Q2 2020 Morgan Stanley Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly piece continued to standby. Thank you for your patience.
[music].
The earnings release.
Joseph Smith.
Copies of which are available at Morgan Stanley Dot com.
Today's presentation May include forward looking statements that are subject to risks and uncertainties that may cause actual results could differ materially.
Right I notice, it's regarding forward looking statements and non-GAAP measures that appear on the earnings release.
On Tuesday may not be duplicated or reproduced without our consent.
I'll now turn the call over to Chairman and Chief Executive Officer, James Gorman.
Hi, good morning, everyone and thank you for joining us.
As you all know over the past decade, we've dramatically transformed our business model we.
We've grown the contribution of more durable balance sheet light sources of revenue investing in wealth management and investment management, while maintaining our leadership position and taking share across our integrated investment bank.
The intention has been to provide stability right from in times of serious stress.
And to provide strengthened by you track client in tons and volatile an active market.
The environment for the second quarter provided exactly that test.
The cobot health crisis economic collapse in a tremendous surgeon unemployment.
I see fiscal and monetary stimulus.
Operating with 90% of employees working from home.
Extraordinary Klein financing demand.
An increase in corporate defaults in bankruptcies.
Right code market volumes.
Against this extremely challenging backdrop I'm very proud of my colleagues the way they managed to support our Cline and risk managed massive uncertainty all while working from home.
The results, we announced this morning build on a very strong relative performance of the first quarter with a record breaking second quarter.
Revenues of 13.4 billion exceed our best quarter ever by 21%.
We delivered record net income of 3.3 billion and then ROTC of 18.6%.
Looking at discrete tax item with an expense efficiency ratio of 68%.
The stability by pipe home in the face a record breaking volumes and the surgeon capital raising from clients was critical.
Our revenues of course benefited from this record activity.
But the RTC is a function very strong operating leverage with a high degree of expense discipline in the pace of significant macro headwind.
As importantly, a credit costs were relatively limited.
This is by design as we had virtually no unsecured consumer loans, we do not have significant emerging market exposure and we have modest exposure to the small business segment.
Each about businesses contributed meaningfully to the result, but the stand out was institutional securities.
For the post crisis period I is she had record revenues of 8 billion and record equity underwriting WRECO debt underwriting recoded equity sales and trading and record fixed income sales and trading fixed income in particular was the stand up.
In wealth management, despite the impact of rights on net interest income and some integration costs relating to we tried I imagine was up 24%.
We still clients continue to consolidate assets with their advisors deposit growth and loan growth.
Investment management also performed exceptionally well with red called an industry, leading long term flows as well as growth across all asset classes geographies and invest the segments.
Assets now at 665 billion up from approximately 460 billion at the beginning of 2019.
So what does the future hold.
Clearly it will be challenging for the back half from 2020 to meet the record first half results.
And we expect advisory macro trading to be significantly lower.
That said many parts of that business should continue to perform well.
Let me touch on the C car examine that its CB results.
This year, the new SCB results confirmed what we believed for many years that we carry significant excess capital.
We still believe that up PPNR is understated and will continue to work with the regulators to better calibrate the models to the realities of that business.
Our excess capital position allows us significant flexibility to continue to support that Cline invest in that business ROA balance sheet and continue to pursue inorganic opportunities in targeted areas.
In the near term, we remain committed to our quarterly dividend of 35 cents.
Overtime, we expect to reinstate up buyback and increase the dividend subjective costs to regulatory approvals.
Let's turn to we tried.
I remain as confident if not more so about the strategic benefit to Morgan Stanley from this transaction.
Among many positives it delivers it gives us strong digital capabilities a platform for international expansion, a world class workplace business and we will further enhance see tier one ratio.
Before turning to John Let me touch on the recent events affecting the black community, particularly in this country, but also in many places around the world.
It is clear that the racial injustice. The does exist to now society for very long time has not been result.
We have morgan sending want to be part of the solution.
As part about continuing efforts in this area. We recently added a commitment to diversity and inclusion as that fit coal value and made a number about the structural and financial decisions to materially enhance the opportunities provided to add to both employees.
We will be doing more in the coming quarters to ensure that our employee population mirrors the broader society in which we operate in living and will provide detail around our recently announced institute of inclusion.
So let me now turn the call over to John who will discuss the results of the quota in greater detail. Thank you.
Thank you and good morning in the second quarter from net revenues were $13.4 billion with net income applicable to Morgan Stanley of 3.2 billion.
The quarter included an intermittent net discrete tax expense of $134 million, which impacted EPS by eight cents.
Excluding this item net income was $3.3 billion, an EPS was $2.04.
So excluding this item our OE and ROTC were 16.4 at 18.6, respectively, and our year to date basis ROTC was 14.2%.
As part of our decade long business transformation, we have taken a highly integrated approach to client coverage.
Our business segments in divisions work together to deliver a wide range of solutions and the firm's intellectual capital to our clients.
This long term coordinated approach has allowed us to provide a deeper level of service and stronger partnerships with our clients and has positioned us us for our results this year.
Throughout we remain disciplined around our expenses working diligently managed down our efficiency ratio and our fixed cost base.
This quarter illustrates the significant operating leverage in the model, especially in institutional securities.
Quarter over quarter, IC revenues was up over $3 billion, while non compensation expenses were down over 100 million.
Our from efficiency ratio was 68% in the quarter.
High levels of client activity led to elevated transaction related expenses, which were offset by a dramatic reduction in marketing and business development and continued discipline around professional services costs.
We continue to support our employees and communities through these challenging times through financial equipment medical and other means to support.
We remain focused on opportunities to work smarter and more efficiently. We have learned a lot about our organization and its cost structure through this period, and we will leverage that learning to continue to optimize how and where we work and how we use our technology.
Now to the businesses.
Institutional Securities reported.
Revenues of $8 billion, a post financial crisis record and nearly $2 billion higher than the prior best quarter.
Record results were realized across various businesses products and regions.
Our integrated investment bank benefited from our coordinated and client focused approach.
We saw significant demand for our leading research and bankers to help clients navigate these uncertain markets.
Corporate clients took the opportunity to raise capital and liquidity and sales and trading investors actively reposition their portfolios given the rapidly changing environment.
Robust underwriting volumes also contributed to increased levels of sales and trading activities.
Investment banking generated revenues of $2.1 billion, increasing 79% from the prior quarter underwriting drove the results delivering its strongest performance in over a decade.
From a geographical perspective, all region saw sequential improvement with particularly strong results in the Americas.
Adviser advisory revenues increased 28% from last quarter to $462 million benefiting from higher completed M&A industry volumes, driven by an increase in larger transactions.
Year to date and now its industry volumes are down over 40% and we expect M&A to remain muted until there is more clarity on the path of the recovery and stability in prices. However, Ceos and boards are engaged in strategic dialogue is integrated into our client discussions.
Equity underwriting revenues more than doubled versus the prior quarter to $882 million driven by increases across products.
A follow on converts blocks and Ipos.
Issuance accelerated in the latter two months of the quarter global equity volumes were the highest and nearly a decade as clients bolstered their balance sheets in monetized equity stake.
Quarter saw record convertible issuance as near zero interest rates and elevated volatility led issuers to favor equity linked instrument.
Fixed income underwriting revenues were 707 million up 59% from the prior quarter driven by bond issuance.
Global high yield new issue volumes in June represented the highest ever recorded.
Investment grade market also saw record issuance volumes.
Activity has been driven by a combination of companies looking to fortify their balance sheets and others, taking advantage of the very constructive financing environment.
After precedent unprecedented levels of capital raising issuance levels are likely to flow from the current toward pace as we enter the summer.
Pipelines remain healthy, particularly ipos and if markets remain constructive we would expect active issuance in the latter part of this year.
Equity sales and trading revenues increased 8% sequentially to $2.6 billion.
Strong performance in cash and derivatives as well as the rebound in prime brokerage balances contributed to results.
Cash and derivative revenues were the highest in over a decade driven by strong trading results across regions. As we continued to help our clients navigate through this period of unprecedented uncertainty.
In cash in the face of historic volumes, we executed for clients and help keep markets open and functioning and derivatives results were strong across product types.
Prime brokerage results were resilient at inline with the prior quarter balances rose significantly front March lows as market levels trended up and certain clients, we levered although.
Second quarter average balances were about 50% below the first quarter.
Fixed income sales and trading had its best quarter and over 10 years, excluding the impact of VVA with robust performance across all major businesses and geographies.
Revenues of $3 billion increased 38% from the strong first quarter results were particularly high in April as macro benefited from elevated volatility and wider bid offer spreads and credit market retraced much of their first quarter movements.
Clients were especially active in the beginning of the quarter and remained engage throughout the market spreads normalized and volatility abated.
We continue to see improvement and client penetration as we gain mindshare, especially among leading asset managers.
Micro revenues increased significantly driven by securitized products and credit corporate.
Macro performance was strong across products declined versus the robust prior quarter.
Commodity results also remained strong benefiting from continued elevated levels of market volatility in oil and metals.
Across other sales and trading and other revenues results improved dramatically from the first quarter.
The three main drivers across these lines include investments associated with deferred cash based compensation or DCP.
Performance of our 41 billion dollar held for sale portfolio and our provision for credit losses for our 43 billion dollar held for investment loans.
Some of these components was approximately $200 million this quarter versus a negative 1.1 billion and the first quarter.
Spreads tightened throughout the quarter, leading to approximately a $250 million gain on mark to market of our held for sale portfolio net of losses on our hedges.
Our provision for loan losses was $223 million down from 273 million in the first quarter and DCP swung positive this quarter as markets recovered.
Our I asked you loans declined.
By approximately $11 billion from the prior quarter, driven primarily by pay downs and our corporate and event book as clients took advantage of open an active capital markets to replace short term funding with longer term capital.
Our funded ratio of corporate loans peaked at over 25% of commitments in one Q and now stands at 18%.
Our allowance for credit losses on loans increased to 756 million, which represents a 43% build in our allowance over the quarter.
Our loan.
Look continues to perform well and we had no charge offs in the quarter. Currently we have approved less than $1 billion of request for principal and interest forbearance across I asked you loans.
As you can see in our new disclosure on page 11 of the financial supplement our allowance for corporate loans increased to 3.8% and our allowance for commercial real estate increased to 3.1% across the entire held for investment portfolio, our total allowance rose to 1.8%.
Now turning to wealth management.
Second quarter revenues were $4.7 billion.
DCP losses of approximately 425 million from first quarter reversed almost entirely and prepayment amortization declined. These factors drove the sequential increase in revenues.
Pre tax profits was 1.1 billion and pre tax profit margin was 24.4%.
The underlying growth drivers remain strong on the heels of the technology and risk management of investments we have made client asset consolidation continues.
We increased retail asset capture and retention and lending penetration with our existing clients.
Additionally, net recruiting has materially improved.
Transactional revenues were $1.1 billion after excluding the impact of DCP transactional revenue was down versus a prior period, reflecting a decline in client activity from the extremely high levels of the first quarter.
Asset management revenues were 2.5 billion down 6% sequentially lower starting asset levels drove this decline.
Lending growth in the first half of the year has been strong at over $5 billion with balances of 85 billion up 15% versus the prior year driven by securities based lending and mortgages.
The loan portfolio continues to perform extremely well.
We saw mortgage forbearance remained stable at approximately 2% of the portfolio and our 90 day delinquencies are at 24 basis points.
We have granted approximately $1 billion of forbearance on commercial real estate loans in our tailored lending book.
Each of which has personal guarantees from ultra high net worth clients.
We had less than one basis point of net charge offs in our wealth lending book year to date and provision for loan losses of $23 million was inline with last quarter.
Net interest income was a $1 billion, excluding the impact of prepayment amortization and I was relatively flat compared to prior quarter and exceeded our expectations.
The impact of lower rates was offset by elevated LIBOR levels and spreads at the beginning of the quarter and higher lending and BDP balances.
We expect to see Eni drift lower for the remainder of the year as LIBOR and spreads have normalized.
Growth in our lending businesses and higher levels of stable bank deposit should continue to offset some of the pressure from lower interest rates.
Total U.S. bank deposits were $236 billion meaningful increase in bank deposits that we saw in the first quarter was sustained and we continue to see BDP balances grow.
Clients remain cautious and cash as cash and short term securities levels remain over 20% of total assets.
We expect to see an outflow for delayed tax payments.
Total expenses were 3.5 billion up 19% sequentially increase was driven by higher comp expenses principally related to DCP.
The Solyom integration and execution of our Morgan Stanley at work strategy are on track and are important precursors to our integration of each rate.
We continue to add new corporate clients approximately 180, this year and 525 since the announcement of the Solyom acquisition.
We continue to prepare for the expected closing of the trade deal in the fourth quarter and have started to incur expenses in advance of the closing.
Excluding these integration and acquisition related costs in the second quarter the margin would have been over 25%.
These integration and acquisition related expenses will likely erode the margin by 50 to 100 basis points this quarter as well.
After we closed the trade these integration costs will be more substantial and we will provide further breakout at that time.
Investment management revenues increased 28% to 886 million, representing the second highest quarterly level in over a decade.
Total AUM rose, 14% to a record high 665 billion of which long term AUM was 397 billion.
Long term net flows.
We're also a record at 15.4 billion across strategies from a broad based set of global investors. This equates to an annualized rate of 18%.
Total net flows were $36 billion.
Strong fund performance, our deep global client partnerships and the power of our brand have driven this industry leading flow growth.
Our clients are trusting us with their assets, we continue to deliver differentiated value to our clients across both public.
And private markets as well as through our global solutions capabilities.
Our Global Act active equity strategies continued to deliver significant outperformance and are attracting robust flows from institutions in wealth management clients, both internationally and from the United States.
Liquidity inflows remains strong with positive flows across strategies.
Asset management fees of 684 million increased 3% sequentially driven by higher management fees on higher average AUM.
Investment revenues were $230 million in the quarter. The sequential increase was supported by the rebound in global markets.
We continue to invest in the investment management business and to focus and execute on multiple organic and inorganic growth opportunities to meet client needs.
Turning to the balance sheet total spot assets rose to $975 billion in line with the recovery and equity markets and high levels of client activity.
Standardized RW ways were flat at 416 billion as an increase in market risk assets was offset by a decline in credit risk assets.
Our standard ICICI ratio.
One ratio rose 80 basis points to 16.5% compared to our recently announced FCB of 13.4.
Our board declared or 35 cent dividend per share.
Our tax rate was 22.6% for the quarter, excluding 134 million of intermittent net discrete tax expense.
We continue to expect our full year 2020 core tax rate will be approximately 22% 23%.
The second quarter illustrates that our strategy is working working and highlights the power of our differentiated model. We were at the four front of serving our clients when they needed us most.
As for the operating outlook the dispersion of potential macro outcomes is high the path forward will largely be determined by the course of the cobot pandemic the shape of the economic recovery and potential additional fiscal stimulus.
We continue to see reasonable client activity in the first few weeks of the quarter, but would expect a reversion to more normalized levels as we head deeper into the summer.
Aspects of the capital markets business will likely normalized and a rebound in M&A activity will take some time.
And well, we would expect to see continued momentum around new assets, new clients and lending growth as we become a destination of choice for financial advisors.
And investment management, our record flows will support fee growth and investment returns will depend on the macro environment.
We will continue to focus on what we can control serving our clients managing risk and controlling our expenses with that we will now open the line to questions.
Thank you to ask a question your knees are one on your telephone Slingshot. Your question, Chris depend key in the interest. This time, we ask that you. Please limit yourself to one question and one follow up.
Our first question comes from Ben and how can reduce your.
Your line is now open.
Hi, good morning, Thanks for taking my question.
And.
Just a quick note that like the de fast results recent results certainly reflect the improvements in the resilience that you guys have made in model and that must be a nice affirmation.
To sure all the hard work you've been putting in so.
Congrats on.
When we think about the wealth management business and the pre tax margin.
How should we think about is it just backing out the for the for 25 DCP from both revenue and comp and would that result than in the sort of core pre tax margin being demonstrably higher and is it is it fair to say that just maybe the headwinds from the environment.
And.
We're not quite as per pound as you anticipated and profitability in this business is going to.
Be better as far as the outlook or is it not that simple.
It's sort of that simple.
Firstly, thank you for your kind comments.
To address the broader.
The deep us as CB numbers and these results.
And the upcoming closing on a trade assuming this shareholder vote happens, which is eminent which I expect it will.
I clearly feel that we were at a different inflection point that we've been building towards for many years. So.
These results of fund that I'm sure, we'll talk more about on wealth manager I mean, you can do Brennan, obviously, you can do the math on the on the DCP, which basically nuts.
Revenue against comp expense.
You know the wealth management margins the material change in those margins was the.
Net interest income the change rights and as we move to zero rights now you can never be rates will be poem lead zero in which case, we'll have to do other things to enhance that business by the way. The trade operates with margins around 40, 45% at the moment so with some of the restructuring that we'll be doing putting those two businesses together.
They clearly as margin enhancement opportunity just from that trade alone.
But in the last few months we had.
Low market prices, so the points, where we where we price the fee income.
Thats, obviously improved we had a little bit of a rush of activity, but we had.
No not nearly as much because that clients are very stable and very fee based.
So you know in the wealth business when I look how does the fundamentals assets of growing flows of growing.
Fee based flows of growing loan book is growing deposits are growing.
Advisor attrition is basically zero, we're attracting net advises we're consolidating a trade running up some international growth platforms.
We've got a lot of opportunity to make the business more efficient to more technology, driven and interest rates will look up to themselves at some point. So I remain extremely optimistic about the business.
Okay, great. Thank you for that I appreciate that James and.
When following up on on that when we think about Eni John I think you said you expect it to drift lower.
Bye.
His is is it that the impact turned out to be a little bit more muted then you all expected and this is the right jumping off point with a more modest headwind from here.
Or is there was there some onetime noise in the quarter around and I within within the wealth business.
No I mean I think it's.
As I said in my prepared remarks Brennan.
The performance is better than we expected if you recall in the first quarter, we thought that the impact of all the rate cuts, we sort of tried to size that for you.
And it's performed better the primary drivers are as I said the elevated LIBOR now that's normalized and so that's why I'm, suggesting that the Eni is going to drift lower I think the first two quarters if you.
Emanate, the prepayment had been pretty pretty neutral and stable in terms of Eni and and that normalization is going to cause the drifting down slightly of the Eni going forward and then it should be stabilized. What we are seeing is that some of that loss that we expected. We picked up in terms of just the balances both the lending balances in the and the excess.
Deposit balances have abated some of those headwinds so it's better than we expected, but still clearly impacted by the zero rate environment and just to build on that I mean, we can't control. The in I, obviously, very very little given where rates are.
But what we did see and what I saw in the last financial crisis. Those institutions that are strong and stable attract flows disproportionately.
The last crisis, we're obviously not that institution and we were in fact, losing.
Well, it's not dramatically, but we certainly wouldn't adding and we were losing we were losing a little bit on the margin.
This crisis the reverse is happening we're attracting positive flows and significant positive if I see a talent and that's just a function strengthened stability. So.
I think that who's very well for the future that particular business.
Thank you. Our next question comes from Glenn Schorr with Evercore. Your line is now open.
[music].
Hi, Thank you.
So I heard loud and clear on the first couple of weeks reasonable activity and expect this summer to settle in.
I do think we're still lack of volatility level, that's almost double like last year. So it might settle in at a higher level I'm not asking you to comment on that but.
I do want you to comment on on the fixed franchise, obviously the world.
Changed and lots of repositioning happened, but your way over where you used to thank you expected quarterly levels will be so what I do want to ask is what what have you noticed on the.
Client front in terms of the coverage picking on new clients client wallet penetration on the because we haven't seen everybody's results, but I think these results show you taking share in a great quarter, great color for everybody by taking share despite that.
Yes, I think it's there it's really a little of everything every business contributed.
We risk managed extremely well and recognize the team now has been working together for about three years.
They are really working well I've commented about some progress we continue to make in mind share of our of our fit.
Hi, good clients, particularly around asset managers in penetrating those accounts.
Through the coordinated approach so it's been a really strong set.
Sort of backdrop, but also playing to the sort of the work that we've been doing in that business and investing in clearly the market for the wallet is significantly up this quarter and we participated in that growth and we.
We believe we captured more share to the degrees that the wallet shrinks, we feel very good about the positions that we've established and we expect to continue to maintain that share, but it's really going to be the results being driven by a you know what the wallet size looks like going forward.
I would I would I mean, I'd take it back and Glenn you being covering us for long time. So you know the history, but lets go back to 2015 and.
When column and Ted restructured the PICC business and I think it's a full quarter November December we cut the R.W. ways, we cut the people on the expenses by 25%, which was seen as pretty brutal at the time, Yeah. Wses came down from I forget that the original numbers, but somewhere around 300 billion to about 140.
A couple of year period, and we got out of the physical commodities business, we had a much smaller footprint and structured trading business. The SPG business was run a lot more tightly.
And I think the work the team put together to create an integrated investment bank leveraging the incredibly strong equities franchise with many of the same clients who are dealing with that fixed income franchise and the same time building up DCM, which created obviously further opportunity across all of fixed income. So it's a series of things now we always said the bid.
This was.
You know long term if it couldn't do a being in revenue on a quarter. It really wasn't a Bible business was never going to meet its cost of capital.
And we sort of sit that target out there was a minimum threshold against the backdrop of doing five 600 million for two quarters in 2015.
So that we you know that was pretty modest backdrop and I'll be set competitors were doing multibillion. So that point. We then consistently delivered last couple of years ran a being the half a quarter, we kind of normally raised a minimum target 2 billion on a quarter acknowledging you might have a bag quarter occasionally.
But we've de risked the enormously so the swings a much less volatile on the downside here, we benefited from the massive financing wave.
Very active markets I think a really good integrated investment bank led by Ted pick.
Semi Kelly Smith running fixed income food who'd been previously.
Number two guy and the equities franchise for long time.
Putting all of the management together the culture together, the risk management together and away from the big structured the liquid positions and away from physical commodities and it's all side to come together. So we're picking up share and when you have a monthly explosion that everybody's numbers are up I don't know 60, 80%.
Then all fell base you can stop posting really respectable numbers and you know that that's sort of way we've got too. So it's really a multi years story now are we going to 3 billion in fixed income revenues is quota note. We know can do 3 billion revenues at least from from what I've seen the outlook, but that doesn't mean, we're going to have a bad quarter by any stretch so it's that kind of.
Backdrop, but I feel I feel really good about a ship position.
Globally against the banks, who never have some of the big macro businesses that the big Universal banks have particularly in FX.
Where where we just have a much smaller footprint, but nonetheless, I am macro business trade it really well.
Well the brink said, let's follow up is now that the the benefits realized what you and many others thought about your capital excess capital position.
You've mentioned in the past about using some of the to augment.
The franchise in asset management, but let's say the shackles come off sometime next year does matter when what's your thought process around deploying capital is it are there places to meaningfully deploy capital across the markets franchise or or is the plan the same.
Use it to augment asset management, returning the rest like how you're thinking about the excess capital now that that family agrees.
Yes, I don't think this is.
Either this all dash.
You know we're in it we're in a great position now we've got onto the SCB about 200 basis points of excess capital will pick up.
John Science actually 300, I'm, sorry, I was short changes 500 basis points, who knew that could happen.
We've got a the C.T. one will be enhanced further by.
The trade closure.
And obviously, it's not at that level, but it's still additive to our capital base.
You know if we come in with an NCB shortfall, we'd be looking at doing things with the R.W. ice in the business it'd be more pressure on that we don't have that pressure. So the share gains that we've picked up.
We can maintain or even enhance and you know strategically will look across the trading franchise not to go gang busters on that but are there opportunities where we can continue to pick up share, possibly a was certainly open to that in asset management. As you know we've talked about this for a number of years because we are.
Our asset management franchise as I sit Oh numbers have gone from beginning of 2019 I think there for 80 billion. We were over 636 40 now are attracting really good flows the pipe homes building out well, we'd love to augment that so that's a clear intent a wealth management, we did it with a with the trade so the opportunity to use capital of four.
For a one around for the balance sheet expansion. If we wanted to do that and you know at biases to be conservative to.
To be fair, we don't but the good news is we're not gonna have to restructure or shrink Cup business because of some capital and showed pool. So number one that number two asset management transactions number three just investment in a platform and that technology to continue to modernize Morgan Stanley.
Before you know a dividend paying out about a 35 cents a quota which is about to bid over 2 billion annually.
We made in the first half of this year about 5 billion. So we've covered almost a two and a half use of dividends in the first half of this year. So I dividend coverages is very comfortable I would love to expand the dividend in time I've always said I think we should pay out effectively what we make in wealth management as dividend and.
Think of that is yield starcom thing of the institutional businesses the growth soft.
So that's that's coming then obviously, you're not getting back on the buyback train.
You know, we've still got we've got to be in five.
Change of shares outstanding we started this at about 2 billion.
We'd like to continue to drive that number down we don't we don't want to sit on this capital not put to work for shareholders, we want to put it to work.
Thank you Sir our next question comes from Christian Burger Live economists. Your line is now open.
Good morning, James and John maybe John.
Clarify a isn't it.
In there but.
Just to clarify on wealth management and I jump off points for Threeq is a billion dollars in twoq and that will drift lower from a billion dollars right. Just because this confusion around I'm talking about ex prepaid numbers et cetera, I just wanted to clarify that it's really the billion dollars in this quarter and.
How to think about where the jump off point is.
The first two quarters again were approximately $1 billion.
Okay perfect. Okay. Thank you quit.
And then just more broadly.
I think you alluded to learn a lot about the expense structure of the business over the last few months. So maybe just provide a bit more detail on kind of how you're thinking about what you've learned and then sort of like how are you seeing that ultimately effects.
The long term efficiency ratio potential of the firm.
Yeah, I would say attrition that we are first of all the crisis is clearly not over we're still in the middle of this and we're continuing to learn about our infrastructure and our employees and what's the most efficient way to work. So those comments were really around first we have to get through this and then longer term.
I think theres, some interesting things that come and come out of it clearly the work from home as a as a backup or.
As a backup or BCP planning measure is clearly an acceptable one we've been now at 90% or the folks working from home for Awhile now in the plant continues to hold up quite well. So I think theres. Some things that we can learn from that as well and so I think again longer term real estate decision to take a long time given leases.
And ownership, but I think that will take a look at the footprint over time, but our first priority right now is to get through the health crisis and keep our employee safe.
Let me just say couple of things about expenses.
And about that real estate coming in particular, because something I said I think on the Las coal or on a TV interview was picked up and blown out of proportion.
On the real estate footprint I said, we'd love to live with all about people working from home will most of them and therefore that gave us an option to rethink our real estate strategy that was interpreted.
By some in the media as we're going to radically shipped a footprint in a major location sense I'm going to happen.
You know we're committed to the major cities in this world where are we Havent headquarters here in yield for EM today, with John although socially distance London Frankfurt.
Which we've moved in consolidated does how European headquarters Tokyo in Hong Kong that doesn't change Mogens Sandy will remain a major player in the commercial real estate market globally. However, when we think about a DCP backup Senate's when we think about at consolidation embedded various offshore send us an identity management when we think about some of it.
Excess capacity costs have branch network is this the time to start addressing those issues clearly we have more flexibility to do it than we would have under normal circumstances and that's what we've token are we going to be radically expanding real estate across the firm over the next five years I doubt that very much but are we going to be radically shrinking at I doubt that very much.
So hopefully that they put some more reasonable tone on.
What was picked up in those comments on the Noncomp expenses. So just to say, we put on treat being of extra revenue this quarter and we put on about 100 being a big string Noncomp expenses. This business has unbelievable operating leverage now to be fair. It goes both ways right. If you lose 3 billion in revenue you can bring down your non comps that.
Quickly.
So it goes both directions, but if we're in a growth mode and we can control these non comps and obviously comp except in wealth management is simply a ratio that we can manage.
You know you could you have embedded huge operating leverage in the business and that's why we saw the ROTC numbers that we sold this quarter.
Great. Thank you.
Thank you and next question comes from my carrier with Bank of America. Your line is now open.
Good morning, and thanks for taking the questions.
First seems like forever ago, but just how are you thinking about some of this strategic initiatives. You highlighted started the year you just given the current anbar, obviously, a lot of putting puts and takes.
Oh, the still uncertain, but just enough the would be helpful.
Well I'll touch on maybe jump months of also add a little bit just on the I think we went public with three metrics a pre tax margin sort of medium term and then long term exploration efficiency ratio the same and ROTC the same now.
Not to be cute about it but in this quarter.
We achieved the long term aspiration of efficiency ratio on the ROTC.
Im not pretending that that's a steady state right now I'll be very happy if we go back to achieving what we said we do in the.
A two year period, and we're only six months into that two year period. So you know, but as I said, we have the non comp operating leverage so the efficiency ratio through revenue growth I think is a slam dunk. The ROTC again with this kind of operating leverage and without the credit provisions if you have revenue.
Growth I'm very comfortable photos the wealth management, one that's more challenge because we did not expect to go to effectively zero interest rates at the beginning of the year that said.
Even with this environment.
And with the with the pretty lousy print at the start of the corridor.
And with some of the integration costs that are coming from me trade built built in they still hit margins above a 24% and I think they will grind away back up into the zone that we talked about how quickly that's going to happen, Mike I'm not going to predict.
But it's not going to be forever. So you know overall.
You know we stand by the strategy, but we can't you know nobody in this world can predict goodness, what the next month is gonna be like let let alone the rest of this year and we've got a presidential election coming all sorts of massive uncertainty some of that uncertain news. We just demonstrated plays to our favorite so I don't John I'm sure we'll ever view.
On when these medium term goals you know when it's realistic come and talk seriously about them again, but it's too early yet, but it is interesting that through the first half of this year, we basically on track for two of the through them.
And the only other observation I would make is when we laid out those goals, we hadn't an assay trade transaction that either so we're going to you know I think the course of the rest of the year and getting the deal closed and seeing where we end up and then when we come back in January I'm sure. We'll update you on what we're seeing and how we feel about those those goals.
Okay makes sense in just a quick follow up on the trade just given a lot of the industry changes in wealth and online banking thinking you guys mentioned in providing you with online brokerage only the corporate platform. Just how are you thinking about like the online banking kind of asset I mean in addition to that DRA.
Well.
The online banking is clearly additive or building out digital banking cross a millions of households in wealth management using the trade platform for that clearly additive.
The other question was I think the IRA platform.
You know early days, but I've always said, so that's a decent business model. It just isn't one that we've had now we've got an opportunity with a true we trade and I'd like you know why not right that's an opportunity for us to pursue.
But it's very early days, it's a tiny business for them.
A major obviously the elephant is that core advisory business and that's not going to be disrupted, but we'll take a look at the IRA stuff as we as we get into next year.
And I would just add that.
E trade.
The trade has performed exceptionally well.
During this period sort of validated many of the reasons why we're so excited about doing transaction.
Customer activity levels are at record highs exceptional net new asset and account growth.
At this point through their public disclosures through may they've sort of outperform on new assets in client sort of all of last year. The plant has held up very well. The technology is excellent they've had no no hard to outages and all the reasons why we bought that bought the company I think have been enhanced.
And validated through this period.
Great. Thanks.
Thank you and next question comes from tier limits Soc Gen. Your line is now open.
Hi, Thanks for taking my questions a great results.
Uh huh.
But if you could the tool a bit more about.
Each rate ambitions I know you will see the numbers.
And the autologous against Legislates I thought to strategically.
Can you talk more specifically about what you do cheese.
With the integration and it sounds like maybe like a ambitions on revenues and she front.
Was it may just like a a scale game, although seems like that's the big you all in.
That's it in wealth management, that's efficiencies you get.
And then secondly.
Few competitors have shaped equal.
Are you doing.
For the second half.
I was wondering what your expectations were.
For the second processes to assist us off but we'll see a buses the second part of 2019. Thank you.
Well I am I would touch briefly on the strategic rationale free trade, we did that earlier this year, but oh.
Repeat that and John I'm sure, we'll have a crystal ball on what the sick enough is going to look like versus the second of last year I'd be interested to hear is cristobal.
Because we're all kind of curious how it's kind of unfold, but I will say I'm very comfortable with Morgan Senators and institution through the second half of its here we have many many businesses.
And much of our revenues that are not driven by.
The volatile trading activity, so anyway, let John handle that one.
Just quickly on on a trade Andrew.
You know and I think as we said very clearly at the time it makes us I think the largest player in the workplace.
Vectren this country, which is the third channel for client acquisition behind some sort of advisory personal interaction and digital it makes us the second or third largest player in the digital space. Some with the first allowed US player in the core advisory space. So we're all three channels. It diversifies our revenues as an institution by adding threed.
And if revenue it improves as C to one ratio it gives us a platform to say digitally internationally. It creates an opportunity for us to build the digital bank across our wealth management business.
They have a small I re platform, which I mentioned, which is interesting Oh, we have obviously some expense consolidation across the two platforms. They have a terrific brand for a younger generation of investors. They have a terrific brand for more active trader investors and options trading investors, which.
We're excited about so there are there are a a long line of.
Things that make this attractive and the test was how did they hold up in this period of incredible volatility and as John does said they hold up extraordinarily well they have attracted.
Hundreds of thousands of new accounts.
But with that has come real money not just kids playing this is real stuff. They brought in billions of dollars of net new assets and deposits.
And they platform has remained very stable. So that route that that is the trade story, it's a continuing evolution of the Morgan send a strategy and a nod to the fact that having stronger digital capability across our wealth management business is critical and a nod to the fact that we're interested in expanding internationally.
I will I will not attempt to make a crystal ball prediction.
But given some of the comments that I made in my opening remarks, clearly we have a differentiated model with wealth and I am which is sort of the stability of that model in those businesses should continue to perform quite well.
And then the at the the which we referred to historically as the ballot and then the I.S.G. creates some of the alpha.
As James said, it would be hard to see how we produce the first half results in the second half results.
But we also think we'll continue to do quite well given the market share gains that we've made a and the client penetration that we have and it's really just going to be a function of what the wallet size is in the second half and I don't think anyone has the ability to predict what that will be.
Thank you Sir our next question comes from Devin Ryan with JMP Securities. Your line is now open.
Alright, great. Good morning, I guess first question here with respect to be fast and thanks for the color and obviously the overall positive outcome, but James you mentioned working with the regulators is stressed scenarios aren't I don't think necessarily reflecting how the business actually behaves and we've seen that trading over the past.
A couple of quarters and whats I think a real world stress test. So I'm just curious if these are normal conversations just around future too fast assumptions and modeling that you kind of always have or is it related to the 2020 outcome. It it sounds like some peers like Goldman or potentially petitioning for some relief. So just kind of curious around that comment.
Yeah, I think Devon.
No I don't Wanna get ahead of the regulators and and you know we we have an obviously discussed anything relating to capital and capital requirements in <unk> in the light of these earnings but it's a more fundamental view if you go back to 2008 2009.
Regulators would be entirely justified and being Holly skeptical of Morgan Stanley's business model at that point given.
A trajectory coming out of the financial crisis.
And the early days when the integration Smith found they look to be slow them up most people had hoped but never bothered me by the way, but most people were anxious about it. So there was kind of up a period of you know, let's just wait and see it I think some of the the market models that they put in place that affect all of the banks disproportionate.
The Hood.
Morgan Ciena is the time has progressed in the business model is played out in the stability. The franchise now fully tested here and with producing our we have a 15%.
Most of the competitive set or four to 800 basis points below that.
It certainly gives pose to to reflect on the stability. The business model now, let's played out a couple quarters.
I've said for long time, the peeping our results do not reflect certainly what we think about the business.
And for that we believed that there is a model issue relating to financial Buzz that compensation have fix that is believed to be when in fact, it's not fixed at all it's a commission based structure so that.
Ah potential further regulatory relief on that which we've been lagging full for many years and I think it's well understood now.
By the regulators, but listen Mohegan Sun is not the Morgan said it was 10 years ago were different were different institution, we didnt have the credit provisions that everybody else. That's not lock that's by design, we don't have exposure to unsecured consumer credit we have very little emerging market credit we have very little small business middle market lending it's by design.
And so at some point if your model is built not to endure.
The credit.
Kind of hits that the the other banks naturally have given their portfolio and you don't have the liquidity that you had in your trading businesses and you had the balance of the wealth management of the repetitive no. So those revenues and earnings then you're a different kind of animal and that's really what we've been getting full for long time.
I'm not going to get ahead of the regulatory discussions we've got another Sicad test John coming I think in the next couple of months. So clearly that test will reflect a cobot type world more explicitly than the last month and we'll play it out you know we'll play it out but Morgan Senate currently has excess capital and I believe we chose to create another $3 billion.
I believe we're going to.
Create excess capital through the rest of this year and be sitting with many billions of dollars of excess capital at year end and we want to do something with that.
Let me just at a couple of quick observations, one where there is a formal appeals process. We're not entertaining that these are just natural a normal dialogues, we have with our regulators and as James said, we've been talking about it with them for years.
I do think that we saw some recognition of that in this years results. Some of the PPNR modeling is more reflective of more recent results and obviously given the transformation that we've we've gone through we see started to see some of that in a in a in the results, but again, we think thats more there and then on.
The last point of a re submission as James said you know they the fed did release sensitivity analysis. It was very geared towards lending and credit losses, a as he mentioned, we do have a differentiated portfolio not only in terms of its makeup but also in terms of its size.
We've avoided a uncover.
Unsecured consumer very limited small business middle market small commercial banking. So it's just a much different model and I think it will fare quite well in the Resubmission and obviously, we've all seen what the trading results have been through this many stress test. So we feel good about the capital position, we feel good about where we stand and sicario.
And you to talk to our regulators about so sort of the results in the transformation that this company has gone through.
Thank you. Our next question comes from Robert Veterinary at the most Fargo. Your line is now open.
Hi, good morning, Thanks for taking my question.
First questions on deposits how did the delay in the tax deadline impact deposits in the second quarter have you seen a run off in the last couple of weeks as we approach the deadline and is there still an opportunity to reinvest.
Some of those deposits at higher rates to pick up some yield.
Sure. So it clearly has had an impact.
The payment date with ER was yesterday are typically.
We see a the run off sort of post the payment date, historically, it's sort of been in and around $5 billion to $6 billion. So we would expect something comparable in similar there, but I think the interesting dynamic around the deposits are as you said, we have the excess position.
We've seen sort of a rotation into the markets really slowing. So if you look at this period, we saw about $20 billion of cash come into the system from a combination of dividends and interest, but often new cash into the system.
And only 15 billion of that went into the market. So net 5 billion and BDP as I. Just said, we would expect to see some of that flow out with tax payments, but what we.
Oh definitely seen is last year. This period that number would not have been a positive at all it was about a negative $10 billion. So the deposit levels of really stabilized and starting to creep up and I think what the opportunity for us as I said the durability of these deposits.
Increase and we've seen them pretty stable now well, probably just continue to pay down some of our higher cost wholesale liabilities, we've got about $25 billion of Cds at a run off over the next 18 months, we clearly don't need to replace those at some other third party arrangements as well, so it's really going to be around reducing some of.
The wholesale liabilities and then continue to deploy that into the lending growth that we're seeing in that business.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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