Q1 2021 Morgan Stanley Earnings Call
Good morning, I won't be reading and statement on behalf of Morgan Stanley Today's presentation, WOMAC rights and Morgan Stanley's ending the earnings release and financial supplement copies of which are available at Morgan Stanley Dot Com. Today's presentation may include forward looking statements that are subject to risks and uncertainties that may.
Cause actual results to differ materially.
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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.
First quarter of 2021 was a significant record for the firm and for many of our businesses.
It was marked by some truly extraordinary highs numerous performance records.
The closing of the Eaton Vance steel a second strategic transaction and the last year and one very complex event relating to the collapse of the hedge fund and a CAGR.
In summary, we generated record revenues of $15 7 billion and and our TCE of 21 four per cent.
The high revenues for reveal the operating leverage and our business and the quarters efficiency ratio was 66%.
Wealth management generated revenues of approximately $6 billion.
Net new assets for 105 billion, which is easily a best ever quarterly flows and concrete evidence of the growth trajectory of this business.
These flows represent an annualized increase of over 10% of beginning period assets.
Pretax margin was 27, 9%.
Margin should only improve in future years, and we expect will exceed 30% as rates tick up.
Daily trades reached a new record with heightened levels of retail client engagement.
E trade and particularly the strength of the self directed channel exceeded our expectations.
In addition assets continue to migrate towards the bice.
Fee based flows for the quarter were a record 37 billion.
We're adding new clients at a record pace, creating more opportunities to consolidate wealth held away and provide advisory services.
And our workplace business is that and corporate plans and as a result, the number of participants week, we reach increased to $5 1 million.
Institutional Securities revenues of $8 6 billion were also a record.
Clients remain highly engaged.
Fixed income had the strongest first quarter of the last decade and has consistently gained share in recent years.
Investment banking revenues reached a record driven by record equity underwriting.
And our equities Division also had its best quarter and out of a decade over a decade.
Turning to investment management.
On March 1st we closed our acquisition of Eaton Vance, bringing together two high performing asset managers.
Our teams at both Eaton Vance and Morgan Stanley executed the closed ahead of schedule, while prioritizing client service.
The momentum Eaton Vance and AMC demonstrated between announcement and close only strengthened our conviction of this combination.
Since we announced the transaction and the beginning of October credit former assets grew by nearly 200 billion and pro forma net flows for approximately 100 billion.
And the first quarter pro forma net flows with 53 billion, representing an annualized organic growth rate of 16%.
Our industry, leading organic growth signals. The clients are very supportive of the combination and increasingly recognize the highly differentiated value alpha and solutions that we offer across the global platform.
And there's some management now has assets under management of one four trillion and is very well positioned and key secular growth segments.
Let me discuss the loss, we incurred navigating the collapsed about CAGR.
First we liquidated some very large single stock position through a series of block sales, culminating on Sunday Night March 28.
And that resulted in a net loss of 644 million, which represents the amount the client owed us under the transactions, but failed to pay us.
Subsequently, we made a management decision to completely de risk the remaining smaller long and short positions, which while not especially problematic might've been.
And we decided we would be out of the risk as rapidly as possible and and so doing incurred and incremental losses of $267 million.
I regard that decision and as necessary and money well spent.
The results are all reflected in Q1.
And I'm very pleased with how the institution came together and responded to this very complex situation.
Let me close with and early readout from our acquisitions be trade and Eaton Vance.
The performance of both businesses is significantly exceeding our expectations.
And as importantly, the integration so far is proceeding without major incident.
These acquisitions when combined with our existing wealth and investment management businesses drove our client assets to five seven trillion of which approximately 150 billion represented net new client assets to the funds from this quarter.
We are more convinced than ever that both deals help position Morgan Stanley.
In the years ahead, I'll now turn it over to John to discuss the quota and detail and together, we'll take your questions.
Thank you and good morning.
The firm produced record revenues of $15 7 billion and the first quarter.
<unk> businesses and regions performance was incredibly strong as clients remained highly engaged and markets were constructed.
Excluding integration related expenses, our EPS was $2 22, Aro TCE was 21, 4% and our efficiency ratio was 66%.
First some housekeeping.
To improve the transparency and comparability of our external financial reporting we made several enhancements to our disclosures this quarter.
You can find more details and three year's restated data on pages 12, and 13 of the supplement.
And more significant items are as follows.
For the firm the provision for credit losses for <unk> loans and lending commitments is now presented as a separate line and the income statement versus being and other revenues and expenses.
And institutional securities sales and trading net revenue have been reclassified into equity and fixed income, which now includes certain investments and other revenues that are directly attributable to those businesses and.
Other revenues, notably contained corporate loans and lending commitments and related hedges as well as the impact of deferred compensation plan.
And and investment management following the closing of the Eaton Vance transaction, we have simplified reporting by breaking revenues into two lines asset management has been renamed asset management and related fees, although the historical numbers remain the same.
And we have combined the remaining revenue categories under a new line named performance based income and other notably carried interest.
We have also updated our AUM disclosures alternatives and other has been updated to alternatives and solutions to reflect the addition of most of the parametric AUM, excluding parametric portfolio services for <unk>.
Institutional investors that have been included and a new line called liquidity and overlay services.
Now to the businesses.
And momentum and institutional securities witnessed through the back half of 2020 continued as clients remained highly engaged.
Several performance records were set as revenues were broad based and balanced across businesses and regions.
Revenues were $8 6 billion, representing a record and a 66% increase compared to the same period last year.
The integrated investment bank continues to serve clients across the complex.
Regionally Asia remained a standout building on the for best quarters of the last decade and 2020, the first quarter of this year set a new record.
Europes performance was solid across investment banking and fixed income and was the strongest and over a decade.
Investment banking generated revenues of 206, $2 6 billion more than doubling the prior year driven by record underwriting results.
Advisory revenues were $480 million reflective of higher completed M&A industry volumes versus the prior year.
Equity underwriting continues to be exceptionally active.
Record revenues of $1 $5 billion reflected strength across products and sectors IPO activity was extremely strong with blocks follow ons and convertibles also notable.
Fixed income underwriting revenues of $631 million for the second highest only to the second quarter of last year as companies continue to take advantage of the attractive borrowing environment.
We saw strong activity across non investment grade financing spread across sponsors and corporate issuers.
Investment banking pipelines remain healthy across products for <unk>.
Dziedzic dialogues are active equity markets should support issuance and conditions remain favorable for borrowers and we are seeing a broadening across sectors beyond technology and health care.
Equity revenues reached $2 $9 billion, the strongest and a decade as global equity market volumes remained elevated.
<unk> for our results were the best and a decade, reflecting heightened client activity and a constructive trading market environment.
Both cash and prime brokerage revenues declined versus the same period last year.
Revenues associated with higher volumes and higher prime brokerage balances, respectively were offset by the losses James discussed.
Fixed income revenues of $3 billion was the highest for our first quarter and a decade performance was broad based across products.
Bet around the speed and strength of the global economy recovery.
Passage of U S fiscal stimulus and the movement and passive rates supported client activity.
Micro performance continues to be strong the meaningful increase versus the prior year was driven by securitized products and municipals.
Macro results were robust reflected a decline from the very strong prior year as bid ask spreads were more stable. This period and commodities also had solid results.
Other revenues of $123 million improved meaningfully versus the prior year.
Kris primarily reflects gains related to deferred cash based compensation plans compared to losses and the prior year and lower mark to Mark losses on corporate loans and related hedges.
Turning to ISG lending our credit portfolio continues to perform well.
Prove confidence and the economic outlook and Paydowns on corporate relationship loans, particularly non investment grade resulted in a release of $93 million net.
Net charge offs and the quarter were $10 million and our allowance for credit losses on ISG loans and lending commitments now stands at $1 billion.
Total ISG loans were up $2 5 billion, while lending commitments increased by approximately $5 billion relative to <unk> as we continue to support our clients.
Our vulnerable sector portfolio continues to represent less than 10% of the overall ISG loans and lending commitments, we saw some velocity and the book with new commitments for investment grade clients that were largely offset by paydowns.
Approximately 90% of this portfolio like our entire ISG portfolio is either investment grade or secured and lastly, barron's for the ISG portfolio.
<unk> continues to decline and now stands at approximately $300 million.
Turning to wealth management, given the timing of the close of the <unk> acquisition.
And ill make comparisons to the prior quarter, which will serve as a more relevant benchmark and prior year.
Revenues were $6 billion with strength in every area, excluding the impact of DCP, which declined by approximately $300 million versus the prior quarter revenue increased 11%.
Integration related expenses were $64 million and excluding these costs pre tax profit increased 28% to a record $1 7 billion and the PBT margin was 27, 9%.
The underlying growth drivers and this business remain extremely strong net new asset growth was 105 billion driven by net new clients asset consolidation from existing clients and stock plan and retention.
Fee based flows were a record $37 billion and self directed channel net new households grew by a record 500000.
For 7%.
Financial Advisors also recognize the value of our platform demonstrated and continued strength and net recruiting and retention, which also benefited and M&A.
Elevated client activity across both advisor led and self directed channels drove strong transactional revenues.
Excluding the impact of DCP revenues increased 19%.
Client engagement and the market was high and putting more cash into equities and the quarter.
Self directed engagement was particularly robust reflecting record net buying activity daily.
Daily average trades on the E trade platform reached record highs of $1 $6 million, almost 50% higher than the fourth quarter record of $1 1 million.
Importantly revenue related to the E trade platform transactional activity is highly accretive to the PBT margin.
Asset management revenues were $3 $2 billion up 7% sequentially benefiting from higher asset levels and record fee based flows.
Fee based assets are now one six trillion dollars and have grown over $400 billion from last year greater than the cumulative growth over the prior six years and revenues are up nearly 20% from the prior year.
Loan growth remains extremely robust with balances, reaching 105 billion.
Demand across products with particular strength and securities based lending that day.
<unk> quarterly balance sheet growth of $7 billion north of the 10% full year guidance, we gave earlier this year.
Continued use of data analytics to understand customer needs is contributing to the strong growth.
Net interest income was $1 $4 billion, including prepayment amortization, which turned positive and was approximately $100 million.
Excluding prepay NII was up 6% and in line with our prior guidance.
The increase reflected the realization of funding synergies driven by the Onboarding of $20 billion of deposits that were previously swept off E trade's balance sheet growth and bank lending balances and increased margin lending and the self directed channel.
We have now completed and the Onboarding of approximately 25 billion.
Of deposits since we closed the <unk> transaction and we remain on pace there.
We realized approximately $200 million and NII funding benefits in 2021.
We would also expect to run off additional $16 billion of wholesale deposits through the remainder of the year.
And we expected NII will continue to build on.
On the full impact of the onboard of deposits and continued growth and lending.
We're even more excited about E trade today than when we announced the deal as momentum on the E trade platform is robust.
<unk>, we are beginning to see early successes from the combination.
Our business continues to benefit from increased client engagement across channels as evidenced by this quarter's M&A.
While we expect these flows will be lumpy and should be looked at over the course of the year rather than individual quarters. We are encouraged by the strong start.
We continue to prioritize client experiences as we progress with our integration.
The rest of 2021 will be focused on analyzing the comprehensive datasets, which cover advisor led and self directed clients to help better understand investment behaviors and needs and refining the tools required to connect financial advisers to service those needs.
Over time, we expect to learn from these insights to effectively serve clients across their entire wealth journey.
Workplace will serve as an important growth engine going forward and we are building on the investments we have made to date.
Our workplace offering is resonating with corporate clients, we are adding new <unk> clients and participants at a record pace and our current pipeline is as strong as it's ever been.
Equity plan and wins increased by approximately 70% versus <unk> last year and this led to the addition of 75000 participants and the Morgan Stanley at work platform.
A number of participants now stands at $5 1 million.
Also focused on ensuring that each workplace participant has a companion brokerage account to capture vested award proceeds.
Today, approximately 50% have one and we expect 90% of participants will have a companion account within 18 months. This will further enhance our ability to capture workplace flows.
And the expense side, we are on track to realize $100 million of cost synergies in 2021 and have made progress and the first quarter towards this and on a run rate basis, we expect to achieve to achieve 35% to 40% of the targeted for $100 million expense synergies by the end of the year.
Moving to investment management on March 1st we closed the acquisition of Eaton Vance, We issued 69 million shares and $5 billion of common equity.
We added approximately $9 billion, and goodwill and intangibles, including $4 billion of intangibles of which half will amortize over approximately 15 years.
Our CET one ratio was active by approximately 80 basis points.
This quarter's results include one month of the comp bind businesses financials, so comparisons to prior periods are difficult.
Focus mainly on the quarter and our positioning moving forward.
We're pleased that the business is retained their strong momentum from announcement to close and total.
AUM now stands at one four trillion, an increase of 40% or $400 billion on a pro forma basis versus the prior year.
Upon close Eaton Vance added approximately $590 billion to our total AUM.
The underlying fundamentals of this business remain extremely strong positive net flow momentum continued across both businesses.
Net flows on a pro forma basis were $53 billion for the full quarter.
Long term pro forma net flows of $22 billion were broad based across products and regions.
We saw particular strength and MCM global equity strategies, which continued to attract robust flows following strong investment performance.
Parametric customized portfolios continued very strong organic growth and the alternative and solutions line.
We believe customization is a long term secular trend and parametric is a market leader in this space.
Eaton Vance is leading a floating rate loan business recovered to strong positive flows and Calvert saw strong growth and <unk>.
ESG investing accelerates.
And the quarter revenues were $1 3 billion.
Consistent with strong growth in AUM and the contribution from more durable management fee revenue has meaningful increase and asset management and related fees were $1 $1 billion with just one month of Eaton Vance contribution.
Performance based income and other revenues were $211 million and the quarter.
Saw broad based gains across our alternative funds and the increase versus the prior year was primarily driven by gains and our real estate funds, which continued their recovery from <unk> 'twenty.
Total expenses were $944 million of which integration related expenses were negligible.
Turning to the balance sheet total spot assets increased to $1 two trillion, reflecting higher client activity levels and the addition of Eaton Vance.
Standardized <unk> were flat to the prior quarter at $454 million.
And our standardized CET one ratio declined from the prior quarter to $16 eight.
Our tax rate was 22% for the quarter and we continue to expect our full year 2021 tax rate will be approximately 23%.
We are pleased with our results and the first quarter as our three world class businesses of scale delivered exceptional performance and growth pipelines.
Pipelines are healthy institutional and retail client engagement is strong and our global positions have improved with the successful closing of the Eaton Vance deal. We continue to drive our business model towards more durable and more recurring and less capital intensive businesses.
It's very early and the integrations the combination of breadth and depth of product offerings and services with our enlarged customer base has led to approximately $150 billion of net new client assets to the franchise and our unique business model is well positioned for growth through a variety of market backdrops and with that we'll now open.
And the line for questions.
Thank you ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
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.
Good morning, Thanks for taking my question.
Sure.
I'd like to ask maybe first on wealth management.
The net new asset growth rate, implying double digit organic.
Really impressive.
And not something that the narrative around wire houses.
And to be able to grow really jives with so I'm curious I know we've seen these trends accelerate from Morgan Stanley.
For over a year now, but how much of this remarkable quarter was attributable to trade versus full service wealth management at Morgan Stanley and how should we think about a sustainable for.
And net new asset growth going forward.
Well Brian.
Brian and let me have a go at that I mean, historically the growth rate as you probably know and the full service.
And you called wire houses. So it's been I don't know zero to 2% over the last 15 years.
With lots of financial advisors, some lots of assets into the RA channel and clearly lost to some of the direct distributors and generally just not having in place significant growth plans and I think this quarter and I will talk about the absolute levels and a minute, but this quarter is reflective of a very different view.
All of that wealth management business number one we needed to have a compelling direct channel we have that true E trade number two we needed to have a compelling workplace platform. We have that true so lame and E trade and number three we needed to have net positive.
Growth in terms of recruiting not and just numbers of bodies, but actual people who are bringing in assets and we're doing that and number for you need a compelling platform of ideas, which linked to our institutional business and the quality research and product.
And you just operating at a different level.
And so I think it's the culmination and actually have a lot of things that you trade is clearly a factor and up but it's by no means the only factor. If you took at E trade the organic growth was tremendous and the core business, which again, we've started to see and the last couple of years I think we showed some numbers last year of around 4% target I think it was 4% to 6%.
Now this is a 10% while Q1 is probably going to be your best quarter.
Q2, usually has some tax factors.
<unk> flows going on.
But listen the growth rate is real.
And if free.
Annualized 10% a year for the next several years that would be spectacular, but that's certainly not what we are planning on and I've got to be realistic.
But to be outgrowing some of that non traditional competitors, even even per quarter. It's just that it's a wonderful green shoot to have planted out there.
No doubt.
Thanks for that color James and then.
Thinking about NII within the wealth business.
John you made some comments on NII, but I wasn't sure.
And if those were just purely on the wells are from wide. When we think about it on the wealth management business. Thanks for quantifying.
For you.
Impact.
Is this <unk> got strong loan growth.
We've got <unk>.
Securities yields that have been recovering.
Yesterday's step back side.
So should we should we be expecting continued constructive trend and core NII ex ing out any noise that might happen from prepays quarter to quarter.
Sure.
I think the short answer is yes, we've really got some nice tailwind from the loan growth that we've been experiencing.
As well as the deposit funding synergies.
I think as I said and the first quarter, we don't expect any movement and policy rates.
Short and Israeli what benefits.
The NII so our growth we would expect from the full realization of the.
And the Onboarding of deposits, which as you know was feathered in over the quarter.
And so that will have the full impact next quarter at $7 billion and loan growth and we're running ahead of plan. There. So that's obviously a nice tailwind.
And then as I said, we will continue to see our deposit cost ticked down and some of the incremental wholesale.
Wholesale deposits run off because of the Onboarding. So.
We feel good about the guidance. We gave you the 1 billion to and the fourth quarter was a good run rate and then start to add the tailwind from the deposits.
As well as the loan growth. We also saw some nice loan growth and margin lending, which is not and the bank, but it is part of the wealth management NII story. So again, just a nice a nice quarter and.
And we'd expect it to continue to to grow from these levels.
Thanks for the color.
Thank you and our next question comes from Steven <unk> with Wolfe Research. Your line is now open.
Hi, good morning.
And so wanted to start off with a question on the <unk> development. James You noted that you were pleased with how the firm responded just given the complexity of the situation and what were some of the learnings from that experience and maybe more importantly, how does it inform your risk management approach within PB to ensure that you can avert a similar.
Situation and the future.
Yes, I think.
I mean, my comment about the way that this team has worked together now for a decade. We all went through the financial crisis, most of us and sort of a job a level below where we are now so I'd say the accumulated.
But scott tissue and experience is very real and we have a philosophy, we cauterize bad stuff and and deal with it as soon as we possibly can.
This was as you know a very unusual event it was a family office actually.
No outside money.
Got to enormous size by.
The growth in the single stock position very concentrated single stock long positions that had explosive growth and they're offset by the various shorts and the indices and so there was short so it was and.
And I think what the lessons are still unfolding, if you will or learnings steep but.
It's not going to change how we feel about the prime brokerage business at all this is a gem of a business that we've probably generated I don't know something close to $40 billion and revenue and a decade.
It's a it's a core part and backbone to the equities business. So it doesn't change that at all but I think.
We'll certainly be looking hard at family office type relationships, where they're very concentrated and you have multiple prime brokers and frankly, the transparency and lack of disclosure relating to those institutions is just different from the hedge fund institutions and that's something I'm sure. The FCC is going to be looking at and that's probably good for the whole industry.
St.
Better information is always good and and rooting out way of potential problems can be so.
Theres not a lot.
And should be saying publicly about it but.
Yeah.
As I said, we were never happy taking a loss, but our job is to deal with the facts as reality and.
And get on top of it and get it done and that's what we did and we took the extra bit frankly, just to clean it up by quarter and we didn't we didn't want this thing to be lingering.
No that's helpful color James and certainly appreciate your candor on the topic just for my follow up another one on NII.
NII, John and I, just wanted to get a sense looking at the cost of deposits disclosure and nice to see that come in from 24 bps to 18 basis points and one of the things that we're thinking about just given some of the funding benefits for me trade as well as just some higher cost wholesale deposits and start to roll off.
And where should we expect that number to ultimately bottom and is that what informs those benefits at least your expectation that we should be able to grow or build NII from here going forward.
So the the <unk>.
Weighted average cost of deposits is 18, it will clearly continue to tick down over the course of the quarter assuming rates sure.
Term rates don't don't move and again, we're not expecting policy rates to move as the wholesale higher cost wholesale deposits roll off.
I think as you recall when we originally announced the transaction.
I think we've talked about $150 billion of funding synergies, we've revised that to 250 billion and given the growth in deposits and you said that we would realize that and 200 of and which will be realized this year. So we have incremental.
And the deposit and funding synergies that will will be captured in 2022. So.
All of the sort of the movement, if you will and the cash.
Cost of deposits and sort of factored into our synergy funding synergy calculations. So the way we generally been thinking about it is that the policy rates arent going to move so theres not going to be necessarily a big plus or minus from rates.
And NII will grow because the quantum will grow based on loan growth and then we pick up the funding.
That's great color, John and thanks for taking my questions.
Thank you.
Thank you. Our next question comes from Glenn Schorr with Evercore ISI. Your line is now open.
Hi, Thanks.
James I think you've covered.
Some of the stuff that I wanted to cover on a CAGR for a couple of quick follow ups.
I still want to get to what was so complex about this one is it really just a family office nature and the less disclosure on multiple primes and the leverage and deployed.
Because obviously, what's been great about your PB businesses and you Didnt you can lose money and O. Eight you have the assets when they.
And when they historically when you have the assets and and things break you look for more collateral or you blow up and physicians what was different.
About this one and what do you think.
Why wasn't it disclose what and this meets the materiality cash.
And then what do you think regulators want to change going forward. Thanks.
Sorry for the follow ups.
Well go and I'll try and touch on a couple of them and to be honest.
And there was a lot going on and this quarter and.
So I don't want to spend too much for talking about a specific client situation, which is now done and history, but let me touch on a couple of things are going.
And sort of reverse sort of why we didn't disclose we were having a record quarter. The business size team is having a record quoted the equities business, where this resided was having a record quarter. So you've got to be at a level, where it's material to the overall quarter and I'll leave that up to the lawyers, but we're very comfortable with that that's frankly and give.
Given how the film it's but for me I think we generated 2 billion revenue is more than our previous record quarter out of I don't know 340 quarters that we've had.
Since our origination so.
You've got to sort of focus on the big picture on that one.
It was what was different about this situated relative to Huawei and yes, you're right.
I think we've had we went back through the records and I don't think we've ever had and it was a long time, but a loss and the PB business and the business is back to the previous question from Steve. The business is very well risk managed and has been for decades, now and with the number one prime broker and the world. We were the number one prime broker and this particular.
For instance.
Were enormous positions because of the rapid growth of the fund.
They were levered across multiple prime brokers and as I said, the disclosure rules as I understand them and I'm not the expert on it.
Made made it more difficult to understand exactly who is holding what where and that's something that we'll work through and you know and that's part of how does the learning experience. It was complicated I will say last comment on this.
By the fact that one of the large single stock positions related to security and which we have been and underwriter and we thought the right thing to do was to close that previous underwriting which happened on that Friday, So we had to hold off.
Which caused us to be later than some if you will and the reason for that was not that we werent aware of what was going on we just felt we had and underwriting obligation to deal with so anyway. It's a.
Long story, but again and the context of equities business equities had a record with this built into it which is pretty extraordinary.
Hi.
I appreciate that and then on.
Workplace.
It's a good growth and good margin business on its own.
How do you execute you mentioned the companion accounts over the next 12 18 months, how do you execute on that and then how do you execute on.
Morphing them for the all important wealth management advisory relationship.
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And.
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Okay.
Okay.
[music].
And.
And.
Yeah.
Yes.
And it was their line hold on and pass again.
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Okay, Great and can you put us and please.
Thank you art and the main conference ready to proceed.
We can.
Next question please.
And our next question comes from Christian <unk> with Autonomous your line is now open.
Good morning, and hope everyone can hear me.
We can now sorry about perfect.
Okay.
I'll go back to the wealth management business the organic growth.
Luke was pretty spectacular.
North of 10% and.
I was wondering if you could give more detail on the legacy financial adviser business I hear you on each and a workplace but.
The vast majority of the business is still still the IP business and it's really surprised to see this level of cool. So just curious how much did recruiting for example, and drive growth have you made any changes to the recruiting incentives that you're paying out to drive local just just trying to understand.
Some of the core drivers of the strength here.
Sure Christian as John and I'll take that.
Say just first on net recruiting I think you've heard us talk about this for the last several quarters.
We've been very active we've become a destination of choice for all the comments that James made about the breadth of the platform.
Intellectual capital the technology investments that we've made have made at our platform and our company a place where <unk> want to do business. So we've seen higher levels of recruiting pipeline as we bring and Fas and they are successful and they like the platform. They are obviously talking to their previous colleague.
And therefore, it's sort of accelerating so we've seen really nice.
Net recruiting we're bringing and bigger teams better teams and attrition has dramatically slowed down. So that's point number one in terms of just the contribution of M&A. It was really across all.
And the comments that Ive made net recruiting.
Aided and and.
The E trade platform contributed to the contribution of new clients and the FAA channel, bringing and existing clients away. So just broad based activity very very active we talked about client engagement being quite spectaculars this quarter and it really aided those numbers, but broad based.
Okay. Thank you and then on FIC.
To your point, it's been a while since exceed this level of revenue from that business and you called out.
Our securitized products and as a real strength, which I think has always been a.
Bigger business for Morgan Stanley and maybe any more details on that business and what's driving growth.
And you can do with the state of the mortgage markets and the strength there I'm just trying to get more color on sort of maybe that business and what's driving the strong growth there.
Sure and.
And I think that as I said the fed business.
And there was really every business and all geographies contributed to that quarter $3 billion of revenue. The team is working extremely well together, we are gaining share and that business and depth of the franchise continues to improve.
As you can imagine in this environment, where the debate around rates and inflation and credit and yield.
Generally speaking the credit products had been quite active.
And volumes have been quite elevated also it's being aided by the primary calendar agency issuance. So just a lot of good activity going on and credit and I think as you saw this quarter a lot of debate around rates inflation, reflation, which really added to those results.
Okay. Thank you.
Thank you. Our next question comes from Mike Mayo with Wells Fargo Securities. Your line is now open.
Hi.
Well, great timing with your E trade acquisition.
And I guess retail volumes or some.
From two to three times high higher than historical from what I can tell are you seeing those trends continue through the end of March and do you expect that to reverse.
And as we get out of the pandemic and people get out and out of the house and stop trading as much or maybe this is secular.
Sure Mike.
Yeah, No. We're really pleased with the timing of the transaction as you as you highlight just if you look at number of clients volume trades all of the metrics that we've historically looked at and that business dramatically higher today than they were when we announced the transaction back in February of last year. So.
We're also seeing that same engagement across the ethane led channel. So it's not just related to T. E. Trade. So I think client engagement is very very strong at $1 6 million average trades.
Top of a $1 1 million average trade and the fourth quarter, which was a record it was less and $1 million over the course of last year. So we're clearly at elevated levels. So I think we go back to the.
For 200, or 300000 trades, they were doing and 19 know, but can we sustain this level no one's got a crystal ball, but right now clients are extraordinarily engaged and.
And we'll have to see how this plays out over time.
Mike I would just add that.
The two because.
There will be some obviously these markets won't stay at this kind of retail activity forever, but the two strategic kick is behind this business, which are yet to really.
Had the impact that they will have obviously the deposits and.
As rates rise that will be a phenomenal additive and secondly, the whole workplaces, we're integrating with solely them and that's program and we had some states and there I think about $5 5 million plus.
Clients and their but that that's a huge growth business for us and I think that'll be that'll be sort of the story of the next five years as much as the highlight that very elevated activity will be.
And then my separate question goes back to our CAGR.
So if I heard you correctly, you had $900 million of losses and that compares to record equities anyway 40 billion of revenues over the past decade and prime brokerage.
But within <unk>.
And all the news around this I guess it was just press reports, saying that you didn't have losses. So I think it's a little bit of a surprise and does speak to them and risk management and <unk>.
So I guess my question is are you how much of your prime brokerage business relates to family offices since Youre, saying youre, taking another look at that and.
And why do you think it was you were the only large bank call out losses of this magnitude when others didn't I mean did you I don't know what you guys did differently versus.
Citi Bank of America, JP, Morgan Goldman Sachs or maybe they didn't disclose it I just don't know if you can share some color on that and that would be great.
Well.
I'll give you a couple a couple of things just on the <unk>.
We're in a quiet period. So there's things there are certain times when you can come and about the business unless you sort of pre announce earnings, which we weren't going to do given that it was a record. So secondly, I don't I'm not going to comment on other firms. Some of them went even prime brokers to this institution and I don't think so each of them have their own bed and they make it.
And thirdly.
The the context is the businesses are phenomenal business, that's being risk manage very well. This was a very unusual incidents and I think the family office that under those numbers John Martin.
And I suspect, it's less than 10% of the prime brokerage business very small very small so yeah, Mike I mean listen.
We are quite transparent about this we just we don't like to take losses ever. Unfortunately, when you intermediate.
Flows of capital use sometimes says that's what our whole margin book his and.
The question is once you're faced with the reality, how do you how does the team come together to deal with it.
And I think they did as I said I think they did a really good job.
Alright, thank you.
And so.
Thank you and our next question comes from Mike Carrier with Bank of America. Your line is now open.
Good morning, and thanks for taking the questions.
And the first just on the trading Brian John.
Bust quarter, even with the losses and realize difficult to gauge the outlook.
And what drivers are you seeing that and.
Could continue to drive activity versus normalize it and how is your market share and been trending during this environment.
It's a great question and again without the Crystal ball I'll, just give you some sort of perspective on what we saw and the first quarter and and then we.
Our collective when you get to decide whether we think that will persist for what period of time.
And we clearly still have strong asset values I mentioned, we have healthy pipelines and clients are significantly engaged both retail and institutional markets are open and there's lots of liquidity and we are seeing a continuation of the accelerating economic data.
Around the Globe, obviously news coming out of China. This morning, or last night in terms of the growth recovery. So.
Really good backdrop for macro backdrop as James mentioned seasonality of the first quarter is usually the strongest.
And typically it wasn't last year, but typically it is and is the strongest and these businesses.
We are confident that we have the ability to deliver on the objectives that we set out earlier this year in terms of our strategic goals and we do.
Do believe and I think the data supports that we're gaining market share across all of our businesses. So that's something that we would expect to persist and I think this year is really going to be focused on that just growing our market shares and and.
And at integrating these two very important acquisitions.
Okay, Great and then you said.
And follow up just on the wealth and investment management organic growth, obviously very strong.
James You mentioned some of the retail activity and moderate I guess, maybe on the flip side, both E trade and Eaton Vance and Theyre very early it's early innings in terms of integrating it and getting the maximum potential. So what are some of those initiatives over the next few years and that you feel like.
And maybe partially offset any normalization that we eventually get.
I think James James mentioned, a couple of those already I mean, I think what we've what we've said all along we're going to be very deliberate with the integrations. These deals were not about cost they were about growth and.
And we do not want to.
We don't want to disrupt the client experience, we obviously want to enhance it over time. So we are being very deliberate we're investing and the platforms we're investing.
And the and the service model and.
And we are in the process as we've mentioned before of sort of gathering data and running pilots.
To make sure that we understand what we need so we can service our clients better. So for example, we're defining.
Running pilots around lead generation.
We're defining the phase it will be part of that program.
We're looking at data analytics, and scoring models, we're making the investments and the engine that will help us match the FAA to the client based on specific needs and the goal really for this year is to make sure that we have the pipes the people and the process to be able to support our clients and in the coming years. So we think there's huge potential.
And James mentioned and the 5 million workplace participants we are only clients outside of that channel with about half of those that business continues to grow the great thing about that business is that it's scalable and think of it as a huge funnel of opportunities to further enhance client relationships.
That experience digital so it is very very scalable and when.
We would expect real growth not only in that channel, but to drive growth across the platform really out of the workplace.
And just just to add to it I can't tell you how excited I am about the combination of these four businesses the Eaton Vance our own investment management business, our traditional core wealth management business and E trade.
And how this is.
Transforming the place by providing somebody growth verticals I mean look at the parametric product and Eaton Vance, it's extraordinary they've done an unbelievable job Calvert funds with everything going on and the sustainability space as I said the workplace with.
E trade and what we've done with solely them, there and that will be.
Top two workplace providers in the world are things that we can do to expand internationally, taking Eaton Vance product using our international distribution.
Putting some of our core equities product on the Eaton Vance domestic distribution that would be great.
Capability there. So it's just there is so many verticals now which are driving growth and once upon a time. When we had you have the coal business that sort of number of financial advisers and productivity per financial adviser. That's basically the only two metrics you needed to follow and now we've got like 30 different things that are that are bumping along.
So sort of watch this space My target is 10 trillion dollars of money under management I've told the team internally and I hate that.
But you know what I told Danny simple, it's a couple of years ago that my target is it doesn't and public platform was the trillion dollars assets under management and the wealth and asset management business and he correctly pointed out you know its revenue is Perez said, its not assets and I would say, yes, or no, but I'd like a trillion dollars with high revenue per asset and guess, what we've got a tree and for when we started the web.
Management journey 12 years ago, we had 500 being under management now and we have for Trillium and so we're heading to 10 trillion. We've got all these growth vehicles and I just couldn't be more excited about it.
Thank you. Our next question comes from Glenn Schorr with Evercore ISI. Your line is now open.
Hi, Thanks, very much maybe just a little more color on workplace and I feel like it's a good growth and good margin business on its own but nirvana is the ability to transition them over to for wealth management advisory relationships all the time.
And the question is how do you execute on that you mentioned companion accounts, but do you make research available what products do you push of course have you pre market for them to convert them because it takes time.
Yeah, Glenn John is going to answer, but sorry about cutting off the for boats and personal Trust me a lot too.
<unk> done a quite what happened, but I told the team, let's get you back on for another go at it.
So Debbie back.
So I think.
You you sort of highlighted some of the things that.
We're going to drive the growth going forward and again, we want more corporate accounts, we're seeing the pipeline very strong the hit rate is higher.
And that product is really resonating, we then want to grow their participants.
And then once the participants are in the system, we need to build trust and relationships with them through content.
Through education and through services, because the ultimate goal as you said is to convert them to a broader client and when we first converted them.
And we indifferent whether they go into the self directed channel the channel or virtual channel.
Because that will just give us an opportunity to build that relationship deepen that relationship as the clients.
Requirements and services and needs change, we'll be able to grow with them and so your comment about migrating one across.
Wealth client across the different platforms. The ultimate goal, but first we want to build trust with them bring them into the Morgan Stanley.
Relationship.
And then try to one of the keys is to try to have that integrated experience across the platforms for the clients. So that's a lot of the technology that we're trying to build too. So we wanted to bring him in deepen the relationship and then let them go for the channel that best suits them.
Thanks, and thanks, James and I'm, very confident and our relationship I appreciate that.
Good day here.
Yeah.
Thank you and our next question comes from Tim Abbas Hussain with Jpmorgan. Your line is now open.
Yes, thanks for taking my question.
The first one.
On fixed income.
As we know you're very credit familiar and.
And clearly that's been performing extremely well I just wanted to see how you're thinking about that business.
And longer term more stable environment around credit and.
And with your macro pieces being a bit weak. So can you talk a little bit about the mix and if you are happy about the mix.
And what opportunities do you see to further growth and rates and FX area.
I think the short answer again is it where we're very pleased with the performance from the fixed income business we've deepened.
The breadth and the franchise as you said credit has historically been a.
A strong point for us, but we're seeing good results and good penetration and both the macro as well as the commodity space and.
So again, we think we've gained market share since we restructured this business.
We have six or 7% player before we're now probably a 10% maybe even 10% plus per player we would expect to maintain that.
And that market share going.
Going forward potentially increase it or grow it a little bit more but we've been very pleased with the balance of the business and the results over the last several years and this business.
And and coming.
Coming back to answer Bill.
And then you are great number one GB player, but clearly family offices and high concentration risk no transparency for clients is reflected by the margins that you take.
So as a result and Mr.
And your risk office will take margin and <unk>.
And the nation.
So to say unwinding of the position and and that you have not significant amount of money.
So I'm just trying to understand how you're thinking about not just the family office and we'll disclose and needs to be reviewed that's more around and margin requirements and.
And how are you thinking about your business in terms of risk.
Management and.
And in that context could you could also maybe highlight for me if all your synthetic prime brokerage business.
Yes.
On the cat.
On a dynamic basis on a fixed basis in terms of Martin.
You know.
Uh huh.
I'll, just make one comment and I'll, let John add a couple of comments.
We've answered and dress that's topic and I'm sure, we'll have plenty of opportunity to talk about it and the future but.
This is a pretty small part of what we do as a whole fun, but.
You know I.
Thank you.
Comment I want to make as family offices, and not bad because I don't want to be very clear about that we have some phenomenal family office clients and there.
All over the world.
Tremendous institution, so, let's and I'll throw the baby out with about 20 here. This is not a judgment call on family offices. This is a very idiosyncratic event.
And I'll, let John if he wants to buy and nothing more to it but I don't want to over labor This issue.
Yeah, I would just and I think just pulling some of the threads of your questions together just make a couple more observations.
First is we obviously are looking across all of the portfolio as James mentioned, we're looking at our stress testing methodology and.
And we will recalibrate, it if and where it's appropriate to do so.
Number one your comment about margin and collateral I mean, I think the way we think about it as we had collateral based on a certain set of facts that turned out not to be true and James has mentioned.
And it wasn't necessarily it was a family office it wasn't necessarily that they had large concentrated positions and it really came down to the fact that this firm had large positions. The same positions in the same names at other banks across the street and it wasn't apparent to us so.
That's what isolates the situation here and makes it more unique we scrubbed the portfolio. We haven't found anyone that has similar fact patterns or copycat strategies, and we will continue to be diligent around around all of those points.
Thanks for your answers.
Thank you. Our next question comes from Devin Ryan with JMP Securities. Your line is now open.
Okay, great and good morning.
Wanted to ask a question about the recent announcement to offer a few specific bitcoin related funds to wealth management clients and I. Appreciate you have to walk before you run here and it and it's pretty small, but just given how fast.
The ecosystem is developing and the interest and space losses, just maybe give some thoughts on I guess, one what the reaction was and currently and then two just thoughts more broadly as youre thinking about the crypto space across the organization.
Sure and and I think your comments are.
Very appropriate it's a fast growing space, there's a lot of interest in this space and.
We had significant interest from our our wealth clients to try to get access to this new asset class.
And so we tried to facilitate that.
We tried to facilitate that we've allowed our within our wealth management platform qualified investors to get access through two specific passive funds. If you will to give access to the crypto currency.
The uptake and the interest level has been has been strong and we would expect people to continue to be interested in this space and we'll continue to monitor it and evolve and we're in the business of trying to provide.
Services and investment opportunities that interest our client base and as we continue to see.
More are stronger interest will continue to try to work with the regulators and others to provide services that we think are appropriate.
Okay perfect for it.
Squeeze in a quick follow up here just on the spec market clearly played a role and I think the record amount of investment banking activity and the market really started to lock up a bit over the past month on the pipe side and now the SEC is adding some more scrutiny here. So I just loved it maybe think about.
The backlogs there and expectations for you.
And moving forward to kind of work through those backlogs and then.
And the IPO market.
Kind of do a handoff here the traditional route going public if the stock market for us.
Sure I mean listen this back or the product itself is just another financing vehicle just like a private placement and our direct listing and.
Even with those incremental and new products. The traditional IPO product has been very active very strong and we've been a market leader in that space you are appropriate.
Now that the backlog I think is over 200 specs on file so I would expect that we'll continue to see more issuance there seems to be a pause as the market is digesting this and the regulators are looking at it so I don't want to get it in front of that.
But there is clearly interest and this product both from an issuer and a and a buyer perspective.
And I think it does also add to some of the.
Momentum and the M&A product, but I'd also point out you know.
Theres a couple of hundred million dollars of sort of spec money that can be.
Levered and put into the M&A.
Environment, but there's also a trillion and a half dollars of dry powder with the private equity firms. So if you put multiples or leverage on those there's a lot of buying power. So I think that's also a good driver of the M&A market going forward.
Yeah.
Okay, great. Thanks, John.
Yep.
Thank you. Our next question comes from Jeremy <unk> with BNP Exane per boss. Your line is now open.
Alright, Thank you and I wanted to carry on the discussion about the revenue growth drivers and wealth management, because I agree with you I think the upside shoot from that.
Is it too early to see signs of revenue synergy between E trade and the workplace channel and the adviser channels.
Its customers, bringing in assets held away or starting to cross over into other channels and use other services and can you see signs of that yet or is it too soon.
Yeah, I mean, I think as I mentioned, we are seeing some anecdotal signs are that we are running some pilot programs. We think we're capturing some of the traditional.
E trade clients, who might have left that platform.
And for incremental advice and now they are staying with us and and working with our financial advisory platform. So I think there is some very good early signs and I think youre seeing some of that obviously and the M&A. The other point I would make is in terms of the workplace for retention.
When we announced the transaction, we targeted a 15% retention rate there.
It's early days, but we're pleased with the progress that we're making E trade is still there.
E trade platform retention rate is still well above 15%. So we feel very confident about our ability to deliver on that and as we get further along on this journey will start to give you more color on that but early anecdotes are quite positive.
Okay, great and could I, just ask a follow up a technical question and I'll kick off Kickoffs and I know, you'll you'll set up with this topic, but just a technical question does the facts of the law, which is now and your data history does that have any mechanical calculation impact on risk weightings or capital requirements and your PB business.
Again, the volatility related to this event was as James said was very short in terms of time series. So I think the answer is it will not have a meaningful impact of the overall capital requirements.
Okay. Thank you very much.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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