Q3 2020 Morgan Stanley Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to stand by thank you for your patience.
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Copies of which are available at Morgan Stanley Dot com.
Today's presentation may include forward looking statements.
Subject to risks and uncertainties that may cause actual results to differ materially.
Please refer to our notice regarding forward looking statements and non-GAAP measures that appear in the earnings release. This presentation may not be duplicated or reproduced without our consent I will now turn the call over to chairman and Chief Executive Officer, James Gorman.
Hi, good morning, everyone and thank you for joining us.
For a decade now we'd be rebuilding Morgan Stanley from the depths of the crisis to fund position to saying whatever comes our way.
Our performance. This year was validated that approach and third quarter revenues were 11.7 billion. The second highest quarterly result in our history.
Balanced business mix continues to deliver consistent results in high return.
Our T. C a 15% with the year to date, our Tc rate of 14.3%.
On October 2nd we closed the acquisition to be trite and.
And last week, we announced our intent to acquire Eaton Vance would says is the lot latest strategic step in our transformation.
We added these acquisitions from position of strength.
And we have a strong momentum across each of our businesses.
Institutional Securities has been pivotal to our performance in 2018, 19, and again in 20 year to date extremely strong.
This quarter ice GE reported a the 6 billion of revenues and to be in a pre tax.
Strength in Asia equity underwriting and fixed income sales and trading and our overall equities business Powerade outperformance.
Asia had its best quarter in nearly a decade as we continue to see the benefits of the investments we've made in that region.
Fixed income delivered the highest third quarter revenues in 10 years, excluding deviate.
I see revenues today to 19 being up 24% over last year and.
And we continue to believe our institutional securities business has meaningful organic growth opportunities.
Wealth management continues to grow both organically and Inorganically.
On a year to date basis fee based flows have been exceptional 53 billion with 24 billion in this quarter alone.
Lending balance growth was a quarterly record of 6 billion.
Versus the prior year lending balances and increased nearly 20%.
Well, we did not only trade in the third quarter. It is important to note how they performed delivering strong client activity and asset growth in the quarter as they have all year.
With the trade at <unk> total client assets and now 3.5 trillion.
That is up from 600 billion approximately we oversold before we bought Smith Barney a decade ago, representing an increase of nearly six times.
Our investment management business serves as the third leg of the stool and produced over a billion of revenues on its own in this quarter.
Assets under management reached a record 715 billion.
Oh no no that is compared to 460 billion of assets under management, we had less than two years ago.
Assets under management growth is being powered by long term net flows without the 10 billion the quota fueling of course fee revenue growth.
Well generating the strong organic growth our recent announcement allowed us to transform our investment management business.
Giving its scale and several incremental growth engines at one time.
Frankly, it was too good of an opportunity to pass up.
For years, we viewed Eaton Vance as the perfect partner, we will.
We will bring together two high performing asset managers with great business momentum.
And through this partnership we will now manage 1.2 trillion in assets under management.
Generate a combined 5 billion in annual revenues.
And to submit October 2020, as one of the most important month in our history received an upgrade to wait to for Moodys. The only G. Sibs received an upgrade during the pandemic.
Their recognition of the fence clearing consistent strategy to shift our business mix towards lower risk recurring profitable revenue streams in wealth and asset management together with our integrated investment Bank is a further codification about transformation.
So what did the next six to 12 months old.
One we will make material progress on the integration of the trade too.
True, we will close and commenced the integration beaten van.
Three we will reinstitute, our capital distribution plan, one Q2 thousand 21, assuming of course, we have clarity from the fed reserve.
It is worth noting that our seed to one ratio following the additions to be trade and Eaton Vance is expected to be 300 basis points above a SCB requirement of 13.2%.
Full we will focus on driving organic business growth, while managing expenses.
And five we will ensure our culture remains firmly concentric and grounded in doing the right thing.
This includes operational resiliency meeting all regulatory expectations and maintaining the risk profile, we enjoy today I will now.
I will now turn the call over to John to discuss the results of the quarter and together we will take your questions. Thank you.
Thank you and good morning in the third quarter from net revenues were $11.7 billion with net income applicable to Morgan Stanley of 2.7 billion were.
We reported an ROTC of 15%.
Our year to date revenues reached a post crisis record.
To sell securities is having an exceptional year, capturing the elevated client activity and managing risk well.
Wealth management is delivering stability, while the underlying indicators to continue to position us for future growth and in.
And investment management is delivering growth through industry, leading long term net flows are.
Our bankers and financial advisors are supporting our clients as they remain intensely engaged.
Expense management remains a priority on a year to date basis are from efficiency ratio was 71% down approximately 90 basis points from the prior year.
We remain focused on our more controllable sources of spend while continuing to support our growth initiatives employees and communities.
Non compensation expenses increased on higher volume related expenses and higher unfunded credit provisions, which were partially offset by a meaningful decrease in marketing and business development expenses.
Compensation expenses increased on higher revenues.
Now turning to the businesses and.
Institutional Securities had the strongest third quarter in a decade equity underwriting corporate credit and strength in Asia underpinned the results.
Clients remain engaged through the third quarter as risk assets continue to rally through August and capital markets remained active.
From a regional perspective Asia had a stronger quarter in nearly a decade with contributions from each of the businesses.
Heightened activity and interest in China, which saw particular strength in ipos in equities drove results year.
Year to date 2020 Asia revenues are higher than all of 2019.
Investment banking generated revenues of $1.7 billion decreasing 17% from the prior quarter.
While fixed income underwriting subsided and advisory revenues remain muted equity underwriting buoyed results with particular strength in ipos.
Advisory revenues were $357 million reflective of lower completed M&A industry volumes.
Equity underwriting continues to be extremely active with revenues of 874 million results were driven by ipos, which nearly doubled versus the prior quarter offsetting declines in convertibles and blocks.
Fixed income underwriting revenues were $476 million results were impacted by the lower levels of event related activity in the quarter.
The equity underwriting pipeline remains healthy we expect issuers to continue to access the market and remain opportunistic be advisory pipeline is recovering as evidenced by the recent increase in announced activity and we have seen the pickup in both sponsor and corporate activity.
Equity sales and trading revenues were $2.3 billion. We're number one in this business both for the quarter and year to date.
Results were particularly strong in Asia as well as the Americas consistent with client interest in higher growth regions and momentum names respectively.
Well volumes declined from historic levels of the second quarter activity remained robust both cash and derivatives revenues were elevated for a third quarter.
Prime brokerage results were strong average balances increased as market levels rose rose and certain clients re levered with spot balances closing above twoq period end levels.
Fixed income sales and trading had the strongest third quarter in a decade, excluding the impact of D.A. driven by the strength in micro.
Revenues were 1.9 billion in aggregate with most products declining from an exceptionally strong second quarter.
Activity levels were healthy as clients remained engaged throughout the summer months from a geographical perspective results were broad based and year to date fixed income has now generated over $7 billion of revenues.
Micro continued its robust performance bid ask spreads remained elevated though lower than the prior quarter benefiting results performed.
Performance was supported by continued strength in securitized products and credit corporates.
Macro was impacted by lower sequential revenues in rates and foreign exchange as spreads normalized and volatility decline.
Foreign exchange and rate markets continue to be range bound.
Commodities results reflected lower activity, but were forwarded by.
By strength in metals, highlighting the diversification of the business in recent years.
Our I asked you loan portfolio portfolio continued to perform well as a reminder, over 90% of our IC loans and commitments are either investment grade or secured.
The sequential decline in results across other sales and trading and other revenues primarily reflected lower gains net of hedges on our held for sale portfolio due to less spread tightening compared to the prior quarter.
Our funded I asked few loans declined by $2.3 billion from the prior quarter, driven primarily by pay downs in our corporate loan book.
Our funded ratio of corporate loans now stands at 15% down from 18% in the prior quarter and well below the one to peak at over 25%.
We added to our reserves modestly in this quarter, our provision for loan losses was $66 million down 70% from the second quarter we.
We had approximately $23 million of net charge offs, primarily from one commercial real estate loan that was troubled pre kobin.
Our allowance for credit losses on loans and lending commitments increased to 1.1 billion of which our allowance on loans now stands at $806 million.
The increase were primarily driven by kobin related sectors covered related sectors continue to represent just 10% of our total IC lending exposures.
On the substantial majority of these exposures are either investment grade or secured by collateral.
Our allowance for corporate loans increased to 4.8% and for CR CRP remained stable at 3.1.
Across the entire held for investment loan portfolio, our total allowance rose to 1.9%.
Turning to wealth.
Third quarter revenues were $4.7 billion broadly in line with the prior quarter and up approximately 5% excluding the impact of DCP.
Pre tax profit was $1.1 billion.
Reported margin was 24% merger related expenses and a regulatory charge impacted the margin by almost 200 basis points.
The underlying indicators of this business remain robust including record new net new.
Record net new assets continued strength in client engagement fee based flows loan originations and net recruiting.
Fee based flows were exceptionally strong at $24 billion in the third quarter contributing to a year to date fee based flows of 53 billion.
Total client assets ended the quarter at 2.9 trillion dollars, 11% higher than the prior year.
In the third quarter transactional revenues were $880 million, including the impact of DCP revenues increased sequentially exhibiting seasonal strength driven by capital markets activity.
Asset management revenues increased 11% sequentially to $2.8 billion, reflecting higher starting asset levels on higher markets and fee based flows import.
Importantly, asset management fees, our $8 billion year to date, a 6% increase over 2019.
Lending growth remained strong with balances exceeding $91 billion on a year to date basis balances have grown by $11 billion with record quarterly growth of $6 billion in the third quarter.
Growth was broad based across the portfolio, we saw strength in securities based lending, which was driven by strong engagement from ultra high net worth clients and by adding resources to our lending businesses.
The loan portfolio continues to perform exceptionally well.
We had only $2 million and net charge offs in the last seven quarters in this portfolio.
Forbearance continued to decline.
Mortgage forbearance fell by more than half representing less than 1% of our portfolio and 90, plus day delinquencies declined to 20 basis points.
Forbearance on commercial real estate loans in our tailored lending book declined by approximately 40%.
Net interest income was $889 million declining 14% sequentially.
Higher lending and BDP balances helped to partially offset the impact of prepayment amortization and tighter deposit spreads.
Prepay was more meaningful in the quarter accelerating in the latter part of September as rates decline nearly half of the sequential decline in Eni was attributed to prepayment amortization.
Total U.S. bank deposits were $238 billion.
And third quarter BDP balances were up $7 billion, despite delayed tax payments totaling.
Total expenses were $3.5 billion in line with the prior quarter.
Investment management results were very strong as the business continues to demonstrate meaningful momentum.
Long term net flows and strong investment performance has supported a U.M. growth, which is translating into higher fee revenue.
Revenues of $1.1 billion represented the second highest quarterly level in over a decade, increasing 19% from a robust prior quarter.
Total AUM rose to a record high $715 billion, representing over $200 billion of growth since last year.
Long term net flows were $10 billion driven by continued strong investment performance and global equity strategies.
In global remains critical our investment team in Asia began sub advising a newly established SG global equity fund in the third quarter.
It was one of the most notable fund raises in Japan in the last 20 years and at quarter end and more than $5 billion in assets under management.
Inflows across all regions led to an annualized long term growth rate over 10% for the second consecutive quarter.
Total net flows were $13 billion as liquidity inflows moderated and investors pivoted away from money funds.
Asset management fees of 795 million increased 16% sequentially driven by higher management fees consistent with strong growth in AUM.
In the third quarter, we did see an increase in fee waivers on certain money market funds as a result of the rate environment.
We expect to see the full effect of this trend in the fourth quarter.
Investment revenues were $258 million in the quarter, we saw broad based gains across the portfolio with sequential increase primarily driven by gains in Asia private equity funds.
Total expenses were $741 million.
The increase was driven by higher compensation on higher revenues as well as higher BC any expenses on higher average AUM.
We are very excited about the future of this business and to be partnering with Eaton Vance.
Back to close the transaction in the second quarter of 2021, we look forward to advancing our partnership with Eaton Vance and further enhancing our investment management platform.
Turning to the balance sheet total spot assets declined to $956 billion as funding levels declined from high so the second quarter our stock.
Our standardized R.W. A's declined by $5 billion to 411 billion.
And our standardized.
One ratio rose 80 basis points to 17.3 compared to our SCB of 13.2.
Our board declared a 35 cents dividend per share.
Excluding $113 million of intermittent net discrete tax benefit our tax rate was 24.3%.
We continue to expect our full year 2020 core tax rate will be approximately 22% 23%.
On October 2nd we closed the acquisition of each trade as it.
As a function of the closing we issued 232 million shares at $11 billion of common equity.
Our assets increased by approximately $77 billion, an R.W. ways by $12 billion.
We created approximately $8 billion, the goodwill and intangibles of which 3 billion will be amortized over approximately 15 years and our CE tier one ratio increased by approximately 40 basis points.
Tangible book value per share declined by approximately $4 and our book value per share was essentially flat.
As you would expect in the fourth quarter, we will start to see merger related expenses as we begin the integration of each trade we will.
We will start start to break these charges out in our disclosures in January when we report year end results.
As for the operating outlook the dispersion of potential macro outcomes remains high and while we are cognizant of the seasonal patterns as the fourth quarter. We are encouraged by client engagement across all three businesses in the first few weeks of the quarter with that we will now open the line to questions.
Thank you ask a question your press Star one on your telephone switch my question the pound.
Question the pound key in the interest of time, we ask that you. Please limit yourself to one question and one follow up after.
Our first question comes from Glenn Schorr with Evercore. Your line is now open.
Hi, Thanks very much.
Curious if we could talk about flows in wealth management are you mentioned, a couple of things, but I'm curious.
What you would attribute year to date to recruiting versus consolidation of.
Of wallet share and.
While we're on it if you could talk about the wealth management loans being up almost 20% is that.
Combination of mortgage and SBS sales, just just curious what's driving that within wealth management.
Sure in terms of the.
The flows listen this is a long term secular trend that we continue to see that people want.
To to pay for a managed account and one fee and we.
We've seen this for the last several years and we now approach about 50% of the assets, we manager and fee based accounts.
It's really a combination of multiple factors and I think you mentioned many of them. One we've seen more cash come into the network and that cash is being deployed.
Although there is still a significant amount of cash on the sidelines within our network, but we have seen more come in and more thats being put into the market number.
Number two your comment about net recruiting we're seeing a morgan Stanley become the destination of choice for financial advisors recruiting has been quite strong and we brought in bigger teams over the last course of the last nine months and with them, they're bringing their assets, which are being deployed into the fee based accounts, so really a combination.
Those two things and then lastly, we've seen attrition dropped significantly so we're not losing.
Many assets so a combination of all those three things and again, we think thats a long term secular trend that will continue and we'll continue to see good flows into our fee based accounts and then I think the lending growth is really as you mentioned those two products the SBL product.
So a significant pick up about $4 billion. This quarter predominantly about 70, 75% of that came from our ultra high net worth.
Client base.
We've continued to invest in the platform I think we've gotten better at using data and analytics. We've added some more support to the field and Weve seen real receptivity around.
Around that product with our client base and then lastly mortgage continues to do quite well interestingly, we had about 45% purchase this quarter, which which was nice to see is as that has picked up as well. So it's really both those products have been quite a quite strong within the within the footprint.
I would just add Glenn you know sort of Soviet now from little distance, because I'm not directly involved in that.
This is the healthiest I have seen this business in the following years up being here in terms of client flows both.
Fee based flows and absolute players, which we historically don't breakout other a lot of movements during the year with tax payments and the like but it's extremely healthy and the attrition numbers very low as John said, so net recruiting a better client.
Better client penetration and a lot of very wealthy clients.
Proof.
Validating the model and you add that to the trade franchise, which has also seen very strong flows. This year, it's up to me, it's very exciting to see it.
I appreciate that maybe just one follow up on the expense side.
First maybe with the core expense you mentioned.
Activity levels are up so obviously expenses are elevated but marketing MTN. It's been down maybe if you could start with how to think about that for the go forward on expenses and then I know that we have to wait till January for your integration thoughts on each rate dollar wise, but may.
But maybe you could talk a little bit about.
You actually have to spend money on on on the integration and the trade. So we can just start putting together our thoughts on models. Thanks.
Sure.
Just broadly on the on the expense base, what Weve, obviously seen given the elevated volumes is elevated.
Brokerage and clearing expense that goes with the trading volumes as well as transaction taxes, we as I mentioned Asia has been very strong. So we've got a little bit more of a skew towards transaction taxes and those will continue to remain elevated assuming that the volumes remain elevated and those generally ebb and flow or.
Or they do ebb and flow with the volumes, we've done a really nice job.
Also managing our professional expenses, we continue to try to drive those numbers down and then the market and business development expenses is really been driven by just the lack of the lack of travel the lack of conferences things being converted.
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To to virtual and we would expect that to remain muted for a while but ultimately those expenses will start to pick up as we start to see movement around the globe.
In terms of any trade as you know.
In February when we announced the transaction, we talked about $800 million.
Integration related charges that we would incur.
Incur over a three year period as I, just mentioned that that will start in the first that this current quarter in the fourth quarter will start to break out those disclosures. So you can actually exactly what they are.
We closed the deal about 10 debt 10 days ago, we're extremely confident about both the funding and cost synergies that we laid out and we also think there's significant revenue opportunities as we can as we get into the integration here. So you'll start to see that this quarter, we'll break it out and as you said, we'll give you some more thoughts around that in January.
Thank you our next.
Question comes from Steven Chubak with Wolfe Research. Your line is now open hi, good morning.
So James I wanted to start off with a question on capital. The accretion has been considerable as you noted since the pandemic started and you're clearly significantly Overcapitalized. You also noted that you plan on returning the excess possibly as early as one Q next year.
Correct to regulatory approval and removal of the buyback moratorium, how should we be thinking about the pace and cadence of buyback and your comfort initiating payouts in excess of 100% of earnings and this separately how does the dividend target of alongside that.
A few questions talked and then Steve very awful.
Thank you well.
You're welcome.
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Listen we're we're of the capitalist I mean, that's the bottom line.
We were out of the capitalized before we went through see kind of lost time, and our SCB numbers actually were lowered by the fed reflecting the change in the business model.
You know, it's something that we thought we felt for a long time and it's starting to be recognized and even if you look at the PPNR models, where we continued to argue I think entirely appropriately that financial advisor compensation is variable not fixed expense that would come down as revenues come down our PPNR numbers would actually be healthier than they.
Currently showing eventually I think that I grunt will prevail I hope it will prevail, but even without that all with the accretion from the E. Trade transaction, you know, we making two and a half billion dollars. The quota net and we're paying out total dividend I think about 2.2 billion look at John maybe slightly higher.
So where were clearly, creating a lot of excess capital about probably $7 billion net without doing buyback on a base, where we had 300 basis points above the minimum.
The minimum requirement will always keep a buffer I don't know what that buffers should be 100 basis points, probably something like that I'm looking at as CFO here to see if he disagrees with me sort of shaking his hand sideways Keith.
He is probably a little plus on the 100 on probably a little minus on the L. He's little minus Okay. We're all happy.
Let's see you know on buybacks I. There is no absolutely no reason give them more incentives current condition.
The.
Shaped to the balance sheet.
Liquidity profile on the mix of the businesses why we wouldn't be distributing capital except that for right now it's the right thing to do for the broader acumen d. as we work through this pandemic exercise and the fed does it sub pandemic stress test, which is going on right now I'm highly confident we will come out of that showing we have a.
On the excess capital I'm hopeful we'll.
Have those results you know before we get into next year, but obviously, that's not within my purview given that I would expect us to be back doing buybacks in the first quarter, obviously, if the economy completely tanks between now and then or the results.
Less positive than I expect them to be then then all bets are off but that's you know you've got to run the business as you see it likely to be and that's my likely scenario how much do we do yeah, you could do a by definition could do above 100% payout why not if you otherwise wouldnt, we'll never ate into the 300 basis points at some point we.
Have to do something with this capital to shareholders rightfully, who own the company are entitled to generate a decent return on the capital invested in the company, we have to do something with it buying Eaton Vance was a tremendous opportunity to use some of that it's going to do.
Hit our C. One I think about 90 to 100 basis points.
But we've created 90 to 100 basis points in the meantime, so we're sort of back to where we are but we own a new company. That's a nice thing.
So you can tell I'm, a little animated almost subject. If you look at any of the global geographies in the US I think it's fair to say we are carrying the most capital surplus and I don't think there's any rational reason why once we get through the cobot stress test. If you will that that would that will perpetuate unless we.
Get a result, which is adverse which I don't expect.
No. Thanks for all that perspective, James maybe just a question for John on the DIY outlook on the you beat on virtually every line item I think and I always the lone exception you were not alone in this quarter as prepay started to accelerate even towards the end of the quarter, but just curious given the strength in loan growth.
That was cited in Glenn's earlier question want to get a sense as to how we should be thinking about the eni trajectory from here or whether we should expect things to start to stabilize and maybe even grow a you know as we look out to 2021.
Yeah, well I think.
Well, you're right, we did get hit with prepayments at the end of the quarter I think absent that prepayment levels.
Generally came in where we thought and where we had guided you to probably a little light as we saw.
As we saw some contraction in deposit spreads I think on a go forward basis. If we were just ourselves I would say were pretty stable at this point, we obviously have reinvests reinvestment risk as the investment portfolio turns over but we're generally offsetting offsetting that with the growth we're seeing in the portfolio.
But as you know we did close each trade.
Trade comes with a large low cost deposit base in a very highly liquid high quality investment portfolio. So from a quantum perspective next quarter or this quarter you will see the dollars of Eni go up as high as about half of the revenues generated at the trade where from a eni.
And then we're.
We're going to start optimizing their portfolio as we laid out in February.
We'll give you a better sense of sort of what the sensitivities are around that but we're highly confident we can get the funding synergies that we outlined in February.
That contribution of Eni I, probably ticks up but still is going to be sort of again relative to others about only 25% of the wealth business, which again is a much smaller part of the overall company.
Steve just back to your capital question I mean, it's important to note that lets us.
Let's assume just mathematically I don't know, we carrying 20% excess capital right now.
300, plus basis points on a 13.2 requirement.
If that's the case and we still generating our ease of 13% ROTC of 15% so.
With with that excess capital we're generating these kinds of returns. So I think shareholders would would you know could sensibly look through that and project what the returns would be on the capital we're actually using to run the business and all.
And obviously, they're higher than where we are now.
Hey, Thanks for that perspective, James Thanks for taking my questions Joel.
Thank you. Our next question comes from Ben and Hawken with Utopia. Your line is now open.
Good morning, Thanks for taking the questions.
Start with one on expense.
One on expenses so.
At the beginning of the year James you provided some targets to your targets that.
That focused on.
Fishing see ratio and pre tax margin wells, but I seem to recall that they were based on this it before all the deals. So I think they were based on what what else.
Referred to as legacy MSR pejorative way, but just.
For clarity so I turned to be nitpicky here I just wanted to trying to understand is there a way we are going to be able to track your progress in your legacy business Hi tore.
Towards those targets or is the idea that now that you've got so many of these like strategic integrations that are continuing your transformation that that's sort of trumping. The work that you had previously laid out on efficiency and therefore, it is just more important to folks.
Yes on the integration there and not.
Yes, the efficiency push just want to try to understand how to think about that.
Sure Brendan I think there is sort of treat three elements to look at this one is what is the as you described with the legacy business.
Going to generate in terms of efficiency ratio and right now I think this year was slightly up to 70% we were less than that in Q2 were higher in Q1 and were Rod I think right on the button this quarter.
Our two year objective was 70 270, twos, so meaning that our long term aspiration was under 70 and we are very close to maybe not so so check the box on legacy number two is what do.
The new acquisitions due to a efficiency ratio if you look at the pre tax margin on.
The trade business it's.
Let's see it was sort of in the 40 ish percent range, maybe a little below that with what's going on with a net interest income and if you look at the Eaton Vance business, it's closer to 30%. So by definition, if you simply add one plus one.
Our efficiency ratio would actually be lower but the third bucket of course is one of the integration costs for that on site on Eaton Vance until we close hub. It's John said should be Q2 of next year.
We have actually we had a small number of integration costs already in each trade as you know in in the last.
And the last a little bit and that will build and I think we put out a prediction of 800 million over three years I personally would like to accelerate that.
We will probably identified as a below the line numbers. So you know just the Clinton unless some fuel models will show a you'll be able to see a efficiency ratio with them without up but you know clearly we'll talk to our accounts about the right way to report that but you know we're not going to hide the ball here, we are highly confident that.
Absent the integration costs, our efficiency number.
Numbers, there's no reason why they don't spend.
Okay, great. Thanks for that and then I know that.
John I think you mentioned that your plan is to lay out some more specifics around the trade with the fourth quarter call, which makes a lot of sense, but.
What's your early read on how you're thinking about some of these.
Changes that are likely to happen on the back of this integration is the.
Is the plan that the E trade bank, so we'll be folded into the one of the Morgan Stanley. Thanks.
Are you planning to integrate the Bds and you know the real.
Really one of the great assets city treat brings to stock plan business.
As sort of a different focus more of a public plan focus.
And so the strengths are very different but offer a nice you know kind of Yin and Yang with the Solyom, which has a strong private.
Offerings. So how do you plan to bring those.
Platforms together or is the idea that in order to fully capture the broad strengths.
Keeping them separate is a better approach.
So it is.
Maybe to the full integration is is is not going to be realized in order to maintain those various strengths.
Sure and I I mean broadly the answer Brendan to that question is is yes, but I think the way we're thinking about it first we've got to integrate the systems.
We want to capture the cost and the funding synergies that we laid out we want to do it in a way that doesn't disrupt the customer experience and.
Ultimately enhances the customer experience.
And then as you said I think we believe there are significant opportunities across all three channels.
To to generate growth and revenue growth and whether that's in the stock plan business.
And trying to get our cash capture numbers up to the trade numbers. When we did the deal they were running about 15% there there.
They're they're now running north of 20, our numbers were dramatically lower than that so if we can bring the combined business together and get that to a higher level closer to there is that's a significant synergy clearly.
Clearly there are generating lots of new clients. Some of those clients are ultimately going to want to want advice.
Want advice.
And so you know there are lots of opportunities across all three channels and we'll start to see those as we get these systems integrated as we mentioned before that will keep the trade brand for the self directed.
Business line, but we're going to bring these companies together slowly this was not a deal about cost. It was about revenue opportunities ultimately just like the Eaton Vance deal was.
And we're going to take our time, integrating well and bring the cultures and companies together.
But and to be clear nothing has changed in that view of each right if anything it's got better.
The integration plans, we'd been would account for six months with a Mike PC CMV trade has joined our operating committee.
You know very well pull through plants great detail.
We'll stage the various businesses as you highlighted the workplace the or the banks et cetera, and then the actual E trade trading business will retain a separate identity, but.
Because it has it has a very powerful brand in the marketplace. So so we're you know we're highly confident we're going to get the cost synergies, it's just and and I think we gave you that 800 million number in January and February I guess, when we did the deal and it would be fair to say that's probably not.
You know with where we tend to be conservative with numbers like that so I doubt were going to be spending more than that and the pace of the spend will be just run with the integration plan. So it's going exactly as we hoped it would go but even a little better frankly.
Thank you. Our next question comes from my carrier Capex doesn't mean he ran this now okay.
Good morning, and thanks for taking the questions.
First institutional had a very strong year in two years that matter.
James You mentioned upfront still see good organic growth opportunities just given your leading share in some of the areas New provide you a little color and just where you see some of the attractive organic growth in that business and that maybe offset some of the expected moderate.
Yeah, well, firstly, you know doing.
Doing deals in the institutional space is a little fortune you are unlikely to want to do balance sheet type deals I don't think anybody would would be sending out balloons. If we did that and they're they're obviously advisory businesses around the world that you could acquire small ones boutiques, if you like but.
But we haven't we haven't found anything that that really excites us yet.
So if we look at the organic growth I mean, just look at fixed income.
And still the gap between what our fixed income business is doing which is phenomenal by the way from where they've come from its truly phenomenal.
And credit you know Sam Kellie Smith, and Ted pick of a single institutional business for that turnaround in the last couple of years, just phenomenal but they.
But they clearly.
Really have capacity to grow in that business. Our equities business. You know we lost the number one mantle for quota we didn't like that we got to back up.
Clearly prime brokerage has continued to consolidate those growth across a prime <unk>.
Prime brokerage our capital markets business in Asia, particularly China bound Asia enormous we have an incredible franchise. There I think there are pockets of banking, we could be strong grain we have some segments, where we're very dominant.
Healthcare Tech and then some other industry groups, we could get even stronger.
So I you know I think in DCM, we buy progress I think when number five or a five.
Five or six of DCM underwriting John and look for it.
For actually pointing to me.
You know I think the gap there.
There with some of our competitors Theres no, particularly rational reason why there should be I get there.
I think that's just it's it's nowhere near as you know we know we know what we could be as a potential. The question is can.
Can we get there with the kinds of returns we want and expect from the business. So we quite judicious, we're not just throwing balance sheet I'd look at the trading but I think that trading about this quarter was 60 million a day and that was materially lower than our major competitors. So we're quite judicious about about.
A series of small steps rather than big swings as the way I describe the answer.
The institutional business and they've delivered you know as I made a point of sales and 18, they had a record 19 and again and 20, they delivering so I think there's a lot of upside and obviously, it's also framed by the competitive landscape and what the European banks are doing youre not doing it said.
Et cetera, Jonah I don't know if you want to add to that you know I think if you sum that up well and I think Asia.
It's really a bright spot for us as I said year to date or the revenue generation from that business and I see now bigger than Europe, we see that as a real growth engine and we'll continue to make investments.
All right. Thanks, a lot and then just given the recent M&A, whether decrease loss or Dan.
They both me and just curious on timing.
Yes, obviously, the capital and where are you seeing something something in industry dynamics and then more importantly, both of those businesses are putting up the gross so just what do you think that business does with these these transactions obviously not over the next six to 12 months.
You just four years.
Yeah, you're a little gobbled, there with the phone line, but I think the question was around the timing of those transactions, here's how I think about acquisitions.
There are at least four things that matter one is strategy to his coach a three is price and four is timing.
The strategy is that the the the high table. If you will the Holy Grail, you got to have strategic intent, it's got to be a logical fit it's got to be building on something which already have competence in it's not a swing for the fences, it's not new ground, it's something we know well we good at and that's the perfect strategic.
Opportunity comes when you get that and we got that with the trade and ER and then with Eaton Vance <unk> co.
Culture is very important, particularly in the finance industry, where a lot of deals have gone bad because of cultural bad cultural fits including by the way in the asset management space and there is a fairly high skepticism probably from all of you about large Esa management deals we told through that lot Eaton Vance been around 94 years, we have the biggest distributed their product are we.
No them extremely well parametric has been an absolute home run in our system, the Calvert funds and what they've done and sustainability space.
Fixed income.
Combined with that fixed income business say core equity funds, there's so much to like about it and about their leadership team and I would point out that they have they had an internal voting shareholder structure and all 25 of their internal voting shareholders voted in favor of the deal unanimous so.
So it wasn't just the board it was the management so culture I feel really good about prices price you know you don't buy quality assets cheaply.
Timing is the thing leasing you'll control and I am sure. If we didn't do this transaction will lead and then somebody else might have.
We didn't want to do it before we had the trade thing completely done on the other hand, you know we wanted to get moving its assets quality assets don't sit on the shelf for very long their interests and Morgan Sandy we earned its in them. So timing is just timing is the thing you've got to give most of them. It may not be the ultimate can be.
Unions, certainly came out on the television trade, we didnt want to communicate all of a sudden we're trying to do an acquisition a week were not we didn't control the timing. So we we you know we do if we go if we got the first three right then Tommy is the least important.
What it does in the covered thing I think as you brought a timing issue with whats.
With what's going on with the economy, what's in their business is growing they've had great growth as I said, the parametric product has done incredibly well.
Since it was created a few years ago. This in great great growth across the whole platform as is our asset management business. So we really think we putting together two strong growing businesses and you know the the investment market is not going to go away whatever happens.
Whatever happens in the election, whatever happens politically so I'm not worried about that over the next couple of years.
Great. Thanks.
Thank you. Our next question comes from Mike Mayo with Wells Fargo Securities. Your line is now open.
Hi.
Well to coincide with your upgrade of your credit rating. Congratulations My question is on risk and three bar I spoke to upgrade I thought you're about to upgrade as Mike said upgrade you have disappointed me man.
[laughter] well first.
Yes, 3% quarter over quarter of loan growth.
Is well above the industry to just wondered about the risk related to that and how you're getting what others are not.
Second on the E trade acquisition.
Spread revenues for each period.
Sure.
Seemed like they'd be up quite a bit lower so updates on revenue thoughts with that acquisition.
And then third with Eaton Vance.
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$7 billion for from returning about $360 million you'd have to double the earnings just over 10% or so and.
In terms of risk from risk.
The credit risk with the spread revenues and Eaton Vance risk with just really getting your your money's worth.
Well I'll, let John talk about the credit risk, but I would observe that we're not in the unsecured credit world. We do not do small business lending on any scale at all.
We tend to loan against People's portfolios. So we have collateral when we have total visibility on the consumer side and on the institutional side, we're very careful about what sectors. We've been in were not overexposed to some of the more troubled sectors and we have a lot of really good clients have been really loyal to us have great businesses that we want to support during this period. So.
You know the fact that credit is performing a differ.
Differently from some other institutions is completely irrelevant I mean, it it entirely depends on who you are lending to under what terms and conditions. So.
On the E trade business, yes, with the and I obviously.
That businesses is.
You know it's affected by that on the other hand the.
The account openings the positive asset flows the opportunity for us to provide those kinds of mortgage and lending products today clients the opportunity for us to provide the ulta put the alts platform on the system. The fact that we're not spending $200 million year building out our own digital platform. There are so many positives before you can get to the workplace business.
Where they conversion right as John said.
Its something like 20 plus percent aus has been about 3%. So I'm I just think that we is certainly we have our eyes wide open on whats going on interest rates in this world I don't expect that to be a permanent state, but it's certainly not something that makes me shy about the attractiveness of this acquisition the underlying benefit.
Closing the business have been phenomenal and the one thing that is actually change in people's behavior, even more than what is going on the last five years is the increased use of digitalization, whether it's a health services financial services.
Obviously shopping et cetera. So I think we could we couldn't be more plus than you've got a trade at the time, we got it on Eaton Vance listen Mike I'm not that smart one of your colleagues on the call said that even if we paid a billion dollar Texas for a 90 billion dollar company.
Slide Yeah, that's it.
I'm not ashamed besides fully priced but this is a quality asset and I look at the growth rate in the asset I don't look at the static position we.
We will get the expenses out of this we will consolidate this we will generate the revenues from it it fills out that fixed income asset management business in a way that we couldn't have done otherwise and it provides us some real growth endurance as I said with their core.
Equities platform with parametric with Calvert funds, the Atlanta fund that they've got so many businesses that work for us they have very little international distribution. We can take them internationally, we have trouble getting our product distributed domestically because we don't have a stronghold selling sales force as others do they do they have a world class one so.
You know it will will that deal deliver I'm positive that deal is going to deliver and if we have a pay by a couple hundred million dollars people said, we haven't paid solely by a couple hundred million dollars. Some people said, we overpaid Smith Barney by couple of billion dollars. So I take a very long term view on acquisitions.
Hi, just one more follow up pull back the lens, even more I mean over the last 10 to 20 years, you're right now reversing some of the actions that you took in sort off and can't then and now you go ahead and get an asset manager you've got out there.
Kind of the mask market wealth management now you're back with the trade.
Can you give us kind of your big picture strategic thoughts on why to the long term reversal here.
I totally disagree with what you just said, we've not had a long term or both so we sold van Kampen, which I regard as a mistake I've said it a couple of years later I wish we hadn't done that but we.
But we did it and I said on the call a couple of weeks ago commodity Flanagan was listening.
Regret that but God bless him. He is a friend of mine and I wish him well.
We haven't got out of the mass market and by the way each trade is a combination of a workplace business an active trader options derivative business and a direct business. We we have always provided financial services. Since we merged with thing would or 1997 to the average investor we happen to have a lot of very very wealthy investors. In addition.
But we have millions of people with hundreds of thousands of dollars to invest not tens of millions of dollars to invest. So this is not a change in strategy at all this is about getting scale in the businesses, we want to be in the one thing we did differently, which I would have done differently. I've said repeatedly is van Kampen, but you look at some of the other stuff we did.
We got out of mortgage servicing Saxon we got out of shipping storage and oil storage and shipping transmontaigne.
And high demand, we got out of the stepped up PDT business sub pay demolished business because it was a prop business. So we've we shut down from point a hedge fund we got out of discover which was a credit card business to the mass market unsecured credit we have fundamentally ever and that happened before my tenure, obviously, but fundamentally change the.
I follow this company to focus on originating distributing in managing capital for individuals governments and institutions. That's what we do and this is entirely consistent with that and Eaton Vance sits squarely in that.
And that squid.
Thank you. Our next question comes from Jim Mitchell with Seaport Global Your line is now open.
Thanks, Good morning, maybe just a follow up on the trade if we look at their results in the first half. They as you pointed out James are very strong, adding 650000 retail accounts up 14% cash balances up to 50%.
I guess two two parts to the question I guess first.
On the flip side, you have lower rates. So how do you think about the accretion targets given the growth we've seen versus the interest rate declines we've seen since you announced the deal and then secondly.
How do you what's driving I mean, obviously the market's volatile, but do you think that kind of account growth can continue and it's not a big surprise going forward.
Let me start and then I'm sure John let let's listen we're on day 10, or something here and I know everybody wants to fill out your models I'm sympathetic to that you run those already told me that's what everybody is looking for.
And I'd love to be able to do that for you, but we're not going to do that today.
They have had unbelievable growth I think they write code.
New account.
Number but for this year was 93000 and that are over 300000 in the first quarter second quarter couple of hundred this quarter well over that Theyve had incredible asset flows into the business. So will that continue I think it will stay elevated it won't continue at this level that will certainly be net attrition.
Because some of these accounts that rope and we'll close that was smaller accounts, but they also brought in a lot of large accounts. So I think it will I think the answer is Jim It was slow, but they've reached I would I believe they've reached a new baseline above where they were previously because of all the engagement around the markets.
How they pay in L., then plays out based on that and based on some of the mortgage and olds product and other stuff that we put in their system and some of the expenses that we were able to take out a and the funding benefits you know John John can address that but we'll certainly do a full update at your rent bumps, we a have a natural quarter of them sitting inside Morgan Stanley John.
Yeah, I think stay tuned for Jay.
Stay tuned for January but we announced this deal in February we told you it would be dilutive in year, one breakeven ish in year, two and accretive in year, three and we still think that that.
The general framework and we'll give you more information in January we're just we just started on this path, we still have high confidence in the funding synergies.
$400 million of cost savings and the broad outline that we outlined in February.
All right. Thanks appreciate it.
Thank you. Our next question comes from Devin Ryan with JMP Securities. Your line is now open.
Hey, great. Good morning, Thanks for taking the question.
First one.
Is.
Just around the acquisitions and I appreciate that you guys have your hands full and the message is nothing big coming soon or was it sounds like but if we take a step back you've added many millions of new retail customers to Morgan Stanley's ecosystem over a short period of time, whether that be through Solyom. You trade are you there.
You've answered so if we think about products are there any big products or services that you're not touching yet at the firm level that could really make sense to plug in to this broader retail consumer base or is it really now just more about cross selling existing Morgan Stanley.
I think we've got you know we've got a very full plate right now.
And I think the biggest opportunity is probably a push.
Putting a mortgage product to high FICO score clients with good assets at each trade and putting the banking product through the moving 70 system the digital banking today.
To go with our already you know the two banks that we have I think they're the two.
Two obvious ones, Devon, but I'm not seeing a specific product gap and as always we have today total open architecture would take anybody's best product, including from all that competitors because if that's what's right for the client and that's the right thing to do so I'm not saying it product up.
Okay terrific and then just a quick follow up I just want to make sure I'm following what's happening on the on the wealth side on the advisor head count so.
Yes. This is the first quarter of net additions in over a year. It's the best addition quarter in five years and I heard the comment that.
Morgan Stanley as the destination and also benefited from lower attrition.
Yes. It is this quarter kind of a one off in that evolution or is this something that we should maybe focus on is a shift occurring.
Maybe the backlog good background also maybe just curious kind of what the recruiting backlog looks like you know if we start to think about your head count.
Headcount growth again on the financial advisor side.
I mean, Joe May have a comment but I it.
It's hard to predict but the trend is definitely a friend and if you look at the net recruiting numbers. So for the last several quarters I don't have them on hand, but I think the gap has been closing we've now turned positive.
You know its a.
We're at an interesting inflection point with that business, it's got great momentum, but solo say nutrition.
Part of a Devon is that people aren't leaving then by definition you are going to be growing but.
John Yes.
That's right and the pipeline for recruiting certainly in the near term is strong we're attracting a attractive teams with good business books of business.
As James said the number of advisors if you go back.
JV was dramatically higher attrition rates are quite low and on an.
And on a net basis.
We are seeing sort of flat to.
To slightly growing numbers, but more importantly, the assets and the revenues at the new advisors are bringing with them is going to be additive in future years. So it's a really nice it's a really nice position to be in right now.
Yes.
Terrific. Thank you.
Thank you.
Our next question comes from Gerard Cassidy with RBC capital markets. Your line is now open.
Thank you good morning, James Good morning, John.
And John you touched on the Prime brokerage results were strong in the quarter average balances I think you said increased as the markets.
Prove the new more clients became read levered up or engage more.
Can you share with us what's going on with winning new clients, particularly in other geographies outside of North America.
Then also driving these numbers.
A couple of things, we did have a nice quarter and TB, you're right balances are up.
From where they were they are still below the peak levels, we have seen the long short hedge funds re lever.
Kwan still having a I haven't really heard as much as the volatility in the equity markets still remains reasonably high we continue to see a nice pipeline of new launches that adds to the growth dynamic.
Excuse me add to the growth dynamic and it's been pretty broad base. So.
We continue to believe a if the markets remain constructive if volatility comes down we'll continue to see growth in the PB balances, which will drive revenue growth in the future.
Very good and then as a follow up I think James you talked about the strength in the institutional business. We've been very pleased with the numbers and 2018 19 and year to date.
Cited some of the competitors overseas earnings strong is there any evidence yet that they are kind of getting back up on their feet and so the a more competitive environment as we look forward or do you think there is still struggling.
Well I I don't think I've said that gerrard to be fair I, just said there might be opportunity, depending what are some of the international competitors strategies do and clearly some of them have chosen over the last two years to shrink their balance sheets and go back to you know they core traditional banking businesses more.
It's hard for me to predict I mean, these things wax and wane a little bit so I don't want to comment on the strategy, except to observe what's happened and that's clearly provide the opportunity for some of the U.S. banks, but that could change.
Okay. Thank you.
Sure.
Thank you. Our next question comes from Andrew Lim Soc Gen. Your line is now open.
Hi morning says taking my questions.
A question for you James on the M&A side. So you talked a few weeks ago the balance.
Disappointment, I am asking trading and like a bank, who is PE ratio from nine to 10 times.
I can see how buying wealth management and asset management businesses like try and changing vessels professionals that but I'd like to.
Like discuss it from a different angle why isn't it a better strategy to divest CRB.
It's not obvious to me that see I'd be has synergies with asset management and wealth management.
You can have to see IB tracing a nine to 10 times, and then asset and wealth management trading at 20 times and so on.
On top of that you could have a the bulk of the excess capital, we have asset and wealth management and that could be 10 freed to shareholders without restrictions on the fed. So I was just wondering what your thoughts on that as a strategy to maximize shareholder value.
Oh, that's not going to happen.
Thats my thought about that.
We have an integrated model for reason we have the.
We have the bellows from wealth and asset management, we have the engine room, we generate a originate product in our institutional business that Hello.
Ups provide enormous opportunities for our clients across sales is how the house there was.
There are so many synergies Andrew that's just not that's not even remotely close to where we think about this business.
Thank you.
And ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
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Okay.
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