Q3 2022 Morgan Stanley Earnings Call
Good morning, welcome to Morgan Stanley's third quarter, 2022 earnings call.
On behalf of Morgan Stanley I will begin the call with the following information and disclaimers.
This call is being recorded.
During today's presentation, we will refer to our earnings release and financial supplement copies of which are available at Morgan Stanley Dotcom.
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.
This presentation may not be duplicated or reproduced without our consent I.
I will now turn the call over to Chairman and Chief Executive Officer, James Gorman.
Hum.
Good morning, everyone. Thank you for joining us and I know, we're starting a little later than some of the previous quarters I appreciate you staying with us.
The pen performed well in a very uncertain and difficult environment.
Our TCE of 15% excluding integration expenses.
The stability and strength of the business model both.
Both management pre tax margin, excluding integration expenses was 28, 4% and coupled with 65 billion of net new assets demonstrates how this business, even though they are a very volatile market environment and with indices down over 20%. This year continues to attract new client assets and remains highly.
Profitable.
This business is enormous scale and channel diversification should ensure continued success.
Investment management and investment banking were clearly impacted by the market environment, but as I've said elsewhere advisory and underwriting activity has not gone away. It has simply been deferred.
Fixed income and equities remains very solid with no areas of obvious concern.
Businesses navigate the complicated markets without serious incidents.
Finally, the strength of our capital position is very clear as shown by the continuation of our strong buyback program with $2 6 billion of share repurchases and this past quarter, coupled that with the dividend yield north of 3% and a CET one ratio of 14, 8%.
On an operating basis. This firm is doing well in a post COVID-19 world from a market perspective, we expect continued volatility as the federal reserve continues to tighten policy such to bring down inflation to acceptable long term levels.
This is an environment, where it behooves management to be prudent about balanced.
Our wholesale retreat from the market is not cold pool, but at the same time I must be more cautious in credit sensitive parts of the business.
Fortunately the business model changes for the past decade or more.
Plus the acquisitions of Smith, Barney E trade and Eaton Vance put us in a position of significant relative strength and should support solid absolute performance in the months ahead.
I'll now turn the call over to Sharon to discuss the quarter in detail and together, we'll take your questions. Thank you and good morning. The firm produced revenues of $13 billion in the quarter, our EPS was $1.47.
Our Aro TCE was 14, 6%.
Excluding integration related expenses, our EPS was $1 53.
Our our OTC he was 15, 2%.
We built our business model to perform through the cycle and withstand volatile environment evidenced again by the performance this quarter.
Institutional securities fixed income benefited from macroeconomic development.
And in wealth management, we continue to attract strong net new asset.
Your scoring the benefits of an advice driven model and a variety of backgrounds.
Year to date efficiency ratio was 72% excluding integration related expenses, our year to date efficiency ratio was 71% ensuring future growth remains a priority and we continue to invest in tech driven efficiencies and with the abatement of Covid related restriction marketing.
And business development expenses have progressively normalize as our teams reengage with clients and our colleagues in person.
Efficiency remains an important performance objective and we review incremental spend on an ongoing basis.
Now to the businesses.
Institutional Securities revenues were $5 8 billion.
Down from the robust prior year, but seasonally strong for seasonally strong rather for a seasonally slower quarter relative to historical levels.
And fixed income and equities was a counterbalance to muted activity in investment banking.
Investment banking revenues decreased year over year to $1 $3 billion with meaningful declines across products, particularly underwriting ongoing market volatility continued to weigh on issuance and lead clients to delay strategic action.
Advisory revenues were $693 million.
Solid results reflected the completion of previously announced strategic transaction.
Revenues were down relative to the record prior year and in line with broader M&A market volumes.
Equity underwriting revenues were $218 million with year over year declines across product, reflecting the overall volatility in global equity markets.
Fixed income underwriting revenues were $366 million investment grade issuance fared better issuers took advantage of favorable windows and investors demonstrated selectivity and a more challenging market.
We remain engaged with clients and strategic dialogues are active across multiple industry groups.
The eventual conversion to announce mint is dependent on clarity around macroeconomic condition.
<unk> inflation road angio politics, as well as the stabilization of valuation.
Equity revenues were $2 $5 billion.
The business performed well against the backdrop of equity market declines in volatility.
Prime brokerage revenues decreased from last year results were impacted by lower average balances reflective of client deleveraging, which was partially offset by the mix of client balances.
Cash and derivative results declined versus the prior year as client activity moderated.
Fixed income revenues of $2 $2 billion represented the highest third quarter in over a decade driven by strength across the macro complex.
Macro revenues increased meaningfully versus the prior year period inflationary pressure as well as central bank and physical activity drove volatility higher.
Extension changes in portfolio supported client engagement and increase flow trading activity.
Fitting rates and foreign exchange.
<unk> revenues were in line with the prior year revenues favored the Americas more than the current period.
Other revenues declined from the prior year and reflected a loss of $100 million.
Mark to market losses on event and relationship loans net of hedges and movements in revenues related to deferred cash based compensation contributed to the decrease.
Turning to wealth management, the business continues to deliver strong results.
Fight the economic uncertainty.
Revenues increased from the prior year to a robust $6 $1 billion as we continue to grow the more stable parts of our firm.
The rising rate environment supported net interest income more than offsetting the lower asset management and transactional revenues.
Pretax profit was $1 $6 billion and the PBT margin was 26, 9% excluding integration related expenses. The PBT margin reached 28, 4% underscoring the resiliency of this business against the backdrop of declining asset values.
Total net new assets were $65 billion in the quarter, bringing our year to date net new assets to $260 billion.
As a consolidation from existing clients net new clients workplace relationships and positive net recruiting we're all sources of strength.
Growth of net new assets highlights the value of trusted advice, especially through periods of market uncertainty.
Our platform continues to attract advisors, who recognize the integral role of the wealth management business at the firm.
And the value advisors gained by leveraging our technology and our products to best serve their clients.
Transactional revenues of $616 million declined from the prior period due to lower retail engagement and the impact of movements in revenues related to deferred compensation plan.
Asset management revenues of $3 $4 billion, primarily reflected lower market levels.
E Bay flows were $17 billion moderating from the robust levels seen in recent quarters.
Suggesting retail hesitancy to invest in managed product in uncertain markets.
Bank lending balances grew to $146 billion and on a year to date basis balances have grown by $16 billion.
On a year to date basis, rather this quarter balances have grown by $16 billion.
The pace of loan growth slowed this quarter on the back of Paydowns in securities based lending and moderating mortgage growth.
Total deposits declined by 2% in the quarter to $332 billion.
There was a shift in mix to higher yielding savings products as our expanded bank offering attractive clients' investable cash.
Net interest income was $2 billion up nearly 50% from the prior year and this accelerated rate hike cycle, we have outperformed our model beta across our deposit portfolio, which has more than offset the changing mix of our deposit base.
Through the end of the year, we would expect NII to remain broadly.
In line with the guidance provided last quarter.
Noting that some of the rate benefit was pulled forward into the third quarter.
Despite this period of heightened uncertainty and volatility we achieved consistent growth in wealth management, we continued to deliver strong net new assets and demonstrate economies of scale with considerable growth opportunities ahead.
Turning to investment management.
Revenues of $1 $2 billion declined from the prior year period substantially driven by lower asset values as well as the impact of outflows over the last year.
Total AUM ended at $1 three trillion dollars.
Long term net flows were approximately $2 billion.
While equity strategies continue to see outflows the pace has moderated from recent quarters.
Triste rate volatility negatively impacted fixed income flows however, our broadened portfolio also delivered after.
Inflows of $7 billion into our alternative solutions platform were led by continued demand for parametric customized portfolios and our direct indexing and tax efficient investing capabilities as well as continued demand for private credit.
Liquidity and overlay services had outflows of $32 billion.
It's like we relocated money.
Holdings, two alternative risk free assets.
I sit in management and related fees were $1 three.
$3 billion.
Impact of lower average AUM led to the year over year decline.
Performance based income and other revenues were a net loss of $101 million, primarily driven by the markdown of a single underlying public investment in one of our Asia private equity funds.
Investments in the business and the integration of Eaton Vance continued to progress well.
We are investing in products and vehicles that will allow us to deliver solutions to a broader set of clients.
Our strategic focus on secular growth areas, such as alternatives and direct indexing supported by our ability to globally distribute products positions us well to perform through the cycle.
Turning to the balance sheet.
Standardize our double you as we're relatively flat ending the quarter at $460 billion.
Prudent management of resources was partially offset by an increase due to market volatility during.
During the third quarter, we also bought back $2 $6 billion of stock taking advantage of our current valuation and utilizing the flexibility of our repurchase authorization.
OCI related to our available for sale securities portfolio reflected unrealized losses of $1 $3 billion. While this should be earned back over time, it reduced our CET one ratio by approximately 30 basis points in the quarter.
Our standardized CET one ratio was 14, 8% approximately 150 basis points above our regulatory requirement inclusive of buffers as of October 1st happened.
Capital remains critical to our strategy, particularly in this rapidly evolving backdrop.
Our tax rate was 21, 4% for the quarter down from the third quarter of last year, primarily driven by the realization of certain tax benefits.
We now expect that our full year 'twenty two tax rate will be approximately 22%.
Looking ahead, the broader economic outlook remains uncertain.
While we cannot be sure how the market dynamics will play out we remain confident in our strategy, particularly our ability to aggregate client assets in wealth management support our institutional clients and deliver diversified solutions and investment management.
All while prudently managing our capital profile and focusing on our strategic goals.
With that we will now open up the line to questions.
We are now ready to take any questions you get in the queue. You May press star and the number one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press star and the number two on your Touchtone telephone.
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.
We'll go first to Ebrahim poon, putting a wala from bank of America.
Good morning.
Yes.
James do you would you alluded to a lot of crosscurrents fully appreciate that I think.
From the shareholders' perspective anything slight folks on Morgan Stanley is.
Some degree of confidence on the COPD defensibility of ROE can you just talk to US as you think about the you've already seen a ton of market volatility as we look forward your confidence with return on tangible equity of 15, 16%. How defensible do you think that is and understanding the quarter to quarter volatility, but how defensible do you think.
That is and remind us about the synergies from Eaton Vance.
Et cetera that we should be mindful of when we think about Morgan Stanleys growth relative to what happens to the market. Thank you.
Great well, that's a good broad question to kick it all I would say first of all with thrilled with the deals we did with the trade at Eaton Vance I mean, they both worked.
Better than expectations.
We need and Vance for example, the Jim that is parametric because just the gift that keeps giving E.
E trade with the deposits that we brought over through that deal what we've done with the stock plan business is now combined with <unk>.
35% of the S&P companies, and obviously, having a digital banking platform.
Platform I've often described they trade it as a technology company.
We bought a lot of technology with that so just on those two things are thrilled with it in terms of the overall environment and how we play in that environment, maybe I'll just touch on the environment for a minute.
It shouldn't be surprising what's going on in the market. So I'm kind of surprised every time I see somebody on TV, who seems surprised by it.
We had zero interest rates for a decade, we have massive monetary and fiscal stimulus.
We have the first land war in Europe , and 70 years.
Inflation in 40 years and the fed had to move now my opinion was they moved place, but they moved and they are going to keep moving and rates are now around 3%, they're probably going to go to mid fours.
That remains to be determined and with that there will be consequences.
So far we haven't seen clarity around inflation abating Mike.
My guess is that we will see that clarity and it will be worried but certainly by the middle of next year.
The fed will be successful in this journey, but that's it that's it got from you know all the numbers I'm looking at but it doesn't mean I'm gonna be right. The world obviously remains volatile.
We you're going to see some disruption we're seeing at some of the more ridiculous stuff that's been in the market in the last few years companies trading at 50 times revenues.
What's gone on with bitcoin trading at $60000.
Some of the the.
What's going on in some of the games stop in other companies, where there's been these sort of aberration type trading I mean, that's been washed out and that's okay. We're back to sort of fundamentals.
How does Morgan Stanley playing that.
Restaurant management, obviously gets hurt when fees are down because asset prices are down, but I'm not I don't think random long term financial depreciation summed up particularly concerned about that.
As I've said, the banking pipeline and underwriting gets to food people don't stop doing deals in fact, there was a deal announced this morning.
And there'll be much more deals as we get closer to economic clarity.
Our sales and trading businesses remain robust we are holding share in those I feel very good about that and a lot of that business is actually repeatable. If you think of prime brokerage, it's actually very stable.
And with wealth management, we brought in 65 billion of new money and one of the most difficult quarters that we've had in 15 years.
That would have been unthinkable, even two years ago.
So the fact that clients are continuing to bring us money and the funnel all the way as the money comes in the door is working is not that's not an accident.
That's a business model designed so I'm really happy with the way that's working out so in aggregate honestly I'm pretty relaxed I mean, I see T. One around 14.8% were required to have 33 I think.
I don't know if that answered your question, we could probably spend all day talking about it.
The environment is always difficult, but we are not under stress.
No. It didn't thank you and just one quick follow up to that at the same time, you've shown a tendency to lean in and be opportunistic Eaton Vance. He did a lot of disruption among your peers both here in Europe .
Like how do you think about just Morgan Stanley leaning into actually gain share in this backdrop.
Well I think you've got to keep investing and we we were.
We are not making major cutbacks across the plants I mean I'm sure. It's Ryan will talk about expenses in a minute.
Where obviously being being prudent, but we don't see any we don't see any reason fixed great draconian measures, we build a business model and in times like this is when if you can sustain that you actually do very well coming out the other side. So I feel I feel pretty good about pretty good about our relative position to be.
Bonuses.
We'll take our next question from Christian Ballou with autonomous.
Good morning.
Maybe chevron on the deposits I hear your comments on deposit mix shift.
What sweep deposits were down I think 18% Q on Q, which I think is the worst quarterly.
Decline by significant margin. So so I'm a little surprised that you said.
Was it beat our expectations our deposit beta is in line with our expectations.
I guess my question is how are you thinking about your guide for 50% terminal deposits paid off is that still realistic given the fed has to Heikki and then obviously the P. C. A real problem sweep deposit decline.
Sure. So let me just take them in separate that a little so the change that you saw in mix of of deposits you actually what we saw is yeah I would I would label it as transactional cash in investable cash that transactional cashes, the sweep deposits that you're talking about and as James said with the expanded bank offering.
Which was also aided by a trade and we have more diversified products than we've ever had before and in fact, what we've seen is the savings account that we offer as those other deposits is where those that investable cash is going when it's new to the bank. So from the aggregate standpoint Morgan Stanley .
He actually has the vast majority of its deposits is coming from the wealth management system. This is important when you compare it to the last period that you were talking about because that actually wasn't the case. So we had sweep deposits, we had some savings and Cds, but a big chunk of that was actually wholesale deposits that was coming from outside so what Jay.
<unk> said with us being able to attract these new assets is the new assets that are sitting at Morgan Stanley that overtime can be deployed as you think about either different investment opportunities or different transactional opportunities as it relates to deposit beta we are outperforming the deposit beta that we've modeled which is where that NII is still coming from.
So NII as you know Christian is going to be made of three different things the deposit beta the actual deposit mix and then loan growth and taken together, that's still propelling NII to where it was this quarter.
Okay.
Maybe I'm just leverage lending in the bridge book can.
Can you speak to your balance sheet risk appetite you guys seem to be in a number of sort of like hog deals citrix Twitter et cetera.
So first of all how big is your bridge book or leverage loan book. However, you want to characterize it and then second are you increasing your risk appetite here to capture opportunities.
And then how are you thinking about managing that risk.
So broadly speaking I'd say, we've been extremely prudent in terms of risk management I think that's most notable actually when you think about our RW isn't just our capital position. So we've been looking at different risk based metrics really overtime and bringing them down over the course of the year. So that's for the entire institution just no.
One that we've entered into what feels like a more volatile period.
As you think about those different relationship and event net of hedges over the course of this quarter or are they actually were quite modest marks given the environment.
Well go next to Glenn Schorr with Evercore.
Hello, Thank you.
Maybe a follow up on on.
The deposit conversation.
I'm curious you have these expanded offerings you have to provide savings account.
How do you how do you monitor and how do you guide client behavior and is the goal at all costs.
Deposits in house, even if the cost of those deposits is a lot higher than sitting in a brokerage account I'm just curious on the on the how to.
Oh the intention of course is to give the clients opportunities in choice Glenn as you know, which has been our position over the course of the last God.
God knows how long, but the intention is to give them as many offerings as possible and yes. As you said, if we can bring those assets in and give them an opportunity to have a savings account or we can issue C DS or as you've always talked about we have other types of things such as alternative what it does is it brings those assets in house.
Then in a point, where they want to be deployed into the marketplace. We can do that as it relates to what we might necessarily give two different deposits. It would be of course again related to the transactional versus investable cash.
Maybe staying well.
It's been very successful at.
Growing your securities based loan book.
I think of those as extremely low risk to Morgan Stanley but.
It backed by Securities and Securities of all types have fallen a lot. So I'm curious if you can comment on how big that book will it still grow and how you're managing the whole margin call situation I'm, just getting a mark to market on that that'd be great.
Sure. So we have seen a paydown specifically this quarter. So just in terms of the actual book, but in terms of the risk, which you highlight we've always said, it's really more of an operational risks than anything else. We have obviously seen margin calls and they've all been handled very well over the course of the quarter. So we haven't seen any issues there and in addition to that I think when you look at the.
L T V as well we noticed when we have those you know, we obviously look at that data internally and it is very much in line with the longer dated historical average and for this quarter. It was over the course of the quarter on average was in line with last quarter as well. So I think that book remains very well managed and he is a great opportunity and option for our client base and of course, it will just be it.
Depending on the environment itself.
We'll go next to Brennan Hawken with UBS.
Good morning, Thanks for taking my questions I'd like to drill in a little bit Sharon to the comments that you made around deposit betas in deposits and what's been changing in the mix.
For you all right that all makes a lot of sense, you know I think that there's clear benefits to having deposits much more oriented to the wealth management business.
And it helps to watch that mix between the sweep and other.
But.
The idea that the NII guide is essentially unchanged and you had $250 million growth quarter over quarter that suggests that basically and ice can be flat into for Q. So is that have we hit given the dynamics given you have a wealthier clients and you and you have more of their cash and so theres. If you wanted to.
Keep that funding, which is of course more attractive than wholesale and <unk>.
Gonna have to pay.
For it in those savings accounts and so therefore is it just.
And with loan growth slowing to just right to just assume that okay. You know.
This is probably like the stable level of NII for at least the foreseeable future.
You know as we head into 2023.
Or you know well.
Well, we hit a point, where you'll be able to continue to see some some resume some growth and we've just entered this transition period, how should we think about it a little bit longer term.
Yeah, I think I mean, the truth is I think we'll have to see right. So you're right in your assumption that that's basically what it implies in terms of quarter over quarter for NII, obviously, we haven't given 2023 guidance yet and the reason I mean aside from the fact that we've got all we give guidance in January but aside from that the guidance would obviously.
We also take into place what is actually happening with the deposit mix and I do think that this is an excel. Obviously is an accelerated rate hike cycle deposit behavior is still playing out but the intention here is really to make sure that we have these deposits in house and they will continue to be deployed into the marketplace over time. So that's the balance.
One is trying to achieve when you think about that deposit mix and what we're actually doing from a great bank and growth perspective on the loan side I think that again, where you see the positivity is these are environmental factors right. So when you think of household penetration from our assays into different mortgage and lending products those things continue.
Right. So what you're focused on which is completely fair is really going to be dependent largely on the environment itself. How quickly you see rates, new and then how you see deposit behavior play out overtime.
Okay, Alright that is all a totally fair thanks for that color.
Second question would be on the left fin book, there's definitely some increased focus there I know you referenced some marks through the institutional business on the other line I wish it wasn't that surprising given the environment, but.
But how are you thinking about managing those risks.
There still is some inventory.
The street broadly is going to need to work through and Investor appetite is has been weak and so.
How have you hedged that book, how or how should we be thinking about those risks going forward and how are you continuing to manage it.
Thank you.
Clearly prudent disciplined risk management, and I think that the mark that you've seen so far underscores an underlying that I think that the other point that I would just mentioned as we think about the outlook perspective, what you saw over the course of the third quarter was that the market and issuers and others are very opportunistic as it relates to <unk>.
Windows and if the windows specific driven market and so when you do see positive windows and we saw it in August and we saw in early September you do see movement and so one is watching that calendar as you think through that and I think you know, we're looking for those market receptivity and for those favorable windows.
I'd just add to it I mean, there's obviously been a lot of talk about this here in a couple of names in particular, and we can't talk about individual names as much as I'm sure you don't like us too by the way, they're not hung deals until they're actually out there but.
That aside.
We're about a year ago, a little over a year ago, we turned a quite conservative Brennan we.
Across the <unk>.
Cross the whole plant, we pulled in a little bit and we pulled them with imagine bulk, particularly our Asian module book, we looked across that whole prime brokerage platform and we pulled in a little bit with certain clients there.
And we've been we've been quite cautious in the leverage finance arena and somebody mentioned one transaction citrix gradually a small player in that.
So you know we're not it's not like we'd been large in this space, which might account for the fact.
In the other line, which as you know incorporates a bunch of things, including loan losses number I chose very modest I think it was like negative 100, and there are few pluses in there in modern it says, but the aggregate picture is not that frankly, it's just not that troubling.
We will remain cautious as I said in my in my sort of opening comments, particularly in credit sensitive areas.
We're a big institution, we serve a lot of clients you don't get this perfect, but I feel actually pretty good about the way we've navigated this surpassed so.
Stay tuned to it.
We'll go next to Dan Fannon with Jefferies.
Hi, Thanks, Good morning wanted to follow up on the wealth side in terms of organic growth.
The fee based growth did slow a bit and I think Sharon you mentioned, some decision, making maybe being a little bit more challenged or slowdown in this type of backdrop, but maybe could you just talk more broadly about the channels that you're seeing growth on both the total flows as well as maybe whats where the rate of change might be either the biggest theirs or slowest whether that's through.
Through existing advisers workplace.
The various funnels that you have out there.
Sure I think that's a really great question, because I think it is pretty remarkable to see $65 billion of assets in a quarter such as this one is coming from different parts of the funnel specifically, though the advice based channel is the one aggregating the most at this point in time versus say, the self directed itself, which isn't surprising but what's so interesting.
Testing about the advisor channel is it.
Existing and new clients, yes, but also we're beginning to see more and more referrals and more and more anecdotes and stories, where you actually see the assets coming through the advice based channel is actually coming through different referrals that we might have seen from the actual workplace relationships and so we've been spending a lot of time.
When you look at workplace.
And finding a way to a provide better content and more content to various employers specifically in this environment, which is very very well received and number two sort of point is that when you think about the assay. We've talked a lot about how to match various F phase within the workplace more and more referrals into more and more.
Data, we have is who's able to monetize those referrals are better and better it is and so we're seeing that continue to pick up and then from a workplace perspective. We also have integrated various relationship managers than we might've seen with as a workplace into the actual F 18, all of those things taken together is cut.
Going through from an M&A perspective.
Advisor based channel, but it's clearly a positivity if you sort of think of the rate of change where some of that might be coming from so I think very proud of the result on the net new asset side.
Okay, and then just to follow up on that.
Does your broadly obviously you talked about being.
Focused on efficiency, but is there anything specific you can point to that youre doing differently or thinking about as you start budgeting for next year or even as we go into the fourth quarter that from a rate of change that you're focused on.
Well I'd say that we've been focused on expenses.
All all year I mean, we're always focused on expenses, but very much in the spring of this year, we've been taking and I spoke about at our last two earnings call a very hard look at all of the expenses and just continuing to manage and manage them on an individual project on a project level understanding where all the costs are coming from and also understanding where the growth is coming from.
We are balancing that of course with the need to continue to invest not only on the business side, but also continuing to make sure that the infrastructure and controls are there as you think about expanding the business. So it's really around that foundational side, where some of those expenses might also be coming through if you think about technology migration et cetera.
So it's just it's tactical in nature as well as this holistic approach of just making sure that you're very cognizant. It's certainly part of something that we're thinking through as you look at the budgeting perspective.
So I mean, obviously, we're looking at head count I mean, where.
You've got to take into account the rate of growth. We've had in the last few years and we've learned some things during COVID-19 about how we can operate more efficiently. So that's something that the management team is working on between now and the end of the year and again, we want to be.
We want to provide growth opportunities across the platform, but we've also identified some efficiencies. So you know it.
Time that will become clearer.
We'll go next to Devin Ryan with JMP Securities.
Hey, good morning, Thanks for taking the questions I want to start on fixed income trading obviously revenues have been quite healthy in the volatile rate environment with customers moving around their portfolio. Since you guys noted.
Been a long time since we've seen these levels of rates. So I'm curious how you guys are thinking about what are higher for longer environment looks like for fixed income trading once rates subtle in I'm assuming.
No more movement in yields on an absolute basis could be helpful. But would just be great to get your views from any historical context or just broader expectations.
Absolutely.
The thing I think when we looked at the beginning of this year and we said, okay well how do you think about the fixed income environment, what's sit out isn't just the absolute level of rates, but it's also this the dispersion of what's going on in different economies. So if you think if you go back a decade and you had all rates at zero for every economy and all of a sudden you've moved to a place where you have divergent.
Yes. It does obviously also driving foreign exchange for example, so I think all of that taken together is one that we keep looking at it it's clear that should that continue that's a place where one would expect a higher volatility and therefore by definition like likely higher client engagement.
And so as we go forward, that's clearly something that we're looking at but that's that's how I would reflect where the fixed income market is right now versus where it's been 10 years ago.
Yep, Okay. Thanks.
Just a quick follow up here also just on kind of corporate M&A opportunities obviously.
Evaluations across financials, and Fintech are down pretty dramatically over the last year.
So I'm curious, whether you're seeing more maybe opportunities emerge maybe not.
Things you were looking for but just.
More sellers.
Potentially coming to market just given some of the challenging macro that we're seeing and also the big change in valuation during the last nine months to a year.
I mean, you're you're going to see a little bit of a washout and some of the Fintech space. I mean, this is reality you've seen companies trading at valuations with which God, we could only dream of over here and a modest little house.
But.
They're just not reality and that washes out you'll see consolidation a lot of these businesses are scale driven businesses have enormous technology requirements to support cyber and stuff.
Stop client fraud and.
Data control of management and so on so consolidation is the key word at these prices.
I think the sellers are only there if they need to so they're probably holding up for something a little more balanced and maybe.
If my predictions right that sort of end of next year. So in the Fintech space.
Generally consolidation across financial services has been the catch word for a decade, and we've moved aggressively to be at the front of that and I think that's just reflecting reality scale matters.
We'll go next to Mike Mayo with Wells Fargo Securities.
Oh hi.
First one.
Just general question can you just give more details on your tech spending.
How much you're spending what that's growing well.
How much has to change the bank and I know I've asked you before about you know how much of your workload you look to move to the cloud maybe how many apps you have just a little bit more meat on the bones I appreciate it the wealth Expo that you held in June .
I recognize the cost avoidance that you've achieved with the acquisition of E trade.
Now your backbone is complete your tech backbone, but these are kind of high level comments that you've made so any public comments they can get to put more meat on the bones would be appreciated.
So what why don't I take that Mike I think.
We don't we don't publicly break out checks.
And maybe maybe we will do more of that through next year, but I would say just to give you some sense of sort of what the focus is obviously moving to the cloud was a big deal and you sold the deals that we did in that all of the innovation, that's taking place in the financial.
Financial adviser channel the next best section the virtual advisors.
All of the technology and I think you probably saw some of that the work we've done around workplace sodium was is basically take company E trade as a tech company building a workplace platform. It doesn't revolve around a financial intermediary, but all of it goes straight.
From stopped playing straight into bested.
Trade accounts are we doing a bunch of work you know what we just did reviewed our electronic trading platform in equities and what they're doing in equities and fixed income and some of the opportunities to leverage the derivatives trading within the trade platform with our electronic trading within air Equities group.
So there you know in a lot of stuff, we're doing around cyber data protection data management.
AI is a huge.
So we have a group of people that are distinguished engineers, which we appoint each year a group of very sophisticated tech.
Acknowledged.
Software engineers and designers and we had a new class just woken beam and actually last week I think it was so enormous fan coming on I mean to your base question takes place it is going up.
I think it's fair to say along with some bad controls and compliance areas. It's the fastest growing part of this firm, but that's good because it's displacing things we'd be doing it manually, which we shouldnt be doing manually. So I'm perfectly happy to see our tech spend go up a lot of it is around new innovation, but we are also running a plant which is driving six.
Billion dollars in revenue and there is just basic take infrastructure that we keep modernizing that is the backbone of that plant. So hopefully that gives you a bit of a sense.
Alright.
He tried specifics in another area.
You got 65 billion of inflows to wealth in a tough market.
Noted, but I see the definition of been close has changed over the last year to also include dividends interest and as asset acquisitions.
From the note in the earnings supplement.
So how much of the 65 billion of inflows to wealth were related to dividends interest and asset acquisitions.
It was I just would highlight there are no asset acquisitions this quarter and the dividends and interest was always my desk.
Sure.
Yeah, that's I mean to my knowledge that sort of changes happened at least in the last two decades.
We'll go next to Jeremy <unk> with BNP Paribas.
Thank you you talked about E trade and workplace and the multichannel business model, which I think is very powerful.
I just wanted to ask because that'll bedded down or was that fully operational.
Humming along or are there any major integration steps for implementation steps still to be done.
So a lot then integration I talked about this actually in the call in January there will be a back office conversion that we'll see in 2023 mm, but that's the most major thing that we have left to be done as well as over the course of the fourth quarter. We will expect something in terms of integration expense specifically from an E trade.
Perspective, it will look similar to the third quarter.
And in terms of referral between the channels that capability that starts really happening already.
In place it's happening it's all of the capabilities that I'm, sorry, I misunderstood. The question that you were talking specifically about the integration expenses and how we were thinking about that is from a referral perspective, I would say there's still a lot more of that will continue to be done. So we're just scratching the surface of that entire those relationships and bringing those funnels together.
What I mentioned for example, as you think about the referral program. That's just beginning right to them better data that we have amongst who's the best for Fei to refer to to refer a workplace relationship to that will just continue as you kind of better understand in aggregate data remember we've invested a lot in the.
Is that you would consider AI in nature. It gives you a better sense of what does someone do with his or her next stock plan distribution. For example, do they buy a house or they need a mortgage okay. What happens at this stage in someone's life cycle. So the more and more data that we aggregate across all of these channels and more and more powerful the wealth management business.
So to James' point around the technology investment that technology investment is core to be able to continue to grow the business with what we've called that we discuss this project genome before.
Just repeat something that Andy SAP Hussain said one of the recent conferences.
Our plan is to generate one trillion dollars of new money new client money every three years. So it's 330 billion.
Obviously in a very difficult environment like this.
At that run rate is more challenging, but we've had quarters, where we'd be much higher than where we are now so it's about.
So call it 75.
A little more $80 billion a quarter and this quarter. We did 65 that is an unbelievable number if you'd think about trillions of dollars, we generated 50 basis points.
50 basis points per dollar of assets. So that is an unbelievable revenue machine and there are many many factors contributing to it it is a completely different business model because of workplace because of.
The direct channels because of what we've done with the bank and the way we've changed the whole financial advisory interaction with their clients through technology, So very exciting.
This path that we're on and it's heading towards you know what I said at my long term goal here is 10 trillion dollars and clients' money at 50 basis points as a $50 billion business and that's that's the Tiger waiting for them. That's why we're gonna go.
We'll go next to Gerard Cassidy with RBC capital markets.
Thank you and good morning.
James you mentioned that.
Obviously, it's no real surprise the market conditions as you describe some of the issues. We've confronted this year and obviously the capital raising is going to come back at some point can you guys give us a little further color on your pipelines of what you're seeing possibly for the fourth corner as we go into the first of next year and the investment banking and trading areas.
The pipelines are solid.
The activity I think what's interesting is continues to be across a diversified base of different companies. So it's not just.
One sector in particular.
James and I highlighted I think it's really around that acronym macroeconomic factors in that Geo politics et cetera, but what it really ends up doing is it creates uncertainty in our cost of capital and evaluation with which therefore also impacts of price discovery and so that's kind of the what's the clincher in terms of this realization.
<unk> of it.
Remains a solid pipeline.
Do you think your clients are more realistic about that price discovery today showroom versus maybe six months ago.
I think that you know people are digesting the various prices and I do think that you're beginning to see that on say an issuance perspective right. So if you think about the cost of capital that also took people time to die or rather companies time to digest and understand that we are in a different regime where treasuries.
And so it means that their cost of capital is also higher.
And you might not have necessarily seen issuance right away because those corporate balance sheets were there.
And now you know you might see an opportunistic or more prudent behavior from their treasurer, CFO and so I think that that mindset begins to shift and yes over time devaluation mindset begins to shift as well.
I'm on the road, a lot and I see a lot of Ceos, I mean, I think the.
Ceos have sort of established or on the path to establish companies are getting very realistic and they want to get on with business. I mean, you can't sit on your hands right, but you've got to figure out always a better way to do business and the environment.
Wonderful if you have zero interest rates, but.
That's unsustainable so we've moved to a normalized and obviously, we're going to go a little higher than that to beat inflation back but.
But people are adjusting to that I think the ones that are struggling still.
Companies that.
But companies that were valued at you know, let's just say a sporty levels.
And you know Theyre doing you rounds, and they're finding they just not paying the same and that's that's hard to accept as an entrepreneur, it's their baby and they want to believe that it is what it was at the peak and maybe it was other valued at the peak, that's just what what frothy markets too.
And again some of these public companies that have.
They have traded down from their offering price.
Because we're in a different environment and money's got more expensive. So those groups will take longer to adjust.
But this is sort of real politik around coal businesses that have been around for a while they just pretty quickly I mean, we're all we all get it we've all been through different cycles.
A little lucky in certain cycles, where things are really cheap and then you got to move a little hotter in local faster when things aren't and we've done deals in both kinds of cycles.
There are no further questions at this time, ladies and gentlemen. This concludes today's conference call. Thank you everyone for participating you may now disconnect.
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