Q2 2023 Morgan Stanley Earnings Call
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Thank you for calling in for the Morgan Stanley Life Earnings Conference, we'll be going live shortly.
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Good morning on behalf of Morgan Stanley I will begin the call with the following disclaimer. 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 will now turn the call over to chairman and Chief Executive Officer, James Gorman.
Hi, good morning, everyone and thank you for joining us.
We started the second quarter with significant headwinds and uncertainties and it's fair to say that we ended the quarter overall in a better place with a better tone.
Headwinds reflect the ongoing market transition from a high inflation low rate environment to a higher rates lower inflation environment in.
In addition, there were several other issues impacting the markets.
April started on the heels of the first bank crisis, since 2009, which had the risk of bleeding into the broader financial system.
The action by regulators in what turned out to be idiosyncratic stories of the failed banks combined with the strength and support from the large U S banks help to rebalance the system.
Second we found our country moving headlong into a debt ceiling crisis.
It was it was likely to be resolved there is no doubt it created unnecessary uncertainty in the market in April and May.
Thirdly after rapidly rising rates are at 15 months, a big reach to pause if not a plateau at its recent meeting.
While we may not be quite at the end of rate increases I believe we are very very close to it.
Finally strong rhetoric from government leaders from both the U S and China in recent weeks.
Evident, but there's now been recent efforts to normalize relations in a constructive dialogue is surely welcomed.
Seeing these four not insignificant macro concerns progressed positively supported a more constructive tone in the market, particularly evidenced in the last few weeks of the quarter.
Yeah on more macro issues way of Morgan Stanley completed a significant part of the trade back up to its integration with the final part to be completed after labor day, and we're very pleased with how it's gone.
And today, we announced new institutional initiatives with Japanese research and equity and in foreign exchange without long standing partner M York G. Further evidence of how our businesses can work together over time to best serve our global clients.
And importantly, we received the most recent results of CCAR.
We were pleased that performance under the stress test has improved for the bulk consecutive year every year since the S. C. B was introduced.
Given our strong results, we increased our dividend by seven 5%. The same as we did last year that brings our total annual dividend per share to $3 40 annually with a dividend yield of about 4% given the current stock price.
As to the financial performance of the Perm this quota at certain key metrics are encouraging.
New assets in wealth management grew by 19 billion in combined with inflows from investment management, we saw over $100 billion, bringing our year to date net new assets to approximately 200 billion six months.
A year to get de growth is well ahead of pace and well, obviously any quarter can bounce around and that will happen.
<unk> growth in net new assets in wealth management is evidence about scale and our expanded channels and the clients that we serve.
Second our institutional businesses navigated a choppy environment well.
And altogether the firm delivered net revenues of over $13 billion up 2% from last year when conditions were very different.
This translated into an hour a TCE of 12%.
Finally, our CET one ratio was 15, 5%.
Well, we knew this would significantly exceed our capital requirements and it did it reflects how does out of Remy remain highly capitalized in face of the new unfolding Basel three and game.
It's too early to predict the rate of market improvement through the rest of 2023, but the more positive tone in activities seen later in the quarter across many parts of that business is promising.
Of course, how much it moves through the balance of year remains unknown.
The fundamentals of our business model remains strong.
Finally, a brief comment on succession.
At the annual meeting in May I made it clear I would transition out of the C. U C E O role before next year's annual meeting.
Succession planning should be intentional and manage just like strategic planning for the firm or any of that critical talent managing talent management processes.
We are and have been dealing with a number of uncertainties, including but not limited to the CCAR results. This is not the same.
Basel three upcoming endgame proposals and certain other pending matters.
Committed to the board that I laid out response to those issues and when I do transition out of the CEO role I will remain as executive chairman for a period of time.
We are fortunate indeed to have three very strong internal candidates. The board continues to evaluate along appropriate processes, but their readiness to step up as the next CEO of Morgan Stanley .
I'll now turn the call over to Sharon to discuss the quota in greater detail and then together we'll take your questions. Thank you. Thank you and good morning. The firm produced revenues of $13 $5 billion. Our EPS was $1.24 an hour our TCE was 12, 1%.
Ported results include severance charges of approximately $300 million. This reduced EPS by <unk> 14 cents and Aro TCE by about 140 basis points.
As James discussed sentiment and activity improved towards the end of the quarter evidenced by grandkids that emerged across our businesses.
In institutional securities client engagement aggressively picked up and in wealth management, we witnessed a moderation of sweep outflows as well as a stabilization of retail investments into cash and cash equivalents.
The firm's year to date efficiency ratio was 75%. In addition to severance expenses for the quarter included $99 million of costs associated with the integration of E trade and eat and of that approximately 75% of which relates to E trade.
Together severance and this year's integration represent an impact of about 175 basis points to the year to date efficiency ratio.
For the balance of the year, our expectations for total integration expenses are broadly in line with our prior guidance with approximately $150 million remaining.
Looking towards the back half of 2023, we continue to balance investments with the operating environment now.
Now to the businesses.
Institutional securities revenues of $5 7 billion declined 8% versus last year.
With overall client activity, while overall client activity was lower compared to the prior period results improved as the quarter progressed alongside better market condition.
Investment banking revenues were flat compared to a year ago, Although advisory remained under pressure a pick up in underwriting supported result adverse.
Advisory revenues of $455 million reflected lower completed M&A volumes.
Equity underwriting revenues were $225 million.
While IPO activity remained muted results were supported by follow on and convertible encouraging signs that equity and equity linked markets were opened at times for regular way issuance.
Fixed income under 100 revenues were $395 million up year over year, driven mostly by investment grade bond issuance, where corporates and financials took advantage of constructive markets in may and June respectively.
Investment grade markets remained resilient against an uncertain backdrop.
Across investment banking client activity trended positively as the quarter progressed.
He announced M&A backlog of grew consistently throughout the quarter with a potential plateau in rates and lower implied volatility client dialogue is currently active we continue to invest in the franchise and have made selective senior hires to enhance our footprint to best position for the opportunity.
We are cognizant of the typical summer slowdown and it is hard to know whether positive trends will continue for the near term current conditions remain encouraging certainly for the medium term outlook and especially for 2024.
Equity revenues were $2 $5 billion down 14% compared to strong results in the previous second quarter due to lower activity and lower market volatility.
I'm brokerage revenues were solid supported by increasing average client balances consistent with rising market levels.
Passion derivatives declined versus last year on lower global volumes and lower market volatility.
Fixed income revenues of $1 $7 billion decrease compared to last year's elevated result.
<unk> performance reflects tempered client activity and prudent risk management.
However, improved market conditions in june's shifted client sentiment and supported the quarters overall results.
Macro revenues were down year over year attributed to the declines in foreign exchange and a challenging environment and reduced activity.
Really upset by the pick up in client engagement following the resolution of the debt ceiling debate and performance in rates.
Micro results declined versus last year predominantly on the back of lower client activity.
And commodities were down significantly compared to the robust prior year, which benefited from volatile energy markets.
Other revenues of $315 million improved versus last year, largely driven by lower mark to market losses net of hedges and higher net interest income and fees on corporate loans held for sale.
Turning to ISG lending and provision our allowance for credit losses on ISG loans and lending commitments increased to $1 $4 billion.
In the quarter ISG provisions were $97 million the.
The increase was driven by continued negative outlooks for commercial real estate and modest portfolio growth net.
Charge offs were $30 million and we're substantially all from a handful of specific loans from our corporate lending portfolio.
Turning to wealth management.
Revenues were $6 7 billion.
Our record excluding the impact of D. C. P revenues were $6 $6 billion and increased 5% supported by higher net interest income results demonstrate the strength of the business model and our ability to continue to serve clients throughout different market environments.
Pretax profit was $1 7 billion.
With a PBT margin of 25, 2% severance charges were $78 million in integration related expenses were $75 million.
In together and with the impact of D. C. P. These three factors were a drag on the margin of approximately 300 basis points.
Despite the challenging market backdrop, the business model continued to deliver against our core objectives, most notably wealth management delivered $90 billion of net new assets, demonstrating our platform's ability to grow in various market environments.
Net new assets were driven by our advisor channel existing client consolidation and that recruiting was strong and offset seasonal tax related outflows in April .
Our early investments in technology, including data and AI are providing advisors with tools to service current clients better and more efficiently prospect new business, including from our workplace channel.
Also significant.
As James mentioned, we are pleased to share that we've accomplished an integral part of E trades back office integration.
Adding over 3 million E trade accounts to Morgan Stanley 's unified platform. We did this with virtually no client disruption, which has always been a critical priority.
We expect to finish our integration efforts on time in the second half of this year.
Moving to our business metrics in the second quarter performance was solid down the line in light of the environment asset management revenues were $3 $5 billion down 2% versus last year's second quarter, primarily reflecting lower market levels transat.
Transactional revenues were $869 million, excluding the impact of D. C. P revenues declined 2% year over year reflective of lower client activity for most of the quarter.
Fee based flows were $22 $7 billion bank.
Lending balances grew by $1 $1 billion, driven by mortgages offsetting paydowns and securities based lending.
Total deposits of $343 billion were up slightly quarter over quarter.
<unk> outflows moderated during may and June compared to April which included seasonal tax outflows.
Is it months trends are encouraging but it remains too early to be declared it.
Net interest income of $2 $2 billion was virtually flat versus the prior quarter.
The impact of lower sweep balances and higher funding costs were offset by higher rates.
Looking towards the rest of the year, we do not expect NII to expand.
<unk> will be a function of our deposit mix and the trajectory of various rates.
Similar to the institutional business retail sentiment improved as the quarter progressed.
For the first time since the beginning of the year June saw positive monthly flows into equity markets from advisor led sweep balances we.
We are encouraged by this more recent activity and remain well positioned to support ongoing asset growth and our clients through market cycles.
Turning to investment management revenues of $1 $3 billion declined 9% from the prior second quarter, primarily reflecting lower performance based income and the cumulative impact of lower asset levels over the course of the year.
Answer it with the market environment.
Asset management and related fees were $1 $3 billion declining 3% year over year, reflecting the stability and diversification of our client franchise.
Performance based income and other revenues declined year over year due to the challenging investing environment in certain asset classes and markets, such as real estate and Asia private equity.
Solid performance in other areas of our private alternative strategies acted as a partial offset reflecting the diversity of our platform and our capital light client driven alternative franchise.
Total AUM increased one four trillion dollars our integration with Eaton Vance continues to progress well integration related expenses were $24 million in the quarter.
Long term net flows were positive inflows were driven by ongoing demand in alternatives and solutions, which offset outflows in equities and fixed income.
In alternatives and solutions parametric customized portfolios.
Credit and private equity continue excuse me remain consistent sources of net inflows underscoring the benefits of our diverse platform.
Additionally, this quarter alternatives and solutions benefited from a significant inflow related to a portfolio solutions mandate.
Liquidity and overlay services had inflows of $9 7 billion.
Supported by ongoing demand for money market funds.
We continue to be very well positioned in secular growth areas, such as customization in private markets across geographies and with our global client base.
Turning to the balance sheet.
I'll start assets decreased $35 billion from the prior quarter to $1 two trillion dollars.
Our standardized CET one ratio was 15, 5% up approximately 40 basis points versus the prior quarter.
Standardize our W. As declined about $9 billion from the prior quarter to 450 billion.
Conditions and continued prudent resource management.
Recent stress test results reaffirmed our strong capital position and our.
Durable business model, we announced a quarterly dividend increase of seven and a half cents and renewed our $20 billion multiyear repurchase authorization.
Our tax rate was 21% for the quarter, reflecting our global mix of earnings.
Well, we outperformed our tax guidance in the first half we expect a tax rate of approximately 23% in the second half of this year consistent with our initial guidance.
Although we cannot be sure how the backdrop will play out for the rest of 2023, our priority of the management team is to diligently address what we can control given the market realities.
Should stable and higher asset levels prevail wealth and investment management are poised to benefit, particularly as we continue to attract net new assets of 10.
Testament to our asset growth strategy.
Within institutional Securities, while advisory will lag the financing markets.
Backlog is building and underwriting trends are positive.
Open and functioning markets remain key to supporting client conviction and activity levels.
Most critically our business continues to advance.
Our clear and consistent firm strategy driving long term growth, while remaining well capitalized.
With that we will now open the lineup for questions.
We are right now ready to take any questions to 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.
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 will take our first question from Ebrahim <unk> with Bank of America. Your line is now open. Please go ahead.
Thank you and good morning.
Well I guess, maybe first question James for you Oh, Thanks for the update on the succession as we think about it.
What you built in terms of the franchise and I think you talked about the unfolding bulky and game rules.
That are expected over the next week or two.
From a shareholder perspective do you see these rules as game changing where investors will have to reevaluate the value proposition of Morgan Stanley you have the franchise and you as a management team we'd have to review strategic targets that you've laid out.
Give us a sense and I know.
Glenn do you find loans, but I think the question we get from shareholders is the comfort around the ability of the phone to manage to manage through what could be pretty radical changes.
Well.
An important question and you're right I have made comments on that sort of set the table, where we are right. Now we've had a lot of speculation based off of what the Basel III end game.
Looks like by the way I'm not sure it's actually being implemented fully in Europe , just to say it I think the U S. Banks, So you have more capital, but putting that aside.
Outside we did get the speech from the Vice Chair I think it's important to.
Look at the title of that speech, which was holistic capital review. So it's taking into account all of the CCAR stress tests.
C B buffers and the like because this stuff is implemented.
We haven't seen natural rules I mean, I guess there'll be a proposal coming out as you say it in a couple of weeks.
There will be an extended comment period, there is clearly very different views as to the need for the U S banking system too.
Accrete more capital in fact, if you look at the test for the last few years the what.
What happened with the regional banks, what Silicon Valley Post Republic signature.
What happened during Covid, what's happened during this period of high high inflation, what's happened with the biggest rate increase.
Pat.
He is put all that together the U S. Large banks actually did really well in fact, if not all of them suddenly for Morgan Stanley Our capital position improved four years in a row under CCAR. So it's kind of hard for me to sit here and say that we won't be commenting.
Forcefully that we are very well capitalized.
An extensive comment period I suspect what comes out of that will not be the same as what stops.
I think in the sausage, making there'll be a lot of evaluation clearly the intent is not to the U S banking system, which is the backbone to the economy, it's to strengthen us.
Then there'll be a long transition period. So you know it just happened to be reading the speech from the Vice chair in the last couple of days and he had a paragraph in there anticipating this question I thought I read to any proposed changes would go through the standard notice and comment rulemaking process, allowing for all interested parties appropriate time any final changes too.
Capital requirements would occur with the appropriate transition times and he goes on again later in the speech to pointed out.
It could be it will not be fully effective for some years.
So here we are in 2023 I don't think this is going to happen in any meaningful way before the end of 2026.
I think what comes out a year from now after the comment period will be very different from what goes in and just take my personal which is applying a standardized IWA hit on operating risk.
As the various regulators to try and figure out what the right way to assess operating risk capital is.
And to put a standout hit its fine but to do it based on fee income, which is the current European proposal. It seems to me to be nuts, I mean, where we're not.
You don't build fee based businesses to create operating risks you build them to create stability. So that's a point we've made very clear that the regulators and I think theyre, taking it under consideration. So long story short yes. It's the final trust. It's ironic I don't believe all the European banks are complying with their own rules, we have a very.
Healthy robust capital system uses its been tested 12 years in a row, a Morgan Stanley has done well and there is no chance it will be a major strategic shift for Morgan Stanley as a result of any of this is my conclusion.
We'd rather not.
Sounds about right. So one quick question for you you mentioned and I have not seen is expanding from here I guess is implied in the expectation that NII should stabilize in the back half give.
Give or take within a few percentage points.
It will depend really ebrahim. Thanks for the question really depend on the deposit mix and so as I mentioned, there were encouraging signs in terms of that mix.
If we think about the back half of the quarter, but that liability mix, what's going on with suites will be the primary driver. When you think about NII in the near term.
Yeah.
Well move to our next question from Devin Ryan with JMP Securities. Your line is now open. Please go ahead.
Hey, Thanks, good morning.
Wanted to touch on the institutional.
[noise] Securities.
Similarly, I think.
I have a pretty good quarter relative to the backdrop and you mentioned that engagement.
Really accelerated kind of towards to the back half of the quarter. So I'm, assuming kind of on the other side of the debt ceiling debate things started to normalize a little bit. So just want to talk about some of the puts and takes and whether you know maybe the second quarter results, which are still the softest results since 2019 second quarter.
This is kind of a more normal.
Come work do you actually think that you know what.
You saw kind of in that recovery in the back half of the quarter is normalization and so therefore, we could actually bounce back from.
The outcome of the second quarter. Thanks.
Sure, let's take all of IC first so when we think about where we discussed a lot at length really about normal post COVID-19 has been so for the overall ISG wallet to land between 2019 and 2020 our views there broadly has not changed in terms of where we expect ourselves to be we've laid out.
It's pretty clear sort of market share our guidelines in terms of where we are from a wallet perspective. When you look specifically you talked about fixed income we've moved from 6% wallet share at a 10% wallet share. So I think the dramatic change that we've made in that business has really been around a client centric franchise and making sure that we're there.
Sure enable it to be able to service our client base. When we talked about as you highlight is that there was less client activity for us This second quarter compared to last year's second quarter, but interestingly as you mentioned and you're right. We saw a dramatic change in that activity levels, specifically in fixed income right. After.
The debt ceiling debate. So I think what we're looking to do is capture our fair share of the wallet and that overall wallet in terms of normalization, we think will likely land between 2019 and 2020.
Okay.
Great color there and then just.
In terms of just is this green shoot in kind of normalization team. Yeah. We are seeing in the equity capital markets debt capital markets normalization M&A still Ben.
Lackluster and so just curious whether you just feel like maybe that's more on a lag basis as capital markets recover than M&A.
Recovery would come next door is there something else kind of idiosyncratic to that market that may hold back results in that business. Thanks.
Yeah remember that of course, our advisory is always going to be lagged just because of the announcements. We're digesting. The fact that we had very muted or a dearth of announcements if we look back six nine months.
If we think about the last month of the quarter, we began to see more announcements and we're seeing that really and sector specific because that has.
T J dialogue around them, so be that financials, where you might see industry consolidation.
Where youre seeing transitional discussion and reasons to actually have strategic dialogue. So what gives us confidence is that youre seeing a broadening out of those strategic dialogues. Our backlog is building and we're seeing it across various sectors, where having both backlog and discussion, but it is fair to say that advisory will likely lag simply because.
You are dealing with a large announcement pipeline from the last six to nine months.
We will move to our next question from Glenn Schorr with Evercore ISI Group. Your line is now open. Please go ahead.
Yeah.
Hi, Thank you.
So.
Want to drill down a little bit more on the 90 billion I know it can be lumpy.
But I didn't think it was two two workplace.
Produce but I wonder if you could drill down a little bit of on what happened to work. So well this quarter in this first half of the year.
Bodes well for your doubling our pre tax margin.
Sorry, doubling the pretax income.
For a while so just curious on what's contributing to the good lumpiness lately.
Obviously, well ahead of your truly an every three year pace.
Thank you so much Glenn for the question, Yes, I think referencing Andy speech that he gave for those of you who may not be aware is helpful. Because it is an asset light strategy. When we think about where we see expansion in that business going forward. This particular quarter you know historically over the long term, we've generally said no.
One channel is contributing to over 25% of M&A Interestingly. This quarter, we did see the advisor life channel was a big proponent and more than that it was it what was the big production part of the funnel was the assets held away from existing clients. That's been a strategy that we've been talking about back to.
15 through 2018, or so and we put out a number of tools on the modern well tool kit et cetera to give advisers have more time to begin to not only prospecting new clients, but also really offer their existing clients better advice and so that's where I think you're beginning to see a lot of it.
That work in terms of aggregating assets held away and we continue to believe that that's a real opportunity for us to grow our asset base.
I just wanted to add.
On this a little bit because it's obviously been a focus of mine for many decades the.
The run rate Glenn is as you know for the three years before this was a trillion dollars. So we're running about 330 ish a.
Yeah. This year run rate, if you extended would obviously be higher than that it would be around 400, but.
I think you're right. It's got it's going to be lumpy I mean, you've got you're going to have a quota and he has some way. That's you know a $50 billion quarter and I wouldn't get too excited about that and just as I don't get too excited. We're ahead of the run rate what I really care about what I'm really excited about is it's a real thing. This is not this is not just us.
Somebody that's going to stop we've got a lot of wealthy clients just the dividends the interests they get on their accounts the money they bring in the migration from the workplace the migration from the trade accounts. It's a it's the real deal and you know it's I know we put out this 10 trillion dollar a number which I think is.
Ah I think you know.
This is going to happen and a 5%.
Our increase in the value annually on the portfolio, which with the tree and every three years it happens in a bit of it five years.
And you know it's just it's just a.
Pretty much unstoppable force, but there will be lumpiness in it I'm sure that I don't know when.
But there will be lumpy this happened to be a great one and.
I'm excited about it I think.
Hitting two we clearly hitting the 10 trillion, which is at 50 basis points $50 billion in revenue and if you do the math companion I know people are going to call me Crazy and I know, it's the end of my tenure, so I get to do this kind of stuff, but if you do 5% of it 14 over 14 years, you end up with 20 trillion, which is 100 billion dollar revenue business.
Well that seems like a long way out, but I started this job 14 years ago, and we had much much fewer than the $6 three trillion, we have today so it's possible.
Wow.
Maybe just one quickie shown.
You talked about the suites and it's too early to tell if we've settled in.
I'm curious if you have any stats you can share on what percentage of FSA and on what percentage of clients has accounted for most of the moving I'm not sure. What's the route through here, but curious on how widespread across the client base the shifts have been or concentrated.
Yeah.
In terms of the the the shifts in terms of moving out of sweeps into savings, we're seeing savings products, we still have over 80% of our actual.
Actual deposit base, it's coming from our own client base, what's interesting in terms of the movement of sweeps, which might be your question I'm not sure I'm totally answering what Glenn is that we began to see some of those suites not just remember we used to see them move into money markets or other cash alternatives in June we began to see some of those.
<unk> dollars actually move into markets. So various assets, we haven't seen that trend since January so that just shows that some of the clients are actually also deploying excess cash or cash equivalents actually into the marketplace as well.
Our next question, we'll move to Steven <unk> with Wolfe Research. Please go ahead.
Hey, good morning.
So James I appreciate your comments on Basel, III and game might be helpful. If you could just speak to how the lengthy transition period informs your near term buyback appetite if at all and given the R. W. A inflation could be quite meaningful now what are some of the mitigating actions you can pursue.
To alleviate some of the pressure on your businesses.
Well again, I think you know Steve we've we've got to see the rule proposed first.
You know what.
I mean without talking out of school up clearly had conversations with all the appropriate regulatory bodies and I'm encouraged by.
Their response, which is they sincerely want to hear comments from the industry. They do understand.
You know capital changes across our whole industry.
Have to result in the right economic outcome for the country.
And by definition, the bank's stability as evidenced by the recent many years of C cause shows that the G. SIB banks the top eight banks for sure well capitalized. So I you know I don't want to get ahead and talk about what we'd mitigate clearly we have flexibility around that right now, but yes. We do it you saw that this quarter, we ended up with 50.
0.5% CET one you know we did that not really from a Basel three perspective, I mean, we had that in the back of my mind, but more from you know this environment. It was a little.
It was a little squirrely.
And let's just say Hey, you know you had three bank fails at the beginning of the quarter that wasn't a good look.
So we wanted to be cautious and.
On the specific buyback obviously just on the dividend you know we're totally comfortable with the dividend. We've said many many times you got half the company's yield stock and we're going to treat it that way and the dividend increases you've seen I think they're entirely appropriate and I would expect they continue I, becoming use without saying exactly what level, they're at on the <unk>.
Back I mean, we would take advantage of weakness in the stock we will be prudent we are creating you know this was a very difficult quarter and we created $2 billion. So it's not like we're not making money here and.
I'd like to see the rule I guess in a couple of weeks you run right. We're getting the rule and then the first range of comments.
We'll be doing buybacks through this year, we have 20 billion dollar authorization from the board, we wont be doing 20 billion AR, but we'll be doing buybacks and but moderated I think this thing is going to take.
As I said I'd be surprised if this is all done and dusted by where are we 23.
By the end of 'twenty six I think that's sort of in that three and a half years, which is a lifetime in these industries.
No. It's a fair point James I mean immediately we all had the experience with Basel three win.
Wasn't getting that fully implemented for a period of years and the impacts were fully loaded. So I think we're all just trying to prepare for maybe some expectation that it gets priced in a little bit more quickly.
It could it could and you know, we'll adapt but we won't change our strategy.
And I'm I'm.
Gonna be a strong advocate.
Where I think some of these rules do not align with what is right for the global for the U S financial system in the U S economy, just Morgan Stanley self interest.
No helpful perspective, if I, if I could squeeze in one more here just on investment management, the 30% margin goal that you've laid out for wealth and I am wells when we adjust for the specials of about 300 bips year within spitting distance of that 30% the investment management margin, it's running in the mid teens.
<unk> and I recognize you're still integrating Eaton Vance, but what are your margin aspirations for that business and what are some of the actions you're taking to maybe help close that gap.
So the margin goals that we've given it has been really around wealth management I respect your point, though we have given larger efficiency targets for the firm and so there are places where you know you're all puts and takes between ISG and I am remember, we look back less than 18 months ago or so.
We did we were close to 30% margins in the I M business. So what we've seen over the course of the last year.
Yes, so it's just been the accumulative impact of the outflows associated with changes and what investor appetite was particularly around active equity.
But also just the asset levels themselves that are associated with market. What's important to US is the diversification of the platform and then continuing to invest and where we see real structural changes in that business and I mean by that business I mean, more broadly and in industry landscape, so things like customer.
Asian consistently every quarter, regardless of what we've seen sort of on the top line. We continue to see increased flows net inflows on the customization product. You saw you know we talked about a solutions based product. This additional quarter. So we're leaning in to where we see industry opportunities and as we grow assets.
Similar to us growing assets on the wealth management side that should help to support the margin for the investment management business, which we do see is a through the cycle business.
Okay.
Well move to our next question from Brennan Hawken with UBS. Please go ahead.
Yeah.
Yeah.
Brian is now open.
Operator, maybe we go to the next one and come back to Brendan.
We'll move to the next question from Mike Mayo with Wells Fargo. Your line is now open. Please go ahead.
Hi, well. This is the first chance we have to ask you about the CEO change James.
And just.
Just why about Seo change in 2012.
Oh.
[laughter].
Second chance Trust me [laughter], Yeah, where you are.
You know you survived and thrived. So there you go.
Thank you I appreciate that.
But it's yes, it's wall Street, and what have you done first lately and what's gonna happen ahead. So.
First I don't understand what exactly the chairman is and I do hope you have in person.
Shareholder meetings again like you did in the past.
And what would that mean when your executive chairman and what is your thought process on timing of the new CEO and what are your considerations I mean, we can all go through Canada.
The candidates that we see in the press, but let's just hear from you directly what you're thinking and what the board's thinking who all they think makes that decision.
Well.
Got.
To take a few of those pieces, we're not gonna have inputs and shareholder meetings.
Since he is I did this before Covid, we had more people from security than we did shareholders physically in the meeting so let's just be honest it was an enormous waste of our.
Time and money.
And while one or two people might ask like housekeeping question.
And I just don't think it's it's a good use of time and money, but that along with my pet Peeve that we Shouldnt have quarterly earnings report. So it should be every six months will be to immediate changes that would make it probably was god of finance.
But that's not what you really asked about on the C O stuff I mean.
We you know I'd say about five years ago. It stepped down about five years I said three years ago to be three years and nobody believes me. So I said the best way to get people to believe and the board agreed with this strategy was at the annual meeting to say it won't be in the job of the next annual meeting so that makes it very clear. It's 12 months, we're already two months who knows when exactly.
That happens frankly, just isn't that relevant I mean, whether it happens tomorrow what happens on me whatever it is 15th of May.
Annual meeting is irrelevant it'll happen somewhere between those dates.
There's a few things I think just given my tenure I can probably get done.
That will help the new C O get off to a great start and that is my intent to home on somebody to do this job.
As you know well better than I've done it for the next several years and to thrive in it and the best way to help them is to get them off to a good start so the exact timing will be just driven by.
That obviously given the questions here on Basel III and game, that's an important thing for me to dig into you know over the next few months.
We just got the CCAR stuff done we got the dividend.
We're chipping away at what I call that the remaining pieces.
The board will ultimately decide we have a process it's a committee.
The comp management development and succession committee chaired by Dennis Nally runs that process. It reports to the board obviously are in.
In the pool, but ultimately choose the next CEO and I'm sure at some point they'll want my formal input on that but they're doing their processes. They should independently and I think it's very healthy. So the criteria you look for obviously not necessarily who's the best business operated running a given business on a given day, but who is best equipped to deal with the multiple.
Season challenges of running a global bank and that's what the board will figure out so saying more than that I think it would be inappropriate because it gets ahead of the board's process and that's their job and I'm just here to help along the way so hopefully that clarifies it Mike.
Yeah, just one follow up so that at least I guess, there's three contenders three heads the business lines. If that's correct and you know I guess that means maybe two people don't get the job what's a good technique for your firm or any firm to make sure that those people who don't get the top job are still made part.
So stay with the firm and feel a part of everything that's happening.
Well Wall Street has had a history of that not happening I think we will frankly, we would challenge that history. We have an unbelievable team they've worked together for you know at least they use I think they've all been on the operating committee and we have an unbelievable team of executives around them Sharon.
Who you're hearing on this cool Eric Grossman, our Chief legal officer clear Woodman, who runs Europe Middle East.
And so on its own so we haven't we have a lot of very talented executives you know that'll be for myself frankly to help navigate that path, but these jobs are enormous jobs with the C. O R President or C. O O of these global companies and you know we one of the largest companies in the world. So I'm confident we'll end up.
And in a great place Mike.
Well move to our next question from Brennan Hawken with UBS. Please go ahead.
Hopefully you can hear me now.
Sure Brendan.
All right.
Sorry about that before so Sharon I know you mentioned before about the NII and the deposit cost having a big impact.
But actually the deposit cost trends were roughly in line with what we were looking for and yet and I turned out to be a little better than expected could.
Could you tell us we don't have great visibility on the asset side did something happen on the asset side were you able to reprice some assets and how much more of that do we have potentially on the come.
There were there were some places where we benefited from the asset side, but as you know we'll have to look at the al on next and it will be dependent on some of the market rates that we see going forward. So unfortunately, there's not damage more clarity I can give you other than what is leading us as we'd go forward is law.
Arguably that liability mix and so that that's the trend that will when we look out in the next couple of quarters is one of the biggest trends that will drive NII from here.
Okay. Thanks for that and then I noticed I know it can diverge, sometimes but the trends for firm wide NII, where different down about 300 million quarter over quarter. So could you help us maybe understand why it was at a firm wide NII differed.
Substantially from the wealth management trends.
Yes that was largely just associated with the trading position you know and as you know it depends on many things, including what products you have where they are but how they're booked and what type of instrument and in addition, various types of funding cost. So it's really the I think when we look and we manage the business specifically.
On the trading side, given our portfolio and how we think about our bank versus just the broader broker dealer, etc.
We don't we don't manage it on an NII basis. When we're looking at NII NII is clearly a driver from the wealth management side.
We'll move to our next question from Dan Fannon with Jefferies. Your line is now open. Please go ahead.
Thanks, Good morning, another question on wealth.
Acknowledging the strong M&A number in the aggregate, but what do you think we need to see for the fee base and then eight to begin to get closer in size to the total M&A and maybe what you think longer term that mix will look like.
Yeah, Great question, we've looked a lot at fee based and thought about it sort of as we think about the funnel are one thing that we highlighted to you last year or last quarter, rather was that from the advisor life side, we still had around you know 23% of those.
As I said in cash and cash equivalents that is our historical average of the last five years is around 18%. So in our mind a lot of it has to do with the way that people are looking at the markets right now and the idea that when you're moving into a fee based assets specifically on the retail side you are doing so and you actually.
Obviously actively investing in different market assets and so what is encouraging is as I highlighted on I think to the question. Glenn asked is it in the last month of the quarter, we began to see individuals individual retail clients actually put that money into other markets. So that's an encouraging sign but we do think that a portion of that is.
Market dependent.
Understood. Thank you.
Well move to our next question from Gerard Cassidy with RBC capital markets. Your line is now open. Please go ahead.
Thank you good morning.
Sure and can you give us some color when the E. Trade deal was close I think it was back in October 2021 of the real attractions I, saying for Morgan Stanley was the workplace channel.
And you guys are obviously a dominant player in this workplace channel are there any metrics that you can share with us on the success, you're having in increasing the penetration in the channel.
Yes, we've talked a lot in the last two quarterly updates around just the movement that we see in terms of channel migration is what we've called it. So workplace assets that are then some portion of it is moved into the advisor led side and then.
From that sort of as a core you see assets held away beginning to come in for the first three years that we find that that number was around $150 billion. So call. It $50 billion a quarter and then in the first quarter of this year, we were for that one quarter, we saw $28 billion and when you look at the.
First half were largely running almost up to a full year rate of last year and so what that puts into account. We are seeing encouraging signs, we don't know exactly where that number will land them, but obviously, it's trending in a good direction and what it shows again as the workplace can begin to be sort of a seed to there.
Conversation that people have with advisors and you see that being 10, 20% of the a assets that are brought into the migration. The other 80% or so are coming in from assets held away.
Very good and then James just to circle back to the capital comments that you made with the Basel III and game and we've heard from some of your peers about the engagement with the regulators appears to be stronger. This time, maybe than in past can you share with us your feelings. When you think about what you guys all went through.
Post the financial crisis, and the new regulations that came from Dodd Frank do you think the regulators are really listening to you folks more so this time than in the past or is that.
Not the case.
Well I think Gerard you know, it's it's really where we need to see the rule that the tests.
One thing to listen and there's another thing to listen and act the test is.
Once the regulatory community received feedback from the industry groups, which are very coordinated I will say.
You know what input do they take into account.
Frankly, how do we compare you know what the European banks have done.
On their own regulations, so I think bringing the U S to sort of a gold plated European standard.
It doesn't feel to me like the REIT and outcome I think we should do what's right for the U S financial system.
Yes, I think they're listening they've shown.
And the interest in a strong interest in getting the feedback from the industry. The communities the legislative bodies et cetera, so, but the proof will be in the pudding will find out over the next I don't know.
How long it would take the comment period I'm, assuming it could be a year or so I mean this is a big deal remember Basel III and getting foods proposed in 2017, so its taken us six years to make its way in a smooth sailing boat across the Atlantic.
And here. It is so now we go to decide what we liked about what we've done. So I you know I'm, maintaining constructive time, because I think everybody wants went up in the right place.
I don't happen to think and this is a country that some people's views that the Silicon Valley first Republic has a whole lot to do with this stuff.
But you know that's a different discussion for later day, so yeah, I would hope and expect that they're going to listen because they we should be listening to each other.
Our next question, we'll move to Andrew Lim with Fox Chien. Please go ahead.
Hi, Good morning, that's for taking my question, so I'd like to circle back I know on Basel III as well. So I think your comments about some European banks, having maybe a bit more what to do.
A lot of them are guiding towards impacts on a quantitative basis at the low end to sort of like below 50 basis points. So I was just wondering if you saw something a bit more specific that might level, the playing field for the European banks versus the U S banks debates.
And then turning over to the U S banks, obviously, but we're all familiar with the largest impacts that have been talked about by Jerome Powell and Michael ball one of your competitors will be more forthcoming, saying that that might and due to.
Operational risk weighted assets being added to a standardized risk weighted assets, which currently isn't the case under the standardized approach.
I was wondering if you had any like specific thoughts about that or whether you thought that was a bit more.
That's relevant.
Even though that that would allude to like C. O M. P. S sources from many years ago, how do you think about that.
Well I'm not I'm not going to go into more detail about the European banks. So I was just observing that the system was set up many years ago under Basel, the European banks, but.
Some of which are fully compliant with it and some are not yet and the country system is set up in the U S. The CCAR.
So we've actually had a capital stress test system for at least 12 years or something so that was simply the observation on the operational risk standardized approach to risk weighted assets, yes, actually that is very clearly going to be in the proposal that is the Basel III proposal and that is going on.
And the initial read out I think from the U S proposal, a way that ends up I've made my position very clear on that.
That are tying standardized that'd be ways to fee based business is not just doesn't make sense to me. So up until now we've had idiosyncratic evaluation of specific bank operational risk and the regulators are trying to move to a standardized approach how they get there when we get there.
<unk> remains a lot to be seen a lot of work to be done on that.
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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