Q2 2019 Earnings Call
Right.
Yeah.
Okay.
[noise] [noise] [noise] [noise] [noise] [noise].
[noise].
Good morning. This is your on your <unk> head of Investor Relations.
[laughter].
Yeah.
And Morgan Stanley Dotcom. Today's presentation May include forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially.
Please refer to our notices regarding forward looking statements and non-GAAP measures that appear in the earnings release.
This presentation may not be duplicated or reproduced without our consent.
I will now turn the call over to Chairman and Chief Executive Officer, James Gorman.
Thank you Shirley good morning, everyone and thank you for joining us.
The second quarter was met with a mixed market backdrop, the quarter began on a strong footing that macroeconomic and political uncertainties affected sentiment and conviction.
Despite the sharp decline in interest rates and the slowdown in global growth the business model held up well.
Collectively we produced revenues over $10 billion, an hour, we have releven percent and an ROTC of nearly 13%.
Our year to date efficiency ratio of 71% below the 73% target reflects our commitment to managing expenses tightly given the risks to global growth.
Despite the challenging environment institutional securities results were solid with aggregate revenues over $5 billion.
Our equity underwriting franchise performed well and continued to bring new companies to markets.
Issuers were opportunistic and took advantage of fertile markets when available.
In advisory M&A announcements picked up as the quarter progressed.
We expect our equity franchise to remain number one globally.
And fixed income results were at the lower end of our expectations.
Wealth management produced record PBT and a margin of 28% at the top end of the guidance range, we gave through 2019.
These results illustrate the resilience of the model.
Higher asset levels, and strong loan balance growth more than offset the effects of lower interest rates.
Investment management had very strong second quarter results.
This business has meaningfully involve evolved since we Rio reorganized at approximately four years ago under Dan Simkowitz his leadership.
While results do have the potential be lumpy in this business, obviously to put the growth in perspective revenues over the last 12 months are up nearly $900 million since full year 2016.
Moreover, increased net long term inflows should aid ESAB asset management fees going forward.
We continue to invest in the business and look forward to sharing more about a mis management in the months ahead.
Turning briefly to the results of this is see CCAR exam.
In late June we announced that we will increase our quarterly dividend for the sixth consecutive year to 35 cents a share quarter up from 30 cents a share.
We also intend to increase our repurchase common stock from.
4.7 billion to 6 billion.
Collectively this represents prop approximately a 100% gross payout.
In addition to increasing our return of capital to shareholders, we're able to invest in the business and completed the acquisition of Solyom in the second quarter.
We look forward to continuing to work with the federal reserve and returning high levels of capital in future years.
All in all we we produced a solid quarter in a difficult environment topped with a strong see CCAR results with that I'll now turn it over to John to discuss the quarter in greater detail.
Thank you and good morning in the second quarter from revenues were $10.2 billion essentially unchanged from the prior quarter.
PBT was $2.9 billion and EPS was $1.23.
Returns were inline with our target ranges within our ROE, we have 11.2, and an ROTC of 12.8%.
Given the global growth outlook is uncertain, we remain focused on expenses total noninterest expenses were $7.3 billion on a year to date basis total non interest expenses declined 3% and our expense efficiency ratio was 71%.
Focus on our more controllable sources of spend particularly marketing and business development and professional services continues to help self fund, our ongoing investments, including a technology workplace enhancements and the integration of sodium.
Now to the businesses.
Institutional securities generated revenues of $5.1 million in the second quarter, a 2% sequential decrease stronger performance in the Americas, particularly investment banking was offset by relative softness in Asia.
Non comp expenses were $1.9 billion for the quarter, a 4% increase from the prior quarter.
And compensation expenses were $1.8 billion, resulting in a compensation to net revenue ratio of 35%.
In investment banking, we generated revenues of $1.5 billion up 28% sequentially with advisory equity and debt underwriting all improving versus the first quarter.
Despite lower completed M&A industry volumes advisory revenues increased 25% quarter over quarter to $506 million underwriting results were resilient considering the mixed backdrop.
Equity underwriting was a very strong recovering from a challenging first quarter.
Revenues were $546 million up 61% sequentially.
Equity volumes picked up across all regions.
IPO issuance rebounded strongly as the U.S market normalize following the government shutdown.
We also witnessed a healthy pickup and follow on activity.
Fixed income underwriting revenues increased 3% sequentially to $420 million, despite lower industry issuance volumes in investment grade bonds and leverage loans.
Overall advisory and underwriting pipelines remain healthy.
Ceos remain engaged focusing on potential M&A across the size spectrum as an investment for future growth.
Geographically while activity in the US remains strong M&A activity in the Asia Pacific region is down notably compared to last year, driven by reduced cross border volume.
As we look ahead macroeconomic uncertainty and geopolitical events can impact the conversion from pipeline to realized but for now the environment continues to support activity generally.
In equity sales and trading we retain our leadership position and expect to be number one globally.
Revenues were $2.1 billion, increasing 6% quarter over quarter.
Across products activity take peaked mid quarter before subsiding in June .
Prime brokerage revenues rose sequentially consistent with the seasonal patterns in Europe .
Client balances grew versus one quarter at client conviction remains subdued.
Cash revenues improved quarter over quarter, driven by the Americas and derivative revenues were essentially flat.
Fixed income sales and trading revenues were $1.1 billion in the second quarter.
This represents a decline of 34% from a seasonally strong one quarter.
Which had significant structured activity compared to a more challenging backdrop this quarter and limited structure activity revenues.
Macro revenues declined sequentially, the sharp move lower in us interest rates had a negative impact on the rates business.
Additionally, persistent low volatility dampened FX results.
While credit complex results declined sequentially. They were strong by historical standards driven by securitized products performance.
Credit trading businesses benefited from robust client activity and balance sheet velocity was maintained.
Commodity revenues declined quarter over quarter on lower trading results.
Investments increased a $113 million sequentially, driven by $176 million in realized gains associated with an investments initial public offering and subsequent mark to market gains on the remaining holdings subject to sell restrictions.
We hold a series of strategic and business related investments around the world and various platforms and exchanges and this is another example of our ability to monetize these investments.
Wealth management reported record revenues and pre tax profits of $4.4 billion and $1.2 billion respectively.
The PBT margin was 28.2% the highest margin post the acquisition.
Asset management revenues were two and a half billion dollars up 8% quarter over quarter benefiting from the improved asset levels. We saw at the prior quarter's end.
Transactional revenues were $728 million.
This represents an 11% decline from one two which included large gains in our deferred compensation plan investments.
Retail investors remain cautious given record market levels sharp intra quarter market swings and heightened levels of uncertainty.
Transactional activity remained subdued but has been consistent over the last several quarters.
Total client assets ended the quarter at 2.6 trillion dollars, 4% higher versus the prior quarter.
Net fee based asset flows were $10 million.
Net interest income declined to $1 billion. The sequential decline was largely driven by two factors one greater than this expected deposit outflows due in part to tax payments, resulting in a higher cost liability mix and to the divergence between LIBOR and fed funds, which impacted the spread on our variable rate loans.
On a year to date basis net interest income is up 2% and including the impacts of mortgage prepayments was better than our stated expectations of year over year mid single digit growth.
Looking ahead.
The shape of the forward curve and our deposit mix will continue to affect Eni.
We now expect Eni X prepayments in the third quarter to be largely in line with the third quarter of 2018 with potentially a more material impact in the fourth quarter. If the forward curve is realized.
We continue to expect loan balances to grow by mid single digits for the full year.
Loan balance growth in the quarter was healthy total bank lending ended the quarter at $74 billion, increasing $3 billion from one Q on strong growth in Sps and continued progress in mortgages.
Loans have grown 6% year over year, reflecting deeper client engagement.
Other revenues were $120 million, increasing 48% sequentially as a result of realized gains from our investment portfolio.
In the quarter these gains largely offset the negative impact of prepayment amortization on net interest income.
Total expenses were essentially unchanged compared to the first quarter.
Lower compensation expenses, driven by movements in our deferred compensation plans were partially offset by seasonally higher noncompensation expenses as well as solyom expenses and the cost related to ongoing integration.
We closed the Solyom acquisition on May Onest and have been pleased with the progress.
We will be investing in our workplace offering for the next 18 to 24 months.
This business is on very strong footing and over the medium term the margin will improve as revenues rise.
Investment management produced very strong results revenues of $839 million, where the highest for the segment and over five years, improving 4% sequentially.
This was primarily driven by strength in investments the business saw strong net flows and we continue to see positive momentum in capital raising.
Investment revenues of 247 million were driven by continued strong performance across our private funds, including in our private equity Asia real estate and infrastructure businesses.
Total AUM of $497 billion increased 4% versus one Q with long term AUM of $334 billion also increasing 4%.
Market related growth and positive net flows across all of our asset classes drove the higher long term a U M.
Asset management fees of $612 million were essentially flat to the first quarter.
The higher management fees on the back of rising average AUM over the quarter were offset by the seasonality of performance fees. As we have mentioned before most of any year's performance fees will be recognized in the first and fourth quarters.
Total expenses were up modestly to the first quarter on the back of higher revenues.
Turning to the balance sheet total spot assets.
Rose to $892 million as we continue to support our clients derivatives in lending activity within sales and trading also drove an increase in our R.W. ways, resulting in a decrease in our common equity tier one ratio of 6% to 16.3%.
During the second quarter, we repurchased approximately $1.2 billion of common stock.
For 26 million shares at 40, 453, and the board declared a 35 cents dividend per share.
Our tax rate in the second quarter was 22.6%.
We continue to expect our full year tax rate will be similar to the 2018 tax rate, excluding intermittent discrete items.
Looking ahead to investment banking pipelines remain healthy wealth management fee based revenue should benefit from higher asset levels and investment management remains focused on growth and delivering in key increased value to clients.
The third quarter is off to a strong start but we are cognizant of the typical summer slowdown and that conviction remains lackluster compared to this time last year.
The uncertainties around global growth have risen, which may impact confidence and activity levels.
That said, we remain committed to our strategic objectives and expect to perform well if markets remain open and functioning with that we will now open the line to questions.
Thank you ladies and gentlemen at this time if you do have a question. Please press star and the number one key on your Touchtone telephone. If your question has been answered and you wish to remove yourself from the queue. Please press the pound key.
And please limit yourself to one question and one follow up.
Our first question comes from the line of Brennan Hawkins S. Your line is open.
Good morning, Thanks for taking the question.
I would like to start.
John you walk through some of the deposit dynamics that impacted Eni this quarter that was helpful.
Hi, curious about what you are seeing since tax season, and your outlook for deposits do you think that that remixes is effectively going to going to remain.
Off.
Balance sheet or do you think there will be some return of some of those lower cost deposits as we go forward from here.
Sure.
Let me try to give you a little bit more color.
Brendan.
In terms of the actual deposits remember there are three buckets that sorta impact and III, which.
It's really the mix of deposits the rate profile and then.
Obviously the balance in terms of our deposits, we saw about $10 billion of outflows in BDP.
Some from larger tax payments as we mentioned some other just as people continue to.
Look at their cash as an.
And investment.
Vehicle and they have seen some higher yielding alternatives, but they are still pretty defensive.
We did have lower rates that obviously impacted both yields and prepayments and then lastly, we had increased balances so that was a positive.
The one thing that we would say on the deposit side that was positive is that the replacement of those $10 billion of deposits. Although at a higher rate were primarily driven from our wealth channel. So we had a lot of demand for our our different products as we continue to build out that product set.
And so that.
Continues to be a nice source to bring new money into the firm.
In terms of what happens going forward I think thats a trickier question, we've seen post the tax payments, probably the last five or six weeks of stabilization.
And those deposit levels, but again customer behavior. The forward curve, what happens to rates in the competitive dynamic will drive ultimately that outcome.
But I think we feel very good about the deposit products that we've been rolling out.
We've been continuing to enhance our.
Our cash management.
Products, we came out with a new high yield savings product that had a lot of interest from the field. So again.
We should be able to source deposits.
Pretty easily if that if that trend continues.
Okay terrific. Thank you for all that color. That's that's really helpful and then.
Another question Youve identified the trade web, Mark, which is and Tailwinds, which was.
Great to see clarification on that.
Another point that.
We had questions we had heard from investors.
On the back of the results were around the Mark in investment management.
That seemed strong again this quarter.
Are the is that just primarily monetization and we should think about as chunky was there anything unusual in that larger revenue line this quarter. Thanks.
Again, I think Chuck is the right word, but if you just think about.
The market environment, the monetization activity has picked up and we've been selling into strength.
Across the private spectrum and as I said, we saw nice gains in Asia portfolios, we saw nice gains in real estate and infrastructure. It's just been a very good environment for Monetizations and we'll continue to take advantage of that environment.
Another key another key driver is the flows we had positive net flows across all four categories equity fixed income alternatives and liquidity the equity performance continues to be quite good.
And so we're very pleased with the the shape and the position of that business.
Thank you. Our next question comes from the line of Gerard Cassidy of RBC. Your line is open.
Thank you good morning.
John can you share with us.
If the fed starts to cut deposit.
Fed fund rates, there's an expectation that the deposit rates for the high net worth customers at some of your peers will start to fall have you guys modeled out how long after the fed actually starts to cut rates, where you think you might be able to take your deposit rates down.
We obviously run lots of different scenarios and lots of different models.
But I would tell you that the guidance that I told you about what we think's going to happen to Eni is based on the forward curve.
And so the forward curve has sort of by July 30 basis points by September I think around 50, and then almost threefold cuts by the end of the year. So if the if the realized rates is different than the forward curve that will obviously impact performance.
If it's slower that's positive from that for the rate component.
That I talked about if it's faster it's negative.
So we obviously model all sorts of scenarios, we've used the 50% beta give or take.
For that for a while in our models and Thats, what we continue to do.
And what happens to actual betas will be as I said, a function of really sort of the competitive environment, what alternative investments look like and whatnot.
Okay, and then as a follow up obviously you guys had good growth on a year over year basis in your residential real estate portfolio within the wealth management Division. There has been some evidence that the high end housing market, New York City in other areas. The condo market is really showing some signs of weakness have you and obviously many year customers a high net worth customers can you share with US just some of your underwriting standards of those types of mortgages, assuming you make them and just how this should not be that much risk even if that market price comes down for those types of properties.
Sure. Let me just take the two parts of that question separately, we've seen good growth in the mortgage portfolio really has been a function around the changes we made in that platform. So we in source and outsourced.
A process last year and we wanted to make sure given that these are our customers and our high net worth customers that we have the right service levels and the right attention to that project.
And therefore, we sort of gradually transition from outsource to in source and then over the last year as we've gotten more mature in that process and our turn times have come down and our process has gotten better we've been able to persecute prosecute more applications and thats really been the pickup it's sorta, we slowed it down to make sure that we got it right and now we're in a better position to fulfill our customer demand.
In terms of the underwriting criteria, we havent changed your underwriting criteria. It has a very strong FICO good LTV product.
That product from a overall credit performance has been quite good and we haven't seen any material changes in both the profile or the credit statistics.
I would just add jarrod.
That portfolio is based upon lending.
Money to existing clients, whose assets we hold here.
So it's very different from a typical mortgage portfolio at a bank. These have very high net worth people. We have there are assets, where you have the transactions. We know what their activity is and as John said that FICO scores are extremely high the loan to values attractive.
It historically has not been an issue for the business.
Thank you and our next question comes from the line of Jim Mitchell of Buckingham Research. Your line is open.
Hey, good morning, maybe just a quick question on.
On capital and de fast.
It looks.
If you can give us your.
Calculation on what the Sep is and I, just I guess too.
Bigger picture.
Given the size of the the FCB potential is there any.
Discussion with the fed or ability to kind of walk through why it seems like their model tends to punish you more than your peers. It seems.
Pretty sizable relative to your more steady wealth management business and just want to help understand or unpack the dynamic in the Sep for you guys.
Why don't I.
I will try to kick off and I'm sure James will have some.
Some comments I think first of all just on the FCB.
Vice Chairman corals has mentioned that this is a top priority priority of his.
And he would like to implement it in 2020.
So I think it's still a little premature given that he said that last year and we just don't really know what the new rules are.
And a recent speeches talked about transparency simplicity and volatility so all good things when we think about it so in terms of.
Commenting specifically on an FCB I think it's a little premature to do that if you look at to see CCAR results again in totality were at a 100% payout ratio, we're increasing our.
Our buyback by 27% and we have seen six consecutive years of.
Or six.
Increases in our dividend consecutive years in our dividend so confirmation that we have strong.
Capital levels. So we're very pleased.
With that result in terms of their models in our models.
Clearly there is still a lack of transparency you see from our de fast data in there.
Their results that we still don't think up as closely as we would like it looks like that they have given us a little bit more disclosure. This year, but again I think you highlight that it looks like they think that our costs could be a little stickier.
Then we think they are but again, we're engaged in those discussions and we will continue to have those discussions.
Going forward.
Yes.
I'd add to that specifically the PNR number.
Is something that we're struggling to understand.
The good news is this is the first time, we have some transparency to it.
It is not a function of a divergence of you around our revenues, which is good it apparently as a function of a divergent view on a non interest expense.
It's hard for us to understand how noninterest expense is sticky unless.
It relates to financial advisor compensation, which by definition is on a grid and is not sticky.
But if one were to assume that you had to pay that notwithstanding the grid structure than clearly would be sticky. That's an assumption that frankly has never been borne out by history. We've never had an instance, where we've gone off grid and up and running those businesses for over 20 years and have never taken financial advisors have grid, nor is anybody else in the industry to my knowledge. So this is something we are clearly highly engaged with.
Again, good news, we have a little bit of transparency.
The only sources of differential that that composedly figure out.
Which is several billion dollars every year, and obviously, two and a half times that of or two in a quarter times that over nine quarters is.
Suddenly relating to compensation expense and probably operating losses that is still bleeding through on the time series, which we don't have full disclosure off of how the federal reserve run those operating losses. So.
In plain English were still suffering from the deeds at this.
10 years ago, and my attitude is we're very very different from now we have very different risk profile, we have a very different business mix and yes every year, we get a year further away from that the time series of it obviously becomes less important relating to those years, but its still impacting operating losses. So.
You know again.
Critical topic, Jim Good question, and it's something I am personally very focused on and I'm glad we're starting to get a little bit under the kimono via because this is 2019 2009 and this phone.
As capital base is extremely strong as evidenced by sea to one ratio. It's one of the top couple of capital ratios in the world and we need to get under this thing and this is a multi billion dollar movement. So materially affects us if we can unravel it which I intend to do.
Okay. Thank you very much and then maybe just as a.
A follow up I think you had talked about the pipeline being strong and think we haven't seen much of a pickup.
Activity levels across particularly M&A and it seems like outside the us has been particularly weak given the overhangs is your sense that the level of dialogue, though is pretty high and getting some clarity on the macro can help on leasing activity or is it.
People still pretty.
Yes, I guess again, particularly outside the U.S. its still pretty hesitant.
Given the uncertainties.
Yes.
I'd make a couple of comments and pipeline is very healthy.
In terms of M&A you heard James we have seen a pickup in that some announced activity in the last four to six weeks. If you step back for a minute and you think about what's driving these transactions.
Clearly gross people looking to buy companies and improve their growth profile, we've seen corporate clarifications, we've seen technology disruption we've seen activism.
So again I think all of those things are still in play and so it's a healthy backdrop for M&A activity.
We've seen a lot of activity and again sort of technology driven both in terms of the tech sector, but also what technology is doing is causing M&A activity lots of activity in healthcare financial so again, a very constructive backdrop Asia is the one area given the trade discussions and sort of China activity, specifically has been quite slow, but again healthy pipeline good backdrop activity.
Feels good it's taking a little bit longer than it normally does.
So sort of a slowdown in the pull through but right now pretty constructive.
Thank you next question comes from the line of Christian Bolu of Autonomous your line is open.
Good morning.
Maybe another question on rate sensitivity do rate cuts have any impact to the institutional business.
I guess I'm thinking more the prime brokerage business here or some of the more lending oriented parts afek.
Yes, I mean, that's a great question and Thats one.
That we look at constantly so modeling Eni, which is a small component of the overall revenue of the firm is pretty easy we use the forward curve in the beta and therefore, we have sort of some perspective.
But in terms of what it does to both our fixed income business in our equity business is really a function of how people interpret the cut.
You know if it increases some of the volatility in rates and there's more movement in rates.
Generally volatility that's not GAAP is helpful for the fixed income business if it.
Improves People's view of the World that we are going to extend the economic expansion and.
People want to.
Press that view in the equity markets that could obviously help in the PB activity levels that could also lead to repositioning.
Of portfolios, which we haven't really seen a lot of so again, its sort of really of how people interpret that caught.
And I know everyone's always focused on to Eni, which for us is less relevant but it really is going to be a function of what happens in those sales and trading businesses.
Okay. Thank you.
My second one sorry, a bit of a nerdy accounting question here, but in the release you kind of mentioned in other sales and trading revenues increased due to a shift in funding mix.
Balance sheet composition also think into Q last Q you made some adjustments.
I think that we are looking at some of your deposit costs are we from wealth management.
So maybe just help us understand kind of what's going on with the funding strategy.
How it's impacting different businesses and ultimately the overall economic impact to the firm.
Okay that was.
Pretty nerdy accounting question, but let me just.
As you know Theres a lot of things that go into both of the other sales and trading line and the other revenue line and generally the way I look at those things are together.
So and the other sales and trading we do a lot of hedging on our.
On our loan portfolios, we do economic hedging on our debt. We've got the DC excuse me deferred compensation plans, we have some liquidity attribution and other revenues we have some of those offsets like the mark to market on our held for sale loans.
As well as some of the R.M.U.S.G. JV is in there. So there are a lot of things that move around and we generally try to call out the larger ones each quarter.
And so again.
Quarter over quarter. The main changes in the sales excuse me other sales and trading was really lower losses on hedges.
On our loan portfolios right, we didn't see as much credit.
Movement in credit spreads.
And then on the.
On the other revenue line.
The mark to market gains on loans were lower so those things sort of moved intend them. So there is a lot of different things moving around I think you have to look at those both together I don't.
I think I understand the question relative to what you asked about the Q. I don't think that that's what drove what specifically what what we saw this quarter, but hopefully that's helpful.
Thank you and our next question comes from the line of Mike Mayo of Wells Fargo. Your line is open.
Hi can you talk about the pre tax profit margin in wealth management and the trade off between.
Optimizing that margin and investing for growth I think that's an all time high on a core basis.
I know, we've talked before about that James.
You can always take a higher.
There is a trade off between investing for growth and making sure you have the revenues coming in over the next several years.
You know were.
We can I start with the split.
Yes. It is an all time high it's it's actually slightly above the range that we put out of 26% to 28% and.
I don't I don't sort of jump around.
And start dancing, when we were a little a few basis points above our range and I'm not going to be to distressed.
If it's a few basis points.
End of the range.
At any point this year.
It's in a great position the margin that business.
We are still investing with that margin a lot in the business. So it's not like was sitting back saying boy, we really milking. This so is stopping.
The team team discussions, we've had with and in Chile.
And the whole field organization im not suggesting that in any way, we're holding back on what they need to do to spend necessarily.
The reality is Mike as you know the incremental dollar of revenue in that business comes on with a much higher margin than 28% today.
I don't know exactly where it is but it's clearly well into the thirtys. So there's almost no way in which you can if we growing revenues you're not going to grow that margin in the business unless you have some sort of.
Operating issue.
Et cetera, so revenue growth, where incremental revenues coming on high than the existing margin you could you could clearly see this margin go higher and we could force it to go higher from where we are we are choosing not to do that because we're playing for the long run.
But.
I guess my my short answer is I think the businesses and balance I think we're investing as we should be and I think the margin is just the math revenue growth does the margin look at look at the Solyom acquisition, we've got to Theres, a bunch of investments, we're making around that and also the integration cost so thats, something which I guess is some sort of drag on the margin right now, but and will be for the next couple of quarters, but I think that that's a smart drag.
And then a follow up certainly the rate environment takes a toll on Eni you talked about that you remind us of the sensitivity of wealth management to higher stock prices in other words, if the stock market stays at this higher level.
What impact could that have on the pre tax margin the third quarter.
Again, we would expect given where the market closed.
The prior quarter that asset management fees are going to go up in the third quarter.
And again Thats a positive we've seen positive momentum.
In that space, both in terms of flows as well as market market appreciation.
And so.
That should be a positive and that there is always gives and takes in the business and obviously, we talked about the NII on the other side.
Thank you and your next question comes from the line of Devin Ryan of JMP Securities. Your line is open.
Hey, Thanks, good morning.
First question, just on wealth management and customer engagement.
Transaction activity has been muted even with markets at highs and that's normally not the case at the same time.
We're seeing pretty healthy engagements some of the brokers and I understand that's a different client mix I'm just trying to potentially tie together. The move that you are seeing the fee based advisory relationships with transactional activity slowing meeting that.
We're eventually going to be left with brokerage relationships.
Where the assets are turning over much in that that's fine or is that maybe in over read it and there is a bull case for transactional activity.
Well again I think it's a it's a good question and you probably have highlighted a lot of the drivers I would just say in terms of the sentiment if you will.
You know we are at all time.
Hi, guys into them and the market levels, but I think as I mentioned earlier, there seems to be a lack of conviction around that.
In terms of both Where's it going from here.
And given all the uncertainty around the rate profile.
As well as the growth profile I think the retail investors inundated.
With information every day, we also saw a lot of volatility in the quarter, which is generally.
Generally not good for the retail sentiment and what we've seen in our portfolios, it's sort of a little bit of a defensive posture in the sense that there is a decent chunk of the investment assets in short dated fixed income securities more so than we've seen in the last couple of years. So they are pretty defensive.
Today.
In terms of how they reacted the economic environment.
The core transactional volume is probably.
On a downward trend because of this shift from.
From brokerage to fee based accounts on the other hand, obviously there is a component of calendar so that will move around with with the calendar and whether those markets are open and close but it's been pretty stable for the last several quarters and I think it's just really a function of what people think about outlook and stability and we'll have to just keep tracking it but there is going to be pressure as we see more people go into these managed accounts.
Great. Thanks, just a follow up on expenses. So you guys made the decision last fall to.
Tightened expense management, just heading into a more uncertain environment.
And that you managed you mentioned, just even last quarter that you're going to manage.
Expenses tightly so I'm just curious how you guys are feeling about the spending plans today relative to how the macro.
Environments developing meeting.
Is that business environment that we're seeing today developing in line with how things kind of you were looking out last fall and thinking about.
So you're just staying on course or some of these newer uncertainties like on interest rates are they changing.
To use or creating a catalyst to maybe look for other areas to tighten.
You know it's.
I think right now we're we're certainly pleased we got a little ahead of the expense thing.
We're we're pretty determined to run a tight ship through the end of this year.
There is no going to be no slack on that.
Whether we turn the dials more I'd say right now probably not I think where we got a lot of expense initiatives going right now that we feel comfortable with.
If things move materially to deteriorate on the revenue front for some reason then we will take action.
I would point out. This is we've had four quarters of $10 billion of revenue and a history in each of those have been in the last six quarters and we had a 9.8 billion dollar quarter along the way this so.
Weve I'm conscious of the need obviously to be very disciplined and we put out I think is 73% target. This quarter has been under 72.
For expense efficiency ratio. So that's definitely in line with what we wanted.
At the same time Weve got to invest and keep growing the business, we kind of just manage it for the next three months, we've got to manage it for the next 510 years. So its that balance, but we're definitely not taking our foot off expenses I'm just not sure we're going to be pushing down harder unless we saw something materially shift I think as John said the pipeline outlook is good the assets were priced at a nice level asset management is coming along nicely.
We've started the quarter quite strongly we're feeling so.
I certainly don't think this is a time to panic, but but we will be we will be disciplined through the year. There is no question about that.
Thank you. Our next question comes from the line of Steven Chubak of Wolfe Research. Your line is open.
Hey, good morning.
So James I wanted to spend some time just.
Digging into some of your earlier comments in terms of the pre tax margin outlook and I know on this call and in June you had cited your ability to.
Really support high levels of investment in wealth as you noted and the higher incremental margins that each additional revenue dollar that's coming through wells what that supports in terms of improved profitability I guess, if I look back over the last five to six years a lot of the pre tax margin expansion has been facilitated by stronger growth in higher margin and I and as we as we look to and I now, becoming a headwind versus a tailwind.
Do you think beyond 2019, you can still hold the line on that 26% to 28% or does the pressure on the Eni revenue source in particular impact your ability to really sustain that level of profitability.
Well I mean, you definitely pointed out the and I on the other hand, we've had DCP worked against US this quarter, we've had prepayments.
Which have flushed out a bit we've had very low transaction activity I mean, I think I am surprised at how low the transaction activity is being notwithstanding the move to asset management product I'd be I'd be more surprised if it goes further down.
I think for a sort of read reaching a basic threshold, where people are buying and selling different securities because.
Other bonds maturing or whatever so.
It's not what drives the numbers is not just in I. Weve had there are a lot of moving parts in here more money going to Annuitize accounts. The average velocity on those accounts I think is about 20 basis points higher than the.
Transaction accounts and Thats for both fixed income and equity account so.
Thats attractive we just price the assets at a very high level at the beginning of this quarter, we've got more money going to Annuitization, we're driving up the lending book.
So yes, Eni is clearly it's clearly a focus it's a huge focus for all the banks.
Yeah, it's it's where its not as important to this institution, but it's clearly important it's clearly important for that business, but there are a lot of things going on under the covers Steven I would say.
I'm confident about the target of 26% to 28% this was a business that.
Back in 2006, when we started the margins were 3% and people said, we couldn't get to unit 15, and then they said we couldn't get to 20 than those that we couldn't get to 25 and and it just clicks on in some quarters that might bounce around by 50 basis points backwoods, So full woods.
But the trajectory is pretty clear and if you have decent asset prices. We continue to have the new ties assets, we're originating more loans in the in the bank book.
The <unk> is clearly not helpful, but we can absorb.
Some of that some.
No reason to step back from the target range that we put out of 26% to 28%.
Thanks for the helpful color James and just.
Maybe one follow up for John just on the NII guidance based on some of the investor feedback that we've gotten at least since two and eight kicked off there appears to be some confusion around the Threeq Guide I was wondering if you could give the dollar eni guidance for Threeq, two or at a minimum maybe quantify the impact from premium amortization that you expect in the upcoming quarter.
The guidance.
That I gave.
It was X any sort of prepay.
And I I based it office third quarter of 2018, when there was no prepay impact and I said, it would be more or less in line with third quarter 18, So I think thats pretty clear I'm sorry, it was confusing.
And the jumble of all the other information I gave so that is.
The guidance on the third quarter and as you know.
Mortgage prepayments is going to be impacted by the rates and sort of the five to 10 years shape of the curve and so I just gave you guidance X prepay if that those numbers go down dramatically.
You will see the prepayment.
Hurt us NFV. They go up you will see a reversal of the prepayment.
And I'd just to state the obvious state because we've now had I don't know six or seven coal is in and I think five or six of them took.
We have some other businesses over here and.
Some of those businesses are chugging along quite nicely.
The M&A pipeline, we talked about the asset management business is doing really well the annuitize assets.
So again it is important to us it's not as important as it is to some of the other banks.
Other things are also important to us equity underwriting is extremely important to us. So I just I'd put it in that context, it's clearly a headwind.
But it's not like we don't have some of the things going on under the Hood here.
Thank you. Our next question comes from the line of Brian Kleinhanzl of KBW. Your line is open.
Yes, Thanks for taking my questions first question on wealth management as a fee based assets to total assets have plateaued kind of around 45%.
Over the last year, if you just kind of give some color on why that's happened and is it still the desire to grow those fee based assets, even above 50% and beyond thanks.
Sure and then we have plateaued a little bit.
It's bounced around sort of 40 340 445.
We do still believe that that number will will go higher.
And could clearly go towards 50% and beyond.
I do think that as we continue to refine our offering and sort of value based pricing.
That will continue to seek more dollars flow into fee based accounts, then to brokerage accounts and right now. It's just some of that's just really a function of.
Now whether the assets in each of those accounts are growing faster or slower because the composition.
Of those two buckets are little bit different brokerage versus fee based.
But we do still think that that number will will increase over time.
And then a separate question on you mentioned that you are selling NFS this quarter offset the prepaid amortization is that an ongoing strategy or was that just a one off action this quarter.
Well.
Two things it didn't fully offset the amortization and two it was not done for that reason, we look at our asset and liability management all the time.
And we took an opportunity to sell some securities and reinvest.
Those securities in a different type of security that we thought had a better profile given that the rate outlook.
So again.
Yes, mostly offset the prepaid but not entirely.
Thank you. Our next question comes from the line of Michael Carrier with Bank of America. Your line is open.
Hey, Good morning, this is actually mark on for Michael.
John you highlighted the number one position in equity trading yet it seems that the results are a bit unit versus peers.
Can you provide.
Details around what went on in the quarter increased competition from larger peers over the results for the quarter is more about here of Cline.
Again, we're number one in that business globally.
We have seen turnover in market volumes slower.
Cash in derivative activity muted clearly relative to the fourth quarter.
If you look at year to date the wallet the size of the wallet is down but again I think our expectation is that we will maintain our market share in that business and we will maintain our number one ranking.
It's hard to look at things these things quarter to quarter, because sometimes people are comparing quarters to good quarters versus bad quarters or or higher performance versus lower performance, but again, we're number one in this business we have been for quite some time, we've got a very comprehensive offering.
We're seeing good activity levels from our client base activity levels lower than 18, but good engagement with our clients and we're very very comfortable with that business and our expectation is to mange maintain share when markets contract and Thats what were seeing.
Thank you.
Thank you and our next question comes from the line of Glenn Schorr of Evercore ISI.
Your line is open.
Hi, Thanks, very much maybe just a quick follow up on the equity front I hear yet number one and maintaining share in PB I think you mentioned something.
Or I should ask the question of our client balances also muted just because market keeps hitting highs I think of you guys as a little.
Over index to TV, because you're so far and away the leader but.
I'm curious if that could have something to do with any given quarter being off a little bit more than peers.
Yes, again, I think quarter any given quarter is just that as a very short timeframe to to look at but I would say our PV business.
As.
Obviously very healthy and very strong what we've seen generally is the PV balances have drifted up but there's not a lot of conviction around that so as markets go up balances go up.
So the gross books have gone up leverage really hasn't gone up conviction hasn't really gone up.
We havent seen Sims.
Historically, if you are in this type of environment, you would see a lot of repositioning of portfolios UGI seeing increasing leverage and we just really havent seen that.
Although the balances continue to go up with the market so healthy, but again I think people are.
Not as can don't have as much conviction around these these these levels in this rally.
Okay.
Quick one on debt underwriting.
It's been a good push its been good growth at Morgan Stanley .
But my view is it will be good lumpy tied to big M&A transactions is that the primary driver in the down 22, or so percent year on year, just the pieces tied to large financings.
Yes, I mean, we well we have clearly seen lower levels of leverage finance activity, which is a higher margin business. We have seen a pickup actually in the last four or five weeks.
In that space, but.
Our balances in our pipeline.
And that business for the first half of the year, we are clearly lower than where they were last year and investment grade, it's a little bit lower but still pretty healthy.
But yes.
The sort of the chunky, our higher margin stuff is really going to be sort of the delta. If you will in that in those numbers.
Thank you and ladies and gentlemen, thank you for your participation in today's conference. This does conclude todays program. You may now disconnect everybody have a great day.