Q4 2020 Morgan Stanley Earnings Call
Good morning on behalf of Morgan Stanley I will begin the call with the following disclaimer.
During today's presentation, we live with parts of our earnings release and financial supplement copies of which are available at Morgan Stanley and dotcom.
Today's presentation May include forward looking statements that are subject to risks and uncertainties.
The cause actual results to differ materially.
She is the first time and notices regarding forward looking statements and non-GAAP measures that appear in the earnings release and strategic update.
Within this strategic updates and reported information.
And adjusted and as noted in the presentation.
These adjustments were made to provide a transparent and comparative view of our operating performance against our strategic objectives. The.
A reconciliation of these non-GAAP adjusted operating performance metrics and included in the notes to the presentation and October to Morgan Stanley closed its acquisition of E trade, which impact period over period comparisons for the firm and the wealth management.
This presentation may not be duplicated or reproduced without our consent and I'll now turn the call over to chairman and Chief Executive Officer, James Gorman.
Thank you operator, and good morning, everyone. Thank you for joining us and I fully appreciate we're competing with the historic day here. So I, particularly appreciate you.
That's the thing and we will be brisk as we always try to be.
Morgan Stanley delivered record results in 2020, we generated an average TCE of $15 four.
And 4%, while meaningfully driving out of strategic vision forward.
We successfully closed our acquisition of V trade.
<unk> and upgrade from Moody's to weight to it placed on review for upgrade of the second time and announced our intent to acquire Eaton Vance.
And last month following the federal reserves release of its second the stress test results.
The $10 billion buyback program that we and.
Intend to execute in 2021.
Our performance and competitive position.
It was hard evidence of Morgan Stanley has reached an inflection point.
John will discuss the details of this year's performance and a moment. The first let me walk you through our vision for the next decade, and Apple focused on growth as outlined in our annual strategic update. This is something we've now done since I believe 2012.
Let's turn to slide three.
Our strategy revolves around demonstrating stability in times of serious stress.
And delivering strong results when markets are active.
2020 for sure tested the thesis.
And the rapidly evolving operating environment, we responded to heightened volatility and supported open and functioning markets and client needs.
We delivered record revenues of 48 billion, while remaining disciplined and our risk management those revenues by the way of up from 30 full being and the time period 2010 through 2014.
Turning to slide number four.
We enhanced our positioning in the areas of secular growth with several strategic acquisitions and 2019 as you know we advanced the workplace offering with the acquisition of sodium and.
And in 2020, we took the leap forward when we announce our acquisitions of E trade and Eaton Vance.
Combining with the trade positions us to reach clients in various stages of wealth accumulation and the scalable economic way.
E trade technology products, and innovation mindset and handset growth model.
The E trade serves the younger demographic.
And while we're on average of about 10 years younger than those we have historically served and.
And we can continue to service as their needs become increasingly complex.
But the Eaton Vance, we will create a leading asset manager of scale.
Eaton Vance Springs, new investment capabilities threat platform, and leading positions and secular growth areas, particularly customization and sustainability.
The deal will also expand our client reach and.
Binding <unk> robust international distribution with Eaton Vance is strong U S distribution.
Please turn to slide number five.
Having experienced the period periods of fragility healing and stability of.
And is now at an inflection point.
The next decade will be characterized by growth.
Our growth drivers spanned across all three of our business segments.
And focus on gaining market share.
Spanning and deepening our client relationships.
Realizing acquisition synergies and operating leverage and finally, returning capital to shareholders.
Please turn to slide six.
Scale, and Orange and connected businesses of the foundation for our first growth driver gaining market share.
Our integrated investment bank produced $26 billion and revenue on a pro forma basis and wealth and asset management.
Platforms is among the largest globally with the type of five trillion and combined assets.
Our breadth and depth of product offerings and services of enabled us to gain and increased share of client wallet as you can see on slide seven.
Our segments of working together to deliver holistic client coverage and of capturing asset and revenue growth.
And 2020 International Securities generated over 300 million of revenues from transactions true wealth management referrals.
Wealth management, and turn and gained 20 billion of client assets and investment management sort of 6 billion of net flows and commitments all from institutional securities referrals.
Our second growth driver expanding and deepening our client base begins with institutional securities on slide eight.
Our integrate the investment bank benefits from Mack coordinated and client focused approach.
We built revenues meaningfully to a record 26 billion and 2020. The result of this growth coupled with risk and expense discipline and operating margin of 35 per cent.
Turning to slide nine which talks about our wealth management business.
With the acquisition of B trade, we are now a top three player in each of the key channels and which investors manage their finances and.
And each presents unique growth opportunities.
With our increased capabilities, we can deepen client relationships and provide more services the millions of households.
And if we look at the trade on slide 10, you'll see the business had a remarkable year in 2020, setting new records across all material all material metrics.
Unique backdrop dramatically accelerated digital adoption and meaningfully increased levels of engagement.
Versus prior record trading activity more than tripled.
And net new assets more than doubled the.
<unk> reached record levels.
The extraordinary growth versus the prior records, it's hard the additional evidence of that decision to buy E trade was indeed, the right one.
On slide 11, we illustrate our extraordinary accumulation of net new assets, bringing of the 200 billion of assets this year new to our firm.
6% of beginning period assets on a pro forma basis.
We've invested heavily over the years building a modern wealth strategy enhancing our technology and building new businesses and the addition of B trade will only help.
This year's net new asset growth was remarkable and while net new assets tend to fluctuate obviously in any year. This is and this was likely at the high end of what is the likely range. We still expect net new assets remain well above historic levels.
On slide 12.
Every year for the past decade of revenues have increased and with E trade and daily revenues will be significantly higher and the future.
In 2020, 65% of trading days, so revenues in excess of $70 million that was compared to just 2%.
On the four years ago.
Let's talk about investment management on slide 13.
With our announcement to acquire Eaton Vance, we will create a premier global asset manager with $1 four trillion and assets under management.
Since 2017, Morgan Stanley investment management has grown assets under management by over 360 billion and both MCM and Eaton Vance had.
Each individually attracted industry, leading long term net flows over 20 per cent.
We're really excited about this transaction and the integration planning is going well.
Eaton Vance has businesses remained strong with increasing assets under management through the end of December.
We expect to close the transaction no later than early and the second quarter.
Slide 14 shows the power of our wealth and investment management platforms when taken together.
On a pro forma basis, we will have of the five trading and client assets trading further revenue opportunities.
Our efforts to enhance and buildup of these businesses and led to strong growth.
The former client assets of more than double the amount we owe the saw in 2014.
Consistent with that predominantly advice driven business model revenue on these assets expressed in basis points on the right hand side of the page is materially higher and our three largest competitors.
Now, let's turn to slide 15, which includes and update on the acquisition synergies, we expect to realize.
The cost synergies, we previously outlined of definitely on track and.
And on the funding side with the additional liquidity and deposits. We've added since the announcement, we expect the 100 million of more and synergies than originally predicted.
We also expect to capture significant incremental revenue opportunities through these deals and when they were outlined and a little bit of detail and on the right hand side of the slide.
So turning to 16.
Expense discipline is a fundamental tenant of the way, we manage Morgan Stanley and as and enhanced record pre tax profits and you'll see our efficiency ratio has come down from 2014 at 79%. So just on 70%. This past year, and obviously that has driven the pre top of pre.
Tax profit expansion.
So our fifth growth driver as highlighted on page 17.
Over the past.
Over the past several years, we have consistently improved our returns despite holding material excess capital.
Very excited about the opportunity to return that excess to shareholders and announced the $10 billion buyback program for this year.
We reached out the share repurchase program this month and planning to increase that dividend when restrictions are lifted by the federal reserve.
I'll now conclude with our updated strategic objectives, which are shown on slide 18.
Well this year will be a transition year as we absorbed two major acquisitions, our focus remains on positioning Morgan Stanley to achieve our long term strategic targets.
Our long term aspiration and frankly I believe is the wealth management would generate a margin over 30%.
By 2022 weeks, but by 2022 and in that period, we expect to range from 26 the third.
30% as we continue to work through the E trade integration.
We also have planning to invest and many aspects of our business for growth, but we will balance this with discipline.
And so doing we are keeping our long term efficiency ratio of low 70%.
And within the range of 69 to 72 over the next two years.
Finally, our long term aspiration priority C is indeed to exceed 17%.
How quickly that occurs depends not only and that business performance, but also of course on capital distributions.
In the meantime, we raised our two year target to the range of 14% to 16%.
And as always the targets are subject to major moves and the economic outlook and any big changes and the political and regulatory environment. However.
Based on what we see now we fully expect to achieve these as stated.
That concludes the strategic part of the conversation I'll now to turn the call over to John is going to go through the fourth quarter and annual results and together, we look forward to taking your questions. Thank you.
Thank you and good morning.
The firm produced revenues of $48 billion, and 2020 records, both with and without E trade and you.
We saw continued momentum into the fourth quarter with revenues of $13 6 billion.
Dynamic markets incredible volatility and consistent client engagement across all three businesses drove results.
Excluding E trade integration related expenses, our Aro GCE was 18, 7% and $15 four per cent for the fourth quarter and full year, respectively, and EPS was $1 92, and $6 58, respectively.
We continued to deliver on operating leverage in 'twenty and 'twenty led by institutional Securities.
Non compensation expenses for the year increased 15% driven by increased volume related expenses and higher credit provisions.
These increases were partially offset by a decrease in marketing and business development.
Compensation expenses increased 11% on a full year basis on higher revenues.
Revenues for the full year were up 16%, resulting and efficiency ratio of 70% down from 73 and 2019.
Now to the businesses.
And institutional securities our business achieved various records throughout the full year of.
Our revenues were $26 billion, 25% higher than our previous best year.
All regions contributed to the results growth in Asia was the standout.
Revenues were $7 billion and the quarter, marking the strongest fourth quarter and more than 10 years.
The traditional seasonal slowdown was not experienced and clients remained active up until the week of Christmas.
Investment banking revenues were $7 $2 billion for the full year of 26% higher and 2019, driven by record underwriting revenues, particularly equity.
And response to the Covid environment the year saw of rolling opening of markets, beginning with debt and rescue financings next with equity and very recently leveraged loans and corporate M&A financing.
Quarterly results were the strongest and over a decade generating revenues of $2 $3 billion, 46% higher versus the prior year driven by record underwriting and advisory results with each region contributing revenue as well above average run rates.
Overall of the investment banking pipeline continues to be healthy across products.
The pace of M&A announcements has accelerated and client and boardroom dialog is active.
Equity issuance remains robust for the strong backlog from Ipos, driven by leadership and health care and technology and follow on activity, notably in the Americas and Asia.
After a record breaking year and investment grade and high yield debt markets strategic activity should support increased acquisition related financing.
And equity sales and trading we remain number one globally for the seventh consecutive year.
Full year revenues of $9 $8 billion increased 22% from the prior period.
This represents the strongest annual result, and over a decade.
This year's market backdrop was unprecedented and the strong performance across products reflected heightened client activity.
Elevated volatility and of double digit increase and global market volumes.
Fourth quarter revenues of $2 5 billion and full year results were robust across products and regions with the biggest growth drivers from derivatives and Asia.
Fixed income sales and trading revenues were the highest and over a decade, increasing 59% the $8 $8 billion per the year.
Clients are highly engaged and the year marked by higher volumes and volatility active capital markets and wider bid ask spreads.
Fourth quarter revenues of $1 $7 billion increased 31% year over year.
The results in the quarter and full year were led by credit and foreign exchange for the full year Asia showed particular strength.
Across other sales and trading and other revenues results this quarter improved versus the prior year the.
The increase primarily reflected lower provisions for loan losses and movements related to deferred cash compensation plan.
Our ISG credit portfolio continues to perform well.
Over 90% of our ISG loans and commitments are investment grade or secured.
ISG loans and lending commitments are up $9 billion. This quarter as we continue to support our clients, while our funded ratio and our corporate book has continued to decline and is now close to pre pandemic levels.
After building our allowance for loan losses throughout the first three quarters. It was essentially flat in Q4.
ISC provisions were $14 million, while net charge offs were approximately $40 million primarily related to one commercial real estate loans secured by a hotel.
Well of risk remains concentrated and are vulnerable sector portfolio of the portfolio continues to decline.
We derisk the portfolio by close to $2 billion this quarter and it now represents less than 10% of our portfolio.
Over 90% of this portfolio like our entire ISG portfolio is either investment grade or secured.
Our reserve coverage remained stable and forbearance for the ISG portfolio continues to decline.
Turning to wealth management and October 2nd we closed our acquisition of E trade.
And this quarter's results include the combined business financials with virtually all of the E trade revenues and transactional and NII.
Making comparisons to prior periods are difficult and so I will focus my comments on Q4, and how we are positioned for 'twenty and 'twenty one we.
We have also included some new disclosure and the supplement on page seven regarding the combined business.
And the quarter revenues were $5 $7 billion.
<unk> integration related expenses of $231 million. The PBT margin was 22, 9% and full year margin was 24, 2%.
The underlying drivers of this business remain extremely strong, reflecting comprehensive capabilities and strong client engagement and activity.
Our record fee based flows of $77 billion for the year and fee based assets are now one five trillion.
We added $18 billion of loans or 22% growth and.
2020, and loans are nearly a $100 billion asset quality continues to be excellent and loans in forbearance are under $400 million down from approximately 2 billion at the end of Q1.
Deposits continue to grow and were supplemented by $54 billion from E trade and are at 306 billion.
And network generated net new assets of 66 billion and the quarter and on a pro forma basis over 200 billion and the year.
We remain the destination of choice for advisors and continue to add strong teams and retain our productive advisors.
These underlying fundamentals and the realization of synergies position us well for the future.
And the quarter asset management fees were $3 billion benefiting from higher asset levels and $24 billion of fee based flows.
The transaction volumes remained elevated and revenues were strong even after excluding approximately $350 million of D. C. P. As clients were active across both the advisor led and self directed channels.
Net interest income was $1 $2 billion and the quarter and benefited from the incremental deposits and investment portfolio that came with E trade.
This is a reasonable exit rate to inform 'twenty 'twenty, one and includes the purchase accounting adjustments associated with premium amortization, which is approximately $50 million of quarter.
This year NII will grow due to the realization of our funding synergies and lending growth with limited impact from rates.
And funding synergies, we on boarded approximately $4 billion of of deposits that were previously swept off E trade's balance sheet and the back half of Q4, and we expect the onboard approximately $20 billion and Q1.
As we invest these deposits and shed higher cost wholesale funding, we would expect to realize 80% of our revised higher funding benefits and NII in 2021 with the full impact of these actions.
<unk> and Q2.
And lending we continue to see strong lending demand and expect approximately 10% loan growth the benefit NII lag.
Lastly on rates, we do not anticipate any change to the policy rates and the near term. However, we will benefit from the eventual normalization of rates the app.
Acquisition of E trade increases our U S bank's sensitivity to rates and of 100 basis point increase in rates would now contribute an estimated $1 5 billion of additional NII compared to the estimated 1 billion, we disclosed in our Q prior to completing the acquisition.
We continue to expect $800 million of integration costs over three years with approximately 40% to be realized this year.
Following the close of the transaction, we took actions to realize the $400 million of cost synergies we outlined.
Our efforts have been aimed at limiting disruption to the customer experience during the integration and will be measured and.
And 2021, we will be exiting the E trade branches consolidating our bank entities and integrating HR and finance systems, and we would expect to realize of approximately 25 per cent of the cost synergies during the year.
Investment management reported revenues of $1 1 billion and the fourth quarter, representing the second highest highest quarterly level and over a decade.
For the full year revenues were $3 $7 billion in line with the prior period, but reflecting a greater contribution for more durable management fee revenues and less from carried interest.
Total AUM rose to a record high of 781 billion of which long term AUM was also a record of 493 billion.
Long term net flows were $8 5 billion and the quarter.
Our global equity strategies continue to deliver strong performance and attract positive flows.
Total net flows were <unk> $25 billion the <unk>.
Global nature of our platform remains an advantage as inflows across regions led to record long term net flows of $41 billion for the year and and annual long term growth rate of 12 per cent.
We are excited about the transaction with Eaton Vance across businesses and strategies Eaton Vance as assets under management across the excuse me increased by over $65 billion since October.
The overall tone of the business is strong and their momentum continues.
Turning to the balance sheet total spot assets were $1, one trillion and standardized our W. As increased of 454 billion, reflecting high levels of client activity and the closing of E trade.
Our standardized CET, one ratio was flat to the prior quarter at $17 four per cent.
Our tax rates were 23, and 'twenty, two and a half per cent for the quarter and full year, respectively. We expect our 'twenty 'twenty, one tax rate to the in and around 23%, which will exhibit some quarter to quarter volatility.
We are pleased with our strong performance. This year, our franchise is better positioned for growth and we have been and well over a decade, we enter 2021 with strong asset levels healthy pipelines engaged institutional and retail clients and and extremely strong brand there.
Confident and our ability to deliver on our objectives with that we'll now open the lines of questions.
Thank you to ask a question you will need the press star one on your telephone to withdraw your question press the pound key and the answer at this time, we ask that you. Please limit yourself to one question and one follow up.
First question comes from Brennan Hawken with UBS. Your line is now open.
Yeah.
Good morning, Thanks for taking my questions.
Just wanted to start on.
The net new asset disclosure that you guys provided here. This this quarter for the first time, thanks for that that's very very helpful.
It seems as though the.
The net new asset growth, the organic growth profile and the wealth business accelerated here in 'twenty and 'twenty.
What do you think is driving that is that a capturing a greater wallet share of existing clients is that the expansion of the client base and.
And it seems.
As though the.
Metric excludes fees and commissions is you have an estimate of what that would mean for a headwind to that growth rate because I believe most of the other competitors disclose.
Disclose it.
Net of those fees.
And I try and think of like for like Thank you.
Well, let me, let me start and John Oh, and talk about some of the disclosures and stuff and and as you pointed out of print and suppose time I think we've done it and many many years and we just thought of his time to reflect the effect of the business has unbelievable growth I mean, when you hear about a lot of competitors and you know a lot.
<unk> placed with frankly.
And.
In absolute dollars modest assets, and we were able to bring and 200 billion and a year.
Now part of that is obviously, it's the pro forma basis as part of that is if you look about the trade is doing the doing great part of it is you know if you're a net attrition of the financial advisers, you will be a net of attrition of assets on most of the buzz and spokes.
For the first time and.
On the plus years I've been doing this we are not in net of attrition.
All of which is interesting given the IFA channels continued to grow but they're not drawing from us.
So we are keeping assets of our advisers, we gaining assets from new advisors.
Through the workplace initiatives for sodium and E trades were gaining assets from the conversion and keeping of those assets at a higher rate than we were.
So.
It's a whole variety of things that are being done within the wealth management business to look for ways to continue to accelerate.
And asset growth at the pump and it's it's not a single thing I do think 6% you know that's the.
As I've used the expression before at the <unk> 40 number.
It's a long way from the 2% till the three 4% we were operating at and I think it will be elevated I don't I don't think and we're going to go back to two per cent and but maybe 6%, but that feels hide suddenly and best in class of what the street office of it.
Maybe John is more on the disclosures.
Yeah. So.
The two critical exposure of the net new assets and the fee based flows and you can see from the footnotes on the net new assets, which is the concept of the assets and we bring into the the organization net of the outflows that does not exclude the fees you can figure out and see the fees on the asset baseline and the disclosure of about 10 or $11 billion are the fee based flows.
And do.
Exclude that as it is is it a function of about how much fee.
Fee based assets and we have heard.
And that are generating a return on those asset base hopefully that clarifies the question and I think for us and the net new assets given the different business models across the.
The net debt.
And the different business models it reflects.
Most people don't have the the level of asset based fees that we do and we thought it was appropriate to dispose of that.
Yeah.
That's great that's very helpful clarification, and and greet the the growth rate looks robust.
Regularly here about how and the traditional wealth management firms of just the providers of share and.
And certainly a mid single digit.
The growth rate does not suggest youre, providing ceding share to anybody and so.
Agreed there and then for my follow up.
And sort of a related question and one of the things that a lot of people myself included pick us as one of the more exciting opportunities for growth and the wealth business is the stock plan business, where you really just have.
The strong position competitively.
And you flag of lot of that and the deck, which is really helpful. You talked about the retention opportunity of the 15 plus percent, which is what E. Trade has 42 historically.
Are you what's the plan to integrate.
The the stock plan platforms.
How long do you think that might take and.
Is it right when we think about the opportunity set.
And you've got the $435 billion of Unvested assets and my guess is that's the opportunity set.
About how much of that tends to best per year is that about a quarter.
30% and it's right to think about that as evergreen right and invest and then the replaced with New awards and subsequent year.
Sorry about the multipart question, but I think it's and that's okay.
So we have a we have integrated the sales team or going to market to our corporate clients.
With the consolidated sales effort as you would expect we're gonna be very mindful of the integration of these platforms I would highly.
Highlights that there were sort of certainly different.
Emphasis in terms of big and big companies small companies private companies and we will converge those platforms overtime and upgrade them both to sort of bring the best of both of those platforms together.
You're right.
The existing opportunity is the $435 billion of invested assets and roughly 5 million participants and our expectation is we will continue to grow the number of corporate relationships, we have and therefore, the number of participants and we've seen good closure rates since announcing of both the soliant transaction and the E trade.
And so we feel very good about the momentum of the number of new corporate relationships, we have and that channel and then lastly on the $4 35.
Give or take 25 or 30 per cent of that vas each year, I think thats the pre tax number.
So clearly there's tax impacting that but as you say our expectation is that number will continue to grow as we bring on more and more our corporate relationships.
Thanks for the color.
Thank you. Our next question comes from Mike Mayo with Wells Fargo Securities. Your line is now open.
Hi.
Well, you're clearly gained share this quarter the year in.
And capital markets.
And trading.
Aside from your gaining share what is your outlook for the industry wallet as you know at the.
Shrunk and trading for a decade.
And now it it may or may not have turned more permanently so and some banks day, we're planning for 2019 levels per trading I'm thinking of can maintain this pace and play and between kind of where do you fall out and why what do you see as the structural changes.
Mike It's it's it's very difficult to say I mean I'm.
Just spoke of what we've been through and the last 12 months and look of the activity in the first quarter versus the second quarter.
And then you know where the year finished so clearly there was a lot of activity and the market. There is enormous fiscal stimulus of rates remain very low.
I think the global economies are recovering and I think the vaccine you know if we get and the U S Mi and doses of day for the next 150 days would be spectacular.
So there are a lot of there are a lot of the industries that are continuing.
To look at a share issuance of new ipos coming recapitalizations of different kinds of raising debt. So the.
Theres a lot of market activity, I think and the in the reasonable near term whether it.
Is at the level of 2000 and 'twenty.
I mean, you you'd have the bid against that just on a pure odds of less than 50 per cent a I think you know but.
But who knows I mean, the euro has started off strong and.
And you know, we we count the Monday, the time and the year started off strong the market corrected the economies of recovering globally.
You administration has come in and it looks like we had a peaceful transition hopefully today. So you know.
I'm I'm I'm I'm quite optimistic about it I can't I can't put a pin to say exactly where we're going to wind up.
But you know, we clearly gaining share of fixed income franchise has.
And well recovered from the 2015 restructuring in 2012 lows of equities bounce you know and.
And retained the number one spot again and and what has been a growing equity fee pool.
And you know clearly that the banking revenue is about to be and for the quarter. There's a lot of M&A activity and a lot of underwriting activity. So I'm pretty optimistic I mean, I can't put an exact number of them, but I certainly don't feel like where we're going to make a major backstep at all here.
And that last comment in terms of backlogs are they up quarter over quarter, a near record down.
And generally I think from my comments, Mike we'd describe them as as healthy.
Across all products and all regions with the Ipos as a stand out as.
And as I said M&A activity dialogues very active pipeline very healthy so as James said very constructive start to the to the year with very healthy pipeline.
Alright, thank you.
Thank you. Our next question comes from Christian Ballou with Autonomous your line is now open.
Thank you and good morning, James and John.
Maybe back on the wealth management organic growth and again echo the earlier comments really appreciate the new information.
But the James you seem to be really pulling down the 6%. This year is not sustainable. So I guess can you just maybe help us understand what exactly was elevated in 'twenty and 'twenty was just overall industry was elevated was there something more specific to Morgan Stanley like higher recruiting.
I'm just trying to understand why you think it was.
And was elevated and then maybe more importantly, just looking forward you know give us a sense of what you think the business can do sustainably and sort of range organic growth that you would you would expect for the business. Thank you.
Chris and you probably know me well enough to find out and no I'm not going to project a trend line based upon one point of data.
You know listen we've had a decade of being growing net new assets around two or three and then three four per cent.
Clearly E trade has fast growing asset growth capability that adds and honestly I think net positive financial advisor are actual numbers.
Numbers of financial buses went up this quarter I think for the first time for years.
So I you know and I, just I just trends of the conservative until I see more data and do I think it's going to pull back to two per cent not adult but.
If we could lock and 6% for the next 10 years and we'd be bringing you know, we're bringing 200 and b and a year I read about a lot of these online players have got $20 billion and total and we bring and $20 billion. Every five weeks. So we are effectively creating these companies every five weeks now if it's going to be four five per cent five per cent.
I don't know and my just my my instinct is 6% on four trillion.
Is a lot of assets to bring in and I think it's doable and I'm, not saying subdural, but I'm not predicting that and I wouldn't want to guide you to that on the other hand, I don't think we're going back to where I think we've got a different kind of the company. The reason is the title of this presentation as cord moving sending the inflection point and the next decade of growth.
Is if there's one message I would like people to take away from it is we are in the growth phase of this company for the next decade, we've been and you know us.
As we said from the crisis forward and sort of fragility, then healing and stability and we are unambiguous C and a growth phase.
We have the capital to invest and our businesses, we're gaining share across the businesses. We've got the scale and the key businesses who've been invested and a lot of technology improvements to the businesses to increase their efficiency and I believe we're in a growth pace and this company and one of those indicators of growth will be a very strong net new asset growth.
John.
Fair enough.
Maybe switching over to capital with the stock now trading well above book value.
How are you thinking about prioritizing buybacks versus dividends.
You know I think of the past you have spoken to and aspirational target of paying out all of wealth and asset management earnings the dividend. So maybe just some updated thoughts around how you're thinking about the prospect and again buyback versus dividend conversation here.
Well the the the third leg to that conversation very important leg is investing in the business.
You know, we're gonna grow let's pretend we growing.
I don't know of net earnings of $10 billion.
And we're paying out dividends at the moment of about two and a half billion.
So if we're doing a buyback this year of 10 billion, where on the eating into a buffer of two and a half b and a year, where we're not going to chip away at a much for seven and $8 four and I think the of threshold of the sitting two I'm looking at John Yep setting.
Turning to let's assume we carry one of 50 100 basis point buffer on that Bob on the SCB. So, let's assume where we want to run up 14, two were at seven and eight four.
We've clearly got we've clearly got some room to move obviously, we've got the Eaton Vance smoothed coming in which of fix those numbers of about 100 basis points. So you know as I think about it you know I've described this before of half. The company has said sort of yield component to it very stable revenues and earnings.
And we could clearly moved the dividend higher and will.
Once the regulators permit that we have clearly we have the capacity.
On the book value.
Yes, I would much prefer to be buying stock class two and we were at $27. So Unfortunately, we couldn't do that.
And I'm not I'm not troubled by buying a little of of book value and I don't you know I don't think we can be too cute, we have well we have of being eight b and non shares outstanding.
Obviously through the issuance from the deals so I'd like to get us back to a b and five type range of the next few years and we've got this capital we don't share.
And enough things, we can invest 10, 15, b and the year and the business and generate the kinds of returns we expect to generate so it's it's a mix of all three but clearly we'd like to see more action on the dividend.
Clearly, we're going to be aggressively buying back and consistently and clearly we have capacity to increase.
And our investment and the coal businesses.
Great High class problem. Thank you.
Thank you. Our next question comes from Stephen True back with Wolfe Research. Your line is now open.
And it was muted.
Oh, sorry can you hear me my apologies for that.
Just wanted to start up of the question on funding and NII and I appreciate the disclosure on funding optimization and the drivers of some of the improved synergies from the initial guidance and I'm curious how much room. There is to cut deposit costs further and it looks like your wealth management deposit cost of 24 bps. It just running well above peers and just a clarifying question.
And regarding the NII guide and the Shine is the growth you're contemplating in 'twenty, one is that versus the <unk> 20 base, which reflects the full impact of the deal or was that of guide versus full year 2020.
I'll do the first of the last question first which is that it was.
And based on the fourth quarter, So I would sort of using of fourth quarter annualized is the right base to be thinking about US again, we did have the full impact of both the the transaction for the full quarter as well as the the amortization of the premium.
And from the investment portfolio.
You you're right our deposit costs were 24 basis points, which were down 14 basis points for the for the quarter. We also saw an improvement as you know BD P or what we call our sweep deposits, obviously at a lower rate.
Basically of one basis points relative to our wholesale of that cost of about 100 basis points. So part of the funding synergies is really coming from replacing those wholesale funding.
Cds and other.
Wholesale funding with the off balance sheet deposits that we're going to bring back on balance sheet.
We started the quarter I think about 65 per cent of our funding and the deposits were sweep. We're now at 75% we would expect about $15 billion to $20 billion of CD roll off that's obviously based on the maturities. So we continue to think that we can drive our average deposit costs lower as we continue to replace the wholesale with the.
The incremental deposits from each of them.
No that's great and then just for my follow up a big picture question, James If Youll indulge me and I was hoping you could help us reconcile versus your prior target of 15% to 17% ROTC and what rate market and capital assumptions are and underpinning of your 17% plus ambition.
And I guess, if we start to think about the inflection and growth that you cited and maybe even some tailwind from normalization just higher rates, which should be more than 100 basis point benefit greater realization of revenue synergy opportunities further progress on the SCB and the direction of travel there has been quite favorable and the 17% plus longer term still.
And it was somewhat conservative and I'm wondering from your perspective, do you see even and upper teens or 20% plus rocky as a reasonable long term ambition and just given the significant transformation that's underway.
Are you beginning of replace Mike Mayo.
And.
Yeah.
What about the plus.
Well its roll months, plus plus means more of.
And we can drive a truck side of that range.
Listen I I wouldn't put.
I wouldn't try and model too much science and this is an expression of our aspiration.
And as I said also happens to be our belief that it's not just Disneyland, where we believe we will deliver these numbers and for some of the reasons you list the Reits being one of them obviously has a huge.
And impact on this phone, but look the way we finished last year and and what are the numbers. We're these obviously become very plausible.
Whether it should be seven and eight plus eight and pulse named plus I, you know listen and if we'd say tier three years ago.
Our aspiration was to have of 17, plus the Rit T. C. You would've put where were off the planet.
So I'm I'm very comfortable with these numbers if we could achieve this then obviously the stock should be trading much higher than it is today.
And embedded in them, we do we do do some math, we stopped with that budget be south of that operating performance. In 2018 1920, the look of that bunch of predictions, we do sensitivities around revenues, we understand what our comp and non comp look like over the next couple of abuse of whether.
And whether we have major litigation exposure, so not the integration costs that have got to work through and then the synergies.
Synergies of the various businesses and then we of course look at the capital question, which I discussed earlier I think with Christian on.
And of buyback dividend or reimbursement and the business and and whatever our wip growth is going to be a nice G and how that affects the <unk>.
E T. One and you know you put all of that and a big big washing machine and that spits a number with the pulse on it.
Thank you. Our next question comes from Glenn Schorr with Evercore. Your line is now open.
Thanks very much.
John I Wonder if we can look of slides 14 and.
And talk to something that comes up a bunch of you.
You show your 5.4 trillion pro forma if you look at that fee rate.
There's only one other peer on that top 10 that are out there that has the sea ray equal or better than yours.
And I think that's the good thing, but this comes up the planning so I'd love to hear you talk about it.
And the sustainability of the fee rate I don't see.
Price pressure in the wealth management business, but people ask on the go all the time John.
Just curious to get your thoughts.
And the like process over the coming years, and what's kind of embedded in those.
The medium and long term targets implicitly with that.
<unk>.
I don't think you're going to see.
Uh huh.
Price compression of any significance across the wealth the rest of the management platform. So it's it's really function Glenn of of.
And <unk>.
Asset types. So for example.
The wealthy of the clients have kept clients with $100 million, they're not paying 58 basis points.
You know there are probably paying out of and are close to 10 basis points of something of a client with a million dollars is paying close of 100 basis points. So it depends a little bit on the business mix.
As to what revenue you generated on those assets.
Obviously, you know some of the E trade active trading clients of high velocity all of them, they're going to have a basis point numbers and a very passive position and restricted stock. So a little bit of that as you know you've got a sort of peel away, what's going on under the numbers, but to your broader question do I see price compression across the wealth management no.
Don't and.
In fact, we will probably generate more revenue as we build up the banking and the banking a lending and deposit product on the asset management side, I mean listen if you're driving performance and the active side you can generate you know you can hold your fees as they are and see the underperformers lose the rest of it.
And they lose the fees.
So I'm not I'm not terribly bothered about and if you knew the names of the three above it.
Get them is the reason you know theyre more index oriented there, it's a different business model.
And we generate a high revenue per dollar of assets that we pay a higher revenue comp structure per dollar of asset, but it's not exactly you know the 30 40 50 basis point win.
And as you know obviously.
Understood understood and wanted to hear your woods. Thanks.
And then maybe if we could just.
The bridge the gap I think I'm of the answer this too but.
This is a pretty strong environment, you consolidate and trade.
The adjusted margin and wealth management of <unk> 24 per song.
Of the medium term and talked with a tier target of 26 to 30.
How do we get inside the range without the help of rates because the fed.
Theoretically is on hold for a few years the.
The yeah. The business is growing we had some you know we had some additional expenses. This year. For example, we made more contributions through our role of philanthropic and charitable efforts given what's going on with Covid and that cost is distributed across the businesses. We paid the one time bonus to all employees learning listen I think $150000 who don't.
The C bonuses given.
Given the head count and wealth management that disproportionately affects that business. So you know there's always a few things going on that.
You know of point of margin is worth about 45 million of quarter I think if.
If I'm doing my math right, you know eight and B and $180 million. So somebody it's something like that so it's not the small numbers can move around a point or two but I think with increased growth increased efficiency better conversion of the us. So it's more at the close in generating this average 58 basis points is how you you bounce between the sort of 'twenty, what do we say 20.
For two of.
24 to 30 range 26 to 30, I'm, sorry, 26 to 30.
And depending on the environment I mean, we've started the of strong.
And it probably helps appoint of fed held up there you go.
Thank you. Our next question comes from Devin Ryan with JMP Securities. Your line is now open.
Thanks. Good morning, first question just want to come back to some of the questions on organic growth and yes.
The slide nine the shows the trillion dollars of assets held away essentially making the point that you already have the customer reach and so I'm just trying to think about whether you view kind of all of that is potential wallet that.
And that you can go after or said another way and are there any products that maybe you don't wind up with and that eight trillion dollars and then the firm becomes more connected through technology, which I think you guys have done a great job over the past couple of years.
How do you think about strategies to connect with.
A greater percentage of that call. It $8 billion of know every business has a little bit of of different.
You know call it sales process, but are there new strategies or even financial incentives that you can think about to really accelerate the penetration into that.
Sure I'll give that a crack and you know we're not naive we don't expect to have 100% of the wallet of all of our clients.
Nearly we don't expect it to bring in all eight trillion over time, but there's significant overlap.
As you know and these channels and and.
And these wealth figures.
We continue and you saw through the net new assets as James mentioned, a lot of that woods from existing customers consolidating their assets a lot of that is being driven by that the technology and that we've made and the investments that we've made and the platform that help our advisors.
And advise their.
And our clients.
And we've seen people bring in bringing more assets. So I think if you think about the opportunity set I think we tried to line it up pretty well through the different channels on the workplace I think it's really around retaining cash and retaining vested assets and then over time growing the relationships self.
And at a minimum.
We've seen people, leaving the E trade platform as their needs got more sophisticated and they needed advice, we're clearly going to capture that top part of the funnel with our phase not with the the FAA led model that we have so again, a real opportunity and I like the way you described it just look at the numbers two and a half million household.
And almost 5 million participants and $6 7 million of households, the breadth and reach of the of the platform.
It's quite large and there is some overlap there, but it's still over $10 million.
Clients that we can provide incremental services or bring in more assets from in terms of.
So the activity.
And as you can imagine we are collecting and analyzing data and working with our clients to try to figure out incremental needs and services and products that they need with the E trade acquisition, we bring on incremental digital capabilities and as you can imagine this year, we're spending the year of trying to figure out.
And piloting a ways that we can work better and more efficiently.
With our clients and we're gonna pilot.
The around lead generation, we've defined the advisor group who's going to work with new clients, they've got scoring systems. We got artificial intelligence trying to help predict what people are going to want and need and next best action and so it's really a culmination of all the investments that we made plus the digital from wealth and we're going to use this year to try and.
Get a very good understanding of our client base with these pilots and how we can provide incremental services going forward.
Okay terrific. Thanks, John just a follow up here just on kind of the core expense structure and trying to think about.
Some of the benefits of 2020 with the pandemic that were deflationary it would seem that some of those benefits roll off.
There is some inflationary aspects into 'twenty and 'twenty, one kind of out of core basis, but longer term.
Obviously, I think we've learned a lot of about the businesses through the past 12.
12 months and opportunities potentially to.
The drive some longer term savings of were for maybe a quarter of deflation and the expense structure. So I'm just love to get some thoughts around how you guys are thinking about areas of opportunity and maybe drive more expenses out of the system based on what you've learned over the last 12 months.
Yeah, we I would say, we're still learning a cry.
Crisis is not over we clearly are hopeful around and the rollout of the of the vaccine.
They're going to be some takeaways.
And some of the digital.
The digital client experiences and we've been able to do the work from home that we'd been able to do but I think it's just a it's a little early to start making those decisions and so let's get through the crisis first.
Thank you. Our next question comes from Mike Carrier with Bank of America. Your line is now open.
Good morning, and thanks for taking the question.
Strategic update and growth outlook and we're always helpful. Just on the efficiency ratio, given the 70% level and 'twenty and realized strong revenues.
And the environment.
E trading the Eaton Vance operating and a better ratio any of the longer term wealth management margins, improving maybe 600 basis points.
And what drives the conservative outlook like are there areas that you want and that's the Michigan.
And you did drive the growth where are the areas for potential improvement and that 70%.
Yeah listen.
I think we sit under the 70% up to two years.
So you know I don't think that's conservative, but we were like we were at 79% just a few years ago.
And I think when I started we were.
My chart.
So.
You know the long term position is we'll run this place with the.
30% margin plus.
What happens and the next two years with you know the bouncing around the market and such.
I don't know, maybe maybe we were too conservative and the short run, but it doesn't change of behavior.
I guess is what I would tell you we are very determined.
To drive this company for growth and for efficiency and for return and that's been unambiguous for a decade now.
So it doesn't change of behavior at all and it's just what do we think is reasonable people you should expect.
At a minimum to achieve and this time period, and that's what we try and put it and the two year period and the longer term we are much more aggressive but you know.
We deal with reality of two years this year as I said, if you annualize the way the Skus started off with the better than.
And the efficiency range.
Yes.
And John and just one clarification on the wealth management, you gave a lot of.
The numbers on the outlook just given the trade deal.
And I just wanted to clarify on the funding benefits did you say, 80% and 21 and most of that by Q2 and then the same thing on the expense synergy I heard of 25 and at 40%. So I just wanted to make graduate number.
In terms of what you recognize in 'twenty one.
I think all of those numbers and you gave are correct.
The the funding synergies are really from this transition from the off balance of the on balance sheet and the run off of the of the wholesale deposits. So again that skews more towards the back half and that you know the <unk>.
80 per cent.
That's the.
When you get into the second quarter, you'll be using a quarter of quarter number not a full year a full year benefit number and then 25% on cost and approximately 40% on the AR on the integration costs.
Yes, those are the right numbers.
Got it thanks a lot.
Thank you and next question comes from Jeremy <unk> with BNP Paribas. Your line is now open.
Your line is muted please on mute.
Sorry, I apologize for that I thought the.
The comments on net interest income outlook and wealth management were very helpful and I just wondered if I could get you to talk and if some of the way about the asset management fees and the transaction revenues in wealth management, because I know this is my estimate sort of asset management and was a bit below maybe that's the lag with the rising of U M, but obviously the transaction.
Revenues were very strong so could you talk about those two revenue drivers within wealth management. Please.
Okay.
Sure and the asset management fee line.
Obviously the exit rate.
We you know we get the benefit now for the full year of the trillion and a half and fee based assets.
You have averaging effect and exit exit effect in terms of 'twenty 'twenty. One so now at the one five trillion of assets.
And so had the benefits of the net new assets that we bring and over 'twenty and 'twenty, one, though on an average basis, but we would expect continued growth obviously in that line and we had over 10% growth year over year.
And that the and that asset management fees and then on transactional it's really going to be around client engagement.
And client activity levels fourth quarter, we benefited from elevated transactional I did say that that was helps by the D. C. P number, which presumably may or may not repeat next year, but that the margin on that revenue as we've talked about in the past is virtually zero.
And so transactional generally.
Has been declining we now have the E trade.
Platform inside of Morgan Stanley. So the commissions based on their options trading as well as some of the flow dynamics will the will aid that number so it will be at a new level, but generally that the that's going.
And can be driven by volume related activity and we'll have to see how it plays out are recognizing the first 11 days have been pretty good.
Thank you and just to follow up on the acquisition expenses, you you sort of break out the amounts of acquisition related expenses and here.
Just wondering if you could.
Talk to us about the split between sort of restructuring and.
And amortization of intangibles, you said youre going to be amortizing the intangibles and just wondering about the the amounts of fats and why we see it.
Sure.
And I just give you a few so again we.
Issued $11 billion of equity of about 230 million shares.
Generated $7 $5 billion of goodwill and intangibles, you'll see that and the first couple of pages of the of.
Of the supplement of that goodwill and intangibles of about 3 billion is gonna be amortized at a rough rate of about 15 years, so about $200 million and that would be allocated and the non comps and the wealth segment.
Thank you and next question comes from Jim Mitchell of with Seaport Global Securities. Your line is now open.
Hey, good morning, maybe we could talk a little bit about the the momentum of the trade and I just wanted to confirm the numbers if I looked at there.
Second quarter of sort of retail client base of around $5 8 million.
Self directed clients and then I think in December the fourth quarter. It was up to $6 7 million are those apples to apples and and if so that that implies quite a bit of new accounts net new account growth of close to 900000 is that that's pretty good momentum and just maybe you could discuss whats driving that and how you feel about that going forward.
Yeah, I mean, I think we tried to lay that out as I said on page seven you can see and.
What the.
The pre closing so the September 30 number.
Chose the self directed assets within Morgan Stanley.
The deal closed so yes, the growth has really been and the E trade channel and your number of about 900000.
<unk> thousand is accurate.
Again, I think from our disclosure going forward, we just we had to conform sort of definitions and whatnot.
But they've had real strong growth with that with new clients given the activity levels. This year.
It's the number we you know you'll be able to track whether the the <unk>.
Alf direct and channel is growing through that number going forward I don't think we're gonna be explicitly.
And disclosing net new clients within the self directed channel as we tried to integrate and bring these two businesses together.
And I imagine that's better growth than you anticipated is that give you even more confidence and the revenue synergies from hatred.
Yes, yes, and yes.
Okay, great. Thanks.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
Yeah.
Yeah.
[music].
And then.
Okay.
Okay.