Q4 2024 Morgan Stanley Earnings Call
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Speaker Change: Good morning. Welcome to Morgan Stanley's fourth quarter and full year 2024 earnings call. On behalf of Morgan Stanley, I will begin the call with the following disclaimer.
Speaker Change: This call is being recorded. During today's presentation, we will refer to our earnings release, financial supplement, and strategic update, copies of which are available at morganstanley.com.
Speaker Change: Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release and strategic update.
Speaker Change: Within the Strategic Update, certain reported information has been adjusted as noted. These adjustments were made to provide a transparent and comparative view of our operating performance.
Speaker Change: The reconciliations of these non-gap-adjusted operating performance metrics are included in the notes to the presentation or the earnings release.
Speaker Change: This presentation may not be duplicated or reproduced without our consent.
Speaker Change: I will now turn the call over to Chairman and Chief Executive Officer Ted Pick.
Good morning and thank you for joining us.
Speaker Change: First, we would like to acknowledge our colleagues, clients, shareholders, friends and family in Los Angeles. Our hearts go out to all those impacted and dealing with the horrific devastation from the wildfires. And we're grateful to all the firefighters and first responders. We are thinking of you.
Speaker Change: Over the last several years, we've been faced with two central themes.
Speaker Change: One, the end of financial oppression, namely the passing of the era of ultra low interest rates and the re-emergence of inflation and two, the end of the end of history with the resumption of geopolitical uncertainty [inaudible]
Speaker Change: These paradigm shifts juxtapose against renewed investor and corporate confidence, present opportunities to support clients with exceptional advice and market access.
Speaker Change: Morgan Stanley is well positioned to execute against these opportunities. The firm's consistent execution is demonstrated by the cadence of the top line and bottom line in 2024.
Speaker Change: Revenues across the four quarters of $15.1 billion, $15.0 billion, $15.4 billion, and $16.2 billion.
Speaker Change: and earnings per share of $202, $182, $188, and $222. The fourth quarter was a top-line record with the highest earnings per share in over 15 years, capping off one of Morgan Stanley's strongest years.
Speaker Change: For the full year, the firm delivered a return on tangible of 19% and earnings per share of $7.95, making significant progress toward our long-term goals.
Speaker Change: The results reflect consistent, durable earnings across the firm, evidencing that Morgan Stanley can deliver during this period of continued macroeconomic and geopolitical uncertainty.
Speaker Change: As we do every January, let's begin with our 2025 Strategic Update entitled Four Pillars of Morgan Stanley, the Integrated Firm. The slides can be found on our website.
Speaker Change: On slide three, we introduce the four pillars of Morgan Stanley to support our integrated firm, strategy, culture, financial strength, and growth.
Speaker Change: Strategy is about consistently serving our clients and raising, managing, and allocating capital. Culture is about rigor, humility, and partnership.
Speaker Change: Financial strength is about strong capital and liquidity alongside durable earnings. And growth is about smart, strategic investments across the firm which generate new opportunities to capture client share.
Speaker Change: The investment thesis for Morgan Stanley rests on our ability to deliver the integrated firm supported by these four pillars.
Speaker Change: Slide four. First, to reiterate Morgan Stanley's clear strategy to raise, manage, and allocate capital for corporations, individuals, asset managers, and asset owners around the world. In the past year, our engagement advice across the full range of institutional and individual clients drove results.
Speaker Change: Slide 5, Morgan Stanley culture is defined by rigor, humility, and partnership.
Speaker Change: The leadership group on the Operating and Management Committees have an average tenure at the firm of more than 20 years, many of them across business segments and regions.
Speaker Change: More broadly, our leadership body of 2,312 managing directors, 173 of whom we recently promoted to the partnership, have been with Morgan Stanley for an average of 15 years.
Speaker Change: 30% of our managing directors have been at the firm for two decades.
Speaker Change: Our partnership is defined by Morgan Stanley leaders who embody this homegrown culture, joined by acquisition and lateral talent who bring an incremental skill set to the platform.
Speaker Change: Morgan Stanley's culture of first-class business in a first-class way forged over many years of trial and success is a competitive advantage and will contribute to the success of the integrated firm. Slide six highlights our position of financial strength.
Speaker Change: The third pillar of the integrated firm is the output of a clearly defined strategy and a tightly knit culture. Our consistently strong capital position over recent years is a standout.
Speaker Change: In 2024, we accreted over five and a half billion of CT1 while continuing to return capital to our shareholders.
Speaker Change: We will continue to prudently grow the dividend, continue to invest in each of our three businesses and across our infrastructure.
and continue to opportunistically repurchase the stock.
Speaker Change: In 2024, we effectively deployed capital to support clients and translated that into earnings growth. High capital levels protect us in challenging climates and sustain us for long-term growth.
Speaker Change: Slide seven brings us to the fourth pillar of the strategy, revenue and earnings growth. Earnings expansion in 2024 reflects a return on multi-year investment to support clients.
Speaker Change: We will continue to invest heavily across the firm in our talent.
Speaker Change: Our clients in E-Trade and in Parametric, in our bank, across resiliency and technology and infrastructure, and in the development of the integrated firm.
Speaker Change: In the past year, expense growth was tempered by our focus on rolling off initial integration spend and taking opportunities to consolidate our real estate footprint. Investments for growth will continue to be supported by ongoing disciplined prioritization of our expense base.
Slide 8
Speaker Change: The last six years show a step function change in the firm's growth across our businesses.
Speaker Change: In the wealth and investor management segments, combined revenues have grown from $20 billion to $34 billion and total client assets have nearly tripled to $7.9 trillion. This growth has been achieved both by way of acquisition and through organic execution. You will also note that institutional securities wallet share has grown by nearly 100 basis points.
Speaker Change: These results reflect not only constructive markets, but also a sharpened focus on key client relationships and an expanded coverage of corporates and asset managers. Morgan Stanley Scale positions us, over the long term, to deliver growth in each of our three business segments.
Speaker Change: We win both through an expanding denominator of global securities, banking, wealth, and investor management activity, and by increasing our numerator, as in our wallet share, in each segment.
Speaker Change: In short, we seek to gain durable share in the secular growth businesses in which we participate.
Slide 9 goes a level deeper into institutional securities.
Speaker Change: First, the growth in institutional security has been both broad-based and, crucially, is global. It is important that we are relevant in all the major regions around the world.
Speaker Change: Amidst geopolitical and interest rate uncertainty, each region grew revenues by roughly 20 percent in 2024. These results follow multiple years of investment in talent and leadership, as well as efficient and disciplined RWA growth.
Speaker Change: In 2024, we saw institutional securities deliver an operating margin of 31% and revenue growth that was significantly higher than our RWA growth.
Speaker Change: We are in a leadership position and can offer trusted advice and market access into the investment banking new issue and M&A cycle which just lies ahead.
Transcription by CastingWords
Slide 10
Speaker Change: In wealth management, investments in our self-directed and workplace channels drive our differentiated client acquisition funnel. Today, with our expanded offering, we reach over 19 million relationships and have added net new assets of over $250 billion in each of the past two years on track to delivering $10 trillion plus of total client assets.
Speaker Change: An important indicator of wealth management momentum is fee-based flows, which reached an exceptional $123 billion in 2024.
Speaker Change: Delivering on new relationships and net new asset growth creates opportunities for our team of world-class financial advisors to tap into the integrated firm for their clients.
Speaker Change: Slide 11 highlights the breadth and tenure of wealth management's client relationships. As 60% of advisor led assets are associated with clients who have an average duration of 20 years. We retain 99% of our clients reflecting their enduring trust in Morgan Stanley. The slide illustrates our multi-channel model which continues to drive new assets to the platform.
Speaker Change: 30% of our advisor-led assets are associated with clients who have a Morgan Stanley relationship of less than 10 years, and 10% of advisor-led assets are with clients of less than two years.
Speaker Change: The Client Acquisition Funnel supports durable growth, namely, as clients mature with our financial advisors, they become the foundation for the continued growth of recurring fee-based revenues.
Speaker Change: Slide 12. In investment management, we continue to focus on the secular growth areas of customization and alternatives.
Speaker Change: Additionally, the integrated firm, particularly the relationship with wealth management, continues to benefit the investment management platform with the enhancement of retail-oriented distribution offerings and additional product capabilities.
Speaker Change: Slide 13, an area of investment is in the incremental growth of our U.S. banks.
Speaker Change: Since 2018, the firm has significantly grown deposit balances and continues to source deposits from wealth management clients with an expanded product offering.
Speaker Change: As we continue to grow our capabilities across the integrated firm, we are well positioned to provide a full suite of solutions to our clients.
Speaker Change: Slide 14, a dividend that is aligned to the growth of fee-based earnings has been a leading priority. Our durable results demonstrate consistent execution of our strategy, and we have raised our quarterly dividend by 7.5 cents for three years in a row to 92.5 cents per share.
Slide 15
Speaker Change: As you have heard us discuss during the past year, the Integrated Firm brings together our world-class wealth and investment management franchises with our world-class institutional securities franchise. We are consistently strengthening the pillars underlying the Integrated Firm to deliver on our strategic goals.
Speaker Change: Across the integrative firm, Morgan Stanley is relevant to our clients, spanning from the advice dispensed in corporate boardrooms to our financial wellness programs for that company's employees.
Speaker Change: We're also the premier holistic partner to asset managers partnering with them to grow their businesses and to generate alpha.
Speaker Change: We can deliver institutional capabilities to our clients alongside sophisticated wealth management advice and distribution in an integrated service model, and in so doing, be mindful of potential conflicts.
Speaker Change: To open 2025, we have formalized the integrated firm by positioning leadership talent at the center of client coverage, integrated data, risk management, and infrastructure to drive growth as we serve more clients across their full suite of needs.
Speaker Change: This effort will be led by Mandel Crawley, a three-decade Morgan Stanley executive and a member of our operating committee. Together with co-presidents Dan Simkowitz and Andy Saperstein, the integrated firm organization is aligned to scale client opportunities across Morgan Stanley.
Slide 16
The Morgan Stanley Investment Thesis is robust.
Speaker Change: The full year results are strong relative to our long-term firm-wide goals.
Speaker Change: We ended 2024 with total client assets at $7.9 trillion, wealth management pre-tax margins of 27%, a firm efficiency ratio of 71%, and a return on tangible of 19%.
Speaker Change: Of note, we added a new goal to achieve durable wallet share gains and institutional securities. The additional metric for institutional securities is an appropriate reflection of the expected contribution of this business segment to the firm's growth narrative. The key word is durable.
Speaker Change: There will always be market and business cycles in each of these businesses.
Speaker Change: Morgan Stanley's trusted relationships over the very long term lead to superior results.
Speaker Change: Against the four pillars of strategy, culture, financial strength and growth, delivering the integrated firm is foundational to durable earnings growth and 20% returns through the cycle.
Speaker Change: Thank you. Now Sharon will review our fourth quarter and annual results, then together we will take your questions.
Sharon: Thank you and good morning. The firm produced revenues of $61.8 billion in 2024 and ended the year with fourth quarter revenues of $16.2 billion.
The full year efficiency ratio was 71.1 percent.
Sharon: Improved efficiency not only demonstrates our ability to grow revenues, but also to prioritize our controllable spend.
Sharon: During 2024, we took real estate charges of $62 million, which impacted full year EPS by three cents.
Sharon: Professional services declined year-over-year, aided by the roll-off of integration-related expenses and discipline across project spend.
Sharon: These savings helped self-fund investments across infrastructure to support growth, such as expanding data centers' capacity, renovations, and technology modernization efforts.
Self-Funding Investments Remains a Priority
Sharon: In the short run, similarly sized additional modernization efforts focused on decommissioning legacy technologies may result in higher amortization costs.
Sharon: This, alongside business-enabled innovation and process optimization with AI, should support the firm's future efficiency path.
Now, to the businesses.
Sharon: Institutional Securities delivered very strong annual results across business and regions demonstrating the high-quality breadth and depth of our world-class global franchise.
Sharon: Full year revenues of $28.1 billion included our highest reported equity revenues and the highest results across combined equity and fixed income markets.
Sharon: The strong annual performance showcases our global footprint and our ability to capture client share amidst an increasingly constructive backdrop
Sharon: Fourth quarter revenues were $7.3 billion as markets remained active, bucking the typical seasonal flow down.
Sharon: We supported clients throughout the quarter and ended the year with momentum.
Sharon: Investment banking revenues were $6.2 billion for the full year, reflecting growth across regions and products. 2024 commenced with strong debt underwriting activity.
Sharon: Followed by M&A announcements that picked up in the second half and ended with increased equity underwriting activity as the IPO market posted its highest volumes since 2021.
Sharon: Fourth quarter investment banking revenues were $1.6 billion. Results were largely driven by accelerating strength in equity underwriting, as follow-on and IPO issuance saw meaningful improvements over the comparison period.
in the quarter.
Sharon: Looking ahead to 2025, our M&A pipelines are healthy and diversified, outpacing recent years. Financial sponsors are joining corporates to drive activity, evaluating exit opportunities for long-held assets.
Sharon: CEO and boardroom confidence continues to improve, evaluation stabilized, and financing markets remain strong.
Sharon: Our business is well positioned for strong, continued rebound in deal-making activity.
Sharon: turning to equity. We continue to be a global leader in this business.
Transcription by Transcription Outsourcing, LLC.
Sharon: Revenues were $3.3 billion in the fourth quarter. Following the U.S. elections, clients re-risked quickly given shifting market dynamics.
Sharon: Additionally, third quarter strength in Asia carried into the fourth quarter with renewed investor interest across the region. [inaudible]
Sharon: Crime brokerage revenues were a record for the business as clients remained engaged and balances rose to peak levels.
Sharon: Cash results increased year over year, consistent with higher levels of client engagement and volumes.
Sharon: The full year results demonstrate our multi-year efforts to re-center our fixed income business around the integrated firm. Improve trading performance.
Sharon: Growth in Durable Lending Revenues and Servicing Corporate and Sponsor Relationships all contributed to results.
Sharon: Quarterly revenues were $1.9 billion, driven by credit products and commodities.
Micro-revenues were above historical quarterly averages.
Sharon: Results were driven by securitized products, which benefited from higher loan balances and an increase in securitization activity.
Macro performance was relatively flat versus the prior fourth quarter.
Sharon: Commodity revenues improved year-over-year. Results were led by our North America power and gas business, where structured opportunities for corporate clients leveraged the integrated firm.
Unknown Speaker 05.
Turning to ISG Lending and Provisions.
Sharon: For the full year, ISG provisions were $202 million and $78 million for the quarter. The quarterly provision was driven by portfolio growth and a build in a handful of individual assessments.
Sharon: For the full year, ISG net charge-offs were $210 million. For the quarter, net charge-offs were $62 million, primarily related to several commercial real estate loans, which were largely provisioned for in prior quarters.
Turning to Wealth Management
2024 was a strong year for wealth management.
Foyer highlights include records, revenues of $28.4 billion.
Sharon: Pre-tax profit of $7.7 billion and a reported margin of 27.2%.
Sharon: The strength of our scaled and differentiated client acquisition funnel continues to set us apart.
Sharon: Fee-based flows were $123 billion, exceeding $100 billion for the fourth consecutive year.
Sharon: Clients continue to seek Morgan Stanley's advice, supporting our thesis that as assets move through the funnel, incremental revenue growth and margin expansion will follow.
Sharon: For the fourth quarter, revenues were $7.5 billion and the reported PBT margin was 27.5%. DCP and real estate related charges negatively impacted the quarterly margin by approximately 140 basis points.
Sharon: Asset management revenues in the quarter set a new record of $4.4 billion, showcasing the progress we have made.
to Durable Fee-Based Revenues.
Sharon: With each quarter this year, asset management revenues saw sequential improvement, powered by constructive markets and consistently strong fee-based flows.
Sharon: Fourth quarter fee-based flows were $35 billion. Importantly, over the last two years, we have seen an increase in the number and the pace of assets migrating from advisor-led brokerage accounts to fee-based accounts.
Unknown Speaker 05.
Sharon: We remain an industry leader in organic growth, net new assets for the quarter were $57 billion.
Sharon: Full year NNA of $252 billion represents approximately 5% annual growth of beginning period assets.
Sharon: This year, our advisor-led channel drove the results, benefiting from both existing clients and new clients coming to the firm.
Transactional revenues for the quarter were $1 billion.
Sharon: Excluding the impact of DCP, transactional revenues represent the highest level of activity we have seen since the peak in 2021.
Sharon: Higher retail engagement in equity-related products and demand for alternative products supported results.
Sharon: These revenues will continue to benefit for the breadth and the depth of our growing alternative platform.
Bank lending balances were $160 billion.
Sharon: Loan growth of $4 billion was driven by securities-based lending, where we saw demand for new lines and a decline in the pace of paydowns.
Sharon: Total deposits increased 3% sequentially to $370 billion, driven by higher suite balances.
Sharon: End-of-period sweep deposits have increased for two consecutive quarters, supporting the view that as rate dynamics change and markets turn to be more constructive, sweep balances will be increasingly transactional in nature.
Transcription by CastingWords
Sharon: Net interest income was $1.9 billion in the quarter. The sequential increase was primarily driven by higher sweeps.
Sharon: Looking ahead into 2025, the combination of a more stable deposit mix, higher lending balances and the rate outlook suggests that first quarter NII should not fluctuate materially from our fourth quarter results.
We are intently focused on driving additional growth across channels.
Sharon: In our advisor-led channel, our effectiveness in deepening relationships is evidenced by our consistently strong fee-based flows.
Sharon: In Workplace, our recently announced partnership with Carta puts us at the center of new client stock plan opportunities as private companies consider going public.
Sharon: And in self-directed, the number of active traders on the E-Trade platform grew, ending the year at levels higher than 2022.
Moving to Investment Management.
Sharon: The business reported annual revenues of $5.9 billion and quarterly revenues of $1.6 billion.
Sharon: Our AUM reached a new peak at year-end of $1.7 trillion.
Supported by market gains and net inflows.
Sharon: Long-term net inflows were $4.3 billion in the quarter, driven by continued demand for our fixed income strategies and parametric customized portfolios.
This brings 2024 long-term net inflows to $18 billion.
Sharon: Liquidity and overlay services had inflows of $67 billion on the back of strong fund performance and seasonality, some of which may reverse in the first quarter.
Sharon: 4th Quarter Asset Management and Related Fees of $1.6 Billion Increased 11% Versus the Prior Year, Driven by Higher Average AUM.
Sharon: As a reminder, performance fees are recognized on an annual basis, largely in the fourth quarter, which drove the increase sequentially.
Sharon: Quarterly performance-based income and other revenues were $88 million. Gains were concentrated in infrastructure, U.S. private equity, and private credit.
Sharon: Our efforts to build a business that is well diversified and focused on secular growth areas as well as global opportunities gives us confidence to drive incremental growth.
Turning to the balance sheet.
Total spot assets were $1.2 trillion.
Over the course of 2024, we demonstrated velocity of resources.
Sharon: Standardized RWAs declined sequentially to $473 billion, driven by year-end seasonality and market dynamics.
Sharon: Lower RWAs at period end have already begun to reverse as we enter a new calendar year.
Sharon: During the year, we accreted over $5.5 billion of common equity Tier 1 capital, and our standardized CT1 ratio ended the year at 15.9%. For the full year, we bought back $3.3 billion of common stock.
Our tax rate was 23.1% for the full year.
Sharon: We expect our 2025 tax rate to be approximately 24%. And consistent with prior years, we expect some quarterly volatility.
Sharon: As we look ahead into 2025, our franchise is well positioned for growth, exiting the year with momentum across all of our businesses, with a strong capital position to invest in our clients and our businesses.
Transcription by CastingWords
Sharon: We enter the year with record asset levels, healthy and diversified pipelines, an engaged and institutional retail client base, and a strong global brand.
Sharon: We are focused on disciplined execution as we progress towards our goals.
Sharon: With that, we will now open the line up to questions.
Sharon: We are now ready to take in questions. To get in the queue you may press star and the number 1 on your touchtone telephone.
Sharon: 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.
Sharon: You are allowed to ask one question and one follow-up and then we'll move to the next person in the queue. Please stand by while we compile the Q&A roster.
We'll take our first question from Glenn Shore with Evercore.
Unknown Speaker
Speaker Change: Hey, thanks for morning, Glenn. How you doing? Glenn? How are you? All right.
Appreciate it.
Speaker Change: Where to begin? I guess let's talk about trading. There's a lot of upside in trading. We've all seen great trading environments, and this certainly was a good one. But I wonder if you could just try to parse out
Speaker Change: the success of those durable games. You know, I'm just trying to separate your actions versus the environment. You certainly have been performing really well. Thanks.
The focus on
Speaker Change: on Institutional Securities over the last number of years is, of course, to deliver to key clients the whole product set.
Speaker Change: Unknown Speaker across what, as you know, we called at one point, about five, six years ago, I think it was in 2018, the Integrated Investment Bank.
Speaker Change: And that was the bringing together of folks in equities, fixed income, capital markets and investment banking.
Speaker Change: Minding, obviously, all the walls between them, but having folks mobilize across those divisions, across the regions, and really understand what life is like to sit in the shoes of folks in different divisions. And as you know in this business, you don't actually know what that feels like unless you're in that business.
So we have leaders moving around.
and six years later now with ISG under Dan Simcox's
Speaker Change: leadership, we're able to in a in an environment that is
Speaker Change: Unknown Speaker ...friendly to a lot of the businesses because now we have real corporate finance activity, we have real interest rates, and you have effectively two-way markets.
in lots of places around the world.
Speaker Change: with respect to central bank activity, with respect to buyers and sellers of assets.
And, of course, if you're well organized,
Speaker Change: You can prosecute that in an orthodoxical way. We have, during this period, under leadership of Sharon in the Office of CFO, been quite prudent on the deployment of those risk-weighted assets through our Chief Risk Officer, Charles Smith. How do those risk-weighted assets and gap balance sheet get deployed to clients?
Speaker Change: One mistake, Glenn, is you can lose the forest or the trees and not think about all the client touchpoints.
Speaker Change: across the integrated firm we're calling it. Or you can actually lose sight of the real drivers of what makes that client valuable to the institution.
Speaker Change: And now we've had six, seven years of really focusing on that and preparing ourselves for the ability to expand.
Speaker Change: Unknown Speaker Our wallet at a time where we believe the denominator is growing as well. It's a little trickier to try to expand the numerator of your wallet when the denominator is not moving, as was the case with zero interest rates, because you are effectively not a price maker and you are potentially going to be taking some concentrated risk.
Speaker Change: But here now with the cycle having transitioned, we were able to lean in first across our sweet spot, which is equities.
Speaker Change: Unknown Speaker ...to have not just prime brokerage, but the cash equities and derivatives businesses really start to generate above cost capital ROEs.
Speaker Change: So the entire basket of equities offering to our clients, but then in fixed income, which has been extraordinarily stable in what is intrinsically an unstable business, given the very different businesses of commodities, interest rates, foreign exchange, and credit. The leadership there, Halleck and Hoarder, have done a brilliant job of really running a durable business with a lot of annuitized revenue around a well-considered financing,
have in classic underwriting.
Speaker Change: such that when we now go into this investment banking cycle, where we do think there is going to be an acceleration of classic primary and secondary offerings.
Speaker Change: We're already doing business that looks like that inside of sales and trading lending businesses client advice
Speaker Change: and of course, there's real collegiality across the investment bank. The last piece to this.
Speaker Change: is what we've been waiting for, which are M&A tickets, which, as you know, are the top of the waterfall, the highest margin product that then have multiplier effect through the whole organization, and that has begun.
Speaker Change: The pipeline is very strong, depending on how you measure it, the strongest it's been in five to 10 years, maybe even longer. And we are excited about pushing that through to the rest of the investment bank.
Speaker Change: What I've said, and I would repeat here too, just to give a lengthy answer, Glenn, is that on ISG wild share, you know, we are clear that we want those share gains to be durable, which is why we didn't go with quantification. We want those gains to be ones that are not gains by reaching concentration risk, counterparty risk, but that clients know we are serious
Speaker Change: Director, World Class Wealth and Investment Management Businesses with our investment bank. And the proof is in the pudding. This past year, 100 base point gain, plus or minus in the investment bank to roughly 15% wallet in a growing denominator. And as you can tell, given we've been quite disciplined on RWA growth against that, and you see the operating leverage in the income statement, it's fair to say the institution at large is very excited.
Speaker Change: That was a very full answer. I really appreciate it. I'll cede my follow-up to the group. Thanks.
Thanks, Glenn.
Hello, I'm Edward Pick.
Speaker Change: We'll take our next question from Ibrahim Poonawalla with Bank of America.
Good morning, Ibrahim.
Speaker Change: Hey, good morning. I guess maybe to some, I know this is you got justice in prior calls.
Speaker Change: Unknown Speaker But as we think about just investments in systems as it pertains to AML, BSA on the wealth management side, if you don't mind addressing where the firm stands there today in terms of sort of meeting all the highest standards from a regulatory compliance standpoint, and I think the essence of my question is
Speaker Change: As we think about the growth opportunity in terms of international wealth, do you need to sort of get your ducks lined up on the AML, BSA front in order to pursue those more aggressively or actively?
Thanks.
Speaker Change: Thank you for the question. I think that the way I would answer your question is more fulsome than just specifically looking at one particular sector.
The point that I would underscore is
Speaker Change: The results themselves in this business speak for themselves in terms of the investment, the ability to attract clients, both existing assets, as well as new clients across.
Speaker Change: for the Wealth Management Platform. So that's the first point that I would make. Second point that I would make is that over the course of the, not just the last year, but really multiple years,
Speaker Change: We've been investing in all of our processes and our systems in order to engage and make sure that we have a robust infrastructure in order to be allowed to grow broadly and meet all of our growth objectives.
Speaker Change: Unknown Speaker And that has to do with everything that I mentioned across the technology side, across better understanding our data, better servicing our clients.
Speaker Change: in terms of investment dollars and in terms of the underlying infrastructure.
Speaker Change: So what we're trying to do and what we've been actively pursuing is making sure that across the firm, not just specific to wealth, we can service and look and impact all of our clients.
Speaker Change: and moreover, you can see that very well in terms of our ability to actually continue to attract assets.
Speaker Change: We'll be making all of the necessary investments to continue to be world-class, both across people and our technology.
Transcription by CastingWords
Good. Thank you. And I guess.
Speaker Change: Separate question, slide 13, with regards to the investment into the bank, just remind us in terms of where we stand in terms of the integration of the bank and as we think about with some of your peers where the bank and the wealth businesses probably are fully integrated, are we there yet? And then what's the opportunity when you think about just deposit growth from your wealth management clients that you can bring on board?
We're definitely not there yet.
Speaker Change: We are, we still have a lot of to do when we think about the bank.
Speaker Change: is an incredible growth engine across the institution. If you look at our bank, we obviously started our bank much later than many of the peers that we now compete with from a commercial bank perspective.
Speaker Change: We have a very different deposit mix than others. And what's so interesting, our deposit mix, is that over 70% of our deposits come from our wealth management clients.
Speaker Change: and we can do with servicing and growing that deposit based over time.
for Time.
Speaker Change: As you think about the lending side and you think about where we are, we continue to see opportunities to help our wealth clients as they expand their lending needs and we better understand their portfolios.
Speaker Change: Moreover, just holistically, as Ted mentions in the slide, there are places where we are still working to move eligible ISG assets onto the bank. That should help institutional securities as you think about the actual funding profiles associated with those assets.
that.
Speaker Change: there are many places that when you look over all the integrated firm the bank plays an important role in making sure we have the ability to see that.
Speaker Change: Yeah, Abraham, I'll tag on to that deposit side. We're, we're going to serve as clients across all three channels in in wealth.
Speaker Change: The FA Channel, the Everyday Transaction Offering, Cash Plus type of offering in E-Trade. We're going to continue to focus on checking accounts with competitive rates.
Speaker Change: Integrating Products into the Client Journey as they move along with E-Trade to potentially a classic FAA. And then, as you know, we've been really banging the drum on Workplace.
Speaker Change: where we can partner with companies to reach employees and on the loan side as Sharon said we've been
Sharon: Growing loans steadily. The loans number in wealth, as you know, was about 80 in the fourth quarter of 18. That's doubled to 160. We grew that every quarter in 24. You know, we're a bank, we lend and we have to do that. In the context of deepening relationships, we lend.
to about 16% of our households.
Sharon: and the best-in-class peers are higher. They're, you know, they're 50% higher, mid-20s. So there's, as Sharon has said, there's real opportunity. And then
Sharon: that we are growing both deposit and loans in a smart way over, you know, the next 5-10 years. You can expect these numbers to continue to move higher.
Thank you. Thank you.
Speaker Change: We'll move to our next question from Brennan Hawkin with UBS.
Unknown Speaker 05.
Speaker Change: Morning, Brennan. Morning. Hey, Ted. Good morning. How are you? Um, we'd love to
Speaker Change: Follow up on that, some of that last discussion, and talk about the loan growth, because it seems like loan growth was the trends were better than certainly many were expecting last year. And it feels like
Speaker Change: given the expectation for capital markets reopening, you know, improving risk appetites, we should continue to see that building momentum. Could you talk a little bit below the surface around what you're seeing on the loan side? You know, you spoke to it at a really high level before, but I'd just love to drill down and hear what you're seeing more recently. And then, where do you stand from a capability perspective? Do you guys need to continue to build that out? Or do you feel like, you know, you're fully ramped up from a competitive?
perspective.
Speaker Change: Thanks, Brennan. I'll take that. As I mentioned in my prepared remarks, as you alluded to, what we saw, if you'll remember, over the last, since really interest rates, when they began to rise, we saw a decline in the use of the SBL product. And we often actually saw an increase in paydowns. Unknown Speaker
Speaker Change: What's changed over the last particularly we noted it this quarter is we've seen that pace of paydowns decline
Speaker Change: Unknown Speaker And then we've actually seen an increased use of the lines. The important part there is, as you know probably better than anyone else, is that that product is one that is often generally used in periods of time by our clients when you actually see markets rise.
Speaker Change: And I wouldn't be surprised if we also begin to see it from a tax perspective as we enter the second part of the quarter.
In terms of capabilities,
Excuse me.
Speaker Change: In terms of capabilities, I think we have the capabilities. There's clearly places you can still look from a tailored perspective. There's still capabilities when you think about the assets that we can move from an eligible perspective, from the ISG side onto the bank. So it's a different portion of the question in terms of what we're doing from a legal entity perspective. But overall, I think we're very happy with what we have
Speaker Change: And I think integrative firm matters here because there is the ability for us now in our risk committee sessions.
Speaker Change: to look at tailored lending as a form of sophisticated structured product that has some institutional qualities to it. So it's not so much the classic bifurcation of division by division, but more of a firm lens across what the commitments are at a time when we should see acceleration in both of the major sides of the house.
Speaker Change: That's interesting when thinking about utilizing the balance sheet. Thanks for that.
I'm really sort of happy to ask this next question.
Speaker Change: because, because of the focus on cash in the past year or so. And now I don't have to worry about drawing Sharon's ire. When I ask, it seems, it seems like we're likely to have a pivot, you know, around cash trends. You know, we've got stability and even a little growth in the sweep. And, and when you think about prior easing cycles, you know, what has how long has it taken before we see some of the recycling.
Sharon Yeshaya, Unknown Executive
Speaker Change: Brennan, it might be the first time in two years that I'm excited to answer a sweeps question. I am really encouraged by the signs that we see on the underlying sweeps dynamic. It often actually plays to the fact that
Speaker Change: There's a lot that our clients can do and a lot that our clients are interested in right now. You see that in the transactional level of activity and all of the underlying trends as it relates to sweeps.
Speaker Change: What you saw this particular quarter, which I found to be quite encouraging and fascinating in terms of the sentiment of the retail investor actually changing, is that we saw a really strong
Speaker Change: increase of the flows moving from sweeps into market. So it's not as though they aren't using that cash to invest, they're just using that cash to look at it more transactionally to go into market and asset level products. That's point number one.
Speaker Change: Point number two is you began to see the fixed income products that were over one year mature and just sit there.
Ed.
Speaker Change: The final point is, you're just seeing less activity go into various types of, quote, cash alternatives. And in my mind, that just means that this cash, now that rates have come down, that markets are going up, it feels to be somewhat more normalized, it's acting transactional, which is what we had always assumed, there'd be some level of transactional cash. And to your point, as that rate differential goes down, and it's no longer, you can earn
Speaker Change: and his Justin Markets, and what you're seeing is that that is actually taking place in the transactional line-ital.
Speaker Change: We'll take our next question from Mike Mayo with Wells Fargo. Morning Mike. Hi. Well last, Ted, last quarter you were
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Speaker Change: Are your backlogs up? Are backlogs a record? I'm not hearing record backlogs anymore. I hear up but not record. I'm just wondering how much you can monetize the backlogs that were in place in some cases, I guess, you know, one, two or three years ago.
Speaker Change: Yeah, depending on how you measure it, whether a volume or unit, you know, number of units or sort of ag value, you see pipelines in the M&A product that are the highest in seven years.
Speaker Change: Kassi was filled for great names over a weekend or over a 24-hour period. We haven't seen that since really 2020, and that was...
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Discussions for IPO potential, not just as an option.
Speaker Change: versus selling to another sponsor or selling to a corporate, but in fact
Speaker Change: Unknown Speaker A real option. So I am you're right. I've been I've been bullish on this.
It has taken some time.
Speaker Change: and I think we will have some unpredictability around regulation in one jurisdiction versus another. But I think the demand for some corporates to get bigger, to purify their businesses, given the deglobalization effect, given climate, given interest rate transition, they have things to do.
Speaker Change: Assets, given where prices are, and that sort of mismatch of expectations versus the reality of what the market's willing to pay for good companies, I think that's really starting to come together.
Speaker Change: I would also say that within the investment banking cylinder, i.e., M&A vs. ECM vs. DCM, those sub-lines, as you know, have rotated over the last...
for six quarters
Speaker Change: A couple quarters ago was a great ECM quarter. This past quarter was a DCM quarter. That also is healthy. It suggests that people in the Treasury or CFO's office
Speaker Change: of large corporate clients are looking at all the toggles so it is an activity based business.
Speaker Change: and I think 25, as we move through the year, if we continue to have reasonably constructive markets and reasonably predictable interest rates and reasonable sort of geopolitical backdrop, I think we are going to see increasing activity as the year goes on.
Speaker Change: So, you said the best backlog in seven years was that for mergers or all investment bankers?
Largely, largely, largely M&A number, Mike.
Globally
Speaker Change: Okay, so yeah, that's a I guess that would be a lagging
Driver to the Whole Capital Market
name, and for you guys.
Speaker Change: When you think of a multiplier, yes, yes, by the way, yes, yes, yes on that, Mike, exactly as you've been saying all along, that that is the last piece.
Speaker Change: Discussed at a sort of free board approval level and then there's some unpredictability and it gets tabled, but the sort of the the the inventory around stuff that is idea flow that is Near announcement that piece of it is increasing and it may not result ultimately in A merger ticket it may actually turn into the company being carved out and taken public right
Speaker Change: I think what we are increasingly confident about, again, if the market and the economy holds up, and those are, you know, those are ifs, but if they do, that you're going to see the entire corporate finance cylinder really kick into something that maybe looks like, you know, mid 90s activity, classic corporate finance.
The End
Thanks for watching.
Speaker Change: Operator, can you hear us? We can move on to the next question.
Speaker Change: Stephen, your line is now open. We'll take our next question from Stephen Chubak with Wolf Research.
Stephen Chubak: Morning, Steven. Thanks. Good morning. Good morning, Ted. Good morning, Sharon. So I wanted to ask on the 30% wealth management margin target, just taking a step back, you're already running at 29% on a core basis.
Stephen Chubak: Sharon, you cited a number of headwinds in the coming year, whether it's just NII inflecting, AUM growth, capital markets feed tailwinds. I'm just trying to understand what would preclude you from getting to that goal this year, and why isn't the longer term aspiration something north of 30, just given significant operating leverage in this model at scale?
Speaker Change: So, I'll take that, Steve. I just juxtapose this call to where we were a year ago and a lot of the conversations, obviously, as you think about the change in the rate environment, but then also, very importantly, the change in the asset management fee revenues.
Speaker Change: That has been a very large contribute to the point that you're making where we've seen the fee-based increase, we've seen the AUM, and then we've seen the revenues.
Speaker Change: But I don't want to lose sight of the fact that we're investing in this business.
and Mighty Margin!
Speaker Change: Places where you have the top of the funnel into the advisor-led channel.
Speaker Change: All of that's working. So the last thing one would want to do is put a target out there, see a change in dynamics associated with all of a sudden markets go down, or there's some shock that we're unaware of. You're unable to meet those targets and you pull back investments. That's not how we want to run this.
Speaker Change: As Ted said in his prepared remarks, the word across this entire, these scripts is durable. We're looking for durable margins. We're looking for durable growth. We're looking for durable returns. All of that comes into play as we think about the actual investment in the business over
Speaker Change: Yeah, and what I would add to that is, you know, the extraordinary performance of wealth, you know, you just look at the fact that revenues grew by 8% year over year, but, you know, PBT grew by 19%.
Speaker Change: So that is, that's the kind of progress against larger numbers that we are excited to see and a full contribution to the firm outcome.
Speaker Change: That's great to hear. Just one quick follow up, Sharon, you referenced the recently announced partnership with Carta, and was hoping to double click into some of the tangible financial benefits from leveraging that partnership.
Speaker Change: Just given the number of plan participants, it's been pretty stagnant over the last few quarters, but certainly feels as though this could be a potential accelerant, maybe help reinvigorate growth within that channel.
Speaker Change: Yes, so let me just first I'll take the second part of your question first because there is some stuff to unpack when you actually look at the underlying participants.
Speaker Change: We have talked about and we've seen, we will see a transition from some of the stock sale plans.
that we have sold and announced.
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Speaker Change: So I just want to be clear that that, there are other underlying factors in there. The other point that I would mention is we have not been in a cycle in which, especially over the last two years, that you've seen a lot of monetization events. And so you have changes really in the workforce dynamics for many of these companies where you might have seen headcount reductions, you might have seen acquisitions in which some of those stock plan participants decline.
Speaker Change: because we continue to meet with mandates and we continue to have expanded corporate relationships.
Speaker Change: So that's important as we talk about where are we investing. We are investing and we're seeing progress as we continue to have greater breadth of corporates that we service within the United States in particular.
Speaker Change: Now, as it relates to CARTA, and I'm glad you mentioned and asked the question is, that's a really exciting partnership, especially as the capital market cycle turns.
Speaker Change: So, as you're likely aware, CARTA does service the private companies in particular, and what we have now done in the relationship that we announced at the
Speaker Change: and at the end of last year, was that we have an exclusive partnership with Carta, which means that they will refer those private different stock plans or different corporate companies to Morgan Stanley as they move into going public. It's really a.
Sharon Yeshaya, Unknown
Speaker Change: We'll move to our next question from Christian Butler with Autonomous.
Morning, Christian. Thank you. Thank you.
Christian Butler: Good morning, Ted and Sharon. Maybe on wealth management, organic growth, first of all. So if I look at flows over the last three years,
Christian Butler: Total flows have been somewhat short of that sort of 1 trillion target and have been at the lower end of your 5 to 7% organic growth target. So maybe just
Christian Butler: Talk through how you think about the ability to accelerate organic growth.
Christian Butler: going forward and then maybe confidence level and that's 1 trillion targets.
Christian Butler: So the, what I would like to note here is, this is a really, I think in the environment that we've been in the last two years, I think this is a remarkable outcome.
Uh...
Christian Butler: Especially if you look and you compare it to our peer set, and anyone who's been able to actually aggregate assets, we're best in class.
You aren't seeing modernization events from workplace corporates.
Christian Butler: So, you add the self-directed channel, you're not necessarily seeing as much money coming in.
Christian Butler: From the workplace side, you're not necessarily seeing monetization events, so people aren't getting that cash. You're not seeing companies going public. Those things are beginning to turn. And so these results were really led from the advisor-led channel, from new clients and existing clients, new clients being really important. And so I think that there's a lot of opportunity there in terms of the five to seven percent.
Christian Butler: Yeah, what I'd add to that Christian is sort of a big picture big picture answer and a little picture answer
Christian Butler: My little picture answer would be, just taking a look again at slide nine, fee-based flows. You know, that is the, that's sort of the core of the funnel.
and we've been talking about that every quarter.
Christian Butler: and Jed Finn running well, very much has been focused on that too.
and you see that the number
just continues to move.
Unknown Speaker 109 billion.
Christian Butler: last year or two years ago, $123 billion in 2024. So fee-based flows, you know, that's kind of the ultimate outcome. And you see that we are seeing this incremental activity now in the self-directed product from clients who they kind of have the kind of experience that we talked about when they make their way to a financial advisor, it could prove very sticky. My big picture observation, though, would be, one, and I know you know this, but
Christian Butler: Joe Disalis yeni sesi sur baş getting what's happening in the market over the last year of what we did this call a year ago the combined assets for wealth and investment management stood at 6.6 trillion
Speaker Change: And as you know, we said we're, you know, we're gonna we're gonna get to 10 and we're going to keep going. And in a year we've gone from six, six to seven, nine.
So, that is a $1.3 trillion in a year.
Speaker Change: Now, of course, we've had the kind of markets that are, you know, take asset prices higher. But that, I think, speaks for itself in terms of our ability to continue to stay on what really is what I would have.
folks paying attention to, which is just this
This commitment to get to 10.
Speaker Change: and whether that takes X years or X plus one years or X plus two years, we want to get the kind of assets that ultimately work their way through the funnel. And you say, well, what's the KPI there? And I see the KPI there is going back to slide nine, which is are we increasing the TAM of relationships?
and are we doing that across
The financial advisory
Lever
Speaker Change: through Workplace and through Self-Directed. Are we doing all three? The answer is yes.
Speaker Change: are growing materially, but that ultimately, we are translating that across a broader number of clients, again, 19 plus million, and that that ultimately, at least for some of them translates into financial advisory fee based flows. And that's the right side. So that's kind of the way we're thinking about it.
Christian, in the context now of the integrated firm.
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Stephen Chubak: Very fair. Thanks for the full answer. Maybe another quick one here on just a comp leverage, very strong expense discipline, especially in ISG comp.
Stephen Chubak: and I'm sorry if I missed this in the prepared remarks, but is the 2024 four-year ISG comp ratio of 31% kind of a good place to run going forward, obviously as human revenue continues to grow?
Speaker Change: Yeah, it's obviously Christian, as you can tell, we look at comp on a full year basis. And you did have outperformance as it relates to the revenue in the fourth quarter on a relative basis. And so you do see changes within that comp, we don't give full year guidance specifically on one expense line, we manage the company holistically. When we think about our expenses, we're looking at our overall efficiency of the firm.
Speaker Change: There's a thirty percent efficiency ratio goal that we have stated over the long term.
Speaker Change: And what I'd add to that is, listen, we're running a talent business.
Speaker Change: And so we pay for performance. And performance comes in, you know, sort of the upside for our partners comes in two forms. One is through compensation over many years, which is why tenure matters. And of course, total return in stock ownership, which is, as you know, a critical part of partner compensation. So that is the thinking. Of course, when you have good years, you experience some operating leverage in comp, which then flows to the
Danielle Pletka, CEOιά
Speaker Change: People and structures and risk management folks as they begin to kind of gestate over the two, three years after that. So we feel like we came out at a good place there.
Speaker Change: Hi, I'm Edward Pick, I'm the one who's been working on the first time in the world.
Speaker Change: Thank you. And before we move to our next question, in an effort to get through all of the remaining questions in the queue, we ask that you limit yourself to one question for our following question. We'll move to Devin Ryan with Citizens JMP.
Devin Ryan: Hey, Devin. Thanks so much. Hey, Ted. Hey, Sharon. I just have one on investment management. Slide 12, you lay out your parametrics been a great success story in the alternatives bucket. Investment management overall, it's still less than 10% of firm wide revenue. And, you know, I know the alls bucket specifically is an area of focus. But I'm curious areas like private equity, private credit, you know, there's a lot of secular growth there. I know
Aaron Mazzrillo, Co-Founder & CEO, Morgan Stanley
Devin Ryan: So when we look at, you know, what I would focus you on as we think about investment management more broadly is the fact that, as you know, we're, we are looking to create a diversified platform. And we obviously were able to do that, as you mentioned, through acquisitions. And specifically through the acquisition of Eaton Vance, when we think about both parametric, and a lot of the fixed income products, we're beginning to see a
Synergies
across the wealth management business.
Devin Ryan: across MSIM, and across all of the initiatives that we laid out at the beginning.
Devin Ryan: So remember, what we said is we thought we there was more to do on parametric specifically on the retail side, that's working, we're seeing increased participation from our FAs, retail clients, and even asset managers to leverage that parametric product. We have also noted that we plan to think about things like fixed income, and use fixed income and see international distribution that was evidenced this quarter, a lot of the flows that we saw there have to do with international distribution.
Devin Ryan: So the synergies themselves are working already. I think there's much more to do.
Devin Ryan: Just on bringing the two franchises together, and as we see continued investment with different parts of private credit, different parts of private equity, different parts of infrastructure, we will take part in those secular growth trends as they move forward.
Speaker Change: We'll move to our next question from Dan Fannin with Jeffreys.
Speaker Change: Morning, Dan. Thanks. Good morning. Good morning. One more question just on wealth. Can you talk about advisor retention, you know, kind of recruitment and backlogs here and then you used to talk about the companion accounts, you know, within wealth and workplace. So curious if there's any update on, you know, where that sits and some of the progress you're seeing within that initiative.
Speaker Change: Yeah, I'll take that. So in terms of the Workplace in general and how we're beginning to see the transitions and the companion account
Speaker Change: What I would focus you on is companion accounts were something that we were looking at at the beginning of time when we had put together the E-Trade and the Morgan Stanley platforms. That integration is largely complete. What we're more focused now is actually better understanding the channel migration and those are the numbers and statistics that we've been giving over the last couple of calls more specifically. So what I mean by channel migration is we have workplace assets that began at some point
foreign affairs, Food,
Speaker Change: The move towards first transactional and then that movement from transactional flows into fee-based So those are more of the metrics that I'd point you to on the forward When we think about being able to mark ourselves to market from a funnel perspective
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We'll take our last question from Gerard Cassidy with RBC.
Morning Gerard, thank you.
Speaker Change: So needless to say we're constantly running a number of stress tests as it as you think about the risk
Geopolitical, macro in nature, counterparty risks.
Speaker Change: And that's been a lot of the focus when you think about the velocity of the balance sheet and all of the capital metrics that we have is making sure that we're in a position to constantly refresh and look when we think about if we look back at any of the episodes that we've talked about and then a lot of the risks that we've learned, we're constantly thinking about where are their tall trees? How do you see the velocity of different positions that you have?
Speaker Change: risk of you not necessarily solved for, because generally speaking, there is something brand new that one I don't know that anyone knew that there would be a global pandemic.
Speaker Change: Director of the Global Pandemic Research Center at the U.S. Centers for Disease Control and Prevention.
Speaker Change: You look at the risk, you look at tall trees, you think about being able to bring down, what can you bring down quickly, and how do you think about velocity, and then how do you run scenarios. What does it mean for higher rates, what does it mean for lower rates, and we look at different geographical exposures as well to try and better understand how we can manage all of that dynamism as you move forward.
I guess what I'd add to that, Gerard, is
Speaker Change: Most of the risks that we have been looking at in this period are, and Sharon kind of went through a whole panoply of them.
Speaker Change: They are largely in the buckets of either the implications or the reality of regime change around interest rates.
Speaker Change: that the period of zero interest rates and zero inflation is now past.
Speaker Change: and that this hot cold that we feel now tilted more towards inflation and if there was a downside risk it would be something that felt more stagflationary, that we are running risk scenarios around that, then there might be periods when it feels a little colder again and that is all sort of imputed in the language of interest rate policy around the world. So that's sort of bucket one, the end of financial repression.
Speaker Change: And then bucket two is the geopolitical uncertainty and tension that we're seeing that has built over the last number of years and will continue. And that's important to us because, of course, we're running a global business.
Speaker Change: So, there may be places where there are re-equitization opportunities. There may be places where there is outsized risk in behalf of clients and we have to navigate that as well. So, those are the two major buckets, I think, of our time and that is why it's so important
Speaker Change: that we were able to put up a quarter that concluded a year where we had the kind of consistency we had on the top line, on the bottom line.
Speaker Change: We can't undertake that that will be the case in every market context, but if you think about the year we just had, there were multiple years within that year.
Speaker Change: And the fact that the enterprise through the businesses we're in was able to generate that kind of consistency on the top and bottom line, I think augurs well for a period where we think all things being equal, the denominator of opportunity should improve.
Speaker Change: There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you everyone for participating. You may now disconnect and have a great day.