Q3 2023 Morgan Stanley Earnings Call

[music].

Good morning, welcome to Morgan Stanley 's third quarter 'twenty to 'twenty three 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.

This presentation may include forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially.

<unk> does not undertake to update the forward looking statements in this discussion.

Please refer to our notices regarding forward looking statements and now I've got measures that appear in the earnings release.

It may not be duplicated or reproduced without our consent.

I will now turn the call over to Chairman and Chief Executive Officer, James Gorman.

Thank you good morning, everyone. Thanks, all for joining us.

We anticipated the market environment in aggregate remain mixed I, continuing a pattern we've seen over the past several quarters.

The net result of Morgan Stanley was regenerated 13 billion Little love it couldn't be in revenues $2 3 billion in net income and our TCE of 13.5%.

Our concerns around the tight employment market high commodity prices inflationary pressures that may impact. The policy provides additional challenges later in the quarter.

But we are seeing increasing evidence of M&A and underwriting calendar instead of building and while we expect momentum to continue this year given the fourth quarter has some seasonal considerations. We expect most of the activity to materialize in 2024.

Meanwhile, its had jumped to control what we can control firstly, we successfully completed the E trade integration. This quarter that was a massive undertaking and the expenses relating to that would've been bleeding through the P&L for a couple of years and involved is migrating 14 million accounts onto our platform and honestly when.

Well, a really seamless performance by the team.

This conversion allows us to further execute on our strategy building, our revenue synergies across channels and attracting clients through our best in class advice offering.

Secondly on the capital front, we bought back one being in stock, we averaged nearly 4% dividend yield over the quarter and at the same time delivered a CET one ratio at 15.5%, which is 260 basis points over our most recent regulatory requirement, we clearly have.

A significant capital buffer.

Also you saw the full details of the initial Basel III and game proposal as you. All know this is a proposal not the final regulation I'm going to repeat that it's a proposal. There was an enormous amount of energy being spent conversations being had across industry groups and agent Agency Board members.

Yes.

And I've been deeply involved myself along with Sharon you Shai.

And we've been told many times that the federal reserve strongly welcomes comments on this proposal.

Given this I anticipate that the agencies will be open to considering all code changes before its adopted as a final rule.

But let me be crystal clear.

Was it the buffers we have built even if this proposal were implemented today as written we have adequate capital to meet the ultimate requirement.

Needless to say there are many years between now and then.

In the quarter wealth management generated net new assets of $36 billion. That's obviously below recent quarters, it's consistent with what I've been saying for a long time. These numbers will bounce around in any quarterly period, they're always idiosyncratic things. This year, we've had two quarters, where we had some surprise on the upside.

And in aggregate for the year, we were totally net new assets of 235 billion year to date, our annualized growth rate is at the high end of the 5% to 7% range that we've been looking at and it's consistent infected spot on with that three year target of a trillion dollars of.

The net new money.

Overall this firm is in excellent shape, notwithstanding the geopolitical and market turmoil that we find ourselves in my.

My hope and expectation is the head of the Morgan Stanley with as clean a slate as possible and deal with the people that are outstanding issues. In the next couple of months I'm very excited about the future of this its leadership its strategy and its culture and I will now turn it over to Sharon who can discuss the quarter in greater detail than <unk>.

As always we'll take your questions. Thank you. Thank you and good morning affirmed produced revenues of $13 $3 billion in the third quarter, our EPS was $1.38 and our our TCE was 13, 5%.

In the third quarter was solid against a mixed market backdrop.

Year to date efficiency ratio was 75% together severance in D. C. P impacted the year to date efficiency ratio by nearly 150 basis points.

As we invest for growth our integration efforts have remained a priority integration related expenses were $68 million in the third quarter and we anticipate a similar amount in the fourth quarter as previously communicated.

Now to the businesses.

Institutional Securities revenues were $5 7 billion declining 3% versus the prior year.

Equity and fixed income results were in line with long term historical averages.

That's been banking revenues remain depressed on lower volume, however, leading indicators across advisory and underwriting progressed positively evidenced by notable increase of Morgan Stanley 's announced volumes in the third quarter on a year over year basis.

Investment banking revenues decreased to $938 million.

Change to the previous year was driven by lower results in advisory and debt underwriting advisory revenues of $449 million, reflecting a decline in completed transactions.

Announced volume in prior periods.

Despite the weaker quarterly results, we continue to see broad sector diversification of our completed deals.

The backlog reflects a similar pattern.

Equity underwriting revenues were $237 million.

Overall activity remains muted relative to historical averages while increased confidence supported early September issuances hawkish tone from the federal reserve and resulting moves in interest rates and serve as a reminder, this market remains window driven.

Fixed income underwriting revenues were $252 million down versus the prior year, primarily reflecting lower non investment grade event.

We are encouraged by the growing client dialogue and bake off activity across sectors and geographies.

Pick up in our announced M&A volumes in the third quarter speak to the trends we've observed at the end of the last quarter, but the landscape continues to evolve as we look ahead corporate confidence will largely be determined by the overall health of the consumer and the stability of input costs.

While risks remain including geopolitical threats.

Underlying trends suggest activity is building and there is a desire among clients to pursue their long term strategic objectives.

Equity revenues were $2 $5 billion the business performed in line with historical averages with relative strength in Europe and Asia.

Prime brokerage revenues were solid client balances were modestly higher compared to last year. The results reflect narrower spreads and the geographic mix of those balances.

Cash revenues declined versus the prior year on lower overall global volumes.

Derivative results increased year over year, reflecting higher client activity with particular strength in Europe .

Fixed income revenues were $1 $9 billion micro results increased versus the prior year supported by strength in securitized products, both in agency and non agency trading.

Macro revenues decreased versus last year's elevated results with lower revenues in rates and foreign exchange results reflect lower client conviction, particularly around the future of Central Bank policy.

<unk> revenues increased year over year on the back of a constructive trading environment, particularly for oil other.

Other revenues of $277 million improved versus last year, driven by lower mark to market losses on corporate loans net of loan hedges and higher net interest income and fees.

Turning to ISG lending in provision and the allowance for credit losses in ISG loans and lending commitments increased slightly to $1 $4 billion.

In the quarter ISG provisions were $93 million. The increase was driven by a continued negative outlook for the commercial real estate sector.

Net charge offs were $39 million, primarily related to one commercial real estate loan in the office sector.

Turning to wealth management revenues of $6 $4 billion were strong an increase from the prior year growth of asset management revenues more than offset the cyclical declines in net interest income underscoring their durability.

<unk> designed our asset light strategy right steady fee based flows it's support asset management revenues with this in mind, we remain focused on asset migration into our advisor life channel.

This quarter, our long term strategy took a critical step forward as we completed the last major milestone of our E trade integration successfully converting nearly $900 billion of client onto the Morgan Stanley platform. This will continue to enhance our ability.

To introduce clients and advisors and seamlessly transition them into advice based relationships.

Moving onto the business metrics in the third quarter.

Pretax profit was $1 $7 billion and the PBT margin was 26, 7% integration expenses as well as D. C. P negatively impacted the margin by approximately 150 basis points.

Net new assets were $36 billion, bringing year to date, and then a $235 billion, which represents over 7% annualized growth of beginning period assets.

Net new assets in the quarter were supported by new clients and positive net recruiting into the adviser channel.

The multiyear buildup of assets provide a foundational pipeline into our advisor channel evidenced by fee based flows of $22 $5 billion in the third quarter alone.

Asset management revenues of $3 $6 billion increased 7% year over year.

Our average assets and the impacts of cumulative positive fee based flows over the past year drove the increase.

<unk> revenues, excluding D C P were $820 million up 7% year over year.

Results reflect opportunistic deployment of new capital by retail clients into alternatives, particularly into private equity and private credit.

Bank lending balances were roughly flat versus the prior quarter growth in mortgages and tailored lending offset pay downs and securities based lending.

Total deposits of $340 billion remained stable compared to the prior quarter.

The deposit mix has shifted as clients continue to allocate rate sensitive cash to higher yielding cash alternatives available on the platform, including our expanded savings offering. In addition, the quarter saw consistent positive monthly inflows into equity markets from sweet balances ongoing evidence.

The improvement of the retail client sentiment.

Net interest income was $2 billion.

Sequential decline reflects a continued shift in the deposit mix.

Looking towards the rest of this year based on where we exited the quarter, we expect NII to trend lower the magnitude will be a function of our deposit mix and the trajectory of rates.

Wealth management business model is focused on steady asset aggregation delivering strong solutions and advice to clients.

All growing and durable is an expanding margin through the cycle, we are continuing to invest in our industry, leading position and the sustainability of our long term growth.

Does the backdrop recovers advisers remain well positioned to capture greater asset opportunity supported by our multichannel model that was built to attract new client relationships.

Turning to investment management.

Revenues of $1 $3 billion increased 14% compared to the prior year supported by higher asset management revenues.

Total AUM ended at $1 four trillion dollars.

Long term net outflows of approximately $7 billion were driven predominantly by headwinds to our active equity growth strategies, which continue to see redemption consistent with the industry.

Putting this segment's outflows year to date long term flows across the franchise, we're slightly positive.

We then alternatives and solutions, we continue to see demand for parametric customized portfolios across both equity and fixed income strategies, a partial offset to the headwinds of the quarter.

Liquidity and overlay services had net flows of $5 $7 billion driven by demand for parametric institutional portfolio overlay solutions and our liquidity strategies.

Specific to parametric and across the entire franchise overlay and long term net flows in the quarter were almost $7 billion underscoring strong trends in this business.

Sean Wirtjes: Daniel Fannon, Christian Bolu, James Mitchell, Sean Wirtjes, Sean Wirtjes Daniel Fannon, Christian Bolu, James Mitchell, Sean Wirtjes, Sean Wirtjes, Sean Wirtjes, Sean Wirtjes Daniel Fannon, Christian Bolu, James Mitchell, Sean Wirtjes Daniel Fannon, Christian Bolu, James Mitchell, Sean Wirtjes Daniel Fannon, Christian Bolu, James Mitchell, Sean Wirtjes Daniel Fannon, Christian Bolu, James Mitchell Sean Wirtjes Daniel Fannon, Christian Bolu, James Mitchell, Sean Wirtjes Daniel Fannon, Christian Bolu, James Mitchell, Meemile, it's our job to control what we can control.

Asset management and related fees were $1 $3 billion up 3% year over year on higher average AUM.

Performance based income and other revenues were $24 million supported by the diversification of our balance sheet light platform.

<unk> were driven by gains in the U S private equity offset by weakness in Asia private equity and real estate.

Our strategic focus on secular growth areas and the expansion of our global footprint remains in place.

Going investments.

Our businesses, including our market, leading parametric franchise as well as our continued growth and innovation in private markets.

<unk> as well to best serve our clients.

Turning to the balance sheet, our CET one ratio stands at 15, 5%.

With flat versus last quarter.

Standardize our W. Ay has declined sequentially to $445 billion, reflecting our ongoing prudent resource management and market movements at the end of the quarter. We continued to deliver on our commitment to return capital to our shareholders buying back $1 $5 billion of common stock during the quarter.

Taken in the context of the mixed environment. We are pleased with the firm's resiliency in our competitive positioning.

Clients gained more conviction, we expect our institutional business to capture more opportunities, particularly in investment banking. This increase client conviction will also further support asset growth in wealth and investment management, we will continue to press, our advantages and execute on our growth strategies all while.

Prudently managing our capital profile with that we will now open the line up to questions.

We are not ready to take any questions.

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 then we'll move to the next person in the queue.

By while we compile the Q&A roster.

Well go first to you Christian Ballou with autonomous research.

Good morning, James and Sharon.

I wanted to just touch on the wealth management a bit of a longer term question here.

James Gorman: Firstly, we successfully completed the e-trade integration this quarter. That was a massive undertaking and the expenses relating to that have been bleeding through the PNL for a couple of years and involved just migrating 14 million accounts onto our platform and honestly it went incredibly well, really a seamless performance by the team. This conversion allows us to further execute on our strategy, building our revenue synergies across channels and attracting clients to our best and classed by suffering.

You know as you mentioned, you've got you had really strong organic growth in that segment over the last years.

Well it doesn't appear to be translating to revenue growth.

If I look at the wealth management revenues, excluding NII it it hasn't really gone in three years, despite gathering significant about of assets. So so curious how you're thinking about the <unk> from <unk>.

As it goes to revenues.

More broadly how you're thinking about think about makes up your asset gathering strategy.

James Gorman: Secondly, on the capital front we brought back 1.5 B and in stock, we averaged an early 4% dividend yield over the quarter and at the same time delivered a CT-1 ratio of 15.5%, which is 260 basis points over our most recent regulatory requirement. We clearly have a significant capital buffer.

Sure actually I think that interestingly enough Christian I'm pretty impressed with the resiliency that we've seen in the business.

This is literally the explanation of the funnel that we've talked about if you look back over the course of the last.

Year alone 260, or 35, rather $1 billion of assets that we've captured that and look at the fee based flows right. We continue to see increased fee based flows. This past year. If you exclude the asset acquisitions that we had over the last couple of years, we are basically at some of the historical highs.

James Gorman: Also, you saw the full details of the initial BUSIL-3 end-game proposal. As you all know, this is a proposal, not the final regulation. I'm going to repeat that. It's a proposal. There is an enormous amount of energy being spent, conversations being had across industry groups and agency board members and I've been deeply involved myself along Sharon Yashire and we've been told many times that the Federal Reserve strongly welcomes comments on this proposal.

Fee based growth as we move forward, you're looking at times since Covid, where we obviously had very high retail engagement and you've been able to offset even with a decline in NII offset those growth to asset based asset management revenues as you move forward. It's that that we are trying to grow.

James Gorman: Given this, I anticipate that the agencies will be open to considering thoughtful changes before it's adopted as a final rule. But let me be crystal clear, because of the buffers we have built, even if this proposal were implemented today, as written, we have adequate capital to meet the ultimate requirement. Needless to say, there are many years between now and then.

So we're trying to continue to grow our asset management fees over time and make sure that we have the right solutions in place to offer our clients now lets take that forward. We have this mixed environment you have 23% of our retail client assets sitting in cash that is 5% higher.

From the 18% on historical averages we've begun to see retail investors put their cash into market. The last four months consecutively, we've seen that movement into the markets. This quarter alone. We began to see alternative grows in the are the new products the growth in transactional revenues.

James Gorman: In the quarter, wealth management generated net new assets of $36 billion. That's obviously below recent quarters. It's consistent with what I've been saying for a long time. These numbers will bounce around and in any quarterly period, they're always idiosyncratic things. This year, we've had two quarters where we had some surprise on the upside and in aggregate for the year, we're totally net new assets of $235 billion a year to date. Aranualized growth rate is at the high end of the 5% to 7% range that we've been looking at and it's consistent. In fact, it's spot on without three-year target of a trillion dollars for net new money.

We haven't seen that since the first quarter of 2022 before you started this rate hike cycle. So in my mind actually the strategy is working.

Pretty darn well, especially if you think about how we've been able to aggregate assets migrate them into fee based flows look at transactional and see that grow and see growth in these new products and deliver them to our clients all while these clients have dry powder to invest as these markets turn.

James Gorman: Overall, this firm is in excellent shape, notwithstanding the geopolitical and market turmoil that we find ourselves in. My hope and expectation is to hand over Morgan Stanley with as clean as slate as possible and deal with the fuel variate standing issues in the next couple of months. I'm very excited about the future of this firm. It's leadership, it's strategy, and it's culture.

Okay. Thanks Sharon.

My follow up is.

Just thinking about your all routes.

This is the type of 20%.

<unk> was 514% this is not nothing to sniff out, but it is some ways off that 20% how should we think about.

Sharon Yeshaya: I'll now turn it over to Sharon who can discuss the quarter in greater detail, and then together as always, we'll take your questions. Thank you. Thank you and good morning.

The bridge from here I know, you've mentioned investment banking, but it's.

Very small part of your business so.

You know, what's the bridge the 20% how much of it is macro how much you've been self help.

Sharon Yeshaya: The firm produced revenues of $13.3 billion in the third quarter. Our EPS was $1.38 and our ROTCE was $13.5 billion. Eltoukhy, Advanced by a notable increase of Morgan Stanley's announced volumes in the third quarter on a year-over-year basis. Investment banking revenues decreased to $938 million. The change to the previous year was driven by lower results in advisory and debt underwriting. Advisory revenues of $449 million reflected a declining completed transaction through lower announced volumes in prior periods.

But what's is Michael what sort of operating backdrop are you looking for thank you.

So kristian, maybe I'd take that given shrunk just pummeled, you and I want to give you a little bit of a break here.

By the way the only thing I'd add to what Sharon said is when people have a choice of making a full 5% return by doing nothing there, they're not going to be trading in the market. So the actual secondary lines and the revenues are the lowest I've seen for years in the last couple of years as rates do eventually come down they will come down and I don't think next year, but they will come down.

After that you'll see more activity in that regard and that so you'll see more money go up into sweeps. So interestingly.

It's kind of a.

Optimal point where rates are.

Attractive for investors.

But not so high they keep them out of the market and not so high that there isn't money.

Kept on sweep so very different from the checking account phenomena you see some of the commercial banks, but back to the 20%.

I'd just say it as is.

As you know we actually we were at 20%. So it's not this is not a.

This would not be a remarkable achievement, it's been like when I first kind of Morgan Stanley and people ask me at the wealth management business could generate in those days, 15% margins and I said well. There are two people are already doing it. So it's pretty obvious that can be done. So we've done it and nothing structurally has changed if anything the firm has got stronger.

We've been investing a lot I mean, let's see trade deal was it was a lot of investment to get that integration done we decided to keep investing through the cycle on the funnel and wealth because we think over the next 10 years, that's gonna paid months to dividends.

Sharon Yeshaya: Despite the week's reportedly results, we continue to see broad sector diversification of our completed deals and the backlog reflects a similar pattern. Equity underwriting revenues were $237 million. Overall, activity remained muted relative to historical averages. While increased confidence supported early September issuances, a hawkish tone from the Federal Reserve, and resulting moves and interest rates serve as a reminder that this market remains window driven. Fixed income underwriting revenues were $252 million, down versus the prior year, primarily reflecting lower non-investment grade events.

The integration across all the Eaton Vance platforms, they would never really integrated as one platform across the different you know Atlanta at Calvert, Parametric and Eaton Vance now sorting through all of that which Dan has done a great job of doing.

And then frankly banking as being really weak I mean, the you know under a billion dollars is evidence of a very weak calendar and in very weak M&A in the pipeline. We saw this quarter was really strong. So I don't think that you know.

I don't think the announcements when translated into revenues in Q4, but they will.

Sharon Yeshaya: We are encouraged by the growing client dialogue and bakeoff activity across sectors and geographies. The pickup in our announced M&A volumes in the third quarter speak to the trends we've observed at the end of the last quarter, but the landscape continues to evolve. As we look ahead, corporate confidence will largely be determined by the overall health of the consumer and the stability of input costs. While risks remain, including geopolitical threats, the underlying trends suggest activity is building, and there is a desire among clients to pursue their long-term strategic objectives.

Q1, Q2 next year. So just on the math I think if we're running about $2 2 billion, we'd have to generate about another 700 being net of quarter.

Just on the expense management, where.

We could do things on expenses easily more than we've done.

And you could get a couple of hundred million from that and then on the revenue side is banking recovers some of the transaction. So if we're just talking about in shrimp pointed out.

The test that's moving into a new <unk> product.

And then I think FID will will move up from this point, you're pretty easily get to the 20%. So I'm I appreciate the question.

Not concerned about that long term outlook I think it's it's it as it has happened and will happen and then frankly won't be that long.

Sharon Yeshaya: Equity revenues were $2.5 billion. The business performed in line with historical averages, with relative strength in Europe and Asia. Prime brokerage revenues were solid. Client balances were modestly higher compared to last year. The results reflect narrower spreads and the geographic mix of those balances. Cash revenues declined versus the prior year, on lower overall global volume.

We'll go next to Glenn Schorr with Evercore ISI.

Hmm.

Hi, Thank you.

So.

First one on wealth management NII I mean, the trends I think her work in the range of what's been happening across the industry. So not overly surprising, but I'm curious if you could breakdown even qualitatively.

Sharon Yeshaya: Williams, Derivative Results Increased Year Over Year, Reflecting Higher Client Activity With Particular Strength in Europe, 16-come revenues were $1.9 billion, Micro Results Increased Versus the Prior Year, Supported by Strength and Securitized Products, Both in Agency and Non-Agency Trading, Macro Revenue's Decreased Versus Last Year's Elevated Results With Lower Revenues in Rates and Foreign Exchange, Results Reflect Lower Client Conviction, Particularly Around the Future of Central Bank Policy, The Modesty Revenues Increased Year Over Year, On the Back of a Constructive Trading Environment, Particularly for Oil, Other Revenues of $277 million, Improved Versus Last Year, Driven by Lower Mark to Market Losses, On Corporate Loans, Net of Loan Hedges, And Higher Net Interest Income and Feast, Turning to ISG Lending and Provision, The Allowance for Credit Losses and ISG Loans and Lending Commitments Increased Slightly to $1.4 billion, In the Quarter, ISG Provision's were $93 million, The increase was given by a continued negative outlook for the commercial real estate sector. Net Char jobs were $39 million, primarily related to one commercial real estate loan in the office sector.

How much of that suite movement is coming in historical Morgan Stanley versus secret here I'm, just trying to see what type of client is moving.

And then.

Go back you piqued my interest James in the comment you just made about not next year, but maybe after that what what conditions do you think we need to see for wealth management NII is stable and grow.

So let's take the first question, which is the two different types of deposit mix, you're right. You know from a if you think about the self directed client versus a advisory based client that we've had in the historical wealth management franchise.

<unk> has proven to be somewhat of a stickier deposit base than you would see on the wealth management side and I think that you know on that.

What I would say is the traditional wealth management side that we had historically had so that does provide you with a sense of what's going on in terms of which client base is.

Seeing that on the potential growth of NII going forward again, that's part of the same asset gathering strategy. Some proportion of these assets as they come over or be that into the self directed or the advice based relationship will be held in some sort of transactional cash so that will be supportive over time.

Sharon Yeshaya: Turning to Wealth Management, Revenues of $6.4 billion were strong, and increased from the prior year, the growth of asset management revenues more than offset the stick-liquid declines in net interest income, underscoring their durability. As designed, our asset-led strategy broads steady fee-based flows to support asset management revenues. With this in mind, we remain focused on asset migration into our advisor-led channel. This quarter, our long-term strategy took a critical step forward as we completed the last major milestone of our e-trade integration, successfully converting nearly $900 billion of client AUM onto the Morgan Stanley platform.

NII to some degree from a deposit perspective, but that also provides us with lending capabilities and opportunities as you know Glenn we've seen tremendous what we would call it sort of household penetration and being able to offer new lending products to our various client bases are obviously with the STL product, but we continue.

To see our mortgages and growth in mortgages, even in this rate environment for new purchases and homes as we better understand our client base are we're able to do that more and actually bringing together. This E trade acquisition, putting everything on the same portfolio in the same franchise from a technology perspective.

As foundational and being able to integrate all of those bank relationships and what we used to call. The bank rails at E trade had for our broader wealth offering that should also help support NII as we look into the future.

Sharon Yeshaya: This will continue to enhance our ability to introduce clients and advisors and seamlessly transition them into advice-based relationships. Moving on to the business metrics in the third quarter, free tax profit was $1.7 billion, and the PBT margin was 26.7%. Integration expenses as well as DCP negatively impacted the margin by approximately 150 basis points. Net new assets were $36 billion, bringing year-to-date NNA to $235 billion, which represents over 7% annualized growth of beginning period assets.

Yep.

I think.

No no.

The second bit I, just think there's an optimal point I mean, we went from zero rates to 5% and effectively.

Justice periods since the sixties early seventies.

This rate increase what's remarkable is we haven't had a recession by the way, but and I personally don't think we'd go into.

With that I mean, if you're an adviser and you've got a clients sitting on a lot of cash and zero I would hope you're telling them to put it in.

Treasuries, so something so that's exactly what's happened at around 2% to 3% it becomes a different kind of discussion. So I think there's a trigger point to and youre seeing it across so as you said the whole industry and that's why you're seeing a different behavior set for people in checking accounts, where they haven't gone to buys the money sitting in the checking account if they're not paying attention.

Sharon Yeshaya: Net new assets in the quarter were supported by new clients and positive net recruiting into the advisor-led channel. The multi-year build-up of assets provide a foundational pipeline into our advisor-led channel, evidenced by fee-based flows of $22.5 billion in the third quarter alone. Asset management revenues of $3.6 billion increased 7% year-over-year, higher average assets and the impact of cumulative positive fee-based flows over the past year drove the increase. Transactional revenues excluding DCP were $820 million, up 7% year-over-year, results reflect opportunistic deployment of new capital by retail clients into alternatives, particularly into private equity and private credit.

<unk> is still getting I don't know 20 basis points or something.

So as as rates come down.

The total cash we have in the book, which is 23% will be coming down anyway, because it's just that that's that's an abnormality related to where rates are right now as rates come down over the next couple of years, you're absolutely going to see people much less price sensitive on what they generate.

And our return on the cash and just using it as a liquidity account to manage you know investments going in and out so I think in some ways. We over achieved our relative to our particular business mix. So I'm quite encouraged about the future because of that.

Sharon Yeshaya: Bank lending balances are roughly flat versus the prior quarter, growth in mortgages and tailored lending, offset paydowns and securities-based lending, total deposits of $340 billion remains stable compared to the prior quarter. Still, the deposit mixes shifted as clients continue to allocate rate-sensitive cash to higher yielding cash alternatives available on the platform, including our expanded savings offering. In addition, the quarter saw consistent positive monthly inflows into equity markets from sweet balances, ongoing evidence of the improvement of the retail client sentiment.

And in fact, you're hearing some of that language coming out of the banks, where they said.

Forget what would some of the other C. O said, but it was effectively the same they've ever achieved in that city and checking accounts and they are making enormous amount of money on that but that's unsustainable.

We've ever achieved and the rates are so high everybody wanted to be in cash, earning not cash sitting dormant.

That makes sense.

Otherwise.

Have to say I did love your comment about accrual would talk about green shoots somebody forgot to water them and give you that one.

Sharon Yeshaya: Net interest income was $2 billion. The sequential decline reflects a continued shift in the deposit mix. Looking towards the rest of this year, based on where we exited the quarter, we expect NII to trend lower, the magnitude will be a function of our deposit mix and the trajectory of rate. Wealth Management Business Model is focused on steady asset aggregation, delivering strong solutions and advice to clients, while growing durable fees and expanding margin through the cycle.

[laughter], that's better than a Pablo. Thank you one one quick one maybe I'll get to comment on this one.

I know, it's the board decision, but the longer the CEO transition announcement take place is there any timeframe, where it starts to put more screen on the organization or become a distraction as every report or in the world is riding on it every day.

Yeah.

Yeah about three years from now.

No wait list and like we said I will not be C O I.

Sharon Yeshaya: We are continuing to invest in our industry leading position and the sustainability of our long-term growth. As the backdrop recovers, advisors remain well positioned to capture greater asset opportunity supported by our multi-channel model that was built to attract new client relationships.

I said at the annual meeting I wouldn't be <unk> within a year and I said that for very simple reason that people didn't believe that I was going to leave because apparently bank Ceos don't and I said I would when I say I'm going to do something I'm definitely going to do it.

I would leave that the earliest possible moment that the board feels comfortable making that decision and I made that very clear to them I think they've done a terrific job now that you've opened up the question I'll answer it more broadly they've done a terrific job Dennis Nally.

Sharon Yeshaya: Turning to investment management, revenues of $1.3 billion increased 14% compared to the prior year, supported by higher asset management revenues. Total AUM ended at $1.4 trillion. Long-term net outflows of approximately $7 billion were driven predominantly by headwinds to our M-SIM active equity growth strategies, which continue to see redemption consistent with the industry, excluding the segments outflows year-to-date long-term flows across the franchise were slightly positive. Within alternative solutions, we continue to see demand for parametric customized portfolios across both equity and fixed income strategies, a partial offset to the headwinds of the quarter.

The succession comp committee.

Our lead director on the board all of the directors engaged really thorough process.

Where I don't like to give you an exact time, because that's sort of a spoiler.

I already did that apparently talking about Logan Roy wants but.

Uh huh.

Where shall I say, we're well into it and I do believe there are diminishing returns at some point in time, we're not there. The team is doing great. The businesses moving forward, but yeah I wanted to get out of the so you didn't give somebody else a chance to see what they can do with it and I think there's a lot of things the growth opportunities in this company now that we've set it up with so many.

Sharon Yeshaya: The equity and overlay services had net flows of $5.7 billion, driven by demand for parametric institutional portfolio overlay solutions and our liquidity strategies. Specific to parametric and across the entire franchise overlay and long-term net flows in the quarter were almost $7 billion, underscoring strong trends in this business. Asset management and related fees were $1.3 billion, a 3% year over year on higher average AUM. Performance-based income and other revenues were $24 million, supported by the diversification of our balance sheet light platform.

Planks that is solid.

You have an abundance of choices and I just you know it just look at what we've done with him. He akshay in Japan. The so called 2.0 that you know Ted has been driving with a hero. The C. O M. G of taking our Japanese business with him to a completely different level and I think theres a lot of things, we can do with them in Japan strategically.

We are taking advantage of the turnaround the Japanese economy. That's just one example, so yes, we were getting close I'm certainly not a barrier to a dime.

I didn't know if the words enabler, but I'd I'd like to get on with it and I was hoping the transition as executive chairman for a bit and this place will go forth and thrive.

Sharon Yeshaya: Results were driven by gains in U.S, private equity, offset by weakness in Asia private equity and real estate. Our strategic focus on secular growth areas and the expansion of our global footprint remains in place. On going investments in our businesses, including our market leading parametric franchise, as well as our continued growth in innovation in private markets. Position us well to best serve our clients.

We'll go next to.

With bank of America.

Hey, good morning.

I guess I just wanted to follow up on something you said, Jim hit on the optimal level of rates and you talked about NII, but if the fed were to hike a few more times.

At these levels for longer.

Sharon Yeshaya: Williams. Turning to the balance sheet, our CET-1 ratio stands at 15.5%, roughly flat versus last quarter. Standardized RWA is declined sequentially to $445 billion, reflecting our ongoing prudent resource management and market movements at the end of the quarter. We continue to deliver on our commitment to return capital to our shareholders, buying back $1.5 billion of common stock during the quarter. Taken in the context of the mixed environment, we are pleased with the firm's resiliency in our competitive positioning.

It's been an argument could be made that just structurally.

This will be challenged until we get to the other side of the retail REIT cycle, given just trying to ask is probably the main and the lowest grade business.

Great products.

Talk to us in terms of how you think about if rates don't get caught is that a headwind to the business until we get to the other side.

No I definitely don't think there is a structural issue I mean, my goodness the business is generating I'm talking about wealth, 26% margins with the various costs in there and I think it's 28% Sharon without them.

If you'd told me fused to go away.

I thought we'd get to 28%, but pretty much nobody else in the world did so no. There's no structural issue here there I'm, just saying is as a and I do think if.

Sharon Yeshaya: As clients gain more conviction, we expect our institutional business to capture more opportunities, particularly in investment banking. This increased client conviction will also further support asset growth and wealth and investment management. We will continue to press our advantages and execute on our growth strategies, all while prudently managing our capital profile.

At the risk of making a prediction.

I suspect the fed will do one more rate increase that some you know by the end of the year I guess November , but that's likely to be at and I do not expect the fed to cut rates in 2024, but I do expect going forward. After that so given that we're talking about 12 months the cashes largely.

Unknown Executive: With that, we will now open the line up to questions. We are now ready to take in 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. Your lives ask one question and one follow-up, then we'll move to the next person in the queue. Please stand by while we compile the Q&A roster.

Moved that's moved I you know on the margin you've got you're going to have a little bit of NII impact over the next 12 months, but that's that's really not the real game. The real game is go forward after that so and and the minute you see the fed indicate they've stopped raising rates the <unk>.

M&A and underwriting calendar will explode because there is enormous pent up activity our boards of directors is sitting there, saying until we understand the cost of financing. It is very difficult to pull the trigger on some of these capital transactions. So I think you're you're heading into an unfortunate I'm not going to be around two <unk>.

Sharon Yeshaya: We'll go first to Kristen Ballou with autonomous research. Good morning, James and Sharon. I wanted to just touch on the wealth management. A bit of a longer-term question here. As you mentioned, you've enjoyed really strong organic growth in that segment over the last few years. But it doesn't appear to be translating to revenue growth. If I look at the wealth management revenues, excluding NII, it hasn't really grown in three years, despite gathering significant amounts of assets.

To enjoy it but youre heading into a really good patch here and I don't know if its six months out or nine months out or it start three months out but this thing is going to start Tony and then rights will be rates will be the cake when they start coming down.

And as I said people will be less focused on cash and accounts and more focused on investment opportunities, that's when you're going to see the double kick up.

Sharon Yeshaya: So curious how you're thinking about the field to move from AUM or asset growth to revenues. And maybe more broadly, how you're thinking about the unique economics of your asset gathering strategy. Sure. Actually, I think that interestingly enough, Kristen, I'm pretty impressed with the resiliency that we've seen in the business. This is literally the explanation of the funnel that we've talked about. If you look back over the course of the last year alone, $260 or $35,000,000 billion of assets that we've captured, then look at the fee-based flows.

Got it I guess, a good time for you to hand off your successor will be thanking you for that but.

So listen I think so.

You mentioned about.

Focus on secular growth I think international expansion you did you've done now I'm, a I'm, assuming you're not doing any big M&A anytime soon just talk talk about international expansion a lot of disruption on wealth management private banking globally, what the opportunities are maybe at investing would love some color around that.

Investing more broadly internationally James mentioned on the deals or what we've been working on and I say energy to Plano between research and also our sales and trading side. We continue to look for opportunities and we have a ruin a colleague who's been working on our India franchise.

Sharon Yeshaya: We continue to see increased fee-based flows this past year. If you exclude the asset acquisitions that we had over the last couple of years, we are basically at some of the historical highs of seeing fee-based growth as we move forward. You're looking at times since COVID, where we obviously had very high retail engagement. And you've been able to offset, even with a decline in NII, offset those growth to asset-based, asset management revenues as you move forward.

I think that there are clearly opportunities there within India, we see a lot of opportunities throughout Asia. We've discussed different opportunities also all across the international franchise in Europe . So when you look at think about investment management that was one of the key points that we had talked about.

Sharon Yeshaya: It's that that we are trying to grow. We're trying to continue to grow our asset management fees over time and make sure that we have the right solutions in place to offer our clients. Now, let's take that forward. We have this mixed environment. You have 23% of our retail's client assets sitting in cash. That is 5% higher, right, from the 18% on historical averages. We've begun to see retail investors put their cash into markets the last four months consecutively.

Distribution.

Investment management E Eaton Vance product all over Europe , we've seen that we continue to see products with Calvert with various active Etfs that were seeing all across Europe , again, and we've been raising new AUM. There. So there are ways to distribute product across.

Ah different geographies, there's a way to work with our strategic partners in places like Japan.

Sharon Yeshaya: We've seen that movement into the markets. This quarter alone, we began to see alternative growth in the new products, the growth and transactional revenues. We haven't seen that since the first quarter of 2022 before you started this rate bike cycle. So, in my mind, actually, the strategy is working. Preet, Darn Well, especially if you think about how we've been able to aggregate assets, migrate them into fee-based flows, look at transactional and see that grow, and see growth in these new products and deliver them to our clients. All while these clients have dry power to invest as these markets turn.

Ways to organically take advantage and move forward in places of growth are that have more secular growth trends such as India. So there are tremendous opportunities, where we see that we can take like I said product client relationship and also work across institutional securities and various.

Races in investment management, Dan simple, it's just talked a lot about that are raising funds through those partnerships and being able to look for ways to work together to also sourced talent internationally as we work across the organization.

James Gorman: Okay, thanks, Sharon. We've met follow-up is just thinking about your ROTC targets on the time of 20%. You know, the quarter is fine, 14% is not nothing to sniff at, but it is some ways of that 20%. How should we think about the bridge from here? I know you've mentioned investment banking, but it's not a fairly small part of your business, so what's the bridge of 20%? How much of it is macro? How much of it is self-help? And for what is macro? What sort of operating backdrop are you looking looking for? Thank you.

And I'd just add I mean, I was in the middle East.

A few months ago, we're opening an office in Abu Dhabi, If you think of the combination Middle East, India, Japan kind of offsetting what's gone on in China, and then strategically I would be very surprised at this firm doesn't do some transactions in both wealth and asset management over the next three years outside the U S. I think we have.

The game plan for it strategically the team as you know it works a lot of ideas and obviously, we want to make sure.

When we do it where you know we're fully ready and we understand all of the you know the the diligence issues around.

James Gorman: Well, Christian, maybe I'd take that given Sharon just pummeled you, and I want to give you a little bit of a break here. By the way, the only thing I'd add to what Sharon said is when people have a choice of making 4, 5% return by doing nothing, they're not going to be trading in the market. So the actual secondary lines in the revenues of the lowest I've seen for years and the last couple of years as rates do eventually come down, they will come down.

Some of these relationships and are careful about that but I think the opportunities are clearly there.

Well go next to Dan Fannon with Jefferies.

Hi, Thanks, Good morning wanted to follow up on flows obviously fee based flows strong in the quarter, but the total flow number came in and understanding the environment was a bit softer here in the third quarter, but could you maybe talk about the channels, where the pullback we've seen the most you didn't mention workplace, though I'm not sure he would love some color there as well.

James Gorman: I don't think next year, but they'll come down after that. You'll see more activity in that regard, and actually you'll see more money go up in the sweep. So interestingly, there's kind of an optimal point where rates are attractive for investors, but not so high, they keep them out of the market, and not so high that there isn't money kept on sweep. So very different from the checking count phenomena, you see it's some of the commercial banks.

Yeah, we've talked at things Dan for the question, we have talked about the fact that within the workplace channel I think in both in the first and second quarter I've been asked about it and it is a people are using some of that cash we aren't necessarily seeing that movement directly into people's accounts and they're seeing actual you know taking the stock that they have.

Might get and actually selling it rather than investing on it given what's going on with the economic environment potentially inflation et cetera. So that's you know potentially a theme out there, but obviously that's dependent on the market what is more exciting in my mind is actually where we did see the increase in.

James Gorman: But back to the 20%, I mean, I just say, as you know, we actually, we were at 20%. So this would not be a remarkable achievement. It's a bit like when I first came to Morgan Stanley and people asking if the wealth management business could generate in those days, 15% margins. And I said, well, there are two people already doing it. So it's pretty obvious that can be done. So we've done it and nothing structurally has changed.

N N E, which was on new clients.

And recruiting so those were the two strongest components and the ability to attract new clients I've said it before on these calls if you asked me five years ago, well before we bought a E trade and when we were just looking at the beginning of the modern wealth platform. Many people ask how will you ever grow because we werent seeing new.

James Gorman: If anything, the firm's got stronger. We've been investing a lot. I mean, the C trade deal was, you know, it was a lot of investment to get that integration done. We decided to keep investing through the cycle on the funneling wealth because we think of the next 10 years that's going to pay monster dividends. The integration across all the advanced platforms, they were never really integrated as one platform across the different, you know, Atlanta, Calvert, Parametric, and Eaton Vance, and now sorting through all of that, which Dan has done a great job of doing.

New clients coming into the institution the investments that we've made across the technology for wealth management has been what's been able to attract new recruits. If you talk to recruit about why they come to Morgan Stanley . It's the product mix. They they could offer it the technology that we have the ability to work with the clients. So youre seeing.

James Gorman: And then, frankly, banking has been really weak. I mean, you know, under a billion dollars is evidence of a very weak calendar and very weak M&A. And the pipeline we saw this quarter was really strong. So I don't think the announcements won't translate into revenues in Q4, but they will in Q1, Q2 next year. So just on the math, I think if we're running about 2.2 billion, we'd have to generate about another 700 million net a quarter, just on the expense management.

That continue and then you're also seeing new client acquisition through the funnel. So those are all positive metrics and again, you'll see that in the stock plan participants are rising as well.

Great. Thank you and then just a follow up on the investment banking and understanding it's a the environment isn't ideal, but you did talk about increasing the announcement. So I was hoping you could provide some context, maybe on the sponsor community and maybe how those conversations are happening and just overall backlog levels.

James Gorman: We could do things on expenses, easily more than we've done. And if you get a couple hundred million from that, and then on the revenue side, as banking recovers some of the transactions stuff, we're just talking about and sure I'm pointed out of these assets moving into a new ties product. And then I think FID will move up from this point. You pretty easily get to the 20%. So I appreciate the question, and I'm not concerned about that long-term outlook. I think it's, as it has happened and will happen in addition, and frankly won't be that long.

Versus you know kind of last quarter.

Yeah. The backlog itself, we've continued to rise and to build them overall over the course of the year, we've talked a lot about sort of being at some of the highest levels that we've seen across all of the bad underwriting or on the advisory side. So all of that is optimistic financial sponsors we have talked about dry powder continue to see that obviously there.

There was some valuation gaps and as James said, the more clarity that we see around the stabilization of rates easier that will be around deployment and then some key themes that we have witnessed them. When we look at the backlog or we think about the transactions that are happening one is the financial sector consolidation. That's the theme that's emerging within.

Glenn Schorr: Will the next two, Glenn Schorr, with Evercore ISI? Hi, thank you. So, first one on Walthanyajan NII. I mean, the trends, I think, are in the range of what's been happening across the industry, so not overly surprising, but I'm curious if you could break down even qualitatively how much of that sweet movement is coming, in historical mortgage family versus betrayed. I'm just trying to see what type of client is moving.

Our pipeline and our discussions in the boardroom. The second is the energy transitions Ah that that again that is important to some of the transactions that we are either we have worked on it and that we've talked it through and in addition to that we are seeing emerging themes around technology around AI around how companies want.

Sharon Yeshaya: And then, to go back, you peaked my interest, James, in the comment you just made about not next year, but maybe after that, what conditions do you think we need to see for wealth management and I like to stable and grow? So, let's take the first question, which is the two different types of deposit mix. You're right, you know, from a, if you think about the self-directed client versus a advisory based client that we've had in the historical wealth management franchise, one has proven to be somewhat of a stickier deposit base than you would see on the wealth management side.

To us that when Theyre thinking about strategic focus and objective and all of these themes are part and parcel to the fact that you can see there is a diversified backlog and we're investing in the franchise. We've made some key hires to help us navigate through this more complex landscape and places, where we see opportunities to execute.

As we move forward.

We'll go next to Steven <unk> with Wolfe Research.

Hey, good morning, James Good morning, Sharon.

Good morning, good morning.

So wanted to start with a question on just the expense and margin outlook. You know expenses were actually well managed in the quarter, but one of your peers did talk about the competition.

Sharon Yeshaya: And I think that, you know, what I would say is the traditional wealth management side that we had historically had, so that does provide you with a sense of what's going on in terms of which client base is seeing that on the potential growth of NII going forward. Again, that's part of these same asset gathering strategy, some proportion of these assets as they come over be that into the self-directed or the advice based relationship will be held in some sort of transactional cash.

Competition intensifying in terms of the war for talent within investment banking and trading I mean, it feels like that's been the case for the better part of a number of years in wealth management and was hoping you could just speak to your expense growth outlook and your confidence in terms of your ability to achieve the firm wide margin target of 30%.

So when you think about the expenses, we have been looking at expenses through the cycle. We've Unfortunately, you know we have taken action.

Sharon Yeshaya: So, that will be supportive over time of NII to some degree from a deposit perspective, but that also provides us with lending capabilities and opportunities. As you know, Glenn, we've seen tremendous what we would call sort of household penetration in being able to offer new lending products to our various client bases obviously with the SBL product. But we continue to see mortgages and growth in mortgages even in this rate environment for new purchases and homes as we better understand our client base, we're able to do that more.

We took actions are those at the end of last year and then we took a one in the spring as well, we've discussed and severance costs throughout the course of the year and so we've been managing our expense base to better understand and to sort of think about it against the backdrop of what environment are we seeing so while there is there is always a war for talent, we do pay for talent.

At and we pay competitively for that talent, but we have to think about it in the context of where we see the potential growth opportunities are and that is also we have to take into account the investments that we're making and that's around processes and investing in technology and when you look at the technology that we're investing in we should see opera.

Sharon Yeshaya: And actually bringing together this E-Trade acquisition, putting everything on the same portfolio and the same franchise from a technology perspective is foundational and being able to integrate all of those bank relationships and what we used to call the bank rails that E-Trade had for a broader wealth offering that should also help support NII as we look into the future.

<unk> efficiencies and leverage as you go forward. So that's the modernization of the plant you know you're gonna have optimization and you're also going to work on things like making sure that you have the right risk and control framework to give ourselves an opportunity to grow so just what it means to boil. It down is it is a balance rate of investing for the future but.

James Gorman: I think I don't know. On the second bit, I just think there's an optimal point of view. We went from zero rates to 5% in effectively the fastest period since the 60s early 70s, fastest rate increase. What's remarkable is we haven't had a recession by the way, and I personally don't think we're going to. But with that, I mean, if you're an advisor and you've got a client sitting on a lot of cash earnings zero, I would hope you're telling them to put it in, you know, Treasury or something.

Also making sure that you have the right investment the right expense base, rather as you move forward and you can take advantage and see that was efficiency gain and really the operating leverage that James is talking about as we move forward through the cycle.

They just say one thing on the.

Well for talent, Yeah, well I mean, obviously really high performers are in demand across the street, but we've actually had the opposite issue. We've had very low attrition, which is why we did some of the expense initiatives that Sharon.

James Gorman: So that's exactly what's happened. At around 2% to 3%, it becomes a different kind of discussion. So I think there's a trigger point and you're seeing it across as you said, the whole industry, and that's why you're seeing a different behavior set for people in checking accounts where they're having on the bus, the money's sitting in the checking account. If they're not paying attention, they're still getting, I don't know, 20 basis points.

<unk> talked about and you know.

Yes, we should feel flat, that's a reflection of the culture and the stability of the thumb up.

But also that's why we took the initiatives because you've got to bring in talented people and new generations to keep growing this place. So you know onesies and Twosies. Yeah, you can lose somebody you know the senior person here or there and we have hired a bunch in banking and insurance it but.

James Gorman: As rates come down, the total cash we have in the book, which is 23% will be coming down anyway because it's just an abnormality related to where rates are right now. As rates come down over the next couple of years, you're actually going to see people much less price sensitive on what they're generating and a return on the cash and just using it as a liquidity account to manage investments going in and out.

But the broader across the you know 80000 people. We've got is the broader message is attrition has been remarkably low and that's something that you know we've just got to work through.

That's great and for my follow up just a question on capital James You noted that pro forma Basel III end game your capital requirements approximate your current capital base, how much capital cushion do you plan on running with.

James Gorman: So I think in some ways we overachieved relative to our particular business mix. So I'm quite encouraged about the future because of that. And in fact, you're hearing some of that language coming out of the banks where they said, I forget what the word, some of the other CEOs said, but it was effectively the same. They've overachieved in that it's sitting in check accounts and they're making enormous amount of money on that, but that's unsustainable. We've overachieved in that rates are so high, everybody want to be in cash, earning not cash, sitting dormant.

Also how it informs your buyback and.

You addressed the question on ROTC targets curious if that 20% target contemplates higher capital under Basel III. So I know, there's a lot in their capital cushion buyback level, 20% ROTC target.

Good I have to write this down there's oh God, there's a lot to remember.

It's not going to affect ROTC, we're not going to be increasing capital. So that one you can put to bed.

Unknown Executive: I don't know if that makes sense to you. Thank you.

Unknown Executive: By the way, I have to say, I did love your comment about, you know, for all the talk about green shoots, somebody forgot to water them. I'll give you that one. That's better than a pummel, thank you.

Oh, the cushion you know, it's a function of where the rules come out I mean, I I've been I've been very clear about this day, one I do not believe the proposal as is will be what we see when the comment period is over I do not believe that Ive no special.

James Gorman: One quick one, maybe I'll get the pummel on this one. I know it's the board division, but the longer the CEO transition announcement takes place, is there any time frame where it starts to put more strain on the organization or become a distraction as every reporter in the world is writing on it every day? Yeah, about three years from now. Now wait, listen, come on. We said, I will not be CEO.

Inside except that obviously spend a lot of time with the regulatory community, which I've done for 14 years.

I think everybody understands for example, the way operating risk that'd be wise have been calculated and I sort of blunt instrument based on fees is not you know it.

It wasn't about buzzard was originally going to do that we're going to take that rule out years ago and they ended up just not getting around to it and suddenly we complying with something that they didn't even want to you know they don't use in Europe . So it's a it's okay. It's just not going to happen the way it is and that's not being pollyanna ish. That's just that's my judgment call.

James Gorman: I said the annual meeting, I wouldn't be CEO within a year. And I said that for a very simple reason, the people didn't believe that I was going to leave because apparently bank CEOs don't. And I said I would, and when I say I'm going to do something, I'm definitely going to do it. I would leave at the earliest possible moment that the board feels comfortable making that decision. And I made that very clear to them.

That said as we what we wanted to frame with investors is God forbid. It does happen exactly as is the rule becomes proposal rule tomorrow and we fine. So we're certainly not going to be we're not going to be raising capital. We're going to continue with the buyback through this period. The final implementation of this thing is going to be 2028.

James Gorman: I think they've done a terrific job now that you've opened up the question. I'll answer it more broadly. They've done a terrific job, Dennis Nally, and the Succession Comp Committee, and Tom Glose, lead director on the board. All the directors engaged really thorough process. And I don't need to give you an exact time because that's sort of a spoiler. I already did that apparently talking about Logan Roy once, but we're, shall I say, we're well into it.

You know, there's a lot that's going to happen between now and then but listen this is the first time you've had members of the headboard and the FDIC I think come out in advance of a rule being promulgated their pets. The wood are saying that they're not comfortable with it. So there's clearly a debate within the regulatory institutions.

And if you get past so why do we need more capital, which I don't think the industry does into well what should be the only place, which clearly shouldn't be is punishing businesses.

James Gorman: And I do believe there are diminishing returns at some point in time. We're not there. The team is doing great. The businesses are moving forward, but yeah, I want to get out of the seat and give somebody else a chance to see what they can do with it. And I think there's a lot of things, the growth opportunities in this company. Now that we've set it up with so many planks that are solid, you have an abundance of choices.

Have fees attached to them, whether it's credit cards and wealth management, that's not the regulatory intent and they've told me that and therefore I believe that will change. So on the cushion is frankly a function of.

James Gorman: And I just, you know, just look at what we've done with Emmy of G in Japan, the so-called 2.0, that, you know, Ted has been driving with a hero, the CEO of Emmy of G, of taking our Japanese business with them to a completely different level. And I think there's a lot of things we can do with them in Japan strategically, taking advantage of the turnaround of the Japanese economy. That's just one example.

You know where where the rule ends up will carry whatever appropriately prudent cushion we need to carry on do we create more capital no not unless we grow the business to reflect that that we can put it to work and thirdly, we continue buybacks, yes, I'm sure shrunk and give more like from what we'd think about it on the buybacks and dividends for that matter on the capital return.

James Gorman: So yes, we're getting close. I'm certainly not a barrier to it. I'm at, I don't know if the words enable it, but I'd like to get on with it. And I'll help in the transition as executive chairman for a bit. And this place will go forth and thrive.

Strategy, we've been really clear that we expect to continue to return capital to our shareholders. Dan said that at the September conference. Even when you think about all of Basel, We first and foremost we talked about the dividend strategy, we doubled our dividend a few years ago and we've continuously increase the dividend that increase has been reflective of that.

Ebrahim Poonawala: Ebrahim Poonawala with Banks America. Good morning. I guess it's only follow-up on something you said James around the optimal level of rates and he talked about NII, but if the Fed were to hike a few more times or if rates stay at these levels for longer, is there an argument to be made that just structurally the business will be challenged until we get to the other side of the rate cycle given just client assets probably remain in lower spread products.

Growth and stable revenues that we've had on more broadly as an institution then of course buyback.

<unk> committed to a buyback, but the size of our buyback is always going to be opportunistic. When you think about what the alternatives are for capital usage right now what are the opportunities that we see going forward and we'll make the right decision for what we think the right decision is for the company and for our shareholders around the uses of the capital, but we increase the buyback.

This quarter. So that shows you sort of how we feel about being able to return capital to our shareholders. When you compare this quarter over the course of last quarter moving from one to one and a half million dollars.

James Gorman: Just talk to us in terms of how you think about if rates don't get cut, is that a headwind to the business until we get to the other side? No, I definitely don't think there's structural issue. I mean, my goodness, the business is generating, I'm talking about wealth, 26% margins with the various costs in there, and I think it's 28% your own without them. If you'd told me a few ago, I mean, I thought we'd get to 28%, but pretty much nobody else in the world did.

We'll go next to Devin Ryan with JMP Securities.

Thanks. Good morning, I guess first question just on the E trade conversion I'm sure good to get on the other side of that and you spoke to some of the benefits I think more on the flow side and revenue side. Just curious if there's any kind of more material expense saving opportunities.

James Gorman: So, no, there's no structural issue here there. I'm just saying, and I do think if the risk of making prediction, I suspect the Fed will do one more rate increase at some, you know, by the end of the year, I guess, November, but that's likely to be it, and I do not expect the Fed to cut rates in 2024, but I do expect going forward after that. So given that, we're talking about 12 months, the cash is largely moved, that's moved, you know, on the margin, you're going to have a little bit of NII impact over the next 12 months, but that's really not the real game.

Assuming there's probably some redundancies there that can be removed and then any other efficiencies that might exist.

But we haven't really this deal was never contemplated from a cost synergy perspective, it's really been around revenue synergies will there be potential savings on the margin it's possible, but that's not really the point of that transaction. What I think is more fundamentally interesting is that a couple of things when you.

About the E trade integration other than the fact that it went very smoothly as it relates to the clients themselves. It creates a really clear foundation when we're trying to migrate.

James Gorman: The real game is, go forward after that. So, and the minute you see the Fed indicate they've stopped raising rates, the M&A and underwriting calendar will explode because there is enormous inter-pactivity, but both of the directors are sitting there saying, until we understand the cost of financing, it is very difficult to pull the trigger on some of these capital transactions.

My great clients from channels and move that so give somebody from an E trade channel or our self directed channel and say, let's make an introduction to our NSA and begin that potential migration if you're on the same platform the much easier and much more seamless transition. So that's a pause.

Unknown Executive: So, I think you're heading into, and unfortunately, I'm not going to be around to enjoy it, but you're heading into a really good patch here, and I don't know if it's six months out or nine months out or it starts three months out, but this thing is going to start turning, and then rates will be, rates will be the kick when they start coming down. And as I said, people will be less focused on cash and accounts and more focused on investment opportunities. That's when you're going to see the double kicker. Got it.

<unk> use of that that's an example of how being on the same platform is helpful. The same goes for workplace right everything flows into the same places again that should be helpful. As we move forward. It's also very helpful from a bank rails perspective, so how do we think about banking product as you can use remember each rate hike.

Bank rails on their platform again, a lot of that can be used as we are now looking to potentially grow portions of the bank or grow lending or grow deposits. Those are all things that now that the platforms are put together on a consolidated basis. So I would look at it more from a revenue synergy perspective than necessarily a cost synergy.

Unknown Executive: I guess it's a good time for you to hand off your successor. We'll be thanking you for that, but I think so.

Sharon Yeshaya: Sharon, you mentioned about focused on secular growth, I think international expansion. ETH is done now. I'm assuming you're not doing any big M&A anytime soon.

Respective.

Okay terrific. Thanks, Ron a quick follow up here just on.

Sharon Yeshaya: Just talk to us about international expansion. A lot of disruption on wealth management, private banking globally. What the opportunities are, where we are investing, would love some color around that. Investing more broadly internationally, James mentioned the deals or what we've been working on, I say, M&FG 2.0, between research and also our sales and trading side. We continue to look for opportunities. We have Arun Koli, who's been working on our India franchise.

Non interest income trajectory gws, so we can make some assumptions around the trajectory of deposits, but how should we be thinking about the asset your trajectory from here you support curve I guess, what are some of the puts and takes to be thinking about there.

Yeah again, so when I look I would look at the the movements suites, if you're trying to draw relationship between sweets and NII really over the last two quarters, yes. It yields are going to be a function of what the market yields are last quarter. For example, I mentioned that we had the NII was supported.

Sharon Yeshaya: I think that there are clearly opportunities there. With in India, we see a lot of opportunities throughout Asia. We've discussed different opportunities also all across the international franchise in Europe. When you look at think about investment management, that was one of the key points that we had talked about potential distribution of investment management, eat and advance products all over Europe. We've seen that. We continue to see products with Calvert with various active ETFs that we're seeing all across Europe again, and we've been raising new AUM there.

By higher asset yields Youll remember that when we walked out of that of the first quarter. We were in a position where there was still a regional banking crisis. Some of the yields were higher do you think about funding yields simply because of what was going on in the environment as those yields normalized that came down you lost some of that asset yield and you began.

Let's see what we you know a different kind of.

The deposits themselves had a bigger or more prominent reaction when you look at our sequential change in NII. So what I would try and do is you should take both quarters for example into consideration when you're thinking about the relationship between sweeps in NII and of course asset yields would be determined by market factors more broadly.

Sharon Yeshaya: There are ways to distribute product across different geographies. There's a way to work with our strategic partners in places like Japan. There are ways to organically take advantage and move forward in places of growth that have more secular growth trends such as India. There are tremendous opportunities where we see that we can take, like I said, product, client relationship and also work across institutional securities and various places in investment management. Dan Simcoicz has talked a lot about that of raising funds through those partnerships and being able to look for ways to work together to also source talent internationally as we work across the earth.

We'll go next to Brennan Hawken with UBS.

Good morning, James insurance, Thanks for taking my questions, we would like to start.

<unk>.

Similar to two to that last question. So there's clearly uncertainty, but but also it seems equally clear that NII is no longer a tailwind for wells. So when you're thinking about this 30% pre tax margin target that you've provided for that business.

How do you think how what are your plans given that tailwind maybe turning into a headwind or at least moderating and how are you calibrating any planned investment and and have balanced that out with the potential for for growth on the back of that.

James Gorman: I just had, I mean, I was in the Middle East a few months ago, we're opening an office in Abu Dhabi. If you think of the combination Middle East, India, Japan, kind of offsetting what's gone on in China, and then strategically, I would be very surprised that this firm doesn't do some transactions in both wealth and asset management over the next three years outside the US. I think we have a game plan for it, strategically the team has worked on a lot of ideas.

Thanks for the question, Brian as you would expect its a balance right. We've made changes to our expense base over the course of this year, but we want to make sure that we're investing for long term growth by being able to offer the technology platform solutions et cetera, So that our advisors. The the most important thing about the <unk>.

James Gorman: Obviously we want to make sure when we do it, we're fully ready and we understand all of the diligence issues around some of these relationships and careful about that, but I think the opportunities are clearly there.

And that is to create opportunities where the advisors have more time more time that the advisors have the more they are able to prospect new business and bring new assets at the top of the funnel. So that's how we're prioritizing the investments in order to get the operating leverage as the market begins to turn.

Dan Fannon: Hold the next two Dan Fannon with Jeffries. Thanks, good morning. I wanted to follow up on flows, obviously fee based flows strong in the quarter, but the total flow number came in and understand the environment was a bit softer here in the third quarter.

Well, but Ah.

Okay. So do you or do you have enough is that lever large enough, where you're going to be able to.

Sharon Yeshaya: Could you maybe talk about the channels where the pullback was seen the most did mention workplace, so much it would love some color there as well. We have talked about the fact that within the workplace channel, I think in both in the first and second quarter, I've been asked about it, and people are using some of that cash. We aren't necessarily seeing that movement directly into people's accounts and they're seeing actual taking the stock that they might get and actually selling it rather than investing on it, given what's going on with the economic environment, potentially inflation, etc. That's potentially a seam out there, but obviously that's dependent on the market.

We're willing to make investments in order to support moving towards that 30% pretax margin, even without NII two ones.

We would see ourselves and I forget whether or not we have a put out those targets and we have been its not that there is a a shot clock in terms of the timing of those target spread and our goal is to create a business model that has the opportunity to do that on a more sustained basis and the way that want us to do that from an asset.

<unk> strategy is to grow the asset management revenue streams, and the transactional streams and that's what you're seeing over the course of this quarter alone we were able to grow assets youre able to deploy those assets into different transactional products, which helps transactional line and eventually it also moves into the advice based relationship product which has.

Sharon Yeshaya: What is more exciting in my mind is actually where we did see the increase in NNA, which was on new clients and recruiting. So those were the two strongest components and the ability to attract new clients, I've said it before on these calls. If you asked me five years ago, well before we bought e-trade and when we were just looking at the beginning of the modern wealth platform, many people asked, how will you ever grow?

A higher annuity stream as well and so that's the strategy and you're seeing it play out as we move forward I just pointed out Brendan I mean on.

Six in Hep B and a revenue the deficit against the 30% long term target is currently about 100 and $230 million. So this is not you know we're talking less than 2% already at 28% ex.

Sharon Yeshaya: Because we weren't seeing new clients coming into the institution. The investments that we've made across the technology of four wealth management has been what's been able to attract new recruits. So if you talk to recruits about why they come to Morgan Stanley, it's the product they can offer. It's the technology that we have, it's the ability to work with the clients. So you're seeing that continue and then you're also seeing new client acquisitions through the funnel. So those are all positive metrics and again, you see that in the stock plan participants rising as well.

<unk> integration cost they could take to send the call said that business tomorrow and hit that number. So it's this is not.

Back in the day, when we were talking about 20% margin and we were at 8% that was you know when certain people were skeptical about that.

We're in a whole different league now 28% can go to 30% we could we can make that happen well, we want to make sure as we make happen the growth over the next several years. So there's not a heavy lift I'm not worried about that dog.

Great. Thank you for that if you could maybe just one more clarification, because you're talking about the asset side and looking at market yields what's the duration that we should be thinking about if we're trying to calibrate.

Sharon Yeshaya: Great, thank you. And then just follow up on investment banking and understanding it's the environment is an ideal, but you did talk about increase in announcements. So it's hoping you could provide some context maybe on the sponsor community and maybe how those conversations are happening and, you know, just overall backlog levels versus, you know, kind of last quarter. Yeah, the backlog itself, we've continued to to rise and to build overall over the course of the year, we've talked a lot about sort of being at some of the highest levels that we've seen across all the underwriting or on the advisory side.

Because the disclosure on the asset side for the wealth is not as robust we have to kind of use use a couple of creative metrics within the filings.

And in general when you're talking about the AFR portfolio, the duration of their asset portfolios under to them, but what you have to think about is just the deposits themselves and what's going on right now when we look at it were slightly still asset sensitive but of course if rates.

Sharon Yeshaya: So all of that is optimistic financial sponsors, we have talked about dried powder continue to see that. Obviously there was some valuation gaps. And as James said, the more clarity that we see around the stabilization of rates, the easier that will be around deployment. And then some key themes that we have witnessed when we look at the backlog or we think about the transactions that are happening.

Right those deposits the deposit duration also shortly so I just think you have to think about it you know you're taking all things into consideration as you move forward given the cycle.

We're going to try and get in the last three questions quickly here, So we might run five minutes over.

Sharon Yeshaya: One is the financial sector consolidation. That's a theme that's emerging within our pipeline and our discussions in the board room. The second is the energy transitions that that again, that is important to some of the transactions that we are either we have worked on and that we've talked through. And in addition to that, we are seeing emerging themes around technology around AI around how companies want to use that when they're thinking about strategic focused and objective.

We'll go next to Jim Mitchell with Seaport Global.

Hey, Hey, good morning, maybe just pivoting to the trading business six thick trading.

Up sequentially a bit unusual in a seasonally slow third quarter. So maybe just talk a little bit about the drivers how how sustainable you think they are you know at least in the near term and maybe overall thoughts on industry wallet into next year.

Sharon Yeshaya: And all of these themes are part and parcel to the fact that you can see there's it's a diversified backlog. And we're investing in the franchise. We've made some key hires to help us navigate through this more complex landscape and places where we see opportunities to execute as we move forward.

Yeah.

Great question when you look at what's gone on in terms of the industry wallet and we talked a lot about 2019 and 2020 being bookends. Obviously you are above the 2019 wallet more broadly and you see this playing out because things like fixed income you do have more central bank action and you do have more broadly.

Steve Chubak: We'll go next to Steve and two bucks. Hey, good morning, James. Good morning, Sharon. Good morning. So, wanted to start with a question on just the expense and margin outlook. Expenses were actually well-managed in the quarter, but one of your peers did talk about competition intensifying in terms of the war for talent with an investment banking and trading. It feels like that's been the case for the better part of a number of years in wealth management, and was hoping you could speak to your expense growth outlook and your confidence in terms of your ability to achieve the firm wide margin target of 30%.

[noise] associated vol. When you think about pre COVID-19 level. So all of that is fundamentally positive in terms of specifically the trading businesses you had movements like I said in commodities oil that ability to capture vol. It's really around being there for our clients, but having greater velocity of cheap and the more that we're able to do that as we move.

Steve Chubak: So, when you think about the expenses, we are been looking at expenses through the cycle. We've unfortunately, you know, we have taken actions. We took actions both at the end of last year and then we took one in the spring as well. We've discussed those severance costs throughout the course of the year. And so, we've been managing our expense base to better understand and to sort of think about it against the backdrop of what environment are we seeing.

Forward, we restructured the business tremendously over the course of the last eight nine years, and it's being there to be able to serve our clients and using our resources to some degree more effectively and efficiently.

Okay, great. That's it for me thanks.

Thanks, Jim.

We'll go next to Mike Mayo with Wells Fargo.

Hi, one kind of positive question one negative question maybe James.

When you think of the permanent improvement from 2019 levels pre pandemic.

Much higher do you think.

Global wallet share should be for boats investment banking.

And trading like as you look out over a three to five years. This was 2019, the normal or should it be above that because were drifting back to global wallet share is drifting back towards 2019.

Steve Chubak: So, while there is, there is always a war for talent, we do pay for talent, and we pay competitively for that talent, but we have to think about it in the context of where we see the potential growth opportunities. And that is also, we have taken to account the investments that we're making, and that's around processes and investing in technology. And when you look at the technology that we're investing in, we should see operating efficiencies and leverages you go forward.

And are there.

The Big U S banks are staying above that.

And then the negative questionnaires, just NII is down 9% quarter over quarter in wealth and kind of what are you guiding for that to be down and when do you think that in place. Thanks.

Steve Chubak: So, that's modernization of the plant, you know, you're going to have optimization, and you're also going to work on things like making sure that you have the right risk and control framework to give ourselves an opportunity to grow. So, just what it means to boil it down is it's a balance, right, of investing for the future, but also making sure that you have the right expense base, rather. As you move forward and you can take advantage and see those efficiency gains, and really the operating leverage that James is talking about as we move forward through the cycle.

Sure I think the wallet global wallet would trend higher than 19.

I think you're at a you know right now, we're obviously that at an extreme low on the banking side.

Trading is kind of muted I mean fixed income yeah, we had a sequential.

Nice run equities had three and up these are nowhere near.

Top level, so I don't see any of the global competitors challenging the sort of the top of the U S. A tree top three or four firms so and.

Well, it's going on as I said earlier with the Middle East and.

Steve Chubak: I just say one thing on the war for talent. Yeah, I mean, obviously, really high performers are in demand across the street, but we've actually had the opposite issue. We've had very low attrition, which is why we did some of the expense initiatives that you're own talked about. And, you know, I guess we should feel flattered. It's a reflection of the culture and the stability of the firm. But also, that's, you know, why we took the initiatives because you've got to bring in talented people and new generations to keep growing this place.

India, Japan.

Parts of Latam, you're going to see non U S growth.

Over the next several years, so yeah, I feel I feel actually really pretty good about the about the outlook and I'll, let Sean I think we've touched on a lot of the NII stuff and you know obviously you can't you can't model. This stuff you don't know exactly how people will behave because it's a function of how they feel about where rates are and other opportunities at any point.

And time, but shrunk yeah, where you know, we're not giving 2024 guidance right here, but we did say is that the next quarter are we have said will be lower and that's a function mathematically at the exit rates of deposits, where we entered the quarter, but what is encouraging is that as we ended September and then we looked into October .

Steve Chubak: So you know, one teeth and two teeth. Yeah, you can lose somebody, you know, a senior person here or there. And we've hired a bunch of banking insurance, but the broader across the, you know, 80,000 people we've got is the broader message is attrition has been remarkably low. And that's something that, you know, we've just got to work through.

James Gorman: That's great.

Our client behavior is in line with our modeled expectations.

James Gorman: And for my follow-up, just a question on capital. James, you noted that pro forma Basel 3N game, your capital requirements approximate your current capital base. How much capital cushion do you plan on running with? Also, how it informs your buyback. And you addressed a question on rocky targets, curious to that 20% target contemplates higher capital under Basel 3. So I know there's a lot in their capital cushion, buyback level 20% rocky target.

We'll go next to Gerard Cassidy with RBC.

Thank you good morning, Sharon Good morning, James I'll, just ask a single question in view of the time can you kind of just give us a.

Our view of the outlook for your mergers and acquisitions your appetite obviously James over your tenure you guys have done a number of successful acquisitions and as you look out over the next three to five years I know, Jamie she won't be here, but.

What's the appetite is it still something opportunistic if something comes up it seems like you have all your products lined up by channel, but can you get economies of scale by buying some competitors in different channels. Thank you.

James Gorman: Good. I have to write this down. There's an old guy. There's a lot to remember. It's not going to affect Rotsie. We're not going to be increasing capital. So that one you can put to bed. The cushion, you know, it's a function where the rules come out. I mean, I've been I've been very clear about this day one. I do not believe the proposal is there's will be what we see when the comment period is over.

Definitely Valletta.

Just opportunistic because it's strategic in that we have a game plan. We just completed an upside about a month ago with the whole operating committee.

And each of the leaders that they use.

James Gorman: I do not believe that. I've no special insight, except that obviously, so I spend a lot of time with the regulatory community, which I've done for 14 years. I think everybody understands, for example, the way operating risk RWA has been calculated and a sort of blunt instrument based on fees is not, you know, it wasn't what buzzer was rigging and do. They were going to take that rule out years ago, and they ended up just not getting around to it, and suddenly we're complying with something that they didn't even want and don't, you know, they don't use in Europe.

No well about a two to Andy and Dan were heavily engaged in that.

From the business side I think.

You know there are a lot of things there are a lot of interesting properties in this world and we've got a machine.

Jim Hennessy I'll give a call out to him. He led the integration D trade. He actually led the integration going all the way back to Smith Barney hundreds of people that work on that so we've got an integration machine I mean, you start with do you have a vision of what the company should look like and then do you have a set of strategic.

James Gorman: So it's not just not going to happen the way it is, and that's not being polyannish. That's just that's my judgment call. That said is what we want to frame with investors is God forbid it does happen exactly as is. The rule becomes proposal rule tomorrow, and we're fine. So we're certainly not going to be we're not going to be raising capital. We're going to continue with our buyback through this period.

Fatigue options, which if available you would you would hit the bid than the opportunistic is when they become available like Eaton Vance did you hit the bid.

But the real issue is can you integrate them safely and securely and then finally, having done that will that drive our growth above the current run rate. So that's how we think about acquisitions. The team is very weighted behind it I don't know Sharon if you want to add anything to that but yeah. This phone will do we will do.

James Gorman: The final implementation, this thing is going to be 2028. There's a lot that's going to happen between now and then, but listen, this is the first time you've had members of the Fed Board and the FDIC, I think, come out in advance of a rule being promulgated, if that's the word, saying that they're not counsel with it. So there's clearly debate within the regulatory institutions, and if you get past the why we need more capital, which I don't think the industry does, into, well, what should it be?

Sensible you know not reckless not life changing but sensible deals as we've done you know we've done many of the Mesa west sodium and there'll be there's a lot of opportunity out there.

James Gorman: The only place it should clearly shouldn't be is punishing businesses that have fees attached to them, whether it's credit cards or wealth management. That's not the regulatory intent, and they've told me that, and therefore, I believe that will change. So on the cushion, it's frankly a function of, you know, where the rule ends up, we'll carry whatever appropriate prudent cushion we need to carry. On, do we creep more capital? No, not unless we grow the business to reflect that, that we can put it to work, and, thirdly, will we continue buybacks?

There are no further I think that's the rest of the time.

Ladies and gentlemen, this concludes today's conference call. Thank you for everyone for participating you may now disconnect.

James Gorman: Yes, and I'm sure Sharon can give more flavor on what we're thinking about on the buyback side, and dividends, for that matter. Yeah, on the capital return strategy, we've been really clear that we expect to continue to return capital to our shareholders. Dan said that at the September conference, even when you think about all of Basel, we first and foremost, we've talked about the dividends that increase has been reflective of the growth and stable revenues that we've had more broadly as an institution.

Yes.

Yeah.

Yeah.

[music].

Okay.

[music].

James Gorman: Then, of course, buyback, submitted to a buyback, but the size of a buyback is always going to be opportunistic when you think about what the alternatives are for capital usage, right? So, what are the opportunities that we see going forward and will make the right decision for what we think the right decision is for the company and for our shareholders around the uses of the capital?

Yeah.

[music].

Yeah.

Devin Ryan: But we increase the buyback this quarter, so that shows you how we feel about being able to return capital to our shareholders when you compare this quarter over the course of last quarter, moving from one to one and a half Well, the next two, Devin Ryan, with JMP Securities.

Yes.

Yeah.

Okay.

Hmm.

Sharon Yeshaya: Thanks, good morning. I guess the first question just on the e-trade conversion. I'm sure good to get on the other side of that. And you spoke to some of the benefits, I think, more on the flow side and revenue side. I'm curious if there's any kind of more material expense saving opportunities, just assuming there's five summer redundancies there that can be removed and then any other efficiencies that might exist. We haven't really, this deal was never contemplated from a cost synergy perspective.

Hum.

Yeah.

Hmm.

Okay.

Yeah.

[music].

Sharon Yeshaya: It's really been around revenue synergies. Will there be potential savings on the margin? It's possible. But that's not really the point of the transaction. What I think is more fundamentally interesting is that a couple of things when you think about the e-trade integration, other than the fact that it went very smoothly as it relates to the clients themselves. It creates a really clear foundation when we're trying to migrate clients from channels and move them.

Sharon Yeshaya: So, give somebody from an e-trade channel or a self-directed channel and say, let's make an introduction to an F.A, and begin that potential migration. If you're on the same platform, it's a much easier and much more seamless transition. So, that's a positive use of that. That's an example of how being on the same platform is helpful. The same goes for workplace, right? Everything flows into the same places. Again, that should be helpful as we move forward.

Yeah.

Okay.

Yeah.

Sharon Yeshaya: It's also very helpful from a bank rail perspective. So, as we think about banking products, as you can use, remember each trade had bank rails on their platform. Again, a lot of that can be used as we are now looking to potentially grow portions of the bank or grow lending or grow deposits. Those are all things that now that the platforms are put together on a consolidated basis. So, I would look at it more from a revenue synergy perspective than necessarily a cost synergy perspective.

[music].

Right.

Okay.

Yeah.

[music].

Sharon Yeshaya: Okay, terrific. Thanks, Ron. Quick follow up here, just on an interest income trajectory into WM. So, we can make some assumptions around the trajectory of deposits. But how should we be thinking about the asset yield trajectory from here? We use the board curve, I guess. What are some of the puts and takes to be thinking about there? Yeah, again, so, when I look, I would look at the movement sweeps. If you're trying to draw a relationship between sweeps and NII really over the last two quarters.

Sharon Yeshaya: The asset yields are going to be a function of what the market yields are. Last quarter, for example, I mentioned that we had, the NII was supported by higher asset yields. You'll remember that when we walked out of the first quarter, we were in a position where there was still a regional banking crisis. Some of the yields were higher as you think about funding yields simply because what was going on in the environment.

Sharon Yeshaya: As those yields normalized that came down, you lost some of that asset yield and you began to see what we, you know, a different kind of, the deposits themselves had a bigger, more prominent reaction when you look at a sequential change in NII. So what I would try and do is you should take both quarters, for example, into consideration when you're thinking about the release. [inaudible] So, there's clearly uncertainty, but also it seems equally clear that NII is no longer a tailwind for wealth.

Sharon Yeshaya: So, when you're thinking about the 30% pretext margin target that you've provided for that business, how do you think, what are your plans given that tailwind may be turning into a headwind or at least moderating and how are you calibrating any planned investment. And that balance that out with the potential for growth on the back of that.

Brennan Hawken: Thanks for the question, Brennan. As you would expect, it's a balance, right? We've made changes to our expense base over the course of this year, but we want to make sure that we're investing for long term growth by being able to offer both technology, platform solutions, etc. So, the most important thing about the investment is to create opportunities where the advisors have more time. More time that the advisors have the more they're able to prospect new business and bring new assets to the top of the funnel.

Brennan Hawken: So, that's how we're prioritizing the investments in order to get the operating leverage as the market begins to turn. Well, but, okay, so, do you have enough, is that lever large enough for you going to be able to or willing to dial back investments in order to support moving towards that 30% pretext margin, even without NII tailwinds. We would see ourselves in a present, we're not, we have put out those targets and we haven't, it's not that there is a shot clock in terms of the timing of those targets, Brennan.

Brennan Hawken: The goal is to create a business model as the opportunity to do that on a more sustained basis. And the way that one is to do that from an asset led strategy is to grow the asset management revenue streams and the transactional streams. And that's what you're seeing over the course of this quarter alone. You're able to grow assets, you're able to deploy those assets into different transactional products, which helps transactional line and eventually it also moves into the advice based relationship products, which has a higher annuity stream as well.

Brennan Hawken: And so, that's the strategy and you're seeing it play out as we move forward. I just point out, Brennan, I mean, on six and a half being of revenue, the deficit against the 30% long term target is currently about $1,2,230 million. So, this is not, you know, we're talking less than 2% already at 28% XC integration costs, they could take 2% the concept of that business tomorrow and hit that number. So, this is not, you know, back in the day when we were talking about 20% margin and we were at 8% that was, you know, when certain people were skeptical about that, we're in a whole different league now. 28% can go to 30%. We can make that happen. What we want to make sure is we make happen the growth over the next several years. So, there's not a heavy lift, I'm not worried.

Brennan Hawken: Robert Dull. Great, thank you for that. If you could show maybe just one more clarification because you talked about the asset side and looking at market yields, what's the duration that we should be thinking about if we're trying to calibrate because the disclosure on the asset side for the wealth is not as robust. We have to kind of use a couple creative metrics within the guidelines. In general, when you're talking about the AFS portfolio, the duration of the AFS portfolio is under two, but what you have to think about is just the deposits themselves and what's going on with right now when we look at it, we're slightly still asset sensitive, but of course it rates rise, the deposit duration also shortens.

Brennan Hawken: So I just think you have to think about, you know, you're taking all things into considerations, you move forward, given the cycle. We're going to try and get in the last three questions quickly here, so we might run five minutes over.

Jim Mitchell: The next two, Jim Mitchell with C-Port Global. Hey, good morning.

Jim Mitchell: Maybe just pivoting to the trading business, fixed trading, up sequentially a bit unusual in a seasonally slow third quarter, so maybe just talk a little bit about the drivers, how sustainable you think they are, you know, at least in the near term and maybe overall thoughts on industry wallet into next year. Yeah, it's a great question. When you look at what's gone on in terms of the industry wallet, we talked a lot about 2019 and 2020 being bookends.

Jim Mitchell: Obviously you are above the 2019 wallet more broadly, and you see this playing out because things like fixed income, you do have more central bank action, and you do have more broadly associated wall when you think about pre-COVID levels. So all that is fundamentally positive. In terms of specifically the trading businesses, you had movements like I said in commodities, oil, that ability to capture wall, it's really around being there for our clients, but having greater velocity of sheet.

Jim Mitchell: And the more that we're able to do that as we move forward, we restructured this business tremendously over the course of the last eight, nine years, and it's being there to be able to serve our clients and using our resources to some degree more effectively and efficiently.

Mike Meo: Okay, great, that's it for me. Thanks. Thanks, Jim.

Mike Meo: For the next two, Mike Meo with Low Fargo.

Mike Meo: Hi, one kind of positive question, one negative question, maybe James. When you think of the permanent improvement from 2019 levels, free pandemic, how much higher do you think global wallet share should be for both investment banking and trading? As you look out over three to five years, was 2019 the normal or should it be above that? Because we're drifting back to global wallet share, drifting back toward 2019, and although, you know, the big US banks are staying above that.

Sharon Yeshaya: And then the negative question is just, NII is down 9% quarter of a quarter as well. And what are you guiding for that to be down and when do you think that inflicts?

Sharon Yeshaya: Thanks. Sure. I think the wallet global wallet would trend higher than 19. I think you're at a, you know, right now we're obviously at an extreme low on the banking side and trade is kind of muted. I mean, fixing come here, we had a sequential, nice run, equity set three and a half these and know we're near top levels. I don't see any of the global competitors challenging the sort of the top of the US tree, the top three are full firm.

Sharon Yeshaya: So, and I think what's going on as I said earlier with the Middle East and India, Japan, parts of Latin, you're going to see non-US growth over the next several years. So, yeah, I feel, I feel actually really pretty good about the, about the outlook and I'll let Sharon, I think we've, we've touched on a lot of the NII stuff and you know, obviously you can't, you can't model this stuff. You don't know exactly how people behave because it's a function of how they feel. I feel about where rates are another opportunities at any point in time, but sure on.

Sharon Yeshaya: Yeah, we're, you know, we're not given 2024 guidance right here, but we did say this is the next quarter. We have said we'll be lower. That's a function mathematically at the exit rates of deposits where we entered the quarter. But what is encouraging is that as we ended September and then we looked into October client behavior is in line with our model of expectation.

Unknown Executive: Well, the next huge yard capacity was RBC. Thank you. Good morning, Sharon. Good morning, James.

James Gorman: I'll just ask a single question in view at the time. Can you guys give us a view of the outlook for your mergers and acquisitions, your appetite? Obviously, James, over your tenure, you guys have done a number of successful acquisitions and as you look out over the next three to five years. I know, James, you won't be here, but what what's the appetite is? It's still something opportunistic. If something comes up, it seems like you have all your products lined up by channel.

James Gorman: But can you get economies of scale by buying some competitors in different channels? Thank you. Definitely. The latter. It's not just opportunistic. It's strategic in that we have a game plan. We just complete an upside about a month ago with the whole operating committee. And each of the leaders that you know all about Ted Andy and Dan were heavily engaged in that from the business side. I think, you know, there are a lot of things.

James Gorman: There are a lot of interesting properties in this world and we've got a machine. Jim Hennessey, I'll give a call out to him. He led the integration. He actually led the integration going all the way back to Smith Barney. Hundreds of people that work on that. So we've got an integration machine. I mean, you start with. Do you have a vision of what the company should look like and then do you have a set of strategic options, which if available, you would you would hit the bed.

James Gorman: Then the opportunistic is when they become available like a man said you hit the bed. But the real issue is, can you integrate them safely and securely and then finally having done that will they drive growth above the current run rate. So that's how we think about acquisitions. The team is very weighted behind it. I don't know if you want to add anything to that, but yeah, this firm will do. Sensible, you know, not reckless, not life changing, but sensible deals as we've done, you know, we've done many of them.

Unknown Executive: I think that's the right time, ladies and gentlemen, this concludes today's conference call. Thank you for everyone for participating.

Unknown Executive: You may now disconnect.