allocation has gone from 55 down to 50 and most of that's gone that three to four points has gone into this cash and short term securities.
How how long people feel the need to stay in and short term and cash.
I think is gonna be a function of what some of the things that we've been talking about on this call, which is people's perspective, when the economy.
Opens up again or the work from home so ceases in some of the restaurants businesses get back in the business and people feel more comfortable with that what's the outlook and yeah. That's why we're also not fully deploying those deposits because again they are generally very sticky, but they're also the based on the investment decision.
Most of our clients so we're going to see.
Monitor those to make sure that we feel comfortable deploying mess.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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