Q4 2021 Morgan Stanley Earnings Call
Okay.
Good morning.
On behalf of Morgan Stanley I will begin the call with the following disclaimer.
During today's presentation, we will refer to our earnings release and financial supplement copies of which are available at MorganStanley.com.
Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially.
Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release and strategic update.
Within the strategic update starting reported information has been adjusted as noted.
These adjustments were made to provide a transparent and comparative view of our operating performance against our strategic objectives.
A reconciliation of this non-GAAP adjusted operating performance metrics are included in the notes to the presentation of the earnings release.
Morgan Stanley closed its acquisition of E*TRADE in October 2nd 2020 impacting annual comparisons for the Afirma in wealth management and closed its acquisition of Eaton Vance on March 1st 2021 impacting period over period comparisons for the affirmative investment management.
This presentation may not be duplicated reproduced without our consent.
I will now turn the call over to Chairman and Chief Executive Officer, James Gorman.
Good morning, everyone.
Morgan Stanley delivered another record year of profits and results in 2021 generating a full year ROTCE of 20%.
Performance was strong in each business. In institutional securities we showed strength and gained share and in wealth management, we added over 430 billion of net new assets, bringing total client assets to nearly five trillion.
We drove out strategic vision forward investment management successfully closing our acquisition of Eaton Vance chiller in the year and created a premier asset manager, which itself has 1.6 trillion.
Of assets under management.
Sharon will discuss the details of the quarter and the full year shortly.
As always I will walk through our annual strategic update.
If you turn to the document and start on slide three.
At the beginning of last year, we set two year objectives with the expectation that 2021 would be a transition year as we worked through our integrations.
Clearly the Vance performance exceeded the expectations we had for 2021 heading into the year. With the early successes of the E*TRADE and Eaton Vance acquisitions and the firm's overall momentum. We entered 2022 ahead of plan.
Turning to slide four.
First I'll focus on a 12 year transformation and where the firm is today here.
History off his perspective on our track record.
Next I'll highlight where we've built unique competitive advantages around each of our businesses and how we expect to grow and maintain our leading positions.
Then I will address our continued commitment to return capital to our shareholders. And finally, I'll touch on how when taken together this should lead to further multiple expansion.
Yeah.
To begin with that longer term evolution, slide five highlights the transformation of Morgan Stanley into a more balanced high returning firm to date.
Total revenues are more than double the level of 2009 with each business significantly growing and contributing to the firms enhanced profitability.
Each of our businesses now have defensible and sustainable competitive advantages to protect and drive their leading positions.
Start with institutional securities on slide six.
Looking back to 2014, when we had recovered from the financial crisis.
But before we reset our strategy and restructured some of this business, we've increased share both overall and individually across business lines.
[inaudible] continues to aggregate the industry leaders and we expect this trend to hold.
Our competitive position is strong and has demonstrated in the very active market for the last two years, we are confident in our ability to capitalize on opportunities to hold if not gained share across the division.
Moving to slide seven. Our integrated investment Bank delivered 30 billion of revenues in 2021 and continues to demonstrate operating leverage highlighted by our expanding margins.
Our footprint is balanced around the world, putting us in a leading share of investment banks with global scale.
Our franchise has never been stronger and we have seen tangible results from the collaboration between our segments.
Yeah.
Shifting to wealth management on slide eight.
The growth we've seen in 2021 has been unprecedented.
We added nearly one trillion in client assets in a single year.
Scale advantages propelled growth, we added 438 billion of net new assets in the last 12 months. This predominantly organic growth is the result of our consistent and focused execution on our integration and expansion initiatives and puts us in a leading position.
The journey of the last few years has demonstrated the out of the possible. With respect to net new asset growth. This business has gone from very low single digits in the last decade.
To 4% to 6% more recently.
To unprecedented growth this year.
Obviously, it's still early days, but the verticals are in place.
Before we commit to specific guidance for net new asset growth, we need more time to better understand the power of these channels.
But what I can tell you is that the proof points are strong and we feel great about where we are today and the business potential.
Turning to slide nine.
With the top advisor led business and the industry complemented by leading workplace and self directed offerings. The wealth franchise we've built as a category one. We already serve nearly five trillion of client assets and overall revenue and assets remain tied of 50 basis points.
Underlining this segment as an economic engine for the firm.
As we think about the growth ahead, we're most excited about the nearly 15 million relationships we have across channels and the potential to deepen those relationships further.
And consolidate client assets onto the platform.
On slide 10, we look more closely at workplace which I'm incredibly excited about for the future.
As we've said before, we see this channel as a funnel for client and asset acquisition to sustained growth going forward. We now have over 500 billion of invested assets in this channel and expect to retain an increasing proportion as they vest.
In 2021, we had a 24% retention rate.
That compares with 21% the previous year.
Given our focused effort our long term goal is to reach 30% retention.
This new metric illustrates the strength of the workplace business to augment net new assets to wealth management.
Net new assets to wealth management.
Moving to investment management on slide 11.
Our platform is transformed into premier and growing asset manager. Our distinctive capabilities enable us to deliver differentiated client value as endorsed by 115 billion of net flows in the year.
Total AUM is now 1.6 trillion.
And our more durable asset management fees and nearly triple what they were in 2014.
If you look closer at our investment management business on Slide 12, you can see we're a leader in growing where it matters most.
Customization, specifically direct indexing through the premiere parametric brand, sustainability and alternatives are each areas of increasing client demand.
We've strengthened our position across these categories with robust investment capabilities.
And we've seen meaningful asset under management growth as a result.
Moreover, the complementary nature distribution networks with Eaton Vance is powerful US retail distribution capabilities and [inaudible] strength in international distribution enhances our client reach.
We're encouraged by early signs of success in leveraging the greater combined networks, along with our world class equity franchise and value added fixed income platform and we expect these areas will continue to drive growth into the future.
Finally, on slide 11. As we look ahead, we expect rates to rise. We expect approximately $500 million of incremental NII in wealth management this year based on the year end forward curve. Additionally, we expect another 200 million this year from the reversal of fee waivers in our investment manager business.
<unk> business.
To further measure our rate sensitivity, we look at what happens if there is an incremental 100 basis point parallel shift in rates beyond the curve. That would deliver another one 3 billion, which largely goes to the bottom line.
While we certainly don't expect this additional shifts to happen this year, the firm will clearly benefit substantially as rates rise over the next several years.
Pivoting to our capital return strategy on slide 14.
Our increased earnings power supported by revenues for more durable sources, has enabled us to double our annualized dividend to $2.80, just last year, while at the same time, executing a meaningful share repurchases.
Notwithstanding the returns we're making the shareholders and the investments we make in our business. We continue to have an excess capital position.
Our CET one ratio was 16% at year end after paying out dividend, executing on our repurchase plan.
And accounting for the impact of [inaudible].
And as further illustrated on slide 15, growing net income has provided us the flexibility to reduce our share count.
We added 300 million shares from our two large acquisitions of E*TRADE and Eaton Vance, we continue to execute on a meaningful buyback program. And brought back share count back to just under 1.8 billion from $2 billion in 2014.
Taking all this together, slide 16 highlights the fundamentals we have in place to drive future multiple expansion.
We have scale significant growth opportunities in wealth and investment management, coupled with a leading institutional business and a strong commitment to capital return.
The Morgan Stanley brand has never been stronger. We've been fortunate enough to acquire additional brands in the last few years that have tremendous value in expanding our footprint.
Some of these elements supports multiple expansion for the combined company.
Slide 17 shows our performance goals.
Of note, we are increasing our ROTCE goal to reflect the earnings power we see in our business model.
We are laser focused on delivering value to our clients shareholders and our employees and we believe in ROTCE in excess of 20% is achievable as.
As we look to the longer term, with the support of our track record behind us writing a new goal long term goal to achieve 10 trillion in client assets across wealth and investment management.
As always our targets are subject of course, the major market moves or changes in the economic political and regulatory environment. However, with the outlook we have now, we fully expect to achieve our goals.
I'll now turn the call over to Sharon, who will discuss our fourth quarter and annual results and together we will take your questions. Thank you.
Thank you and good morning. The firm produced record revenues of $59.8 billion in 2021 and ended the year on a strong footing.
With fourth quarter revenues of $14.5 [billion]. All three businesses contributed to the extremely strong full year results.
Reflecting high levels of client engagement and active markets.
Electing high level.
Excluding integration related expenses, our ROTCE was 20.2% for the full year.
Okay.
Excluding integration related expenses.
With 22% for the full year.
And 24% for the fourth quarter and EPS was $8.22.
And $2 and 8 cents respectively.
And $2.
Respectively.
Even while investing in our business, we continue to demonstrate operating leverage.
The full year efficiency ratio was 67.1%.
Our full year efficiency ratio was 67, 1%.
Excluding integration related expenses, our full year efficiency ratio was 66.3%.
Down from 68.4% in 2020.
Total expenses in the year were $40.1 billion.
The increase in total expenses versus the prior year reflects the addition of E*TRADE and Eaton Vance.
And the integration related costs.
And higher compensation of higher revenues.
Yeah.
Now to the businesses.
Institutional securities delivered excellent full year performance.
With record revenue of $29.8 billion.
In the fourth quarter revenues were $6.7 billion.
Our integrated approach global footprint across business lines continues to distinguish our model.
Isn't it.
Distinguish our model.
And the operating leverage in the business the pre-tax margin was 39.6% for the full year.
Increasing from 34.6% in the prior year.
Investment banking revenues were a record $10.3 billion for the full year.
While each business delivered record results advisory and equity underwriting led the year over year improvement.
Corporate clients actively pursued strategic opportunities.
Corporate clients actively pursued.
Pursue strategic opportunities.
And sponsored deployed capital.
IPO issuances were exceptionally robust in the year.
And from a geographical perspective, results were led by the Americas, along with sustained strength in EMEA.
Fourth quarter revenues of $2.4 billion increased 6% from the prior year driven by strength in advisory.
Fourth quarter revenues of $2.4 billion increased 6% from the prior year driven by strength in advisory.
6% from the prior year driven by strength in advisory.
$2 4 billion increased 6% from the prior year driven by strength in advisory.
Trend from the third quarter persistence, particularly as a result benefited from a broadening of transactions across sectors.
Although underwriting revenues moderated overall, equity issuance was strong and elevated levels of event driven activity supported fixed income.
Fixed income.
We continue to invest in our investment banking business.
Our outlook entering 2022 is strong and our pipelines continue to be healthy across products.
CEO confidence remains high and markets remain open and constructive.
CEO confidence remains high and markets remain open.
Sure.
Additionally, advisory transactions should support strong capital market issuance.
Equity full year revenues were a record $11.4 billion, increasing 15% from the prior year as client engagement remained high.
The increase versus the prior year was driven by strength in prime brokerage and from a geographical perspective Asia.
Revenues were $2.9 billion in the quarter.
Increased revenues in prime brokerage on higher client balances were offset by decline in cash and derivatives on lower client activity versus the prior fourth quarter.
And cash and derivatives on lower client activity versus the prior fourth quarter.
This quarter also included a mark to market gain of $225 million on a certain strategic investments.
Fixed income revenues were $7.5 billion for the full year declining 15% from the last year's exceptional results.
Fixed income revenues were $7.5 billion for the full year declining 15% from the last year's exceptional results.
year's exceptional results.
The full year decline was driven by tighter bid offer spreads in macro in credit corporate partially offset by securitized product.
In credit corporate partially offset by securitized product.
Quarterly revenues of $1.2 billion were 31% lower than the prior year, reflecting a challenging trading environment rates.
31% lower than the prior year, reflecting a challenging trading environment.
And lower volumes and tighter bid offer spreads on credit.
Spreads on credit.
Further our client engagement tempered in December reflecting seasonal pattern impacting results.
No.
Turning to wealth management.
For the full year wealth management produced record revenues of $24.2 billion.
And a PBT margin of 25.5%.
Excluding $346 million of integration related expenses, the PBT margin was 26.9%.
<unk> related expenses, the PBT margin was 20.
Six 9%.
Fourth quarter revenue was $6.3 billion up 10% from the prior year.
$6 $3 billion up 10% from the prior.
And the PBT margin was $22.6%.
6%.
Excluding integration related expenses of $109 million, the PBT margin for the quarter was 24.4%.
Quarterly margin was negatively impacted by seasonal expenses and certain compensation and benefits decisions need to further support our employees.
Given the full annual impact of these discussions was taken in the fourth quarter. The impact was amplified in this quarter's margin.
Going forward this will be spread throughout the year pro rata.
As we look ahead to the first quarter of 2022, we expect the PBT margin to be more in line with the 2021
full year margin, excluding integration related expenses.
This business continues to benefit from strong client demand across the platform.
Client assets grew nearly one trillion dollars this year.
And now stands at $4.9 trillion.
Four nine trillion.
Fee based flows were an incredible $179 billion in the year.
Supporting growth in fee based assets of 1.8 trillion or 25% higher than last year
<unk>, 5% higher than last year.
In the quarter asset management revenues were three, asset management revenues were $3.7 billion.
Asset management revenues were $3 7 billion.
Net new assets of $438 million in the year represent 11% annual growth of beginning period assets. Momentum was carried through the fourth quarter.
<unk> was carried through the fourth quarter.
Which saw net new assets of $127 billion.
We saw strong asset generation from both existing clients and net new clients driven by the advisor channel.
We remain a destination of choice for advisors.
And continue to add strong team and retain productive advisors.
Net new assets.
Net new assets growth is further [inaudible] by positive momentum in our newer channels, namely workplace.
Positive momentum in our newer channels, namely workplace.
Our results demonstrate the tremendous asset generation capability of our platform.
Transactional revenues in the fourth quarter were $1 billion declining 23% from the prior year, excluding the impact of DCP, which declined by approximately $300 million versus the prior year revenues were flat.
The workplace continues to gain traction our total number of participants.
We now [reach stands] at $5.6 million.
14% higher than last year, and unvested assets now exceed $500 million.
As James mentioned, we are reporting on a new metric to show the percentage of stock plan assets remain within Morgan Stanley wealth management.
As James mentioned, we are reporting on a new metric to show the percentage of stock plan assets remain within Morgan Stanley wealth management.
Morgan Stanley wealth management.
E*TRADE previously previously disclosed with similar metrics. The definition going forward, we will measure the retention of the value of vested stock on a rolling 12 to 24 months period.
This new metric will allow us to measure the potential strength of workplace to service funnel.
To grow our asset base.
We saw 24% retention in 2021, which compares to 21% in 2020.
As James mentioned overtime, we believe that number can reach 30% retention for our stock plan administration business.
Going forward, we plan to disclose this metric annually.
Bank lending balances grew by $31 billion in the year and now stand at $129 billion. Strong client demand for securities based lending and mortgages drove the increase.
$29 billion strong client demand for securities based lending and mortgages drove the increase.
Net interest income was $1.4 billion in the quarter, driven by strong lending growth and the benefit of fully phased in funding synergies.
Net interest income was $1.4 billion in the quarter, driven by strong lending growth and the benefit of fully phased in funding synergies.
of fully phased in funding synergies.
The fourth quarter NII is a reasonable base to inform 2022.
This year NII will be impacted by the forward curve and lending growth.
Lending growth on.
On rate all the time and the magnitude of the rate hikes is uncertain, we should benefit from rising rates and the realization of the forward curve.
And the magnitude of the rate hikes is uncertain, we should benefit from rising rates and the realization of the forward curve.
This would imply an estimated $500 million.
Of additional NII this year largely weighted to the back half of the year.
On lending, we continue to see strong lending demand.
And while growth is likely to moderate some.
We expect approximately $20 billion of loan growth in the year.
The integration of the E*TRADE continues to go well. We are encouraged by continued client engagement and are seeing E*TRADE clients take advantage of Morgan Stanley capabilities being introduced on the E*TRADE platform.
Building on our digital client experience, clients are now able to link their self directed accounts via single sign on.
We have successfully merged E*TRADE bank legal entities with Morgan Stanley.
Okay legal entities with Morgan Stanley.
Throughout the integration efforts, we continue to focus on a unified client experience.
While providing clients choice.
Completing this integration successfully remains a key investment priority.
Moving to investment management.
The timing of the Eaton Vance acquisition makes comparisons to prior periods difficult.
I will make my comments, primarily on an absolute basis.
Investment management reported annual revenues of $6.2 billion.
And quarterly revenues of $1.8 billion.
Our results continue to demonstrate the diversification of this business.
And a greater contribution from more durable management fee revenue.
Total AUM rose to a record high of $1.6 trillion.
Of which long term AUM was also a record at $1.1 trillion.
Of which long term AUM was also a record at $1.1 trillion.
was also a record at $1.1 trillion.
Total net flows were $12 billion.
Driven by liquidity and overlay services.
Long term net flows were slightly negative.
Full year net flows were $115 billion.
Asset management related fees were $1.6 billion in the quarter.
The 8% sequential increase was driven by higher performance fees.
As a reminder, performance fees are mostly recognized in the fourth quarter.
Performance based income and other revenues were $166 million, reflecting broad based gains in our diversified alternatives platform.
Finally, the integration with Eaton Vance remains on track. In the first half of this year, we will bring a number of Eaton Vance and Calvert funds onto our international distribution platform.
We are also now offering them some model portfolios on the E*TRADE platform and we are seeing positive traction.
Turning to the balance sheet.
Total spot assets for $1.2 trillion dollars.
Risk weighted assets were essentially flat to the prior quarter at $472 billion, we adopted [inaudible] on December one, resulting in a $23 billion RWA increase.
This was offset by a decline in activity and lower market levels towards the end of the quarter.
Our [inaudible] mitigation efforts were better than we anticipated and resulted in an impact lower than our initial guidance to produce a better outcome.
We repurchased approximately $2.8 billion of common stock during the quarter.
We remain well capitalized well see adoption of soccer and our standardized CET 1 ratio.
Now stands at 16% flat to the prior quarter.
Our tax rate was 23.1% for the full year.
And absent any changes to tax law, we expect our 2022 tax rate to be in line with 2021, which will exhibit some quarter to quarter volatility.
In terms of our outlook for calendar year 2022.
The exit rate of our wealth and investment management.
And the integrations of our acquisitions set these businesses up to continue to perform strongly.
This business is up to.
To continue to perform strongly.
In addition, as James discussed realization of the forward curve.
Will only further support results.
As it relates to institutional securities while it remains difficult to forecast this business.
The banking pipeline looks healthy and the year started off well.
A lot will depend on monetary and fiscal policy and its impact on sentiment.
We will now open the line up for questions.
We are now ready to take questions. To get into queue, you may press star then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. You're allowed to ask one question and one follow up and then we'll move to the next person in the queue.
Please standby, while we compile the Q&A roster.
Yeah.
The first question is from Christian Bolo with Autonomous.
Good morning, guys.
So James, on the organic growth.
It's been remarkably strong.
And you keep calling for a slowdown.
On organic growth, but we're not seeing any sort of evidence of slow anybody can you accelerate from here.
I guess a couple of questions on that. Can you give us a bit more flavor around what's driving organic growth? How much of it is retention versus recruiting on recruiting who are you gaining share from?
I guess a couple of questions on that. Can you give us a bit more flavor around what's driving organic growth? How much of it is retention versus recruiting on recruiting who are you gaining share from?
driving organic growth? How much of it is retention versus recruiting on recruiting who are you gaining share from?
And then I would imagine you have quite a bit of visibility into the recruiting pipeline.
So any sense of like how how long do you seem to sort of strength can continue.
Good morning, Christian. I think you're talking about net new money I assume right.
Correct correct. Yes, yes, I mean, it's not a simple answer because in the old days it was simple.
It was a function of money that you lost by financial advisers leaving.
And money you game by recruiting financial advisors, and obviously, that's a sort of sorry way to run a business that basically settles your P&L for the next nine years to buy a little bit of joy in the near term.
Fortunately, we've outgrown that.
The source of net new money comes from several places.
Source of net new money comes from several places.
One, as you heard the retention in the workplace space is much better than what we did pre E*TRADE.
In the workplace space is much better than what we did pre.
I mean, we were I think it went from 21 to 24 last year, but pre E*TRADE was much much lower and pre sold them.
21 to 24 last year, but pre trade it was much much lower and pre sold them.
Number two.
The reality is wealthy people get wealthier quicker than people who are less wealthy get wealthy and we've got a lot of them.
People, who are less wealthy get wealthy and we've got a lot of them.
We now without the sophistication of our network, the linkages we have to invest in banking a cross out top financial advisors. The family office structure the team has put in place are all drivers of growth that we didn't have before. I mean, just the the new assets that are brought in from our investment banking relationships sort of across the house, whereas in the past we never really introduced
The sophistication of our network the linkages, we have to invest in banking a cross out top financial advisors. The family office structure. The team has put in place are all drivers of growth that we didn't have before I mean, just the the new assets that are brought in from our investment banking relationships sort of across the house, whereas in the past we never really any.
across the house its truly running like one firm.
Thirdly, we just not losing many people. I mean, that's the reality of relative to previous years, when we were being significant net gain is and that's not because we're doing stupid recruiting deals. That's because we're not losing a lot of people know we are doing recruiting deals there are talented people in the in the market.
In the market.
They are not ccoming from one particular form or another. We don't you know we don't focus on firms. We focus on individuals.
And that has been doing well. Then you add in things like the technology the team has put in place in wealth management.
Technology the team has put in place in wealth management.
So did the virtual adviser type technology, where you leverage the best talent we have across the whole country.
All of the old platform that is being built out where we now provide the product that you would've had to go to another firm to get and finally, you bring in the deposits and what we've done with the bank.
You know the online banking then you throw on top of that E*TRADE and what that's been doing in growth.
Christian, it's an interesting story, it's many many parts, which is why we're confident it's going to keep going just recruiting. That's different that you turn that spigot on or off but it's not just recruiting. So I think theres going to be strong organic growth. I mean these numbers we said unprecedented for reason it had never we've never seen.
It's 10%, 11% organic growth year over year, that's got to be the best in the industry and overwhelmingly the best in our history.
And it's better than frankly, many of the traditional.
Foster growing so called fastest growing companies. So we're really excited about that. I don't think 10 or 11% is realistic to hold.
But certainly we're not going back to anywhere near where we were in the old days.
If I can also add to what Christian I would just say if you actually look at the data is relatively as James said balanced across many of these different sectors, but as you think of just the advisor channel you're seeing not only we've spent a lot of time speaking to the community around assets held away.
We are seeing existing clients bringing assets as well as new clients, bringing assets to the advisors channel. So you are seeing a balance of those.
Okay. Thank you.
For my second question on expenses really nice control in the quarter.
But all your peers are speaking about elevated expense growth going forward to retain talent.
And just to invest for growth. Can you talk about just longer term, how you're thinking about balancing sort of that good expense control that we like while continue to invest for the long term?
And just to invest for growth. Can you talk about just longer term, how you're thinking about balancing sort of that good expense control that we like while continue to invest for the long term?
expense control that we like while continue to invest for the long term?
Good expense control that we like Wow, well continue to invest for the long term.
I think we have manage expenses well. I think that we always are cognizant of the pressures around expenses, both on the waste side and on the non comp side. If you think about the comp side, I think we are constantly feel that we pay for performance and that's sort of been the model that we have but as you also think about the non comps.
We're investing in our integration, we're investing in technology, resiliency, cyber. And I think we're also putting in place different types of investments as you think about positioning Morgan Stanley up for growth and making sure that we have the right people and the processes in place to do that.
But there is also inherent operating margin in or excuse me operating leverage in the model. And that's been something that we've been able to demonstrate I think this quarter as well as over the course of the year.
I'd say Christian, obviously, this is going to be a hot topic, because it's all anybody wants to talk about all of a sudden as expense management for 2022.
I'm not going to talk about competitors, but you got to look at business models I mean.
We're a different business model, just take our wealth management business, which as you know 24 plus being a revenue those advisers are paid on a grid.
There is no inflation, that's based upon what they produce.
Most of our investment bank is simply paid based on bonus and that's based on what they produce but at performances. If that goes up they go up which they did this year and we were thrilled to do that.
So.
We've invested a lot in technology, but we've also both companies you know we've said before we didn't just buy E*TRADE in and sold them an Eaton Vance, we bought technology businesses within them.
Which we would've been developing ourselves.
The online banking business within E*TRADE.
The solely in workplace platform, which is basically self way programming business. The parametric platform with Eaton Vance all of these are things, which if we'd built would have been bearish. So buy versus build we made that trade off. So it's a combination of all of those we're very comfortable with our expense situation.
The solely in workplace platform, which is basically self way programming business. The parametric platform with Eaton Vance all of these are things, which if we'd built would have been bearish. So buy versus build we made that trade off. So it's a combination of all of those we're very comfortable with our expense situation.
Right now.
I don't know it just I guess, it's a different business model.
Okay. Thank you.
The next question is from Brennan Hawken with UBS.
Good morning. Thanks for taking my question.
Sean, just wanted to ask a question on the slide that you've got in the deck on
The realization of the forward curve.
As well as the liquidity revenue and whatnot so.
I'm guessing that the 200 million in liquidity revenue is waivers and the recovery of waivers but.
Guessing that the 200 million in liquidity revenue is waivers and the recovery of waivers but.
That number seems a little low what wasn't the waiver in the third quarter $169 million.
It was what was in the queue.
So can you maybe help reconcile where you are currently running on waivers versus that $200 million?
Absolutely. So this $200 million, we're reflecting here. It's a good question is the forward curve and so the forward curve has the first rate hike and the debt.
That we looked at from December 31st so that in the second quarter. So therefore, it's the amount that you would expect to realize this year should that forward curve play out. That's the way that this the slide was illustrated and just to draw the distinction between what you see in the Q.
The [queues] has all different types of flavors, it's not just the money market waivers, but you're right to say that this number on a relative basis would be considered low if you're thinking about a full year context.
Got it okay. So we can calibrate both the NII number and the liquidity, okay.
And then.
When we think about you made a comment I think Sharon when you were talking about the impact in the fourth quarter of wealth management margins, clearly low right full year impact of that benefit.
But it sounded like what you said was when we were thinking about entering 2022 that the full year is the way to think about it but.
That's just like.
Just wanted to sort of clarify to understand. Did you mean that that was the jumping off point, whether that's the right way to think about 2022 in total? Because I'd assume with a lot of the right benefit coming continued operating leverage and whatnot.
You'd be talking more about a jumping off point than thinking about the full year, but am I reading too much into that? No, you're not that thank you for clarifying that that's 100% accurate when we were referring to as the first quarter of 2022 and using
This full year number as a good launching off point is sort of setting you up that's obviously ex integration for their first quarter. Got it. Okay. Rises that should increase the margin as it goes forward throughout the course of the year.
Okay, hopefully I can sneak one in because it was a clarification question.
Thank you.
The investment management fee rate was like really.
Pleasantly surprisingly improved despite the fact that we're still waiving fees like we just talked about.
Could you talk a little about I know Eaton Vance is early and there is still you know that that is still progressing and whatnot, but I kind of thought that the third quarter fee rate would've settled fully but there was an improvement. Can you talk about what drove that improvement? Is that sustainable or was there some one time lumpiness in there?
It's the fourth quarter.
You see some of the rates moving up in the fourth quarter Brennan, but overall I think as you look forward and you think about fees more broadly, we obviously have a larger asset base I think it all ones back to this idea of growth and that's I think really ties to James's slide as well.
Which really thinks about what are we trying to build leaning into growth and really thinking about creating durable fee revenue streams over time.
So when you when you say the fourth quarter I mean, I was excluding the performance fee could you guys break that out. Are there performance fees that are also embedded in the asset management line two that have the seasonality?
Yeah.
No. Okay. So that so the core fee rate is a good fee rate to think about going forward? Yes, and we also disclose them in the
Q and in the K. Excellent.
Thanks for taking my questions I appreciate it.
The next question is from Glenn Schorr with Evercore ISI group.
Hi. Thanks very much.
James, a little tiny qualify qualifier if I could.
A little tiny qualify qualifier if I could.
Last quarter I think you made the comment.
Well organic growth shouldn't be likely below 5%. Today, you said more like won't be like the old days.
Likely below 5% today, you said more like won't be like.
The old days.
Is it still like the old days, meaning that when you are in that 4% range free all the additions and the opportunities you have in hand or are we still looking at like should be five and above? I don't mean to pin you down I just want to make sure I'm getting the right context.
Yes. I don't know what.
I don't know what.
I'm not sure I heard you correctly about what you said about what I said last quarter, but let me say, what I'm going to say this quarter.
We, historically back in the bad old days, we would say negative growth, but we lost more money than we brought in.
And for a bunch of years through the early 2000, 12 through 15, we're probably running at 1%, 2%.
12 through 15, we're probably running at one 2%.
The couple of years before the E*TRADE acquisition and before frankly, the business really hit its stride, we were sort of running around.
3, 4, 5% and we kind of guided you know 4% to 6% was reasonable.
For long term predictions.
This past year I think we grew at 11%.
Which as you know.
I mean, it's it's freakish right claim this is you're talking about a 400 billion of new money. There are a lot of asset management companies that aren't 400 billion in size.
I don't think that's sustainable.
We've got I'd love, it, but I didn't see it sustainable, but we're not coming back to three 4% I don't know if it's 5, 6, 7 somewhere in that time, but it's going to be very healthy growth rate and you compound that out of what is now 4.9 trillion.
You know you get you get to really big numbers switches why combined with wealth and asset management, we put them together and currently there are about $6.5 trillion.
We can see a path to 10 trillion here and we wanted to call that because we believe that's going to happen. So that's we're in that sort of I don't know 4, 5, 6, 7, it's too and that's why I deliberately said in the script that it was too early to put a net new money target out there we needed to see whether it's really settled.
<unk> 10 trillion here and we wanted to call that because we believe that's going to happen. So that's we're in that sort of I don't know 45678, it's too and that's why I deliberately said in the script that it was too early to put a net new money target out there we needed to see whether it's really settled.
Perfect exactly what I needed. Thanks.
The other one James is the long term goals. If you look at the last slide. I think those are great long term goals and if he could do that sustainable sustainably I think you would get your multiple expansion people would love it.
The long term goals. If you look at the last slide I think those are great long term goals and if he could do that sustainable sustainably I think you would get your multiple expansion people would love it.
$200 stocks my friend.
The high class problem that you have is you kind of did some of them this year or last year.
So maybe if again if I could just have you parse some words and just go through how does.
Think about sustainability and what you're building towards what long term means just so we don't do the up and down game every quarter I'm sorry wait you didn't hit your RCC target this quarter. Yeah, let's be clear.
This was the problem. This is the problem with putting goals out there.
You hit them and everybody says great what's the new one.
Our goals last year at two year goals with 14, just take ROTCE.
14% to 16% we happened to hit 20% this year. It was an unbelievably good year and you know if we were really operating with a permanent 20 plus percent of ROTCE, the stock would be much higher than it is now. In fact, I think it should be higher than that now, but that's a different issue.
So we've put out 20% plus.
I don't think you're going to find another bank in the world, that's putting out a 20% plus ROTCE goal.
And you know over a long time, we're not saying forever. That's why we separated client assets of 10 trillion as longer term.
Not to be too cute about it but we think that obviously just mathematically if you do 5% net new money growth you have 5% to 6% back of depreciation, you're talking about is sort of just mathematically four year to five year timeline to get 10 trillion. By the way in in 2006 had total assets as
a company were one trillion.
Now it's $6 five so it's not like an impossible lift. On efficiency ratio.
When I started in this job I think our efficiency ratio was in the low eighties.
We have grounded down every single year and a range of the last, including this year.
2021, 22 was 69 to 72, we obviously beat that. We had as I said, we had a blowout year, but we consistently have the view that notwithstanding all the talk about expense pressure.
Our efficiency ratio will stay under 70%.
You know that that for long term management of managing growth and investing in the business you got to balance growth versus expense. So I think that's a phenomenal outcome and well wealth management you know our long term goals. There was 69 to 72.
I'm, sorry, 26 to 30, we've now said, 30% plus when we get the kick up from the forward curve, we get some of the rate increases. The next couple of years. We finished the integration expenses, you're going to see that number go up no question about that so that's the context and frankly I just like the round.
20, 70, 30, 10 felt like a nice clean sheet everybody can follow it.
And that's what we're planning on.
Awesome. Thank you.
The next question is from Steven [inaudible] with Wolfe Research.
The next question is from Steven [inaudible] with Wolfe Research.
Hi. Good morning, James. Good morning, Sharon, good morning.
So I was hoping to unpack some of the assumptions underpinning the 30% margin target for the wealth segment looking at the adjusted wealth management margin. This past year, a 27% in the 30% target its certainly a significant improvement from where you've been run rating.
For like the past decade plus in this new world order following the trade acquisition. It does feel a bit conservative when layering in the synergies as well as simply the realization of the forward curve and I wanted to see if we should expect the NII windfall to largely fall to the bottom line and can you speak to what you believe is an achievable margin goal.
When contemplating a lot of tailwind or benefits you cited from higher run rate organic growth the upside from higher rates and just the full realization of the trade synergies.
Steve I have to say I love you.
You're the first person in history to call it 30% plus pretax margin in wealth management as conservative I mean, we started we were like 3%. So listen there's nobody in history. I think has ever generated 30 plus percent number. I think it was back if you go back it was.
[inaudible] in the fourth quarter of 219, 99, I believe generated a 29% margin and that was because they were doing let's just say a lot of internet based.
Buying and selling.
The clients back then so that was like an artificial period.
Listen there's a reason we put the plus on it, we don't think 30% is the ceiling.
Now, let's run before we sprint here.
You know we've gone from five to 10 to 15 to 20 to 25 27, 28% margins with growth. That's a phenomenal story, if we can do 30%, which we will do because of the way rates are going it gets even better so 30% plus there's no great magic to it. It's just the math of how we think the bid.
As that plays out the next couple of years I don't know what the plus is going to be it might be 0.1 or it might be five.
Fair enough James Although last year I think you had a similar response when I pressed you on the ROTC target and it was raised so.
Hope, we will see a similar outcome. This go around and maybe maybe you'll clairvoyant.
Well it just for my follow up I wanted to ask her out.
Upcoming changes to the capital regime, Theres, certainly some significant changes coming down the pike as part of Basel four I know we might be jumping the gun. We don't have a proposal yet from the fed but was hoping you could just share some preliminary thoughts on how you see this potentially impacting minimum capital requirements at the firm and any learnings.
From the soccer experience in terms of your ability to mitigate some of those are W. A inflationary pressures.
Sure why don't I take the last one first which I think.
Theme is really around adaptation.
To soccer.
There was data mitigation that we were able to achieve and I think we're proud of being able to focus.
Forward.
As it relates to Basel.
You asked the question.
Nice to hear from you on that one, but obviously there is no final rule yet.
The difficulty in saying something is.
As often and can be offsets between Israel and so that's something that I would bear in mind.
You think through it.
But what I think is really the point is that we have adopted really well and we also have 280 basis points. I think is James shows of excess capital on the CET, one metric and so I think we're really comfortable with our position and we're comfortable to better understand the capital rules as they come our way.
Got it thanks, so much for taking my questions.
Thank you.
The next question is from Mike Mayo with Wells Fargo.
Yeah.
Hi.
Since James Youre looking for the 20% of our TCE.
Permanently.
Much longer do you plan to stay as CEO .
And my settings, such a high target are you encouraging some extra risk taking.
I'll take the second question second part of the question first no.
We in fact did 20% R. A T C. This year without taking extra risk taking with the movement in rates the scaling the business. The completed integration to come of Eaton Vance and E trade and the removal of those costs.
The moats around the business and the embedded growth we have been net new assets I don't think these are involve risk taking it. All this is not about growing the balance sheet and growing risk weighted assets. This is about growing a durable fee sources.
Variable revenues and managing our expenses I don't know if were going to achieve it every single year, but we are certainly.
And they go and it's a go for recent so no I don't think it involves taking extra risk I mean fundamentally our business model is different because as you know, we generate 30 billion and it's going up from wealth and asset management that that don't involve taking a lot of risk in our investment bank.
Traditional investment banking doesn't involve taking a lot of risk some of the underwriting obviously does some of the trading does but a lot of the you know look at equities loved the equities business is buying and selling on behalf of clients. So no. That's.
That's not the plan is not after all these years to dial up the risk.
And you know I'm not going to.
Repeat what I've said, many times I'm, not leaving now and I'm not going to be here in five years and it's up to the board. We are developing successes I'll be here, a few years and I want to see these integrations done I wanted to see is firmly on this path and I want to hand, it over to somebody else, who can take us for the next decade.
Great and then one follow up as far as the ins and outs that's helpful to give the market share.
And the numbers speak for himself, 15% investment banking market share of 23% equity share.
But on the one hand, I think you're one of the biggest.
Providers, the tech industry and with Teck.
Having some pain recently I wonder what percent of your investment banking business.
As to the tech sector, and then offsetting that perhaps there are some other industries that are coming back on line after the pandemic.
Sure I would actually point to the fact that what I said I think in the last two quarters is it we're seeing a broadening out of the advisor activity, it's not specific to any one sector and I think that's been what really contributed to the healthy pipelines in that business across all of the investment banking and then as you look.
And sales and trading it's a highly diversified model and it's not really.
Pinned down to any one specific sector.
Alright, thank you.
The next question is from Matt O'connor with Deutsche Bank.
Alright. Good morning can you just talk a bit.
Picture on the industry wallet for both banking and trading as rates rise and as the fed unwind the balance sheet.
Obviously, there's been some benefit for last couple of years and we're all trying to figure out.
Or two.
The more recent last couple of years go back to pre Covid, if you think about the wallet.
And then my follow up would be on your positioning for perfectly Okay. Sure I think if you think about the industry wallet.
There has been a couple of things.
One is obviously as I said, if you look specifically at investment banking, you've seen different types of activity you see different types of corporate sponsors, which has been one of the contributors of a bigger of a greater wallet. But then if you also think about the sales and trading franchise and the movement. There the activity is.
Changed I think that you were looking back if you think back to pre 2018 17 19, there was obviously less activity with central banks, all having a very similar.
Similar approach and one rate obviously as you inject rates rising you do you would expect or one should expect different types of volatility and different diversification amongst products, which could contribute to a bigger or a different type of wallet that you saw in the early 'twenty 'twenty to 2015 period.
That being said I mean, obviously, none of us have a crystal ball I think right now what we do know is that activity is high I think there's a lot of clients a differentiation and a robust and that's really in that type of a wallet more broadly, but we'll have to see how it goes and I think the point I was trying to make in my conclusion is we don't know how any of it.
Will impact sentiment and I think that's the big piece that is out there is a factor that we have to watch.
Fair enough and then in terms of your positioning obviously the slide six of your deck that shows very strong market share gains the last few years as.
As you think about.
The market kind of ebbing and flowing.
Or is the goal to hold the share that's kind of ties back into from the expense.
Pressure from the industry, where some of your peers are.
Either invested quite a bit this last year or plan to future years.
How do we think about the segment I mean, you already have such strong share in equities for example.
But fixed income is an area where.
You've talked about.
Hum.
Somewhere in between.
On the five so how do you feel about those businesses from a competitive point of view going forward.
So I think that when you what we would point to is I think this is a really it's a scale driven model. We've put a lot of moats in place I think having a global reach across different pieces contributes to the ability to actually hold or gain share across the investment banking.
Division and or excuse me the institutional securities franchise more broadly if you think about the equity is a very strong.
Very strong franchise, there investment banking as I've said before we continue to invest in that business and then if you look at fixed income I think we continue to feel good about that business, our client positioning and we've gained share over the last couple of years and we feel good about being right sized and there for our clients.
Gets to those needs.
Okay. That's helpful. Thank you.
The next question is from Ebrahim <unk> with Bank of America.
Good morning.
I guess Sean.
I was wondering if one you could just get a mark to market in terms of an update on all the integration of <unk>.
And when do we expect to fully get that behind us and just stated that I think James you've in the past talked about looking at [inaudible]
Scaling that up.
Globally, just give us a sense of is that something that can happen in the near term and what's the optionality there on E*TRADE and taking it globally.
So why don't I start on the integration. I think where we what we had said was we looked for approximately a three year integration period, we have seen some and this is specific to E*TRADE. We have seen obviously a portion of the integration related spend over the course of the last two years, we would expect the vast majority.
Of the integration related expenses to be pulled forward into 2022 with a slight residual in 2023, but most of that happening in 2022.
And I think that what you will see later in the 2023 space, there'll be more on the backend and not really a client.
Not really client facing. As it relates to the the actual cost synergies that we've seen.
We're in a very good place. I think that it's exceeded our expectations in terms of the guidance that we gave, in terms of a timeline and seeing those come through but on a holistic basis, we stick to the cost synergy guidance that we gave when we first announced the transaction.
Yeah on the international I mean E*TRADE already manages some plans internationally.
We don't have immediate plans to take the platform outside the US. But it's certainly part of our long term strategy. So I would say right now, let's get the integration done let's prove out the case here.
Get the cost synergies we talked about sort of close the books on that and then we're looking for further expansion.
Got it.
Just a separate question around. There's some concern that the fed is behind the curve in terms of monetary policy. How concerned are you in terms of the risk off of next events happening with one of your clients or within the capital markets business?
If the fed has to hike faster, we'll get to Q T sooner than expected.
Any thoughts around that?
We've got you know we've got a lot of clients. So I'm sure some of them are well positioned for rate hikes. Some it's you know.
Got a lot of clients. So I'm sure some of them are well positioned for rate hikes. Some its you know its.
It's very hard to predict the data points suggests we're going to get three to four rate hikes this year and three to four next year. That feels kind of write that gets us back to sort of near normal normal would be about 10 increases from here.
It gets us to about 2.5%.
If people aren't positioned to manage getting back to normal then it's kind of.
It's sort of their problem, it's not, I'm not particularly worried about it to be honest. And we don't we don't we don't try to predict how people are going to change their positioning with what is a fairly predictable set of outcomes, which is we will have a normalization of interest rates at some point in the next couple of years.
Thank you.
The next question is from Jeremy [inaudible] with BNP Paribas.
Thanks, very much so I just wanted to ask a couple of follow up questions. So two related questions really about the wealth management growth because obviously, that's just such a strong theme and what you're doing.
The first one is I think the new metric, you're giving us the retention of invested assets. That's an interesting metric and a useful one. Could you talk about how you're driving that?
In terms of how you're going to get that higher in terms of how you're approaching those clients and what product you are putting in front of them to drive that higher?
Product you are putting in front of them to drive that higher.
The second question related are you seeing any cross sell revenue synergy between your three wealth management channels advisory workplace self directed?
Or is it still too early for that?
Sure. So the on the first on the new metric I think that the first driver you're going to see is a lot of the companion accounts right. So we've talked about the fact that we would expect to give everybody on the US a companion account or at least be at 90% by the end of this year. And that's still on track and that will allow for is as those assets from stock.
So the on the first on the new metric I think that the first driver you're going to see is a lot of the companion accounts right. So we've talked about the fact that we would expect to give everybody on the U S. A companion account or at least be at 90% by the end of this year and that's still on track and that will allow for is as those assets from stock.
Fast into a companion account, you retain them in a Morgan Stanley or self directed type of way and then you use this will lead to the second question, you asked and sort of tying it together products like lead IQ or technology investments like project Gino to better understand our clients and offer us the technology and agility.
To give advisers and to provide the right advisors to the right workplace participants we are already doing that we already have.
Pilots in place, where we are giving different workplace individuals' advisors. And so I would say that this the first step is really getting everybody a companion account and that's part of the integration process and then the second part is using technology to better match client such that while they still get client choice, we're able to offer.
Them the full advice network that Morgan Stanley has to offer.
Okay.
That's great. Thank you. Could I just ask.
The related follow up do you need to get the CET 1 ratio down to support your ROTCE target staying above 20%?
No. This is a longer term target. I think you saw it even this year. So I would just retort with look at this particular year and where we were in terms of our CET 1 and obviously say we were able to do it given the market circumstances. I'd say that over time however, we continue to look at capital.
As we think about how do we best use that capital for investment returning it to shareholders with dividend looking at buybacks and other ways and uses of capital as we have over the course of the last decade.
That's great. Thank you.
The next question is from Dan Fannon with Jefferies.
Hi. Thanks, good morning, I was hoping you could discuss the profitability of the asset management business now that you've had several quarters of Eaton Vance. And I know that deal wasn't cost driven but wondering if there's any additional synergies and and as you think about money market fee waivers coming through.
You mentioned earlier, the incremental margin on that in the context of the overall profitability of that business.
Sure. So I think that the fee waivers sort of speak for themselves and so I think that gives you a direct number on that.
On the E*TRADE and the Eaton Vance integration or excuse me the investment management and the Eaton Vance integration. I think that the way to think about it is it wasn't ever a cost savings transaction. The idea was always to marry the platforms and you've already begun to see that so if you think about the diversification of the product suite itself.
You're in a position where if you see flows in one business go down you've seen flows go up in other businesses and so that's giving you the [balance] almost in that business specifically. But in addition to that and I mentioned this in my prepared remarks. If you look at the second thing that we had highlighted a lot when we purchase Eaton Vance was the different distribution networks. So we have an international or Morgan Stanley.
<unk> go up in other businesses and so that's giving you the Dallas almost in that business specifically, but in addition to that and I mentioned this in my prepared remarks. If you look at the second thing that we had highlighted a lot when we purchase Eaton Vance was the different distribution networks. So we have an international or more.
[inaudible] had an international distribution capability.
That Eaton Vance didn't have a product such as Calvert, where you have a cyclical tailwind in terms of a secular tailwind in terms of people being interested in that sustainability space that is going to be sold on using our international distribution channels beginning in the first half of this year I think that shows.
The progress and momentum that we have in place as you're marrying those two different sort of companies and they're coming together as one.
Thanks, and one of the other attributes.
It is the parametric opportunity within wealth I guess.
Is it too early to talk about uptake of that some of the tax advantaged strategies they offer?
In terms of your wealth clients.
Well, parametric was already offered and very.
Well received within the wealth management platform. I think we're looking for more ways to sell to offer that product I should say within different parts of the wealth management channel.
Got it, thank you.
Okay.
There are no questions at this time, ladies and gentlemen. This concludes today's conference call. Thank you everyone for participating. You may now disconnect.
Yeah.
Yeah.
Yes.
[music].
Okay.
Right.
Okay.
Yes.
Yes.
Okay.
Okay.
Yes.
Yes.
Okay.
Sure.
[music].
Okay.
Sure.
Yes.
Yes.
Yeah.
[music].
Okay.
Okay.
Sure.
Sure.
Okay.
[music].
Yes.
[music].
Okay.
Yes.
Okay.
Yes.
Okay.
[music].
Okay.
Okay.
Yes.
Yes.
Yes.
No.
Okay.
[music].
Yes.
[music].
Perfect.
Yes.
Okay.
Thank you.
Yes.
[music].
Great.
[music].