Ted Pick:

Good morning and thank you for joining us. The firm generated $15 billion in revenue, $1.82 in EPS, and a 17.5% return on tangible in the second quarter. [Solid earnings] (ph) and demonstration of operating leverage completes a strong first half of 2024. $30 billion in revenue, $6 billion in earnings, and an 18.6% return on capital. In institutional securities, we're beginning to see the benefits from our continued focus on our world-class investment banking franchise, with revenues up 50% year-over-year, including a 70% increase year-over-year in fixed income underwriting. In institutional equities, we are back with a $3 billion quarter. In wealth, we posted margins of 27%, and across wealth and investment management, we've now grown total client assets to $7.2 trillion on our road to $10 trillion plus. Together, we delivered strong operating leverage. Further, on the back of the annual stress test results, we announced that we will increase the dividend by $0.075 for the third year in a row to [$0.925] (ph), reflecting the growth of our durable earnings over time. During the quarter, we built $1.5 billion of capital, and at quarter end, our CET1 ratio is 15.2%, 170 basis points above the forward requirement. Our capital position provides us the flexibility to continue to support dividend growth, support our clients, and buy the stock back opportunistically. The quarter also showed continued balance in both top-line and profitability across the major segments. Wealth and institutional securities produced $6.8 billion and $7 billion in revenue respectively, with earnings also roughly split between our institutional businesses and wealth and investment management. Our businesses are working closely together to maximize adjacent opportunities across the integrated firm. Across the investment bank, navigating changes in the cycle means being deliberate around risk management and, given geopolitical uncertainty, where we spend our time to deliver clients, solutions, and to capture share. In wealth management, we continue to focus on aggregating assets and delivering strong advice. In investment management, we are investing in secular growth areas, including customization and real assets. Year-to-date, annualized growth in net new assets and wealth management is over 5%, with another strong quarter of over $25 billion in fee-based flows. Strong fee-based flows support daily revenue, which on average continues to be about $100 million each day this year throughout and show the stability and continued growth of the wealth franchise. We are well navigating the continued uncertainty around forward rate path, geopolitics, and now the US Political cycle and expect those to be the themes for the balance of the year. We remain focused on our best-in-class talent and building out best-in-class infrastructure to support ongoing growth across wealth and investment management and institutional securities. I wanted to reiterate our strategy, which is clear to advise individuals and institutions around the world in raising, managing, and allocating capital. World-class execution demands that we deliver strong earnings and returns through the cycle, that we do so while maintaining robust capital levels, and that we deliver on a durable growth narrative across the segments. And then Morgan Stanley executes on this strategy in a first-class way [Blue] (ph). That's it in a nutshell. And finally, in reflecting on this weekend's assassination attempt, we share in the hope that in the months to come, we will as Americans, find ways to unify and preserve our better selves. With that, Sharon will now take us through the quarter in greater detail. Thank you.

Operator:

We are now ready to take any questions. [Operator Instructions] We'll take our first question from Glenn Schorr with Evercore. Your line is now open. Please go ahead.

Ted Pick:

Good morning, Glenn.

Sharon Yeshaya:

Sure. Thanks, Glenn for the question. Actually, the portion that -- of the sweep balances that are impacted are as you mentioned, the sweep on the adviser-led channel, which is actually a small portion of the overall BDP that we disclose. So it’s a small portion of that overall stack. And the increase in pricing is being offset largely by the repricing of the investment portfolio, right? So as things mature and that investment portfolio reprices, it's that change in the quarter amount that will offset it when we look ahead.

Sharon Yeshaya:

Certainly. Yes, what I would note there is that what we think about -- when we think about sweeps, broadly is mainly in transactional accounts. And in those transactional accounts, we have a wide range of choices and products for our clients. And so therefore, they have a lot of options as you think about their transactional accounts and brokerage.

Ebrahim Poonawala:

Hi, good morning.

Ebrahim Poonawala:

Good morning Ted. Just maybe sticking with NII and more importantly, on pretax margin, right? You had an extremely strong quarter. The stock's weaker this morning, and it has to do with the NII drag on wealth revenues and margin. So one I think, Sharon, your level of visibility into NII, lots of moving pieces around client behavior, maybe we get interest rate cuts. Just give us a sense of, if history is any guide on, what rate cuts would imply for client behavior? Or is there cash to assets that you are looking at that gives you comfort around NII potentially stabilizing post 3Q? And then maybe a question -- go ahead, yes.

Ebrahim Poonawala:

That’s helpful. And I guess my second question was, just talking to investors, when we look at the 30% pretax margin target, the question is whether this is aspirational, whether the bar is set too high given how competitive the business is. So remind us in terms of your comfort level on the 30% pretax margin, to the extent you can, the time-line of when we get there? And when we get there, should that be a sustainable pace for the business? Thanks.

Operator:

We'll move to our next question from Mike Mayo with Wells Fargo. Please go ahead.

Mike Mayo:

Hi, Ted, you've said this and Sharon repeated this that the industry is only in the early innings of an investment banking rebound. I have to say we've heard that for a couple of years and there now is this time, why is this time real? Do you expect the rebound to continue through the normally slow summer period before the election? How many years? What gives you confidence that this is for real? And how much is your backlog up quarter-over-quarter?

Mike Mayo:

And just one pushback, I mean with interest rates, you know, so much higher than they've been in the past. Don't you think that could get in the way when people are looking to borrow money for deals and the like? Is this a matter of simply waiting for rates to go lower? Or that's not going to get in the way?

Operator:

Our next question is from Dan Fannon with Jefferies. Please go ahead.

Dan Fannon:

Thanks good morning. I was hoping to get a little bit more color on the flows in the quarter within Wealth, maybe the breakdown from the channels and contribution. Last quarter, I think we saw a Family Office be an outsized contributor. But hoping to get a little bit more color on where the flows were sourced in 2Q.

Ted Pick:

Which is part of the reason that workplace is so important, because at workplace, I can continue to experience success amongst the corporate and sponsor community that has an affinity effect on the top of the house at those institutions in terms of their own wealth, and then potentially other products around it. So it can be an indirect sale where you aren't necessarily going directly to the prospective client via the FA, but you could actually work potential clients through the institutionalized effect of workplace where we do a great job educating on wellness -- financial wellness and then effectively institutionalizing ourselves by overseeing incentive comp through the Morgan Stanley Solium product and having succeeded on an MS at work mandate, which, as you know is a durable, sticky asset that effectively is seen by the entire employee base, you can start working your way up the funnel to the senior executives of that front.

Operator:

We'll move to our next question from Brennan Hawken with UBS. Your line is now open. Please go ahead.

Brennan Hawken:

Good morning Ted. Thanks for taking my question. I'd like to just drill down a little more to give the second follow-up here on the repricing change that you mentioned in your prepared comments, Sharon. So the repricing that we've seen in the securities book has been slow. So I'm just kind of curious as to why you think that will help offset the repricing actions that you are taking on the deposit side. Is that because it will be a phased repricing, and therefore there is an ability to have the phased benefit in the asset side offset? And then just a nitty-gritty question on it, is the switch going to be to money fund sweep rather than higher yielding deposits, and then that way you can just slowly replace that funding as you see [fit] (ph)?

Brennan Hawken:

Okay. Got it. And then is the -- is this going to be focused on the advisory relationship similar to what we've seen from some other wirehouse competitors? And could you just -- is it the changes that have been announced by Wells and BofAs, is that what you mean by competitive dynamics? Or is there something else that I'm not aware of?

Operator:

Our next question comes from Devin Ryan with JMP Securities. Your line is now open.

Devin Ryan:

Great. Good morning Sharon and hi. The first question, just on -- another one on the GWM flows. Sharon, you mentioned tax season is a factor, which you completely get. But then you also mentioned increased client spending. And I just wanted to drill into that, just whether that's something that could continue, whether it was seasonal or influenced by inflation? Just trying to understand that component of the impact on flows.

Devin Ryan:

Okay. Got it. Thank you. And then a follow-up just on the interplay between Investment Banking and Trading, and I appreciate the commentary on kind of the improving capital markets backdrop, which is great to hear and kind of the expectation from our end that there's going to be a lot more primary issuance in equities, maybe in debt as well as M&A picks up. So just trying to think about what that means for the trading businesses, equities and fixed income and whether you guys feel like we could maybe sustain around these really high levels or even maybe -- even the wallet could move higher just as you get a stronger primary issuance market?

Operator:

For our next question, we'll move to Steven Chubak with Wolfe Research. Your line is now open.

Ted Pick:

Good morning Steve.

Sharon Yeshaya:

So when you look at it, I would really focus Steve, on the efficiency ratio targets that we put for the whole firm, right? We think that the firm can run at or below the 70% over time through a durable cycle. The issue with your specific question, as you yourself highlighted is, it depends on where those different revenues are coming from. So there might be periods of time where it's higher BC&E related, there might be periods of time where you have different jurisdictions associated with it. But broadly speaking, the enterprise we've given 30% margins as it relates to Wealth and the sort of Wealth and Investment Management space, and then you have the ISG space. So by definition, if you're running at 70% efficiency ratio more broadly, you look for an entire enterprise to run at somewhere of a 30% margin.

Steven Chubak:

Thanks for that perspective. And just a follow-up on the deposit discussion. Both you and your wirehouse peers announced similar actions on deposits, which you noted, Sharon. You mentioned it was informed by competitive dynamics. But I wanted to better understand if there's any feedback you or your peers had received from regulators that prompted the decision? Because from our vantage point, the timing of these pricing actions at this stage of the rate cycle is simply difficult to reconcile?

Steven Chubak :

Okay, fair enough. [I had to try] (ph) thanks for taking my questions.

Gerard Cassidy:

Good morning Ted, good morning Sharon.

Sharon Yeshaya:

Good morning.

Sharon Yeshaya:

I think that's a great question. I know, Gerard a few years ago, you also asked me about different values of those assets associated with what the underlying is. I completely agree with you. As you have workplace assets rise, the value of those client assets rise. New corporations issue their employees more stock. They also grow their employee base. It should absolutely add participants. It should add new corporates. It will add new net flows. And now that we have all of that -- when you just have Solium, now you also have E*TRADE and workplace, and the platforms are integrated. So as those flows -- flow into an E*TRADE account, people can transact on that. And then, as Ted said, we can also offer financial wellness. So absolutely, it helps that ecosystem begin to work.

Ted Pick:

I will take the opportunity to sort of give a brief view on capital, if I could, Gerard, and link that to potential external opportunities. We anticipated or we believe it was possible that we could have a tougher annual CCAR test, and indeed it was. And what we've prioritized in potential uses of capital, above all things has been dividend policy. And as you know, we are increasing the dividend again to [$0.925] (ph), which at spot offers a 3.5% dividend yield. So that is the continued highest priority on use of capital. If you include of course, use of capital to inorganic opportunity. Second our clients. We have continued to lean in for clients, across the business segments as appropriate, and you see the operating leverage across the businesses, particularly across the investment bank. But we've also thought about the buyback opportunistically and have been buying stock back and returning capital. This past quarter, more than $2 billion between the dividend and the buyback, in a way that has been reflective of offering us that optionality. As we sit here today, we are 170 basis points above the buffer. And importantly, we continue to be in the 3.0 G-SIB buffer, which in one context would normally get much attention, but does get attention in the context of your question, which is sort of forward-looking strategic opportunity. It is worth noting if we can manage to stay at 3.0, assuming the framework holds through whatever Basel brings, that will be our buffer in 2026. So we are [170 basis points] (ph) over and we accreted $1.5 billion this quarter. External, i.e., inorganic, therefore, is something we can think about. It's just not something we're going to think about in the short term. The reality is we've got our forced hierarchy, the forced hierarchy is dividend first, investing in clients as appropriate, achieving operating returns against that second. And then third, the buyback opportunistically. Down the road, two, three, four years out, if opportunities come across the horizon, importantly after we have some definition around Basel and continued potential refinement of what we understand to be inside CCAR formulation, so just general regulatory uncertainty, sure, we might look at stuff. But I would tell you in the short-term, we're very happy with the acquisitions that we've made over the last 10 years, 12 years. And we are determined to generate operating leverage in each of the two major segments; Wealth and Investment Management and the Integrated Investment Bank, and then to obviously hit our efficiency ratios of 70% and the margins and returns that we've talked about.

Saul Martinez:

Hi, good morning. Thank you for taking my question.

Saul Martinez:

Good morning. I wanted to follow-up on an earlier question on the outlook for your sales and trading businesses. You've kind of consistently done about into $18 billion to $20 billion of annual revenue in the post-pandemic period, in [fixed and equities] (ph). And right now, we have a backdrop where we're going to see rate cuts, markets are strong, issuance activity may pick up. At the same time, you have perhaps more competition from foreign banks who have lost share. So how do you see -- do you have a view on how you see the wallet evolving for these businesses, your ability to maintain or gain share in this backdrop? And then I guess, ultimately, do you think you can grow revenues here from a base that is materially higher than what it was pre-pandemic?

Saul Martinez:

That's helpful. Thank you. Just I guess a quick follow-up, related follow-up. The ROE, 14% in ISG in the first half of the year early on, as you highlighted, in Investment Banking cycle. Do you have a view on where the ISG -- Institutional Securities ROE can get to as the Investment Banking cycle kind of plays out? Is there a view on sort of what a normalized ROE would be here.

Operator:

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.

Ted Pick:

Good morning, and happy spring in New York. Thank you for joining us. We entered 2024 with optimism, encouraged by improving boardroom confidence and an increasingly positive tone from our institutional and wealth management clients, the quarter was strong. We generated $15 billion of revenue, a 71% efficiency ratio, $2.02 in earnings per share and a 20% return on tangible equity. In a relatively constructive environment, these results highlight the power of our clear and consistent strategy, serving as trusted advisor to our clients, helping them raise, allocate and manage capital. During the quarter, higher asset prices and an improved economic backdrop supported confidence with our wealth management client base. We saw greater activity both in the advisor based and self-directed channels, resulting in higher adjusted margins of 27%. Net new assets grew by $95 billion. Investment Management also generated positive long-term flows in the quarter. Across both wealth and investment management, total client assets grew to $7 trillion advancing toward our $10 trillion goal. As the new issue calendar returned for the first time in a number of quarters, it was great to see us regain our leadership position in equity capital markets. More broadly, we saw building momentum in investment banking, both in our M&A and underwriting pipelines across corporate and financial sponsor clients. [Audio Gap] both generated very solid results to round out a strong quarter in institutional securities. As ever, we remain focused on managing our resources, sweating the income statement and being judicious with our capital. Our CET1 ratio was 15.1%. Our excess capital position allows us to support our clients, invest in our businesses and return capital to our shareholders, particularly as regulators continue to evaluate Basel III endgame. Additional regulatory clarity and a sustained capital markets recovery should have a multiplier effect across our global franchise, further unlocking the unique power of our integrated firm. I wanted to touch on the topic of client onboarding and monitoring in the wealth business with 3 short observations. First, this quarter's wealth management results speak for themselves with record revenues and strong metrics across the board, including strong margins and very strong net new assets. We are really pleased with this terrific performance and we are going to keep ongoing. Second, this is not a new matter. We've been focused on our client onboarding and monitoring processes for a good while. We have ongoing communications with our regulators, as all the large banks do. As James said in January, we want to ensure we continue to be world class in every aspect of this growing business. And third, to be clear, this is about processes. We have been spending time, effort and money for multiple years, and it is ongoing. We've been on it. And the costs associated with this are largely in the expense run rate. To conclude, the first quarter of 2024 aligns with the goals outlined in the January strategy deck

Operator:

[Operator Instructions] We'll move to our first question from Glenn Schorr with Evercore.

Sharon Yeshaya:

I think it's a great question, Glenn. Happy to take that and just follow-up on exactly what Ted said, which is as you said, the results really speak for themselves. This is a phenomenal business. We had record revenues and we're in a great position. We have strong margins, strong net new assets, and no, there are no strategic changes to our business. There is no changes in our ability to do business, and we're extremely confident in our ability to grow and to deepen the relationship with the breadth of firm offerings that we have to serve our clients. Specific to your question on the international business, it is small.

Ebrahim Poonawala:

Maybe Ted for you, as we think about, so it was a strong quarter for Investment Banking Underwriting. There seems to be a fragility to the macro outlook based on what how rates have behaved on the back of inflation, geopolitics? Just give us a sentiment check of when you're talking to your corporate clients, like how resilient do you see the investment banking sort of trends and the sort of desire and appetite for corporates to engage in either DCM, ECM or M&A, large M&A activity as we look into sort of later in the year into the U.S. Elections?

Ebrahim Poonawala:

And just one quick follow-up Sharon, on the wealth management NII and sweep deposits. I think the sense is that we're getting to a bit of a bottom on NII. Is that an accurate characterization? And should we stop worrying about a big cliff event where NII declines meaningfully from where we trended?

Operator:

We'll move to our next question from Steven Chubak with Wolfe Research.

Sharon Yeshaya:

Certainly, let's take just the expense big picture and we obviously disclosed the SEC drivers of expenses, I called them out. We've had multiple years now where we've been looking to integrate multiple acquisitions, and as we've come out of that we've been able to reevaluate our expense base. And I've talked about it in different pieces of our earnings call, many times I've mentioned space. You can see even in the lines around occupancy in the actual disclosures, you can see bump ups in spaces where you're taking write offs down in space and then it begins to trend down again. So we're making big picture decisions around what do we actually need and where do we want to invest those growth drivers as we move forward. So consolidating the marketing dollars and figuring out what is the best use of those marketing dollars, consolidating professional services, how do we actually want to deploy full time hires in those growth objectives. So in my prepared remarks, we talked about 2 things. We talked about taking expenses down in certain line items, but we also discussed investments, right. I talked about the fact that we're looking at opportunistic hires in M&A. We've discussed a lot about investing in parametric and technology. We've been giving technological tools to our advisors and investing in the business. So it's a push pull and it's making sure as Ted said that we're sweating the income statement and we're thinking about our resources efficiently and durably as we move forward through the cycle.

Steven Chubak :

That's great color. And just for my follow-up, relating to the wealth management margins, unpacking some of the different component pieces, given continued strong fee momentum, nice to see the inflection in NNA too. It sounds like NII is close to stabilizing just given some of the key drivers and inputs. And the focus on efficiency just throwing all of that in the blender does suggest that this 26% is probably a reasonable jumping off point and you can build off that base, but I was hoping you could maybe provide some context around that?

Operator:

We'll move to our next question from Brennan Hawken with UBS.

Sharon Yeshaya:

Sure. I think we've talked about it before, Brennan. But I'm happy to talk about it again and highlight that the reason that we point you to the wealth management NII is it's a business driven NII. When we look at the trading NII and we look at firm NII, it really depends on the products that you have, where you're booking them, what you're using as your funding sources. That falls into the various pieces of the trading revenue. So we call, we focus you in from our disclosures really on the wealth management NII when that NII is being driven by a business concept rather than just where you might be booking certain trading trades.

Sharon Yeshaya:

No, I would really step you back and tell you that that's not how we manage the business and the trading revenue is going to fall where the trading revenue falls based on the products that we transact in that quarter. And the wealth management revenue, I've given you the drivers with the deposits, with interest rates, with spreads and with reinvestment and really two separate things that you should looking at.

Mike Mayo:

You had big year-over-year growth in Wealth Management client assets up by about 20%, but the Wealth Management revenues increased by 5%, still decent growth, but it seems like a little disconnect there. So I'm wondering what kind of wealth management client assets you're growing?

Mike Mayo:

And then just one follow-up for Ted. Ted, I think your outlook for the industry capital markets was about as bullish as we've heard yet. I think you used the word potpourri. IPOs in the valley, cross border by sector, financial sponsor, Japan, highest in years, event financing, specifically, what are your backlogs? How do they compare with last quarter? And just one more time, the level of your conviction that this time is for real, because there's been a lot of false starts the last 2 years?

Operator:

We'll move to our next question from Dan Fannon with Jefferies.

Sharon Yeshaya:

Sure. So we did see the percentage of client cash. So we've given you I think 22% in the advisory channel is now down to, say, 21%, 20% levels depending on what channels that you're looking at. But that, I would say, is not a function of the actual cash levels coming down, but rather that the equity markets have risen, so just to be clear in terms of the actual mix. The reason I bring up those percentages is they are still high relative to the pre-COVID historical levels of, say, 17%, 18% that we've given on previous calls. So there is still room to see the deployment of cash over time into the markets.

Sharon Yeshaya:

Absolutely. I'm so glad you asked, as it relates to the family office offering because we have been talking about it for some time. We launched and we really formally enhanced our family office offering in 2021. We discussed it on some of our earnings calls as a place where you could begin to see the integrated firm, and by that I mean a way to offer our wealth management clients different solutions from institutional securities. So our fund management products, where you're actually able to look at your portfolio from a more integrated basis the way that you would as an institutional client. As we begin to offer new solutions to our clients, these are more ways to get touch points with different and deepen different client relationships and bring them on board. So this is an example of that. The reason we pointed out is also to highlight to you that there are lumpy flows that come through these channels. And so when we say these flows can be lumpy, there are different sales channels across the offering and those different channels have different sales cycles and so therefore you will see ins and outs of various pieces of NNA over time, but in this particular quarter and over the long-term history we have seen a very diversified set of channels. We have the workplace, we obviously have the advice-based relationship, different pieces of stock plan, et cetera that come in through the channel and there is diversification there.

Operator:

We'll move to our next question from Devin Ryan with Citizens JMP.

Sharon Yeshaya:

Sure. I'll take that. When you think about the expansion of the wallet and consider where we came from and where we are now, as more and more of the corporations and coverage of the corporations is becoming more integrated, there are many solutions that a bank such as ourselves can offer, be that from a global perspective, if you think about where rates are as just a tangible example, interest rate hedging that you can offer corporations as they think about transactions. There are different types of foreign exchange transactions that you could think about when you're looking at M&A or you're looking at other corporate deals that you have to do in house for a global franchise. So there are corporate solutions that you see, we expect to see growth in from a wallet perspective, and there's also financing where you have different types of markets and channels that are growing, private credit being an example. We're financing different assets by different types of sponsors are places where we could see opportunities for a wallet share growth more broadly.

Devin Ryan:

And then a follow-up just on the debt capital markets outlook, obviously very strong quarter. We have heard a little bit about maybe some pull forward, just on the year in terms of people front loading. And so, just want to get a sense of whether you feel like that may play down as well for Morgan Stanley. And then when you think about the pipeline for debt underwriting, I appreciate that deals come together quickly, so there's maybe not as much of a formal pipeline. But is the tone there similarly strong is what you're seeing for M&A and equity underwriting? And also appreciate there's probably some interconnectivity there as well.

Operator:

We'll move to our next question from Gerard Cassidy with RBC.

Ted Pick:

The competition is real. And we all need to adapt to stay relevant in the ecosystem. I think there's going to be room for folks in the private space to participate in deals. But I certainly do not believe as some seem to suggest that the global investment banks will not have a large role to play as underwriters of securities and all the benefits that that brings to the issuer versus someone issuing private credit and potentially being the owner over time if things don't go well. So I think we're in a world where the ecosystem will at times have many of the players acting as partners. Sometimes we'll act as counterparties and at times even competitors. But I think the ecosystem has more than enough room on a global basis for both the emerging private credit space, but also the incumbents to continue to be able to do their thing.

Ted Pick:

Well, it's a great question. It depends on whether rates are higher because they are sustaining continued growth in the U.S. or if they are higher for a period of time and are followed by a tough landing, in which case we're in recession and clearly then things will slow down. I think our view is that the U.S. economy continues to progress quite nicely, that balance sheets amongst our client base are quite strong, both on the institutional side and on the wealth side, and that there is plenty to do and that the higher rates that we see are in part, if not more than in part dictated by a view that we continue to have some inflation and that the economy is in healthy shape and maybe asynchronously relative to other places in the world. But that again speaks to U.S. strength and as you know, first and foremost, we have our activity based in the U.S. But over time, there will be strength in places again like Japan and Europe, and then eventually in the China complex where we will be busy too. So my bullishness is not a mark-to-market on any given week or month. It's a view that corporate boardrooms have been quiet for 3, 4 years and that is not sustainable. They need to move. They're ready to move before the pandemic, then the pandemic came and then there were higher rates. Those higher rates seem to be well absorbed. Yes, now we need to have models that factor in appropriate cost of capital, as we saw in prior regimes where cost of capital matter. And now we're in a period that comes after financial repression, where we'll have some inflation and some real rates and companies and financial sponsors will adapt and the strong companies will prosper. So we are setting up for that and we believe will be a multiyear cycle. And I would say finally that what we're most excited about of course is the model that we are working with both the institutional community, but also our wealth management clients to adapt and to optimize as we move into the next cycle.

Ted Pick:

Good morning, and thank you for joining us. It is a privilege to be with you. Today, I will deliver the annual deck that was a hallmark of James Gorman's 14-year tenure, both to affirm Morgan Stanley's strategy and to provide a level of transparency on our progress that you have come to respect. Let's turn to the slides. Turning first to Slide 3, over the last 15 years, we have transformed the firm's business mix, scale, profitability and returns. If you compare various historical periods, you can see our business evolution. Each period faced its own challenges. In 2009 to '14, Morgan Stanley was a classic self-help story. Transformation began with the acquisition and integration of Smith Barney. The investment bank was reset, and the firm survived the near triple credit downgrade and the euro crisis. In 2015 to '19, we weathered the years of financial repression, resizing our fixed income business and pressing ahead to the top slot in institutional equities. During this period, we also acquired Solium, which was a step toward leadership in the corporate stock plan space. Then in 2020 to '22, the COVID years, we achieved incremental scale in both wealth and investment management with the acquisitions of E*TRADE and Eaton Vance, giving us a leading self-directed platform and pushing forward in investment solutions. During this period, each of the two major business lines -- wealth and investment management and institutional securities generated operating leverage and high returns. Transformed Morgan Stanley today has tripled client assets in its durable businesses with significant opportunities for further growth. Notwithstanding 2023's geopolitical, macroeconomic and industry challenges, the firm's business model generated consistent results. In 2023, firm revenues were $54 billion with $12 billion of PBT, double the averages of 2009 to '14. Our return on tangible common equity was a solid 13%, inclusive of notable items that reduced returns by over 100 basis points. Last year's return profile was tripled the post crisis years. Combined earnings from wealth and investment management generated 60% of the firm's top line and PBT, and our category of one asset gathering strategy sets the stage for continued durable growth. The institutional securities business also grew over the transformation years with an eye to investing in its leading franchises. The objective has been to create an integrated investment bank of investment banking, equities and fixed income to serve leading institutions around the world. Taken together, the Morgan Stanley business portfolio of today has well higher and more stable profitability. The actions we have taken over the last 15 years, organic and inorganic, were all within our core strategic footprint. At its center is acting as a trusted advisor to clients, helping them raise, allocate and manage capital. It is what we do. We are a global leader and we are really good at it. This will not change. Turning to Slide 4, since 2010, revenues and wealth and investment management have more than doubled, and today we are number one in the world among our peers. During the same period, our client assets have more than tripled to $6.6 trillion. We see continued opportunities to drive growth and are steadfast in our goal of reaching $10 trillion in total client assets. In wealth management, we have established ourselves as a leading asset gatherer by expanding our business model across three channels -- advisor led, self-directed and workplace. The business generated $1 trillion of net new assets over the past three years, and we are relentlessly focused on sustainable growth. We expect NNA growth to continue to vary quarter by quarter, given seasonality and even year to year given market tone and the cadence of migrating workplace assets and attracting assets held away. We are nevertheless confident in our ability to continue to grow and deepen our 18 million relationships with the breadth of our wealth management offering. Over time, our ability to track, deepen and retain client relationships with our differentiated platform allows us to drive revenue growth and operating leverage, enabling 30% margins. Given some of the recent macro headwinds in our continued investments for growth, it's reasonable to expect reported margins to consolidate in the mid-20s range over the near term. The underlying business has achieved 30% margins before, and we intend to deliver that return profile again in the long term against a higher base of revenue. Our wealth platform is complemented by investment management, where we've added a number of new capabilities to our strong public market alpha engines. This business is well aligned to key areas where we see secular growth, including customization such as parametric, private markets and value add credit. At a holistic level, the wealth and investment management business has achieved the kind of scale which enables us to invest in what matters most to clients and to take further market share through cycles. Turning to Slide 5. Morgan Stanley's Institutional Securities Group, our Integrated Investment bank is a preeminent global franchise. Our capability set, extensive client footprint and premier brand put us in a position to be the trusted advisor to every important corporation, public or private, asset manager and asset owner. Our teams across geographies, businesses and client segments position us at the center of global capital allocation and formation. Over the last decade, we have advised on nearly $9 trillion in M&A transactions, raised nearly $13 trillion of capital for clients and as indication of our market's presence. In a single trading session last month, our equities business transacted roughly $250 billion of notional value. Our leadership position outside the U.S., acting as a true global investment bank, is critical for the Morgan Stanley franchise. After more than five years managing our integrated investment bank, I'd add that it is clear from client visits around the world that the barriers to entry to becoming a global investment bank are real. Today, there are fewer competitors, and we are one of those very few who can provide the full breadth of capabilities. We expect the next economic and financial cycle to be led by corporate finance activity which will drive investment banking growth, and as such are particularly focused on expanding our 15% world share in that advice driven business. Turning to Slide 6. When you combine our wealth and investment management platform with our leading institutional franchise, you see the power of what we will call the integrated firm. Our capacity to source new client opportunities efficiently facilitates the flow of capital and deliver Morgan Stanley's firmwide Solutions has never been stronger. Looking at the right side of the slide, more specifically, our premier corporate franchise spans every business segment, with clients at the center of everything we do. We cover their broad range of needs, from advising the C suite on strategy, to helping them raise capital and hedge risks, on through to advising the broader employee base through our workplace offering. Second, we have a unique capability to serve individuals who range from self-directed, up through to the ultra-high net worth set and small institutions who sit between the traditional segments. We can deliver best-in-class institutional capabilities paired with sophisticated wealth management solutions in an integrated service model. Third, we continue to invest in our ability to deliver investment and client solutions as we are at the center of financial innovation and growth. Our global integrated investment bank is core to our ability to source and structure customized opportunities for corporations and financial sponsors. Our structuring capabilities are augmented by scaled distribution channels, extending from the largest institutions through the individual retail client set. With a central focus on our clients, we see significant opportunities in delivering the integrated firm. Turning to Slide 7. Ultimately, the firm's success relies on our human capital and maintaining a differentiated partnership culture. With James as Executive Chairman and together with Andy Saperstein and Dan Simkowitz as our Co-Presidents, our highest priority is delivering the integrated firm to our clients. Our shared Morgan Stanley experience, having all lived through the 15-year transformation, gives us a lens into where we come from and where we are going. The intentional mobility of our leadership, engineered by James over these many years, is particularly important. Andy, in his expanded role as head of both wealth and investment management, is well situated to leverage his deep knowledge of retail distribution and products to drive client opportunities across the business. Dan, having successfully revitalized investment management for nearly a decade, is returning to lead institutional securities, where he spent 25 years, will play a critical role in connecting the firm around sourcing opportunities, structuring financing and distributing capital for our clients. Both these gentlemen have burnished the brand and successfully integrated acquisitions. To have James, Dan, Andy as partners to open 2024 speaks to the enduring strength of our culture. Our broader leadership team has worked together since the financial crisis through the strategic transformation and today are unified in advancing toward our goals. The operating and management committees of the firm each have an average tenure of more than 20 years. Long tenure is one element that maintains the strength of a learning culture of serving clients in a first-class way. In addition to backing the Morgan Stanley experience set of our longstanding leaders, we're enhanced by the injection of some key lateral hires and joiners via our acquisitions. Our businesses are supported by a world class technology and infrastructure organization, and by 2,320 talented Managing Directors, 155 of whom we promoted to the partnership last week. Our 80,000 people are what makes Morgan Stanley's culture and drives us to be excellent on behalf of our clients, to be prudent fiduciaries of capital, and to maintain a keen awareness of the road we have traveled to achieve the firm we have today. Turning to Slide 8, in addition to one -- the performance of the business, two -- driving an integrated firm and three -- maintaining our culture, we are four highly focused on the state of our financial capital. Given our deliberate growth and durable earnings over the last several years, our capital position is strong, going to the finalization of Basel III Endgame. Our regulatory requirements, as ventured within our stress capital buffer, have steadily come down since 2020, reflecting the improved resilience of our businesses. With respect to Basel III Endgame, we continue to believe after fulsome industry comment and further evaluation of economic and competitive impacts, that the final rule will result in a well more constructive outcome than originally proposed, particularly as it pertains to matters that are driving our estimated RWA inflation. Looking ahead, we remain committed to the dividend as it is at the core of our business model's durability. While we will toggle among opportunities to support our clients, grow our businesses, and repurchase our stock, the core strengths and strategic decisions of the last 15 years are reflected in our quarterly dividend, which we have grown from $0.05 to $0.85 per share. The continued sustainability of that dividend is paramount. With the firm coming together, we will drive toward our performance goals. Slide 9 reiterates our confidence in them. Our strategy and long-term value proposition remain intact. The four firmwide goals are in place, hitting $10 trillion in client assets, achieving a 30% wealth management pretax margin, a 70% firmwide efficiency ratio, and achieving 20% returns on tangible equity. Our management team is steeled to execute against our priorities to reach these goals. We enter 2024 with confidence, and our base case for the coming year is constructive. There are two major downside risks. The first is geopolitical, that global conflicts intensify and conflagrate. The second is the state of the U.S. economy over the course of 2024. The base case is benign, namely that of a soft landing. But if the economy weakens dramatically in the quarters to come and the Fed has to move rapidly to avoid a hard landing, that would likely result in lower asset prices and activity levels. On the other hand, if inflation in fact has not been beaten back and continues to challenge consumers and supply chain, that could result in a stickier fed and the resulting higher for longer will have to be absorbed in the way of a higher-than-expected cost of capital and the dangers of a bifurcated economy. These risks, the geopolitical and that of the U.S. economy, present some uncertainties as we start 2024. Nevertheless, as we have discussed this morning, the Morgan Stanley of today is meant to perform through the cycle, and based on the evidence we see, our building M&A and IPO pipelines, improving boardroom confidence, and an increasingly positive tone from our retail and institutional clients, we remain constructive on the year ahead. We will execute on our clear and consistent strategy. We have a global business, a world class wealth and investment manager alongside a leading investment bank. The growth opportunities are extraordinary, especially given how our businesses and regions intersect and support the business strategy. We will continue to lead with asset consolidation across wealth and investor management, and remain committed to growing high quality share in institutional securities to consistently deliver our integrated firm to clients around the world. In so doing, we will continue to execute towards our key objectives and to deliver for shareholders. I will now turn the call over to Sharon, who will discuss our fourth quarter and annual results, and then together we'll take your questions. Thank you.

Operator:

[Operator Instructions] We'll take our first question from Dan Fannon with Jefferies. Your line is now open. Please go ahead. It looks like we lost Dan, we'll move to Glenn Schorr with Evercore.

Sharon Yeshaya:

I can't speak about behavior permanently. But I appreciate the question, Glenn. If we take a step back, it was always an idea, the premise of a sustainable growth in margin was really about ensuring that we continue to see growth in fee-based assets, and we see growth in that migration towards the advice-based channel. And in fact, that is what you've begun to see -- look at our fee-based flows this quarter alone and think about the fee-based flows that we've had over the course of the year. We continue to educate our clients. So when we think through the funnel, we have more participants, we begin to see more assets and then those assets will, over time, migrate to advice. What you point out as we think about the cash and what some might call cash sorting, et cetera, is that we still have that 22%, 23% sitting in cash equivalents, so not necessarily BDP, but rather cash equivalents, that don't necessarily earn a fee, right? Money markets think of a savings product over time, et cetera, that you might see as individuals begin to take that money and deploy it in the markets or deployed into fee-based that will be accretive to the margin over time. And that, to your point, is a place where you should begin to see a margin build and something that becomes more sustainable as we both grow our asset base and grow the advice and the client migration towards advice in those fee-based assets.

Sharon Yeshaya:

So the first point I would say is it's obviously always a competitive market, but we're very well positioned given the tools that we've given to our advisers. A couple of points that I would make to you. The first is when we look forward into the first quarter, that recruiting pipeline is healthy. So when we think about January and what we're seeing, we see the recruiting being healthy. The second point that I'd mention is what I find to be most encouraging when you look under the M&A data, is that we're seeing new clients from the Morgan Stanley. So it's not just attracting assets all the way but rather you're actually getting new clients from those participants. And then you're seeing conversion. So when you think about some of the statistics that I gave you around workplace and we've talked about these statistics, the workplace assets that move over you have 80% of those assets are actually assets that are coming from outside the institution. So you're bringing new clients in, and then they're bringing their assets that are sitting away into the institution. So I think we're well positioned to capture those opportunities. Final point that I'd make is on your banking products, actually, this idea of the E*TRADE integration, right? And we talked about, we've completed the integration, and I said we're looking towards the forward of the front office integration, some of that will be around banking products, et cetera, as we think and we look ahead over a multiyear journey.

Dan Fannon:

Thanks. Good morning. Congrats on the new role, Ted. I was hoping you could elaborate on the current environment and a little bit more and maybe what you see as the biggest opportunities for growth as you look to make progress against the longer-term targets that you've outlined?

Dan Fannon:

Great. Thank you. And you mentioned margin within the wealth chain or wealth segment will consolidate around the mid-20s here in the near term. Can you maybe unpack some of the inputs that will drive that outcome?

Operator:

We'll move to our next question from Ebrahim Poonawala with Bank of America. Your line is now open. Please go ahead.

Ted Pick:

Thanks. Good to talk to you -- with you. It's an interesting question. You're effectively asking what will over the slide look like three, four years from now. We believe that the revenue mix will toggle around. There could be periods like in 2020 or '21, where the investment bank is really firing on all cylinders. Again, early economy type of activity, and that could grow again towards 50%. And we could have other periods where as we continue to invest in the wealth and investment management piece of the firm, that could expand further. I think where we are right now is a revenue and profitability matter where 60% of the firm is in wealth and investment management is not a bad place to start. I think the main message I want to convey today is that while there is a change in leadership after 14 years of James stewardship, there's not a change in strategy. We have undertaken and integrated, if you really go back into time and then include Mesa West five different acquisitions. And I think the view inside the house is that's good for now. We can execute our business with the growth plans in front of us and it feels organic. Now that having been said, there are ideas that come across the transom and we naturally would take a look. But I think for the next period, the view that I would have is that we really work to grow the organization and to do so organically and efficiently. I think on the margin, one comment might be that we could work on sweating the income statement a bit more. There's a little more work to be done post integration where there could be inefficiencies along the income statement. And I think we are much focused on looking for those efficiencies without giving up any of the strategic investment that we want to make on our way to 30% PBT margins in wealth and 70% efficiency of the firm. The way I've articulated the strategic goals is to effectively reiterate -- we will achieve those goals. But along the way, we will invest, and that investment opportunity exists on the current portfolio in an exciting way. And that is why for me, the most important message we wanted to send out to folks today with this concept of the integrated firm. Now we have the portfolio of businesses together. We have a unified partnership culture. We have the two halves of the firm, will toggle by 5 or 10 points on revenue or profitability given a period of time and now we can scale that organically and hit the numbers and work the income statement a little bit.

Steven Chubak:

Hi, good morning. So what I wanted to start off and Sharon with just a question on incremental margins and comp leverage in a lower rate backdrop. We know NII is going to be a source of drag in the coming quarter, certainly if the forward curve manifests, but you should see improved momentum from equity market tailwinds, stronger fee base flows, a better IV backdrop. But the Street is modeling comp dollars flat, revenues up about $2 billion. I'm just trying to get a sense of how we should think about incremental margins as revenue momentum improves but the growth is coming in mainly for more compensable areas.

Steven Chubak:

No, that's really helpful. And just for my follow-up, I was hoping you could just speak to the sensitivity to lower rates. It's a big area of focus for investors. You benefit from having the majority of your deposits in premium savings where admittedly you have bigger pricing flexibility at the same time, the asset side is still very sensitive to the short end. So I wanted to get a sense as to how you expect the NII trajectory to unfold as the Fed begins easing and whether there's any appetite on your side to extend duration to maybe lock in some higher yields.

Operator:

We'll move to our next question from Devin Ryan with JMP Securities. Your line is now open. Please go ahead.

Sharon Yeshaya:

Sure. Overall, the pipeline is more diversified than we've necessarily seen in historical years. We expect to see continued momentum in energy that we've seen over the past year, we see optimistic signs in real estate, and we see optimistic signs in technology. As it relates to sponsors, we would expect sponsors to come back that will obviously take time, and I do think it will likely take a couple of potential prints in certain places and other things that will be encouraging will be on the equity IPO side. What I'd say is we've moved from a period of time that was window driven and that market is beginning to build momentum. And so the juxtaposition between the outlook for '24, I think in '23 is important there as well.

Ted Pick:

Well, I’d say that's a great question. James and I are more -- much more similar than not. He brings to the table a positive mojo to the business from the time that he took over CEO when things were in, as you know, a pretty rough shape and for now in his 15th year of leadership as Exec Chair, he brings a positive spirit to every single interaction that we have, whether it's our operating and management committees, our risk meetings, these calls, client interactions, cultural work with our - with our newbies and folks that are looking to get promoted in the organization. I think that spirit of positivity is something that has been contagious in the organization. It's something that I'm a big believer in and has worked well inside of the trading businesses inside of investment banking, and I think you can feel it throughout the firm. So the reaffirmation of our partnership, our core values and this articulation of the integrated firm, which is the next step now because we went from trying to build our way back to generating the kind of enhanced scale and deep remote through these gutsy acquisitions. That brought us to a place now where we can look around and see how we can bring the firm closer together. I think the tone is one of determination. I've been at this place for more than three decades, and we had our moment sort of before the [abyss] in '08 and I think it's fair to say that the entire senior partnership, James, but also the folks that came through the organization like myself, we are determined to not revisit anything that feels like those days. So the calling card here is durability is consistency. We want to put up consistent results Part of what you see in the strategic deck in the back page, those are very clear numbers, and we will hit them. We will hit those numbers. It will take time. We will have to do all of the three yards and a cloud of dust work associated with a thoughtfully working our way to those numbers such that when we hit them in a normalized environment, which will be part of the next arrow on Page 3 and the years to come, we will have done so in a way where we can achieve full valuation on it because the view will be that they are not only achieved for a moment in time, but sustainable. And that obviously is also the calling card of James tenure, which is that of consistency and durability. So if the first is this positive mojo and the second is this ethos of consistency, rigor durability I think the third, at the end of the day, has been to believe in what Morgan Stanley can aspire to for clients, and that is this integrated firm that we are something differentiated in our two channels very clear on what we do and what we don't do, and that the cycle is very much a tailwind for us.

Christian Bolu:

Good morning, Ted, and welcome to the call. Good morning, Sharon as well. Maybe Ted, for you, on the trading businesses, Morgan Stanley has suffered some share loss over the last couple of years and your peers have been aggressively allocating capital to that business and gaining share so maybe curious on how you're thinking about opportunities to grow those businesses and any plans to either invest more capital or resources into that business?

Christian Bolu:

Awesome. Very clear, and then maybe another one on Wealth Management margins, unfortunately, maybe for Sharon. I can hear you Sharon very clearly that you think higher revenues will drive margins over time. I guess, but if I guess if I look at the business, 2019 versus today, wealth management revenues are up 50%. This is where they were in 2019, where your margins have compressed. And again, I know there's onetime items in the quarter, on the year, but it doesn't seem to me like bigger revenues have driven operating leverage. So what gives you confidence that going forward, our revenue growth will drive meaningful operating leverage?

Ted Pick:

What I'd add, Christian, is, again, all goals being equally important, we will hit that $10 trillion number. So part of it is to allow for some of this latency, if you will, on assets held away on assets working their way through workplace. It's a space that we are a leader in. It's a space that is relatively embryonic in the wealth business. And we will allow for some time for those assets to convert. But the key, of course, is to have them in-house and then as well to see that folks who are our new workplace customers have assets held away in other existing brokerage accounts that they bring them the firm as well

Brennan Hawken:

Good morning and congrats to Ted on the new role. I will -- since I only get one shot at this, I will ask on the long-term targets. So we -- there were some slight changes here. We lost some pluses and we lost a less than on the efficiency ratio, although in fairness, we gained a plus on the client assets. So was that a reflection of these are long-term targets, so I'm guessing it's not really a reflection of the current environment. So what drove the tweak there to maybe signal some reduction in some of the upside scenarios? And how should -- you've referenced the fact that you need the environment to normalize, how should we be thinking about progression towards these targets? And what specific nonenvironmental actions you can be taking in order to move the ball there.

Operator:

We'll take our last question from Mike Mayo with Wells Fargo Securities. Please go ahead. Your line is now open.

Ted Pick:

Well, thanks for the question, Mike. The Wealth business is actually in my blood. My dad and my father-in-law were both brokers once upon a time, and I grew up studying that business as a kid. And I think it is absolutely that, which is differentiated on Morgan Stanley during this 15-year period. The ability to integrate Smith Barney and build out something that's truly special is -- has been existentially, as you know better than most, but also thematically exactly what the firm as needed. In no way has it actually worked to the disbenefit of the investment bank. As you know, the history of our -- of our merger '97 was largely about social issues, but the industrial idea wasn't necessarily off at all. to build a world-class wealth manager would be something that would have enormous barriers to entry and have run well and run their first-class way to deliver value to clients in a differentiated manner. And what we have done, thanks to the leadership of Andy Saperstein with Jed Fin and then the investment management business with Dan Simkowitz now moving over to the Investment Bank and [Ben Huneke] and [Jacques Chappuis] running investor management today is we've got effectively the full funnel. We've got the soup to nuts self-directed the traditional advisory channel and this new channel workplace are working as one. I've spent time working some of the chairman’s and hitting a branch here in Midtown and spending some time with folks that are actually making the engine work. And I think it's fair to say that We, at one point, we're calling the wealth and investment management business, the ballast, which was the right word because we wanted to convey durability, but I'd submit to you, Mike, and hopefully, you'll appreciate spirit of which I say this, I think it's actually the engine. I think this will be the engine for further Morgan Stanley growth. If opportunities were to come before us in the years to come, of course, we could staple them on and do something inorganically. As James alluded to, perhaps that would be outside the U.S. where I spent a whole bunch of time but in running the actual organic business as it currently stands, we are truly a group of one. And as you know, having spent time inside the knitting of MS what we're most excited about, Mike, you as a student of corporate culture and these investment banks, I think what you'd be most excited about is just how well we all get along. There is a zero friction in the leadership ranks across infrastructure, across wealth and investment management and across the investment bank. So the beauty of where we are today, is that all of us as shareholders and custodians of the Morgan Stanley idea and the Morgan Stanley culture of first-class business in a first-class way are very much focused on growing both pieces of the firm and is leading wealth and asset manager has a lot more room and will grow, as I said, to the $10 trillion of assets. And at the same time, I don't see any reason why we can't continue to pick up high-quality durable wallet inside the investment bank and generate operating leverage in that business, too.

James Gorman:

Thank you. Good morning, everyone. Thanks all for joining us. As anticipated, the market environment in aggregate remained mixed continuing a pattern we've seen over the past several quarters. Notwithstanding, the net result for Morgan Stanley was regenerated $13 billion, a little over $13 billion in revenues, $2.3 billion in net income, and ROTCE of 13.5%. The concerns around a tight employment market, high commodity prices, inflationary pressures that may impact Fed policy provide additional challenges later in the quarter. But we are seeing increasing evidence of M&A and underwriting calendars that are building and while we expect momentum to continue this year, given the fourth quarter has some seasonal considerations, we expect most of the activity to materialize in 2024. Meanwhile, it's our job to control what we can control. Firstly, we successfully completed the E-Trade integration this quarter. That was a massive undertaking, and the expenses relating to that have been bleeding through the P&L for a couple of years, it involved us migrating 14 million accounts onto our platform and honestly it went incredibly well, really a seamless performance by the team. This conversion allows us to further execute on our strategy, building our revenue synergies across channels, and attracting clients to our best-in-class advice offering. Secondly, on the capital front, we bought back 1.5 billion in stock. We averaged a nearly 4% dividend yield over the quarter, and at the same time, delivered a CET1 ratio of 15.5%, which is 260 basis points over our most recent regulatory requirement. We clearly have a significant capital buffer. Also, you saw the full details of the initial Basel III endgame proposal. As you all know, this is a proposal, not the final regulation. And I'm going to repeat that, it’s a proposal. There is an enormous amount of energy being spent, conversations being had across industry groups and agency board members and I've been deeply involved myself along with Sharon Yeshaya and we've been told many times that the Federal Reserve strongly welcomes comments on this proposal. Given this, I anticipate that the agencies will be open to considering thoughtful changes before it's adopted as a final rule. But let me be crystal clear, because of the buffers we have built, even if this proposal were implemented today as written, we have adequate capital to meet the ultimate requirement. Needless to say there are many years between now and then. In the quarter, wealth management generated net new assets of $36 billion, that's obviously below recent quarters. It's consistent with what I've been saying for a long time. These numbers will bounce around and in any quarterly period, they're always idiosyncratic things. This year we've had two quarters where we had some surprise on the upside and in aggregate for the year, we're totally net new assets of $235 billion year-to-date. Our annualized growth rate is at the high end of the 5% to 7% range that we've been looking at. And it's consistent, in fact, it's spot on with our three-year target of a trillion dollars for net new money. Overall, this firm is in excellent shape, notwithstanding the geopolitical and market turmoil that we find ourselves in. My hope and expectation is to hand over Morgan Stanley with as clean as slate as possible and deal with a few of our outstanding issues in the next couple of months. I'm very excited about the future of this firm, its leadership, its strategy, and its culture. And I'll now turn it over to Sharon, who can discuss the quarter in greater detail. And then together, as always, we'll take your questions. Thank you.

Operator:

We are now ready to take any questions. [Operator Instructions] We'll go first to Christian Bolu with Autonomous Research.

Sharon Yeshaya:

Sure, actually I think that interestingly enough Christian I'm pretty impressed with the resiliency that we've seen in the business. This is literally the explanation of the funnel that we've talked about. If you look back over the course of the last year alone $260 billion or $235 billion of assets that we've captured. Then look at the fee-based flows, right? We continue to see increased fee-based flows. This past year, if you exclude the asset acquisitions that we had over the last couple of years, we are basically at some of the historical highs of seeing fee-based growth as we move forward. You're looking at times since COVID, where we obviously had very high retail engagement, and you've been able to offset, even with a decline in NII, offset those growths to asset-based, asset management revenues as you move forward. It's that, that we are trying to grow. We're trying to continue to grow our asset management fees over time and make sure that we have the right solutions in place to offer our clients. Now let's take that forward. We have this mixed environment. You have 23% of our retail client assets sitting in cash, that is 5% higher, right, from the 18% on historical averages. We've begun to see retail investors put their cash into markets. The last four months -- in consecutively, we've seen that movement into the market. This quarter alone, we began to see alternative growth in the new products, the growth in transactional revenues. We haven't seen that since the first quarter of 2022 before you started this rate hike cycle. So in my mind, actually the strategy is working pretty darn well, especially if you think about how we've been able to aggregate assets, migrate them into fee-based flows, look at transactional and see that growth -- and see growth in these new products and deliver them to our clients, all while these clients have dry powder to invest as these markets turn.

James Gorman:

Well, Christian, maybe I take that given Sharon just pummeled you and I want to give you a little bit of a break here. By the way, the only thing I'd add to what Sharon said is when people have a choice of making a 4%, 5% return by doing nothing, they're not going to be trading in the other market. So the actual secondary lines in the revenues of the lowest I've seen for years in the last couple of years as rates do eventually come down, they will come down, I don't think next year, but they'll come down after that. You'll see more activity in that regard and actually you'll see more money go up in the sweep. So interestingly, there's kind of an optimal point where rates are attractive for investors, but not so high they keep them out of the market and not so high that there isn't money kept on sweep. So very different from the checking account phenomenon you see at some of the commercial banks. But back to the 20%, I mean, I just say, as you know, we actually, we were at 20%. So it's not -- this is not a -- this would not be a remarkable achievement. It's a bit like when I first came to Morgan Stanley and people asked me if the wealth management business could generate, in those days 15% margins. And I said, well, there are two people already doing it, so it's pretty obvious it can be done. So we've done it and nothing structural has changed. If anything, the firm's got stronger, we've been investing a lot. I mean, this E-Trade deal was, you know, it was a lot of investment to get that integration done. We decided to keep investing through the cycle on the funnel and wealth, because we think over the next 10-years that's going to pay monster dividends. The integration across all the Eaton Vance platforms, they were never really integrated as one platform across the different, you know, Atlanta, Calvert, Parametric and Eaton Vance and now sorting through all of that, which Dan has done a great job of doing. And then frankly, banking has been really weak. I mean, under a billion dollars is evidence of a very weak calendar and very weak M&A. And the pipeline we saw this quarter was really strong. So I don't think the announcements won't translate into revenues in Q4, but they will in Q1, Q2 next year. So just on the math, I think if we're running about $2.2 billion we'd have to generate about another $700 million net a quarter. Just on the expense management, we could do things on expenses easily, more than we've done. And you could get a couple of hundred million from that. And then on the revenue side, as banking recovers, some of the transaction stuff we just talked about and Sharon pointed out, these assets moving into a pneumatized product. And then I think Fed will move up from this point. You pretty easily get to the 20%. So I appreciate the question and I'm not concerned about that long-term outlook. I think it's -- as it has happened and will happen again and frankly won't be that long.

Glenn Schorr:

Hi, thank you. Sharon, first one on wealth management and NII. I mean, the trends I think are in the range of what's been happening across the industry. So not overly surprising. But I'm curious if you could break down even qualitatively how much of that sweep movement is coming in historical mortgage family versus E-Trade? I'm just trying to see what type of client is moving? And then to go back, you piqued my interest, James, in the comment you just made about not next year, but maybe after that. What conditions do you think we need to see for wealth management NII to stable and grow?

James Gorman:

I think I don't know. On the second bit, I just think there's an optimal point. I mean, we went from zero rates to 5% in effectively the fastest period since the 60s, early 70s, fastest rate increase. What's remarkable is we haven't had a recession, by the way, but -- and I personally don't think we're going to. But with that, I mean, if you're an advisor and you've got a client sitting on a lot of cash earnings zero, I would hope you're telling them to put it in treasuries or something. So that's exactly what's happened. At around 2% to 3%, it becomes a different kind of discussion. So I think there's a trigger point and you're seeing it across, as you said, the whole industry and that's why you're seeing a different behavior set for people in checking accounts where they haven't gone to buy the money sitting in the checking account. If they're not paying attention, they're still getting, I don't know, 20 basis points or something. So as rates come down, the total cash we have in the book, which is 23%, will be coming down anyway, because it's just -- that's an abnormality related to where rates are right now. As rates come down over the next couple of years, you're actually going to see people much less price sensitive on what they're generating in a return on the cash and just using it as a liquidity account to manage investments going in and out. So I think in some ways we overachieved relative to our particular business mix. So I'm quite encouraged about the future because of that. And think, in fact, you're hearing some of that language coming out of the banks where they said, I forget what the words some of the other CEOs said, but it was effectively the same. They've overachieved in that it's sitting in checking accounts and they're making an enormous amount of money on that, but that's unsustainable. We've overachieved in that rates are so high, everybody wanted to be in cash, earning not cash sitting dormant. I don't know if that makes sense to you, Glenn. By the way I have to say I did love your comment about, you know, Paul talked about green shoots, somebody forgot to water them. I'd give you that one.

James Gorman:

Yes, about three years from now. No, wait, listen, Glenn, come on. We said I will not be CEO, I said at the annual meeting I wouldn't be CEO within a year. And I said that for a very simple reason that people didn't believe that I was going to leave because apparently bank CEOs don't. And I said I would and when I say I'm going to do something, I'm definitely going to do it. I would leave at the earliest possible moment that the board feels comfortable making that decision. And I've made that very clear to them. I think they've done a terrific job. Now that you've opened up the question, I'll answer it more broadly. They've done a terrific job. Dennis Nally and the succession comp committee and Tom Glocer, lead director on the board, all the directors engaged, really thorough process. And I don't want to give you an exact time, because that's sort of a spoiler. I already did that apparently talking about Logan Roy once. But we’re -- shall I say we're well into it. And I do believe there are diminishing returns at some point in time. We're not there. The team is doing great. The businesses are moving forward. But yes, I want to get out of the seat and give somebody else a chance to see what they can do with it. And I think there's a lot of things, the growth opportunities in this company, now that we've set it up with so many planks that are solid, you have an abundance of choices. And I just, you know, just look at what we've done with MUFG in Japan, the so-called 2.0 that you know, Ted has been driving with Hero, the CEO of MUFG of taking our Japanese business with them to a completely different level and I think there's a lot of things we can do with them in Japan strategically taking advantage of the turnaround of the Japanese economy. That's just one example. So yes, we're getting close. I'm certainly not a barrier to it. I'm a -- I don't know if the word's enabler, but I'd like to get on with it, and I'll help in the transition as Executive Chairman for a bit, and this place will go forth and thrive.

Ebrahim Poonawala:

Hey, good morning. I guess, I just wanted to follow-up on something you said, James, around the optimal level of rates, and you talked about NII. But if the Fed were to hike a few more times, or if rates stay at these levels for longer, is there an argument to be made that just structurally the business will be challenged until we get to the other side of the rate cycle, given just client assets probably remain in lower spread products? Just talk to us in terms of how you think about if rates don't get cut, is that a headwind to the business until we get to the other side?

Ebrahim Poonawala:

Got it. I guess a good time for you to hand off. Your successor will be thanking you for that. But a quick question…

Ebrahim Poonawala:

I think, Sharon, you mentioned about focus on secular growth, I think international expansion, E-Trade is done now. I'm assuming you're not doing any big M&A anytime soon. Just talk to us about international expansion, a lot of disruption on wealth management, private banking globally, what the opportunities are, where we are investing. We'd love some color around that?

James Gorman:

And I just said, I mean, I was in the Middle East a few months ago, we're opening an office in Abu Dhabi. If you think of the combination Middle East, India, Japan, kind of, offsetting what's going on in China. And then strategically, I would be very surprised if this firm doesn't do some transactions in both wealth and asset management over the next three years outside the U.S. I think we have a game plan for it. Strategically, the team has worked on a lot of ideas. And obviously, we want to make sure when we do it, we're, you know, we're fully ready and we understand all of the, you know, the diligence issues around some of these relationships and careful about that, but I think the opportunities are clearly there.

Dan Fannon:

Thanks, good morning. I wanted to follow-up on flows. Obviously feed-based flows strong in the quarter, but the total flow number came in and understanding the environment was a bit softer here in the third quarter? Could you maybe talk about the channels where the pullback was seen the most? You didn't mention workplace, so I'm not sure you would love some color there as well?

Dan Fannon:

Great, thank you. And then just a follow-up on investment banking and understanding the environment isn't ideal, but you did talk about increase in announcements. So I was hoping you could provide some context maybe on the sponsor community and maybe how those conversations are happening? And just overall backlog levels versus kind of last quarter.

Operator:

We'll go next to Steven Chubak with Wolfe Research.

James Gorman:

Good morning.

Steven Chubak:

So I wanted to start with a question on just the expense and margin outlook. Expenses were actually well managed in the quarter. But one of your peers did talk about competition intensifying in terms of the war for talent within investment banking and trading. It feels like that's been the case for the better part of a number of years in wealth management. And I was hoping you could just speak to your expense growth outlook and your confidence in terms of your ability to achieve the firm-wide margin target of 30%?

James Gorman:

I'll just say one thing on the war for talent. Yes, I mean, obviously, really high performers are in demand across the street. But we've actually had the opposite issue. We've had very low attrition, which is why we did some of the expense initiatives that Sharon talked about. And I guess we should feel flattered. It's a reflection of the culture and the stability of the firm. But also, that's why we took the initiatives, because you've got to bring in talented people and new generations to keep growing this place. So one's these and two's these, yes, you can lose somebody, a senior person here or there and we've hired a bunch in banking insurance, but the broader across the 80,000 people we've got is the broader messages attrition has been remarkably low and that's something that, you know, we just got to work through.

James Gorman:

I'm going to have to write this down. There's an old guy, there's a lot to remember. It's not going to affect ROTCE. We're not going to be increasing capital. So that one you can put to bed. The cushion, you know, it's a function where the rules come out. I mean, I've been very clear about this day one. I do not believe the proposal as is will be what we see when the comment period is over. I do not believe that. I have no special insight except that obviously I spent a lot of time with the regulatory community, which I've done for 14-years. I think everybody understands for example the way operating risk RWAs have been calculated in a sort of blunt instrument based on fees is not, you know, it wasn't what Basel was originally going to do though. We're going to take that rule out years ago. And they ended up just not getting around to it. And suddenly we're complying with something that they didn't even want and don't, you know, they don't use in Europe. So it’s not that -- it’s just not going to happen the way it is. And that's not being pollyannaish. That's just, that's my judgment call. That said, what we want to frame with investors is, god forbid, it does happen exactly as is. The rule becomes proposal rule tomorrow, then we're fine. So we're certainly not going to be raising capital. We're going to continue with our buyback through this period. The final implementation of this thing is going to be 2028. You know, there's a lot that's going to happen between now and then. But listen, this is the first time you've had members of the Fed Board and the FDIC, I think, come out in advance of a rule being promulgated, if that's the word, saying that they're not comfortable with it. So there's clearly debate within the regulatory institutions. And if you get past the -- why we need more capital, which I don't think the industry does, into well what should it be, the only place it clearly shouldn't be is punishing businesses that have fees attached to them, whether it's credit cards or wealth management, that's not the regulatory intent. And they've told me that and therefore I believe that will change. So on the cushion it's frankly a function of, you know, where the rule ends up. We'll carry whatever appropriate prudent cushion we need to carry. On do we create more capital? No, not unless we grow the business to reflect that, that we can put it to work. And thirdly, will we continue buybacks? Yes, and I'm sure Sharon can give more play from what we think about on the buyback side and dividends for that matter.

Operator:

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

Sharon Yeshaya:

Look, we haven't really -- this deal was never contemplated from a cost synergy perspective. It's really been around revenue synergies. Will there be potential savings on the margin? It's possible. But that's not really the point of the transaction. What I think is more fundamentally interesting is that a couple of things when you think about the E-Trade integration, other than the fact that it went very smoothly as it relates to the clients themselves, it creates a really clear foundation when we're trying to migrate clients from channels and move them. So give somebody from an E-Trade channel or a self-directed channel and say, let's make an introduction to an FA and begin that potential migration. If you're on the same platform, it's a much easier and much more seamless transition. So that's a positive use of that. That's an example of how being on the same platform is helpful. The same goes for workplace, right? Everything flows into the same places. Again, that should be helpful as we move forward. It's also very helpful from a bank rails perspective. So as we think about banking products, as you can use, remember E-Trade had bank rails on their platform. Again, a lot of that can be used as we are now looking to potentially grow portions of the bank or grow lending or grow deposits. Those are all things that now that the platforms are put together on a consolidated basis. So I would look at it more from a revenue synergy perspective than necessarily a cost synergy perspective.

Sharon Yeshaya:

Yes, again, so when I look -- I would look at the movement sweeps, if you're trying to draw a relationship between sweeps and NII really over the last two quarters, the asset yields are going to be a function of what the market yields are. Last quarter, for example, I mentioned that we had the NII was supported by higher asset yields. You'll remember that when we walked out of the first quarter, we were in a position where there was still a regional banking crisis. Some of the yields were higher, as you think about funding yields, simply because of what was going on in the environment. As those yields normalized, that came down, you lost some of that asset yield, and you began to see what we, you know, a different kind of, the deposits themselves had a bigger, more prominent reaction when you look at a sequential change in NII. So what I would try and do is you should take both quarters, for example, into consideration when you're thinking about the relationship between sweeps in NII. And of course, asset yields will be determined by market factors more broadly.

Brennan Hawken:

Good morning, James and Sharon. Thanks for taking my questions. Would like to start, you know, similar to that last question. So there's clearly uncertainty, but also it seems equally clear that NII is no longer a tailwind for wealth. So when you're thinking about the 30% pre-tax margin target that you've provided for that business? How do you think, what are your plans given that tailwind may be turning into a headwind or at least moderating? And how are you calibrating any planned investment and balance that out with the potential for growth on the back of that?

Brennan Hawken:

Well, but -- okay so do you have enough? Is that lever large enough? Are you going to be able to or willing to dial back investments in order to support moving towards that 30% pre-tax margin even without NII tailwinds?

James Gorman:

I just point out, Brennan, I mean, on $6.5 billion of revenue, the deficit against the 30% long-term target is currently about $120 million, $130 million. So this is not, you know, we're talking less than 2%. We're already at 28% ex-integration cost. They could take 2% of the cost out of that business tomorrow and hit that number, so this is not you know back in the day when we were talking about 20% margin and we were at 8% that was you know when certain people were skeptical about that. We're in a whole different league now. 28% can go to 30%. We can make that happen. What we want to make sure is we make happen the growth over the next several years. So it is not a heavy lift. I'm not worried about that at all.

Sharon Yeshaya:

In general, when you're talking about the AFS portfolio, the duration of the AFS portfolio is under 2. But what you have to think about is just the deposits themselves and what's going on with right now when we look at it. We're slightly still asset sensitive, but of course if rates rise, the deposit duration also shortens. So I just think you have to think about, you know, you're taking all things into consideration as you move forward, given the cycle.

Operator:

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

Sharon Yeshaya:

Yes, it's a great question. When you look at what's gone on in terms of the industry wallet, we talked a lot about 2019 and 2020 being bookends. Obviously, you are above the 2019 wallet more broadly, and you see this playing out, because things like fixed income, you do have more central bank action, and you do have more broadly associated vol when you think about pre-COVID levels. So all that is fundamentally positive. In terms of specifically the trading businesses, you had movements like I said in commodities, oil, that ability to capture vol, it's really around being there for our clients, but having greater velocity of sheet. And the more that we're able to do that as we move forward, we restructured this business tremendously over the course of the last eight, nine years. And it's being there to be able to serve our clients and using our resources to some degree more effectively and efficiently.

James Gorman:

Thanks, Jim.

Mike Mayo:

Hi, one kind of positive question, one negative question, maybe James. When you think of the permanent improvement from 2019 levels pre-pandemic, how much higher do you think global wallet shares should be for both investment banking and trading? Like as you look out over three to five years, is this 2019 the normal or should it be above that? Because we're drifting back, global wallet share is drifting back toward 2019 and although you know the big U.S. bank is staying above that? And then the negative question is just NII is down 9% quarter-over-quarter wealth and kind of what are you guiding for that to be down and when do you think that will be in flex? Thanks.

Sharon Yeshaya:

Yes, we're not given 2024 guidance right here. What we did say is that the next quarter, we have said, will be lower. And that's a function, mathematically, of the exit rates of deposits where we entered the quarter. But what is encouraging is that as we ended September and then we looked into October, client behavior is in line with our modeled expectations.

Gerard Cassidy:

Thank you. Good morning, Sharon. Good morning, James. I'll just ask a single question in view of the time. Can you guys give us a view of the outlook for your mergers and acquisitions, your appetite? Obviously, James, over your tenure you guys have done a number of successful acquisitions and as you look out over the next three to five years. I know James you won't be here, but what's the appetite? Is it still something opportunistic if something comes up? It seems like you have all your products lined up by channel, but can you get economies of scale by buying some competitors in different channels? Thank you.

Operator:

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for everyone for participating. You may now disconnect.

James Gorman:

Hi. Good morning, everyone, and thank you for joining us. We started the second quarter with significant headwinds and uncertainties, and it's fair to say that we ended the quarter overall in a better place with a better tone. The headwinds reflect the ongoing market transition from a high-inflation, low-rate environment to a higher-rate, lower-inflation environment. In addition, there were several other issues impacting the markets. April started on the heels of the first bank crisis since 2008, which had the risk of bleeding into the broader financial system. Prompt action by regulators and what turned out to be idiosyncratic stories of the failed banks combined with the strength and support from the large U.S. banks helped to rebalance the system. Second, we found our country moving headlong into a debt ceiling crisis. While our view was it was likely to be resolved, there is no doubt it created unnecessary uncertainty in the markets in April and May. Thirdly, after rapidly raising rates over 15 months, the Fed reached a pause, if not a plateau at its recent meeting. And while we may not be quite at the end of rate increases, I believe we're very, very close to it. Finally, strong rhetoric from government leaders from both the U.S. and China in recent weeks is evident, but there's now been recent efforts to normalize relations and a constructive dialogue is surely welcome. Seeing these four not-insignificant macro concerns progressed positively, supported a more constructive tone in the markets, particularly evidenced in the last few weeks of the quarter. Beyond more macro issues, we at Morgan Stanley completed a significant part of the E*TRADE back-office integration with the final part to be completed after Labor Day and we're very pleased with how it's gone. And today, we announced new institutional initiatives with Japanese research and equity and in foreign exchange with our long standing partner, MUFG, further evidence of how our businesses can work together over time to best serve our global clients. And importantly, we received the most recent results of CCAR. We're pleased our performance under the stress test has improved for the fourth consecutive year, every year since the SCB was introduced. Given our strong results, we increased our dividend by $0.075, the same as we did last year. That brings our total annual dividend per share to $3.40 annually with a dividend yield of about 4% given the current stock price. As to the financial performance of the firm this quarter, certain key metrics were encouraging. Net new assets in Wealth Management grew by $90 billion, and combined with inflows from Investment Management, we saw over $100 billion, bringing our year-to-date net new assets to approximately $200 billion in six months. Our year-to-date growth is well ahead of pace, and while obviously any quarter can bounce around and that will happen, our consistent growth in net new assets in Wealth Management is evidence of our scale and our expanded channels and the clients that we serve. Second, our institutional businesses navigated a choppy environment well. And altogether, the firm delivered net revenues of over $13 billion, up 2% from last year when conditions were very different. This translates into an ROTCE of 12%. Finally, our CET1 ratio was 15.5%. While we knew this would significantly exceed our capital requirements, and it did, it reflects our desire to remain highly capitalized in the face of the new unfolding Basel III Endgame. It's too early to predict the rate of market improvement through the rest of 2023, but the more positive tone and activity seen later in the quarter across many parts of our business is promising. Of course, how much it moves through the balance of the year remains unknown. That said, the fundamentals of our business model remain strong. Finally, a brief comment on succession. At the annual meeting in May, I made it clear I would transition out of the CEO role before next year's annual meeting. Succession planning should be intentional and managed just like strategic planning for the firm or any of our critical talent management processes. We are and have been dealing with a number of uncertainties including but not limited to the CCAR results, business environment, Basel III upcoming Endgame proposals and certain other pending matters. I committed to the Board that I lead our response to those issues, and when I do transition out of the CEO role, I remain as Executive Chairman for a period of time. We are fortunate indeed to have three very strong internal candidates that the Board continues to evaluate along appropriate processes for their readiness to step up as the next CEO of Morgan Stanley. I'll now turn the call over to Sharon to discuss the quarter in greater detail and then together we'll take your questions. Thank you.

Operator:

[Operator Instructions] We'll take our first question from Ebrahim Poonawala with Bank of America. Your line is now open. Please go ahead.

James Gorman:

Good morning.

James Gorman:

Well, it's an important question. And you're right, I have made comments on it. Let's sort of set the table of where we are right now. We've had a lot of speculation based off of what the Basel III Endgame looks like. By the way, I'm not sure it's actually being implemented fully in Europe, just to say. I think the U.S. banks actually have more capital, but putting that knit aside, we did get the speech from the Vice Chair. I think it's important to look at the title of that speech, which was holistic capital review. So, it's taking into account all of the CCAR, stress tests, SCB buffers and the like as this stuff is implemented. Secondly, we haven't seen the actual rules. I mean, I guess there will be a proposal coming out, as you said, in a couple of weeks. There will be an extensive comment period. There is clearly very different views as to the need for the U.S. banking system to accrete more capital. In fact, if you look at the test of the last few years, what happened with the regional banks, what -- Silicon Valley First Republic Signature, what happened during COVID, what's happened during this period of high inflation, what's happened with the biggest rate increase we've had in 40 years, put all that together, the U.S. large banks actually did really well. In fact, if not all of them, certainly for Morgan Stanley, our capital position improved four years in a row under CCAR. So, it's kind of hard for me to sit here and say that we won't be commenting forcefully that we are very well capitalized. But there will be an extensive comment period. I suspect what comes out of that will not be the same as what starts. I think in the sausage making, there will be a lot of evaluation. Clearly, the intent is not to harm the U.S. banking system, which is the backbone of the economy. It's to strengthen us. Then there will be a long transition period. So, I just happen to be reading the speech from the Vice Chair in the last couple of days, and he had a paragraph in there anticipating this question. I thought I'd read to any proposed changes would go through the standard notice and comment rule-making process, allowing for all interested parties appropriate time. Any final changes to capital requirements would occur with appropriate transition times. And he goes on again later in his speech to point out, it could be -- it will not be fully effective for some years. So, here we are in 2023. I don't think this is going to happen in any meaningful way before the end of 2026. I think what comes out a year from now after comment period will be very different from what goes in. And just take my personal peep in it, which is applying a standardized RWA hit on operating risk as the various regulators trying to figure out what the right way to assess operating risk capital is. And to put a standardized hit is fine, but to do it based on fee income, which is the current European proposal, seems to me to be nuts. I mean, we're not -- you don't build fee-based businesses to create operating risk. You build them to create stability. So that's a point we've made very clear with the regulators, and I think they're taking it under consideration. So, long story short, yes, it's the final trust. It's ironic, I don't believe all the European banks are complying with their own rules. We have a very healthy robust capital system here that's been tested 12 years in a row. Morgan Stanley has done well. And there is no chance there will be a major strategic shift for Morgan Stanley as a result of any of this, is my conclusion.

Sharon Yeshaya:

It will depend really -- Ebrahim, thanks for the question. It really depends on the deposit mix. And so, as I mentioned, there were encouraging signs in terms of that mix as we think about the back half of the quarter. But that liability mix, what's going on with sweeps will be the primary driver when you think about NII in the near term.

Devin Ryan:

Hey, thanks. Good morning. I just want to touch on the Institutional Securities. And you had ultimately, I think, a pretty good quarter relative to the backdrop. And you mentioned that engagement really accelerated kind of towards to the back half of the quarter. So, I'm assuming kind of on the other side of the debt ceiling debate, things started to normalize a little bit. So, just want to talk about some of the puts and takes, and whether maybe the second quarter results, which are still the softest results, I think, since 2019 second quarter, if this is kind of a more normal outcome, or if you actually think that what you saw kind of in that recovery in the back half of the quarter is normalization and so therefore, we could actually bounce back from the outcome of the second quarter? Thanks.

Devin Ryan:

Okay. Great color there. And then, just in terms of just this green shoot and kind of normalization theme, we are seeing in the equity capital markets, debt capital markets, some normalization. M&A still been pretty lackluster. And so, just curious whether you just feel like maybe that's more on a lag basis as capital markets recover, then M&A recovery would come next? Or is there something else kind of idiosyncratic to that market that may hold back results in that business? Thanks.

Operator:

We'll move to our next question from Glenn Schorr with Evercore ISI Group. Your line is now open. Please go ahead.

Sharon Yeshaya:

Thank you so much, Glenn, for the question. And yes, I think referencing Andy's speech that he gave for those of you who may not be aware, is helpful because it is an asset-led strategy when we think about where we see expansion in that business going forward. This particular quarter, historically, over the long term, we've generally said no one channel is contributing to over 25% of NNA. Interestingly, this quarter, we did see the advisor-led channel was a big proponent. And more than that, it was -- what was a big production part of the funnel was the assets held away from existing clients. This has been a strategy that we've been talking about back 2015 through [Technical Difficulty] to give advisors more time to begin to not only prospect new clients, but also really offer their existing clients better advice. And so that's where I think you're beginning to see a lot of that work in terms of aggregating assets held away, and we continue to believe that, that's a real opportunity for us to grow our asset base.

Glenn Schorr:

Wow. Maybe just one quickie, Sharon. You talked about sweeps, and it's too early to tell if we've settled in. I'm curious if you have any stats you can share on what percentage of FAs and/or what percentage of clients have accounted for most of the moving? I'm not sure what's [room for you] (ph) here, but curious on how widespread across the FA and client base the shifts have been or concentrated.

Operator:

For our next question, we'll move to Steven Chubak with Wolfe Research. Please go ahead.

James Gorman:

Well, again, I think, Steve, we've got to see the rule proposed first. I mean, without talking out of school, I clearly had conversations with all the appropriate regulatory bodies. And I'm encouraged by their response, which is they sincerely want to hear comments from the industry. They do understand capital changes across the whole industry have to result in the right economic outcome for the country. And by definition, the bank's stability, as evidenced by the recent many years of CCARs, shows that the G-SIB banks, the top eight banks for sure, are well capitalized. So, I don't want to get ahead and talk about what we'd mitigate. Clearly, we have flexibility around our RWAs. You saw that this quarter, we ended up with 15.5% CET1. We did that not really from a Basel III perspective. I mean, we had that in the back of my mind, but more from this environment, it was a little squarely. I mean, let's just say it that you had three bank fails at the beginning of the quarter. That wasn't a good look. So, we wanted to be cautious. And on the specific buyback, obviously, just on the dividend, we're totally comfortable with the dividend. We've said many, many times we regard half the company as a yield stock, and we're going to treat it that way. And the dividend increases you've seen, I think they're entirely appropriate, and I would expect they continue over coming years without saying exactly what level they're at. On the buyback, I mean, we would take advantage of weakness in the stock. We will be prudent. We're creating -- this was a very difficult quarter and we accreted $2 billion. So it's not like we're not making money here. And I'd like to see the rule, I guess, in a couple of weeks, Sharon, right, we're getting the rule and then the first range of comments. We'll be doing buybacks through this year. We have $20 billion authorization from the Board. We won't be doing $20 billion, but we'll be doing buybacks, and we'll moderate it. I think this thing is going to take -- as I said, I'd be surprised if this is all done and dusted by -- where are we, '23, by the end of '26. I think that's sort of -- and that's 3.5 years, which is a lifetime in these industries.

James Gorman:

It could. And we'll adapt, but we won't change our strategy. And I'm going to be a strong advocate on where I think some of these rules do not align with what is right for the global -- for the U.S. financial system and the U.S. economy, not just Morgan Stanley's self-interest.

Sharon Yeshaya:

So, Steve, the margin goals that we've given have been really around Wealth Management. I respect your point though, we have given larger efficiency targets for the firm. And so, there are places where you all puts and takes between ISG and I am. Remember, if we look back less than 18 months ago or so, we did -- we were close to 30% margins in the IM business. So, what we've seen over the course of the last year or so has just been the cumulative impact of the outflows associated with changes in what investor appetite was, particularly around active equity. But also just the asset levels themselves that are associated with market. What's important to us is the diversification of the platform and then continuing to invest in where we see real changes in that business. And I mean -- by that business, I mean more broadly in an industry landscape. So things like customization consistently, every quarter, regardless of what we've seen sort of on the top-line, we continue to see increased flows, net inflows on the customization product. You saw -- we talked about a solutions-based product this additional quarter. So, we're leaning into where we see industry opportunities. And as we grow assets, similar to us growing assets on the Wealth Management side, that should help support the margin for the Investment Management business, which we do see as a through-the-cycle business.

Sharon Yeshaya:

Operator, maybe we go to the next one and come back to Brennan.

Mike Mayo:

Hi. Well, this is the first chance we have to ask you about the CEO change, James. And just...

Mike Mayo:

Yes, well, you survived and thrived, so there you go.

Mike Mayo:

But it's -- this is Wall Street and what have you done first lately and what's going to happen ahead. So, first, I don't understand what the Executive Chairman is. And I do hope you have in-person shareholder meetings again like you did in the past. And what will that mean when you're Executive Chairman? And what is your thought process on timing of the new CEO? And what are your considerations? I mean, we could all go through the candidates that we see in the press, but let's just hear it from you directly what you're thinking and what the Board is thinking who ultimately makes that decision?

Mike Mayo:

Yes. Just one follow-up. So that -- at least I guess there's three contenders, the three heads of the business lines, if that's correct. And I guess that means maybe two people don't get the job. What's a good technique for your firm or any firm to make sure that those people who don't get the top job are still made part -- still stay with the firm and still a part of everything that's happening?

Operator:

We'll move to our next question from Brennan Hawken with UBS. Please go ahead.

James Gorman:

Go ahead, Brennan.

Sharon Yeshaya:

There were some places where we benefited from the asset side. But as you know, we'll have to look at the ALM mix and it will be dependent on some of the market rates that we see going forward. So, unfortunately, there's not that much more clarity I can give you other than what is leading us as we go forward is largely that liability mix. And so that's the trend that will when we look out in the next couple of quarters is one of the biggest trends that will drive NII from here.

Sharon Yeshaya:

Yes, that was largely just associated with the trading position. And as you know, it depends on many things, including what products you have, where they're booked, how they're booked and what type of instrument, and in addition, various types of funding costs. So, it's really the -- I think when we look and we manage the business specifically on the trading side given our portfolio and how we think about our bank versus just the broader broker dealer, et cetera, we don't manage it on an NII basis. When we're looking at NII, NII is clearly a driver from the Wealth Management side.

Dan Fannon:

Thanks. Good morning. Another question on wealth and acknowledging the strong NNA number in aggregate. What do you think we need to see for the fee-based NNA to begin to get closer in size to the total NNA? And maybe what you think longer term that mix will look like?

Dan Fannon:

Understood. Thank you.

Gerard Cassidy:

Thank you. Good morning. Sharon, can you give us some color, when the E*TRADE deal was closed, I think it was back in October of 2020, one of the real attractions, I think, for Morgan Stanley was the workplace channel. And you guys are, obviously, a dominant player in this workplace channel. Are there any metrics that you can share with us on the success you're having in increasing the penetration in that channel?

Gerard Cassidy:

Very good. And then, James, just to circle back to the capital comments that you made with the Basel III Endgame and we've heard from some of your peers about the engagement with the regulators appears to be stronger this time maybe than in past. Can you share with us your feelings when you think about what you guys all went through post the financial crisis and the new regulations that came from Dodd Frank? Do you think the regulators are really listening to you folks more so this time than in the past, or is that not the case?

Operator:

For our next question, we'll move to Andrew Lim with SocGen. Please go ahead.

James Gorman:

Well, I'm not going to go into more detail about the European banks. I was just observing that the system was set up many years ago under Basel European banks, some of which are fully compliant with it and some are not yet. And the country system was set up in the U.S. of CCAR. So, we've actually had a capital stress test system for at least, I don't know, 12 years or something. So that was simply the observation. On the operational risk standardized approach to risk weighted assets, yes, actually that is very clearly going to be in the proposal. That is the Basel III proposal and that is going to be in the initial readout. I think, from the U.S. proposal, where that ends up, I've made my position very clear on that. But tying standardized RWAs to fee-based business is not -- just doesn't make sense to me. So, up until now we've had idiosyncratic evaluation of specific bank operational risk and the regulators are trying to move a standardized approach. How they get there, when we get there remains a lot to be seen. A lot of work to be done on that.

James Gorman:

Good morning, everyone and thank you for joining us. The first quarter of 2023 was very eventful for our industry, but not so eventful for Morgan Stanley. Firm delivered strong results with revenues of over $14.5 billion, net income of $3 billion, ROTCE of 17% and net new asset flows of $110 billion. At the same time, we bought back $1.5 billion of stock while maintaining a CET ratio of 15.1%. In many ways, it was an excellent test to Morgan Stanley and the opportunity to show the strength and stability of our business model. Let me just touch briefly on the turmoil and the banking sector. In my view, we are not in a banking crisis, but we have had and may still have a crisis among some banks. I believe strong regulatory intervention on both sides of the Atlantic led to the cauterization of the damage. I consider the current issues is not remotely comparable to 2008. I was pleased that Morgan Stanley, along with the other large U.S. banks, became part of the solution by providing an uninsured deposit line of $30 billion to First Republic Bank. Someone who lived through the darkest days of 2008 where Morgan Stanley was seen as part of the problem, it’s indeed rewarding to be here 14 years later as part of the solution. Turning back to our own company, while the performance of the overall business was strong, the results reflected the impact of the environment. In Wealth Management, positive flows of $110 billion were a very strong result, reflect continued growth in the model together with the flight to quality. This obviously gives us a good start to our 1 trillion every 3 years target. Investment management also benefited from diversification as long-term outflows moderated and we saw strength in Parametric and also in the liquidity product. Overall margin in the Wealth Management business was 26%, impacted by modest increases in credit reserves, slightly lower growth of NII versus forecast and ongoing integration expenses. We continue to focus on the levers within our control with an eye towards expense management. In ISG, underwriting and M&A remain very subdued. As I have said previously, these are revenues delayed, not dead. Already, we are seeing a growing M&A pipeline and some spring-like signs of new issuance emerging. That said, it largely remains a back half 2023 and full year 2024 story. On the positive side, our fixed income and equity trading teams performed very well in managing through some historic rate moves. Total trading revenues were solid. I expect the markets to remain choppy through this earnings season and for the next several months. However, absent any geopolitical surprise or limited progress on bringing down inflation, I think 2023 is likely to end on a constructive note in most areas. Morgan Stanley is very well positioned not just for 2023, but for several years ahead as we see significant growth opportunities across all three of our client platforms. I will now pass it over to Sharon for more details on the first quarter.

Operator:

Thank you. [Operator Instructions] We’ll take your first question from Daniel Fannon from Jefferies.

Sharon Yeshaya:

Certainly. The adviser recruiting pipeline remains healthy. We continue to see assets aggregated from all channels, as I mentioned, both recruiting, adviser-led and workplace and when we compare it to a year ago, I think that what we continue to see is that we remain a destination of choice, not only for new advisers, but also obviously, as we stated, from the assets held away that we continue to aggregate in both the net new assets from existing and from new clients.

Sharon Yeshaya:

So first, let’s take NII. As we said, what we have been looking at is we thinking about it in terms of modeled client behavior. Obviously, March itself had a different modeled client behavior than we probably would have expected for other months within the quarter. But when we look ahead, we are currently not expecting expansion of the quarterly NII as we go forward. Now as that relates to the margin, a 26% margin, obviously, is still impacted by certain things, such as integration-related expenses. We mentioned also litigation and we continue to really invest in the model as we go – as we have and also as we go forward. All of that being said our eyes are still on the 30% goal that we have set forth and we will continue to achieve as we move through time to progress to those goals.

Glenn Schorr:

Hello. Thanks. Maybe we could follow-up on that conversation. I’m just curious, you mentioned that interesting stat of 23% sitting in cash and cash equivalents, up from 18% historically. If we weave that into normalizing over time, but also deposits were down 3% and cost of funds is up a bunch. As we go through the year, do you anticipate the normalization of the cash component at the same time, deposits continue to come down and migration continues to be yield seeking, like can – I guess, my question with all that ramble is, can the margin get back into that range while we have these cash leaking and yield-seeking behavior is happening?

James Gorman:

If I could just add and excuse my voice, I have a chest cold. Glenn, on the simple math to take the margin of that business from 26% to 28% is about $120 million. Obviously, we’re still absorbing some integration stuff relating to the platform that will be done this year. We had slightly higher reserves. We’ve been investing pretty aggressively in the business and, frankly, I think, prudent – appropriately, the payoff is the $110 billion, which is a net new asset organic growth of 10%. So I’ll take that any day long, the assets to sustain the building. So yes, we have a lot of levers to push that margin around a couple of percent points. That’s not, frankly, a source of great anxiety to me at this point. And I think you’ll see us probably push a few of those levers as we get through this year and certainly next year. So the trade-off is, I think we all want to keep investing for growth. We see a real window here. This $10 trillion target is for real. The tree in every 3 years is 300 – whatever it is, $330 million a year, $333 million, I guess. And starting off with $110 million, I think we have pretty good visibility to net new money. So it’s a balance. But as we get through this integration as it’s finally completed, some of those costs roll off. We will get a little tighter in the expense management in the wealth business. I know Andy and his team are already focused on that. So – and then the deposit stuff will – it’s kind of going to be what it’s going to be depending on where rates go and what the Fed does.

Sharon Yeshaya:

Absolutely. I think what’s important about that portfolio is that it is diversified, in addition to that, we have been reducing the exposure in the ISG direct CRE portfolio over the course of the last year or so. So obviously, we keep our eyes on it. As you know, CECL is a life-of-loan concept. And so as you see economic deterioration, you do need to account for that. And the same goes for what we’re seeing in the commercial real estate market. So I think that those are the two main points I would point you to is that it is diversified, and we have been continuing to reduce that direct exposure.

Ebrahim Poonawala:

Good morning. I guess just first question, I wanted to follow-up, James, a comment you made about being expecting 2023 to end on a constructive note. I was wondering if you can elaborate on that just in terms of a lot of this is tied to macro. How do you think the economy paying off in terms of the Fed’s fight against inflation damage it does to the economy in the markets? And as you think about ending 2023, where do we think – where do you think we will be on all these fronts by the time the year ends?

Ebrahim Poonawala:

No. I appreciate the color. And just as a follow-up, when we think about capital return in terms of one, the pace of buybacks, given the macro uncertainty, any perspective there? And just opportunistically, do you see this as creating opportunities inorganically M&A-wise for Morgan Stanley as we look forward?

Operator:

We will move next to Steven Chubak from Wolfe Research.

Sharon Yeshaya:

I’m going to try and remember all of your questions, Steve, in order. So if I forget one, just remind me. The first point on FRC, I’ll take first. In terms of the regionals, more broadly, as I mentioned in the prepared remarks, I believe we had about $90 billion that came in without any relationship to those regionals. And so that shows cases to you that’s well above the average that we’ve seen. So I think it just continues to show that the investments that we have made are really working as we move forward. So that’s sort of point number one. The second point that I mentioned, and I think you asked where are those assets coming from? It’s really – in this particular quarter was in that adviser-led space both from existing accounts and new clients. To me, what was most remarkable when I was going through the diligence materials really was what we’re seeing from clients. So the idea that we continue to be a destination of choice for our existing clients and attracting assets held away, again, speak to all the conversations that we’ve all had over the course of the last 7 years or so talking about investments to give our advisers more time to service their clients as we move forward. Then the final question that you asked around the fee-based flows actually a very strong fee-based flow number, to be honest, from our perspective in an environment where individuals – we think about it, cash and cash equivalents are high. You’re thinking about putting your money into managed kind of accounts associated with it from that fee-based concept, you’re unlikely to do that in a period of time where you think the cash and cash equivalents and safety might be what you’re looking for right now. And so that is, in fact, the dry powder that we have that over time could move into the fee-based assets. So I think it’s actually a strong number given the environment that we have on the backdrop.

Sharon Yeshaya:

As it relates to April, I talked a little bit in one of the earlier questions about modeled client behavior. And that what we did see is that in March, we really deviated from some of that modeled client behavior. Now in April, we have been more in line with modeled client behavior. So that does speak to your point of maybe we are in a position where from a transactional patch level, we are there. But again, as James said, it is an uncertain environment. And so from that perspective, we will have to wait and see how we move through time from here.

Brennan Hawken:

Good morning. Thanks for taking my questions. I’d actually have to follow-up on that last question from Steven. So April is more modeled April is typically a tax payment month, which is a headwind. So are you seeing – where is that cash getting funded from? Are you seeing some of the taxes – tax payments coming out of both sweep and the other higher cost deposit sources? Is it more biased to the higher cost? Could that provide some relief? And when we put all that into the mix and think about NII going forward, should we be thinking about stable NII we know it’s not growing, but funding this funding cost elevation maybe could lead to some downside. So curious how we should be thinking about that.

Brennan Hawken:

Okay. Thanks very much. Obviously, a lot of uncertainty, so I appreciate that color. And then one more on the net new asset component. Sharon, you guys have an offer for – promotional offer and it’s tied to higher yielding cash alternatives. What percentage of the net new assets came into – from that promotion this quarter? In the past, you’ve spoken about how when you bring that cash in a majority of it stays in the system. Do you have any more granular statistics on what portion of that stays in the system? It’s obviously good that it comes into the system, but kind of curious when we think about stickiness and how much is hot money and how much is actually durable? Thanks.

Operator:

We will hear next from Gerard Cassidy with RBC Capital Markets.

Sharon Yeshaya:

So, I don’t actually know that it’s the absolute value – the rate level. And I will answer it in two different ways. First, you have to remember that the events in March didn’t make people – I mean, we all read the popular press and most individuals begin to think about what is the most risk-free asset, that being a U.S. treasuries. So, one should not be surprised if they begin to move assets into U.S. treasuries. So, I do think that it’s a function also of uncertainty and not just the absolute level of where interest rates are or aren’t. Now, as I have said, we have these moments that are opportunistic, both when you think about the corporate activity and then when you think about the individual activities, so both for ISG and in Wealth Management. And that was evidenced last August, last October and then earlier in January and February that when markets become calm that you begin to see movements into asset classes and further activity as evidenced by our self-directed channel as well. So, I don’t know that there is an absolute level of rates, but I would say it’s related to confidence in the system more broadly and a belief in asset levels being in a place that will bottom and then potentially will rise as we go forward.

Gerard Cassidy:

Thank you. I appreciate that. And then just as a follow-up question, Sharon, you talked about the credit, the provision and linking into commercial real estate. Of the total loan portfolio, what percentage of that is in commercial real estate mortgages? And are there any construction loans in that portfolio?

Operator:

Devin Ryan from JMP Securities.

Sharon Yeshaya:

On capital opportunities, in Europe. Sorry, could you repeat what’s the question?

James Gorman:

Yes. Devin, let me have a go at that because that probably builds off the capital discussion and where we would invest. We do not have an appetite for private banking in Europe. In fact, we sold our Private Bank in Europe to Credit Suisse several years ago. It’s one of the first things I did, because we would had an unhappy experience. We had owned the business for 21 years, and we lost money for 20 years of them. And I kind of took a fairly simple view that if you lose 20 years out of 21 years, you have probably got to lose it. So, we got out, you need scale. And frankly, it’s not a good fit I believe, with the current regulatory structure that we operate under, so much more interested in the U.S. and Asia and some in Lat-Am. The U.S. business, it’s just going to be an asset gathering monster. To bring in $110 billion in one quarter and $1 trillion over the last 3 years, there aren’t many companies in the world that have a trillion assets under management. So, I think we have got to keep our eye on the prize here and not get distracted by going down some rabbit hole because somebody else is in stress, maybe somebody else is in stress because it’s not a very attractive rabbit hole when you get down inside it. We know what we have got here, and it’s a killer machine. Asia is growing nicely. Again, Lat-Am some, but the workplace conversion is a massive opportunity now that we are focused on. Obviously, we are tracking financial advisors from seeing somewhat of a safe harbor, I guess across the industry. In our organic flows, if you compare them to our traditional competitors, the warehouses or the online brokers, our organic flows, I think are on an annualized basis, significantly higher than the traditional players, and higher than anybody in the industry. So, that’s how we think about it, again, Asia more interesting, Europe not interesting, Lat-Am a little bit interesting and U.S. definitely interesting.

Sharon Yeshaya:

Certainly, I mentioned is actually when I spoke at a February conference this year, which is that when you think about financial sponsors, they may be in a different position than what we would consider traditional M&A, i.e., they are faster to market. They are in a position where you might not have the same level of activity from a Board. And because of the size, you might have different regulatory restrictions. And so from that perspective, we would expect that they might be first before we see really traditional activity open up. And that is – that remains kind of the view that we have and also as the pipeline begins to build, that’s also what we are seeing. In order for that to move forward and become realized, it’s really about the opening of the markets in terms of the financing activity. As we have seen some of the backlogs clear, that’s clearly very helpful. But again, it’s about stabilization and it’s about confidence.

Mike Mayo:

Hi. What is going so right – what is going so right in Asia that it’s your third best quarter in an environment like this? And then what is going so wrong in investment management since you closed Eaton Vance, the first full quarter, it was second quarter ‘21, if I have that correctly. Investment management revenues are down almost one-fourth. So, shout out to certainly E*TRADE and wealth doing well. But in terms of investment management, like it just looks from the outside like Eaton Vance panning out the way you expected. But first, the positive on the Asia was going right and then the negative one, what’s not going right in the investment management?

James Gorman:

Yes. I mean I will just add, I wouldn’t frankly, render a judgment yet on the Eaton Vance deal. I think it’s a little soon through a challenging market environment. I would tell you, I am personally thrilled with it. And I am highly confident that 5 years from now, we are going to look back and be thrilled with a lot of people said that Smith Barney deal was a dumb idea. And a lot of people said, E*TRADE is a dumb idea. And a lot of people said we overpaid for Solium and these things have moments of sort of settling, if you will. It’s like good house its foundations have to settle. And in a very challenging environment, I think the business is holding up, right. So, I am very happy with that transaction, great people, great company, some fabulous brands. And I think Mike, if you come back and ask that questions in 3 years’ time, hopefully, you won’t reverse the questions. But maybe you will say what’s going right with Eaton Vance and asset management, and what’s going wrong in some other places. Because I am sure, as I have said in the rolling sense, you can’t always get what you want, given the environment, something might be working. But yes, I am pretty relaxed about that one.

James Gorman:

I mean super hard. I will be blunt. We sort of guided a little higher on growth in the first quarter and came in plus 1%, which I guess was better than most, but just super hard. So, let’s get through – I think let’s get through this quarter. We will learn a lot of taxes. And as Sharon said, it’s kind of the numbers have reverted back to what we are modeling, which is good. We will see that. We will see how much of this cash that’s moving. We will see whether there is further deposit outflows or not. I mean it’s just super hard to guide right now. So, I don’t think I know it’s sort of – I don’t know if it’s fair or not, but it makes your modeling harder, which I appreciate. But also I don’t want to give guidance that we don’t really have an intellectual basis or fact basis for doing it. It’s just too hard. We are not stressed about it, but that much guidance I will give you, but I just don’t want to put numbers on the sheet of paper at this point.

Matt O’Connor:

Good morning. Can you talk about the sustainability of the strong fixed income trading revenues. Obviously, on an absolute basis, very good, down from a really strong year ago level and benefited from rate volatility, but at the same time, advisory and DCM was sluggish. So, how do you think about this kind of not just 2Q, but the next several quarters in the kind of environment that we are in and maybe some improvement in IB? Thanks.

Matt O’Connor:

Okay. And then maybe just broadly speaking, like as you think about client brokerage in both fix and equity, like what’s your thought there in terms of committing capital kind of on an incremental basis, like providing more or less from here or not really any change?

James Gorman:

Yes. I would just add, if you step back from this sort of over a 5-year view, firstly, just take hats off to the team led by Ted and Sam, Kelley Smith and then Jay Hallik and Jack [ph] in fixed income. It’s come a long way from, I think a 6% share. I think we troughed that. I don’t even know below after crisis might have been much lower, but sort of 6%-ish share per half of the last decade, and then steadily moved up to 10% and pretty stable. It’s kind of what we wanted. I mean – and on the equity side, you can buy share, for sure, more, but you want to be in the part of the prime brokerage business that we want to be in. We don’t want to be in the sort of the broker last resort. So – but if you step back from it and what you have really got is kind of an oligopoly type structure emerged out of the financial crisis where a smaller number of institutions have the global capability for global sales and trading, and we are now one of them. And that was probably not a given 10 years ago. It certainly wasn’t a given. And you have just seen, obviously, Credit Suisse has been merged and that business, lots of parts of that business. I suspect this appear relating to the trading side of the prime brokerage. So, our position gets stronger, not weaker. All that said, we are pretty careful about how much balance sheet we want to use to grow aggressively on the margin because we simply have good options in terms of wealth and asset management businesses. So, it’s a balancing act, but I think the team has done a great job, and I feel really good about where they landed the plane this quarter. tricky quarter, by the way, particularly in rates.

Jeremy Sigee:

Thank you. Just quite a specific one actually. I thought comp costs were a bit heavy in wealth and in investment management. And you mentioned the deferred comp plans linked to investment performance. Is that heavier deferred comp cost? Is that something that stays with us throughout the year, or is it – does it move around? Is that a 1Q specific, or is that stuck with us for the rest of the year as well?

Jeremy Sigee:

That’s perfect. Thank you.

James Gorman:

Thank you, operator. Good morning, everyone. Thanks for joining us. The macro backdrop of the last year presented challenges we haven't seen for some time. The combined impact of persistent inflation and rapid central bank tightening pressured asset levels and led to some – let to very little strategic activity and capital raising. Despite volatility throughout the year, Morgan Stanley demonstrated resilience and delivered on an ROTCE of 16%, including integration-related expenses from our deals. The firm did what it was supposed to do with our more stable Wealth and Investment Management businesses offsetting declines in Institutional Securities. This is hard evidence of the transformation we've made to become increasingly durable and a stark contrast to the 8% ROTCE we had in the last notable challenging environment of 2015. When markets rebound, we will capitalize on growth once again across the full firm and from an even stronger position. Before turning to Sharon to discuss the details of the fourth quarter and the full year, I'll walk you through now how we plan to achieve these goals in our annual strategic update appropriately titled delivering growth through the next decade. Briefly first, I'd like to acknowledge the many contributions Jon Pruzan made as CFO and COO. As you know, he's retiring from Morgan Stanley at the end of this month, and we wish him the absolute best. Please now turn to the deck into Slide 3. What informs our confidence and growth strategy is that we know who we are. We've been clear about that for over a decade. Our clarity of purpose has been a key driver of our success to date, and the next decade will be no different. On Slide 4, you can see we've been consistent since the financial crisis. We have a client-centric franchise with a common objective to facilitate capital flows between those who have it and those who need it. We're committed to our clients and to the markets we're in, clearly illustrated by the leading competitive positions we have. In each of our businesses, we have a significant competitive moat, which will enable us to maintain and further enhance our strength. Slide 5 highlights the strategic decisions we've made over the past decades that are focused on aligning markets -- ourselves to the markets where we perform best. And these are core businesses with scale in major markets that are on the whole more balance sheet-light and benefit from more durable fee-based revenues. We continue to invest in these areas to drive future growth. We have proven track record in our ability to acquire and integrate the businesses that are aligned with this strategy, namely within Wealth and Investment Management. Importantly, we've also taken action to get out of businesses that are not core to this flow of capital. While we may facilitate activities across varied markets, we do not own businesses that are built around unsecured consumer credit payments, physical handling of commodities and the like. Instead, we focus on markets we best, and our ability is there to support our clients in those markets. Please turn to Slide 6. This illustrates the ongoing growth and shift of our business mix. As we continue to grow our client assets, we expect Wealth and Investment Management will become an increasingly larger portion of the firm's pretax profit. The stability of the firm will be further enhanced by this growth, all the while coupled with a preeminent institutional franchise. Fair to say our business model was tested this year, as you can see on Slide 7. 2022 was a paradigm shift. But first the common acts continuation of the first pandemic in 100 years, the first war in Europe, in over 70 years and the highest inflation in 40 years. Despite lower asset values and an anemic underwriting calendar, the firm performed well. We generated, as I said before, a 16% ROTCE; had the most excess risk-based capital of our peers and attracted over $300 billion of net new assets, all while integrating two major acquisitions. So, now moving to the opportunities to maximize growth in the next decade, let's start with Wealth Management. On Slide 8, you can see we have leadership positions across channels, reflecting our combination of best-in-class advice and best-in-class technology. And we have the ability to meet any client wherever they are in their wealth accumulation journey. This allows us to grow with our clients along the way and provides the opportunity for clients to migrate across channels. The growth of our business is reflected in our higher average daily revenues, something I've been tracking for well over a decade. 2022, every trading day saw revenues in excess of $80 million, and over 1/3 of those exceeded $100 million a day. Contrast that with only three years ago, where 95% of trading revenues were each below $80 million, and none exceeded $100 million. The history of the journey as illustrated on Slide 7, Wealth Management has gone through a powerful transformation, as you all know, including with the most significant recent acquisitions in E*TRADE and Solium, which have expanded our client base with two new channels. Today, we have 18 million relationships. We focus on deepening those relationships by offering the right product at the right time and consolidating assets under our platform. From here, we're building on the scale and the tools to reach -- and the reach that will propel future growth. Net interest income has certainly been part of the profitability expansion to date, and you can see the driving forces highlighted on Slide 10. We have invested in expanding our bank offerings, allowing us to offer attractive products to our clients on both sides of their balance sheet to meet their needs. We've nearly doubled our lending balances over the last three years, and we expect to continue to grow attractive high-quality loans. On the other side, our deposit franchise has grown significantly since 2019 and will continue to support future NII through various cycles. Approximately 90% of our deposits are sourced from our Wealth Management client base. And in the current rising rate environment, our cost of deposits is more efficient than that we experienced in the last rate hiking cycle. Sharon will discuss this important topic and our outlook around NII further in a few minutes. Let's turn to Slide 11. This now talks about NNA growth, net new assets. Over the last three years, our platform generated nearly $1 trillion of net new assets showing a clear step change from prior periods and marking Morgan Stanley as a leader across our peer group as an asset accumulator. Given the scale and reach of our businesses, we expect to deliver this pace of asset accumulation going forward. Obviously, there will be up and downs in individual years. But over a three-year period, we expect to drive approximately $1 trillion in net new assets. Most importantly, as you can see on the right-hand side of this page, no single source is accounting for greater than 25% of this net new money. Some people think it's just a result of recruiting. It is absolutely not. It's a combination of several things, which the team has described as filling the funnel of net new money. You can see on Slide 12, which shows our growth in client assets, we have experienced that through our workplace channel. We estimate now that relationships wealth held away has expanded by about 4x in the last three years. With our ability to serve clients across the entire wealth spectrum, we're well positioned to consolidate a portion of these assets. Further, the workplace channel continues to bring new relationships to the platform. We've executed on key steps to deepen those. We've already reached our goal to roll out companion accounts to 90% of workplace participants and to achieve 30% retention of stock plan assets. We look forward to even higher retention. The results of our advice-driven strategy are illustrated on Slide 13. The workplace channel has driven the majority of our growth in client relationships and stands at 12 million relationships to date. While it can take several years to deepen those, we've already seen success in some parts of the offering that of our stock plan administrative services. Over the last three years, we've had approximately $350 billion of after-tax vested inflows. Vesting assets gives us more opportunity to deliver an integrated client experience, and that's allowed us to showcase the power of advice. To date, we've already seen adviser-led flows of approximately $150 billion that originated from a workplace relationship. A portion of those assets are the stock plan vested balances, but a larger portion are from assets that were previously held away. In short, we will -- as we deliver our full suite of capabilities, our strategy to attract clients to advice is working. Investment Management has also delivered strong fee-based growth over the course of its own transformation, as you can see on Slide 14, which encapsulates the business together with Eaton Vance. This business has more than doubled its durable asset management and related fees since 2014. And importantly, this significantly larger revenue base is more diversified. Increased diversification from fixed income, customization and alternatives continues to support results in more volatile equity markets. We remain very aligned to key growth areas. Our alternative investment capital is at $210 billion with strong growth in private credit, real assets, including infrastructure, our multi-strategy hedge fund platform and special situations. And customization by our market-leading parametric business continues to be a significant growth engine. Shifting to Institutional Securities on Slide 15, we have a global and balanced franchise. And our integrated investment bank has and continues to focus on meeting clients where they are active. This has served us well as our strength is evident across various market environments. We remain a leader in equity and Investment Banking and have steadily rebuilt our fixed income franchise focused on our strongest capabilities. On Slide 16, you can see our institutional business remains a top three global leader in the industry, as demonstrated by a wallet share position. We have demonstrated our ability to defend share and gain it in relatively more capital-light businesses. At the same time, we've shown prudence over resources as illustrated clearly by the disciplined RWA usage, which actually dropped from '21 to '22 and our consistent G-SIB surcharge of 3%. Let's move to our capital strategy on Slide 17. We have 200 basis points of excess capital above our regulatory requirement. This is intentional. Our capital strategy has focused on bringing the risk down in our businesses, and we've seen a steady decline in our SCB excluding the dividend add-on reflective of our more durable business mix. Our capital position gives us enormous flexibility, and we're comfortable with our decision to be prudently positioned. On Slide 18, you can see our excess capital position enables us to continue to invest in our business for future growth and deliver robust returns to shareholders. Our business transformation, especially the durable earnings from Wealth and Investment Management, enable us to double that dividend -- enabled us to double our dividend in 2021 and further increase it by 11% in 2022. Over the same time, we've reduced our shares outstanding from the much higher levels driven by the impact of our recent acquisitions. Taken together, we delivered a 9% capital return to our shareholders last year. We remain committed to ongoing shareholder return, adjusting always for whatever the business performance is and the regulatory requirements demand. Shifting to how we see the future state on Slide 19. Starting with the expected path to $10 trillion in client assets across Wealth and Investment Management, we've demonstrated our ability to generate over the last three years positive net new assets of approximately $300 million (ph) a year. Combining that with reasonable average market assumptions give us the confidence this will lead to $10 trillion in client assets in reasonable years ahead. Now let's consider this within the broader firm picture, and bear with me for a minute. In 2022, the firm delivered $14 billion of pretax profit. In this future scenario of $10 trillion of assets, which I believe will happen, generating approximately 50 basis points of revenue which is about what we're doing currently at a 30% pretax margin, which is within 2% of what we're doing currently. If you put that math together, it should create of itself over $14 billion of pretax income. As you can see, that exceeds that of the full firm today just from the wealth and asset management businesses. So if you pull it all together, just to wrap it up, Slide 20 reiterates our confidence in our performance goals. They have not changed on account of what's going on in the markets in the last 12 months. These are the metrics we need to support our longer-term objectives. Of note, we've added a new goal that I spoke to earlier that we've talked about in the last six months to generate $1 trillion in net new assets approximately every three years. Again, I'm sure there will be volatility quarter by quarter, year by year. But as we've demonstrated through the funnel of sources, we expect an outcome over three years of approximately $1 trillion. That's about by the way up to 5% to 7% of beginning period assets within wealth and asset management. As we approach 2023, we do so with quiet confidence, recognizing we have a line of sight with the durability of our Wealth and Investment Management businesses and our market share leading positions across much of Institutional Securities. As always, our objectives are subject to major moves in the economic, political or regulatory environment. However, with a constructive outlook and a proven track record we've delivered thus far, we fully expect to achieve our goals over time. I will now turn the call over to Sharon, who will discuss the fourth quarter and annual results and we'd be delighted to take your questions.

Operator:

[Operator Instructions] We'll go first to Glenn Schorr with Evercore ISI.

James Gorman:

Sure. Glenn, it's a great question, and it's sort of pivotal to the whole strategic positioning of the firm because right now, I think capital strategy is critical. There are a few things going on. Firstly, we have been able to reduce our peak to trough in CCAR because of the change in mix in our business. Secondly, because of the market environment we've reduced RWAs, just we've taken maybe a more prudent lean in. And obviously, we can reverse that at any point in time, which heats up CET1. Thirdly, we have the Basel III finally looks like it's coming to fruition at some point in the first half of the year, although I don't expect that banks will be required to implement whatever the new capital rules are until the beginning of 2025. So while there's a pretty long time frame, a year is a long time in this business, let alone 1.5 years, I still think that it's prudent to kind of have some capital sitting there and just -- I'd rather be in a position where we have excess capital when particularly in an environment where we don't see obvious places we've put it to work. Now that said, we did our best. We bought back I think it was $8 billion and $10 billion last year. We doubled the dividend the year before. We increased the dividend 11% last year. Obviously, we're -- I mean, it's fair to assume that we're going to continue moving on capital distributions. But I like a number of 15%. We actually -- we triggered a little higher than that this quarter. We could easily drop down to 14.5%. That wouldn't bother me at all, but that will be driven by the environment and business opportunities. So, great position to be in coming into a change in the regulatory outlook potentially, and we can always act aggressively, and we've proven we will do that when we have more clarity.

James Gorman:

I mean, listen, our share of fixed income is 10%; banking, 15; equities, 20. So obviously, the fixed income pool grows. By the way, our share a few years ago, it was 6%. So the team under its Ted and Sam Kellie-Smith has done a phenomenal job. But if the pool grows faster in fixed income, just arithmetically, you're not going to do as well as if the pool grew faster in equities. That doesn't bother me a whole lot. I mean, we've never tried to be the FX EM shop. We've never had the global rates trading, FX trading macro businesses that some of the correspondent-driven commercial banks have had, the HSBCs and Citis. And that's a business model just different. We don't have as big transaction services, so we're not going to have as much FX. That said, what the team have done in macro under Jakob, under credit and Jay Hallik in commodities is really impressive. So I'm totally fine with that. And we clearly have the product. It's not like we don't sell muni bonds to our clients, and we don't have fixed income underwriting, et cetera. We have the product. It's just arithmetically, given our share relative to the others, we wouldn't grow as fast. By the way, I was happy to see I think equities was back at number one this quarter, core franchise. And we're really well positioned, Glenn. I'm not bothered by that at all.

Ebrahim Poonawala:

I guess maybe first question, just Sharon, following up on the efficiency ratio about 72% for 2022. As we think about the journey from 72% to something sub-70% kind of in line with your strategic target, a sense of what it means. Is it this time? And are the businesses growing, which are more efficient and that changes the mix? Or could we see that up 70% even over the next couple of years? Would love to hear it in terms of both from a timing standpoint and what needs to happen at the firm to get to a sustainably below 70% efficiency ratio.

Ebrahim Poonawala:

Got it. And I guess just a separate question around market activity obviously highly uncertain how Investment Banking activity shakes out. But if the Fed were to pause and the central banks are done with the majority of the rate hikes, is that enough to drive a rebound in M&A, ECM, DCM? Or do we need a lot more in terms of just confidence returning to the market before we see IB activity picking up? Like what are you hearing for the clients?

James Gorman:

Yes, I would say I think Sharon said it, right. And I am highly confident that when the Fed pauses, deal activity and underwriting activity will go up. I would bet the year on that, in fact. CEO's job is to drive growth in their businesses, and they do that two ways, organic and inorganic. And I've been doing this a long time, and I've done both. And the only tricky part about inorganic once you've got your strategy set is timing. And sometimes, you've got to ignore timing, but if the market is really volatile, it behooves CEOs, particularly those relatively early in their careers to be a little cautious, and that's what we're seeing. That will change.

Brennan Hawken:

And just like to wish Jon Pruzan best of luck, looking forward to watching his next chapter play out. So Sharon, would love to double click on your expectations for NII. I hear you that it's sort of based on the forward curve playing out, and encouraging certainly to hear it's not peaked. But could you maybe give a little bit more color around expectations beyond forward curve? What do you assume for deposit dynamics? Do you think that the decline in sweep balances will continue to decline? What's underlying that? Thanks.

Brennan Hawken:

Okay. Thanks for that. And then certainly different question. Wealth Management, if we look at the client asset trends, they were barely up quarter-over-quarter. Basically, total client assets in wealth were up about the equivalent of the net new assets and can clearly see that self-directed and workplace were a little weak, probably because their exposure -- more exposure to the Qs and the more growthy stocks. Was -- but I would think, given what we saw in the markets that there'd be a bit more of a tailwind to client assets. Was there anything unusual that was happening there?

Operator:

We'll go next to Steven Chubak with Wolfe Research.

Sharon Yeshaya:

Sure. I'm just going to take them -- I'll take them in order. The first is, as you asked about loan growth. The NII guidance in the first quarter is not dependent on the loan growth projections. Obviously, the loan growth itself will be a function of the environment. As I said, from an SBL perspective, we have seen some pay downs and it will be dependent on market conditions. Now, the second quarter -- the second question that you asked me around the deposits and the deposit growth, obviously, there are -- there could be a portion of it that does come from, as you mentioned, different inputs that you might see, be that interest, et cetera, in the end of the fourth quarter. But broadly speaking, what we've seen with the deposit base is that we have many channels, i.e. savings, for example, where we can begin to get those deposits and attract new deposits to the institution and to the bank from other sources, external assets held away that come in. And also, as you think about every piece of NNA that comes in over time, the $1 trillion that James mentioned, there's generally a portion of that, that's actually held from a cash perspective. And so that, I think, also needs to be taken account when thinking about the build as you go forward from the deposit, a longer-term deposit perspective.

Sharon Yeshaya:

Sure. I would look at it more holistically from an institutional perspective. And so when I think about what does it mean? We entered -- I remember doing an investor conference in February of last year. And we talked a lot about what is normal and is 2019 normal. And our answer then was we would expect to actually normalize somewhere between 2019 and 2020 from an industry wallet perspective. In fact, it looks as though the industry wallet has just been right around that range within those two bonds. And when we look ahead, we would expect to remain above that 2019 level, and we'll have to see what the upside is. But a lot of that growth in Sales & Trading has come from the divergent central bank policies and has also come from the fact that you have higher yields, right? So when you think about investing in the fixed income product, and you go into that going forward, that could create different dynamics than we would have seen over the earlier 2010 through 2019 or '17 outlook for Sales & Trading.

Dan Fannon:

I wanted to follow up on the wealth business and the rollout of the companion accounts and the 90% that you've headed. Can you talk about the behavior change or what has happened subsequent to clients receiving those companion accounts and try to get a sense of what that could mean on a longer-term basis in terms of increased activity and asset flows?

Dan Fannon:

Got it. Okay. And then just as a follow-up, you talked about the longer-term efficiency potential. But I guess the thing about fourth quarter, there was some severance looking at non-comp expense as you think about next year. I just want to understand how we should think about the base level of expenses and potential changes and/or where you're looking to be more efficient into this year?

James Gorman:

I think just on the efficiency ratio, it's worth pointing out and Sharon mentioned this earlier, if you actually average the last two years, '21, '22, you end up right at 70%. '21 was about 67, '22 at 73. Part of it is revenue driven. We took the efficiency that will take some expenses out in the coming year. We also want to feed the beast. I mean, we're growing parts of this firm. We're trying to -- we don't -- we're not of the view that we're heading into a dark period, whatever negativity in the world is out there. That's not our house views. So we want to make sure we're positioned for growth. This thing will turn. M&A underwriting will come back. I'm positive of it. So, we want to be well positioned for it, but we're going to manage to that number of around 70% as best as we can.

Gerard Cassidy:

I have a bigger picture. James, you gave us some very good detail about the expectations for growth in the Wealth Management and the new assets, $1 trillion every three years. When you're looking at your three channels, the adviser-led workplace and self-directed, where do you see the most growth? And which one has the best margin that can get you to that 30% goal?

Gerard Cassidy:

Very good. I appreciate that. And Sharon, you talked about the marks that you took in the corporate loan portfolio in the quarter, just over $350 million, I think you said. Can you share with us how big is that portfolio? And where did the marks come from? Were they bridge loans? Or what drove those marks?

Operator:

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

James Gorman:

Okay. Let me try and unpack that a little bit. I'm not going to talk about Twitter. We don't talk about single names as you would expect. You did see the line -- the other ISG line. You can assume that whatever marks we took on any single name are reflected in that. And I think the way I think about this is we run a portfolio business. We obviously have single credits at any point in time that disappoint relative to others. But it's the total package, and the total package, if you look at it actually turned out to be very fine given the environment we're in. So on the plan B, I don't know if the rip we did -- we took about 1,800 heads in early December, would equate to a plan B. It certainly felt like it. We've reduced -- we took a severance charge, Mike, which affected some of the efficiency ratio for this year, but we'll improve it for next year. And that was the rightsizing. We were frankly a little overdue. We hadn't done anything for a couple of years. We've had a lot of growth, and we'll continue monitoring that. Obviously, with the way bonus pools work, we reflected the performance of the firm in the bonus pool. So we're not very different from the rest of the world in that regard. And that obviously resets comp a little bit. So, I feel good about where the whole package is. I'm actually, as I said earlier alluded to I'm a little more confident about the long -- medium-term outlook for the market. I'm not talking about the first quarter or two, although Sharon said the first quarter has actually started well. But the medium-term outlook for the markets, I see the Fed has moved from 75 to 50, likely to go to 25. The next stop on the train line is zero and then to mention they start cutting. Not sure they're going to cut this year, but I think there'll be zero increases this year for sure. So that's the inflection point. And there's a lot of money sitting around waiting to be put to work. And that's our job is to be the flow of capital between those who have it, and those who need it. So I'm pretty confident actually about the outlook. So we're -- we've done our plan B, I guess. We're not anticipating a plan C. And we're going to watch and wait for a little while, but I feel pretty good about it.

Matt O'Connor:

I was wondering if you could talk a bit more about the flows within Investment Management, both the long-term and liquidity and how you're thinking about the outlook there specifically in the long term?

Operator:

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.

James Gorman:

Good morning, everyone. Thank you for joining us, and I know we're starting a little later than some of the previous quarters. So I appreciate you staying with us. The Firm performed well in a very uncertain and difficult environment. An ROTCE of 15%, excluding integration expenses, flexes stability and strength of the business model. Wealth Management pre-tax margin, excluding integration expenses, was 28.4% and coupled with $65 billion of net new assets, demonstrates how this business even in a very volatile market environment and with indices down over 20% this year, continues to attract new client assets and remains highly profitable. This business' enormous scale and channel diversification should ensure continued success. Investment Management and Investment Banking were clearly impacted by the market environment. But as I've said elsewhere, advisory and underwriting activity has not gone away, it has simply been deferred. Fixed income and equities remains very solid with no areas of obvious concern. Both businesses navigated the complicated markets without serious incidents. Finally, the strength of our capital position is very clear, as shown by the continuation of our strong buyback program with $2.6 billion of share repurchases in this past quarter, coupled that with a dividend yield north of 3% and a CET1 ratio of 14.8%. On an operating basis, this Firm is doing well in a post-COVID world. From a markets perspective, we expect continued volatility as the Federal Reserve continues to tighten policy such to bring down inflation to acceptable long-term levels. This is an environment where it behoves management to be prudent but balanced, a wholesale retreat from the markets is not called for. But at the same time, I must be more cautious in credit-sensitive parts of the business. Fortunately, the business model changes for the past decade or more, plus the acquisitions of Smith Barney, E*TRADE and Eaton Vance put us in a position of significant relative strength and should support solid absolute performance in the months ahead. I'll now turn the call over to Sharon to discuss the quarter in detail, and together, we'll take your questions.

Operator:

[Operator Instructions] We'll go first to Ebrahim Poonawala from Bank of America.

James Gorman:

Great. Well, that's a good broad question to kick it off. I would say, first of all, we're thrilled with the deals we did with E*TRADE and Eaton Vance. I mean they’ve both worked better than expectations. In Eaton Vance, for example, the gem that is Parametric as just the gift that keeps giving. E*TRADE with the deposits that we brought over through that deal, what we've done with the stock plan business is now combined with ours, 35% of the S&P companies. And obviously, having a digital banking platform, I've often described E*TRADE, it's a technology company, and we brought a lot of technology with that. So just on those two things, thrilled with it. In terms of the overall environment and how we play in that environment, maybe I'll just touch on the environment for a minute. It shouldn't be surprising what's going on in the market. So I'm kind of surprised every time I see somebody on TV who seems surprised by it. We had zero interest rates for a decade. We have massive monetary and fiscal stimulus. We have the first land war in Europe in 70 years. The highest inflation in 40 years, and the Fed had to move. Now my opinion was they moved late, but they moved and they're going to keep moving. And rates are now around 3%, they're probably going to go mid-4s, but that remains to be determined. And with that, there will be consequences. So far, we haven't seen clarity around inflation abating. My guess is that we will see that clarity and it will be more evident certainly by the middle of next year. And I think the Fed will be successful in this journey, but that's a gut from all the numbers I'm looking at, but it doesn't mean I'm going to be right. The world obviously remains volatile. We -- you're going to see some disruption. We're seeing it. Some of the more ridiculous stuff that's been in the market in the last few years, company is trading at 50x revenues, what's gone on with Bitcoin trade at $60,000 some of the -- what's going on in some of the GameStop and other companies where there's been these sort of aberration type trading. I mean that's been washed out. And that's okay. We're back to sort of fundamentals. So how does Morgan Stanley play in that? Investment Management, obviously gets hurt when fees are down because asset prices are down. But I'm not -- I don't think we're in a long-term financial depreciation. So I'm not particularly concerned about that. As I've said, the banking pipeline and underwriting gets deferred. People don't stop doing deals. In fact, there was a deal announced this morning. And there'll be much more deals as we get closer to economic clarity. Our sales and trading businesses remain robust. We are holding share in those. I feel very good about that. And a lot of that business is actually repeatable. If you think of Prime Brokerage, it's actually very stable. And with Wealth Management, we brought in $65 billion of new money in one of the most difficult quarters that we've had in 15 years. I mean, that would have been unthinkable even two years ago. So the fact our clients are continuing to bring us money and the funnel of all the ways the money comes in the door is working, it's not -- that's not an accident. That's a business model design. So I'm really happy with the way that's working out. So in aggregate, I am pretty relaxed. I mean, our CET1 around 14.8%. We're required to have 13.3%, I think. And I don't know if that answers your question, we could probably spend all day talking about it. But the environment is difficult, but we are not under stress.

James Gorman :

Well, I think you've got to keep investing. And we are not making major cutbacks across the plant. I mean I'm sure Sharon will talk about expenses in a minute. We're obviously being prudent. But we don't see any reason for great draconian measures. We've built a business model. And in times like this is when -- if you can sustain it, you actually do very well coming out the other side. So I feel pretty good about our relative position, to be honest.

Christian Bolu :

Maybe, Sharon, on the deposits, I hear your comments on deposit mix shift but sweep deposits were down, I think, 18% Q-on-Q, which I think is the worst quarter decline by significant margin. So I'm a little surprised that you said deposit beta expectations -- deposit beta is in line with expectations. I guess my question is, how are you now thinking about your guide for 50% terminal deposit beta. Is that still realistic given the Fed is still hiking and obviously the pace here of sweep deposit decline?

Christian Bolu :

Okay. Maybe on just leverage lending and the bridge book. Can you speak to your balance sheet risk appetite? You guys seem to be on a number of sort of like home deals, Citrix, Twitter, et cetera. So first of all, how big is your bridge book or leverage loan book, however you want to characterize it? And then second, are you increasing your risk appetite here to capture opportunities? And then how are you thinking about managing that risk?

Operator:

We'll go next to Glenn Schorr with Evercore.

Sharon Yeshaya :

The intention, of course, is to give the clients opportunities and choice, Glenn, as you know, which has been our position over the course of the last God knows how long. But the intention is to give them as many offerings as possible. And yes, as you said, if we can bring those assets in and give them an opportunity to have a savings account or we can issue CDs or as you've always talked about, we have other types of things such as alternatives. What it does is it brings those assets in-house. And then in a point where they want to be deployed into the marketplace, we can do that. As it relates to what we might necessarily give to different deposits, it would be, of course, again, related to the transactional versus investable cash.

Sharon Yeshaya :

Sure. So we have seen a pay down specifically this quarter, so just in terms of the actual book. But in terms of the risk, which you highlight, we've always said it's really more of an operational risk than anything else. We have obviously seen margin calls, and they've all been handled very well over the course of the quarter. So we haven't seen any issues there. And in addition to that, I think when you look at the LTVs, what we noticed when we have those -- we obviously look at that data internally. And it is very much in line with the longer-dated historical average. And for this quarter, it was over the course of the quarter, on average, was in line with last quarter as well. So I think that book remains very well managed, means a great opportunity and option for our client base. And of course, it will just be dependent on the environment itself.

Brennan Hawken :

I'd like to drill in a little bit, Sharon, to the comments that you made around deposit betas and deposits and what's been changing in the mix for you all. That all makes a lot of sense. I think that there's clear benefits to having deposits much more oriented to the Wealth Management business and it helps to watch that mix between the sweep and other. But the idea that the NII guide is essentially unchanged and you had $250 million growth quarter-over-quarter, that suggests that basically NII is going to be flat into 4Q. So is that -- have we hit -- given the dynamics, given you have wealthier clients and you have more of their cash, and so you -- there's -- if you want to keep that funding which is, of course, more attractive than wholesale, then you're going to have to pay for it in those savings accounts. And so therefore, is it just -- and with loan growth slowing, is it just right to just assume that, okay, this is probably like the stable level of NII for at least the foreseeable future as we head into 2023? Or will we hit a point where you'll be able to continue to see some -- resume some growth and we've just entered this transition period. How should we think about it a little bit longer term?

Brennan Hawken :

Okay. That is all totally fair. Thanks for that color. Second question would be on the LevFin book. There's definitely some increased focus there. You referenced some marks through the Institutional business on the other line, which wasn't that surprising given the environment. But how are you thinking about managing those risks? There still is some inventory that The Street broadly is going to need to work through and investor appetite has been weak. And so how have you hedged that book? How should we be thinking about those risks going forward? And how are you continuing to manage it?

James Gorman :

I'd just add to it. I mean, there's obviously been a lot of talk about this here in a couple of names in particular, and we can't talk about individual names as much as I'm sure you'd all like us to. By the way, they're not hung deals until they're actually out there. But put that aside. About a year ago, a little over a year ago, we turned quite conservative, Brennan. We across the whole plant we pulled in a little bit. And we pulled in with our margin book, particularly our Asia margin book. We looked across our whole Prime Brokerage platform, and we pulled in a little bit with certain clients there. And we've been quite cautious in our leverage finance arena. And as somebody mentioned one transaction, Citrix, we're actually a small player in that. So we're not -- it's not like we've been large in this space, which might account for the fact -- in the other line, which is -- incorporates a bunch of things, including loan losses, number actually is very modest. I think it was like negative 100. And there are a few pluses in there and minuses. But the aggregate picture is not that -- frankly, it's just not that troubling. We'll remain cautious, as I said in my sort of opening comments, particularly in credit sensitive areas. We're a big institution. We serve a lot of clients. You don't get this perfect. But I feel actually pretty good about the way we've navigated this so far. So stay tuned to it.

Dan Fannon :

I wanted to follow up on the wealth side in terms of organic growth. The fee-based growth did slow a bit. And I think, Sharon, you mentioned some decision-making maybe being a little bit more challenged or slowdown in this type of backdrop. But maybe could you just talk more broadly about the channels that you're seeing growth in both the total flows as well as maybe what's -- where the rate of change might be either the biggest or slowest, whether that's through existing advisors, workplace in the various funnels that you have out there?

Dan Fannon :

Okay. And then just to follow up on expenses. You broadly obviously talked about being focused on efficiency. But is there anything specific you can point to that you're doing differently or thinking about as you start budgeting for next year or even as we go into the fourth quarter that from a rate of change that you're focused on?

James Gorman :

We also -- I mean, obviously, we're looking at headcount. I mean we're -- you've got to take into account the rate of growth we've had in the last few years, and we've learned some things through in COVID about how we can operate more efficiently. So that's something that the management team is working between now and the end of the year. And again, we want to provide growth opportunities across the platform, but we've also identified some efficiencies. So over time, that will become clearer.

Devin Ryan :

I want to start on fixed income trading. Obviously, revenues have been quite healthy in the volatile rate environment. Customers moving around their portfolios, as you guys noted, been a long time since we've seen these levels of rates. So I'm curious how you guys are thinking about what a higher for longer environment looks like for fixed income trading once rates settle in. I'm assuming more movement in yield on an absolute basis could be helpful, but would it be great to get your views from any historical context or just broader expectations.

Devin Ryan :

Yes. Okay. Just a quick follow-up here, also just on kind of corporate M&A opportunities. Obviously, evaluations across financials and fintech are down pretty dramatically over the last year. And so I'm curious whether you're seeing more maybe opportunities emerge, maybe things you were looking for, but just more sellers potentially coming to market given some of the challenging macro that we're seeing and also the big change in valuations over the last nine months to a year.

Operator:

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

James Gorman :

Why don't I take that, Mike? I think we don't publicly break out tech. And maybe we'll do more of that through next year. But I would say, just to give you some sense of sort of what the focus is, obviously, moving to the cloud was a big deal, and you saw the deals that we did in that. All of the innovation that's taking place in the financial advisor channel, the next best action, the virtual advisors, all of the technology, and I think you probably saw some of that. The work we've done around workplace. Solium is basically a tech company. E*TRADE is a tech company. Building a workplace platform that doesn't revolve around a financial intermediary, but all of it goes straight from stock plans straight into vested E*TRADE accounts. We're doing a bunch of work. We just did -- reviewed our electronic trading platform in Equities, some of they're doing equities, some fixed income. And some of the opportunities to leverage the derivatives trading within the E*TRADE platform with our electronic trading within our Equities Group. So -- and a lot of stuff we're doing around cyber, data protection, data management. AI is a huge effort. We have a group of people, our distinguished engineers, which we appoint each year, a group of very sophisticated technology software engineers and designers and we had new class just welcomed him actually last week, I think it was. So enormous amount of work going on. I mean to your base question, tech spend is going up. I think it's fair to say along with some of our controls and compliance areas, it's the fastest-growing part of this Firm. But that's good because it's displacing things we would be doing manually, which we shouldn't be doing manually. So I'm perfectly happy to see our tech spend go up. A lot of it is around new innovation, but we're also running a plant which is driving $60 billion in revenue. And there's just basic tech infrastructure that we keep modernizing that is the backbone of that plant. So hopefully, that gives you a bit of a sense.

Sharon Yeshaya :

I just would highlight, there are no asset acquisitions this quarter, and the dividends and interest was always included in that definition.

Operator:

We'll go next to Jeremy Sigee with BNP Paribas.

Sharon Yeshaya :

So last time, integration, I talked about this actually in the call in January, there will be a back office conversion that we'll see in 2023. But that's the most major thing that we have left to be done. As well as over the course of the fourth quarter, we will expect something in terms of integration expense, specifically from an E*TRADE perspective, it will look similar to the third quarter.

Sharon Yeshaya :

I'm sorry, I misunderstood the question that you were talking specifically about the integration expenses and how we were thinking about that is from a referral perspective, I would say there's still a lot more that will continue to be done. So we're just scratching the surface of that entire -- those relationships and bringing those funnels together. What I mentioned, for example, as you think about the referral programs, that's just beginning, right? So the better data that we have amongst who's the best FA to refer to the referral workplace relationship to -- that will just continue as you kind of better understand and aggregate data. Remember, we've invested a lot in the capabilities that you would consider AI in nature. It gives you a better sense of what does someone do with his or her next stock plan distribution, for example, do they buy a house, do they need a mortgage? Okay, what happens at this stage in someone's life cycle? So the more and more data that we aggregate across all of these channels, the more and more powerful the Wealth Management business becomes. So to James' point around the technology investment, that technology investment is core to be able to continue to grow the business with what we've called that we discussed this project genome before.

Operator:

We'll go next to Gerard Cassidy with RBC Capital Markets.

Sharon Yeshaya :

The pipelines are solid. The activity, I think what's interesting is continues to be across a diversified base of different companies. So it's not just about one sector in particular. But as James and I highlighted, I think it's really around that macroeconomic factors, and that's geopolitics, et cetera. But what it really ends up doing is creates uncertainty in the cost of capital and in valuation, which therefore also impacts price discovery. And so that's kind of the -- what's the clincher in terms of this realization of what remains a solid pipeline.

Sharon Yeshaya :

I think that people are digesting the various prices and I do think that you're beginning to see that on, say, an issuance perspective, right? So if you think about the cost of capital, that also took people time to -- or rather companies time to digest and understand that we are in a different regime where treasuries are. And so it means that their cost of capital is also higher. And you might not have necessarily seen issuance right away because those corporate balance sheets were there. And now you might see an opportunistic or more prudent behavior from a treasurer or CFO. And so I think that as that mindset begins to shift, then yes, over time, the valuation mindset begins to shift as well.

Operator:

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.

James Gorman:

Thank you, operator. Good morning, everyone and thank you for joining us. We are doing the call a little differently this time. I am in London, Sharon is in New York. So, if we have any logistical gaps for a second or two please understand, but I think we will be just fine. The firm delivered a very solid quarter against obviously what is a more challenging backdrop. Our businesses proved resilient, reflecting an important aspect of our strategy, and that is to, as we have said many times, deliver stable performance in a difficult environment while remaining well capitalized. The integrations of E*TRADE and Eaton Vance continued to expand our opportunities to reach new clients, grow assets and support the firm’s overall stability. Net new assets in Wealth Management of over $50 billion, despite the volatility and clients tax-related withdrawals in the quarter, underscored the scale of our business and its power to attract assets. And in the face of a sharp decline of equity markets, Wealth Management delivered a strong PBT and improved margin supported by the benefits of rising rates. Investment Management benefited from its diversification and we saw continued momentum in private alternatives, parametric customized portfolios and the countercyclicality of our money market business. Finally, in Institutional Securities, our strong franchise in equity and fixed income helps materially counter what everybody knows to be limited activity across Investment Banking. Our results this quarter also reflected two notable headwinds that are worth calling out. First, we saw a significant movement in the investments related to deferred cash based compensation plans. While the marks on these investments are substantially offsetting compensation expense, they created significant drag on top line revenues in the quarter across the firm, particularly in Wealth Management, where the impact of revenues exceeded $500 million. Secondly, the quarter results also included the legal costs of $200 million that reflects the likely resolution of regulatory investigations by the SEC and the CFTC regarding employees’ use of unapproved personal devices and the firm’s recordkeeping requirements. This has been the subject of industry-wide scrutiny. Our ROTCE, excluding integration expenses for the deals that we have done, was 14.3%, down 20% in Q1 and from last year. As I said at the outset, our objective to demonstrate resilience and balance in a more difficult economic cycle was achieved this quarter, helped in part by the acquisition of E*TRADE and Eaton Vance in what was otherwise a challenging environment. Finally, the Fed stress test further affirmed our differentiated business model. Our diversified business mix, as well as our strong capital position, provides us the flexibility to invest for future growth and support our robust capital return program. As such, we increased our quarterly dividend by 11% and announced a $20 billion multiyear buyback program. Having a dividend that’s aligned to the more stable earnings from Wealth and Investment Management is a leading priority of this firm. And by the way, today’s stock price, the current dividend has a yield of approximately 4%. With the buyback, we wanted more flexibility than an annual fixed commitment allows. Given the nature of our business model, it’s especially appealing to have this additional flexibility to deploy capital at what we believe to be attractive valuations. I will now turn the call over to Sharon. And as always, at the end, we will take your questions.

Operator:

Please standby as we reconnect our speakers. Please continue.

Operator:

Thank you. [Operator Instructions] We will take our first question from Christian Bolu with Autonomous.

James Gorman:

Sure. Thanks, Christian. I think you hit on the head, the environment – if I had to use one word to describe it, it would be complicated. We have the Russian invasion of the Ukraine, obviously, an historic occasion. We have historically low rates with very significant rate increases going around the world. We have got the tail of COVID. We have got obviously the fears of inflation and actual inflation. We have got enormous political change just here in this country, the UK, where I am at the moment. They had a leadership change a few days ago, supply chain issues, China-U.S. relations, etcetera, so yes, very complicated. I think it’s important to say though, it is not 2008 complicated. This is a different type of financial stress in the system. And frankly, the banking sector is much stronger than it was going into the last time we went through a major reset in ‘07/08. Morgan Stanley is in particular, I won’t speak for others, but we are in specifically much better shape. We are long in the U.S. in our businesses, largely because Wealth Management is almost entirely U.S. and the U.S. is yet again sort of a great region to be in, in the world. And yes, while we might head into some form of recession – and I, like many of others, have tried to handicap it, but we are frankly guessing at this stage, but I think it’s unlikely to be a deep and dramatic recession at least in the U.S. I think Asia is a little behind. It depends how COVID rolls out, and it’s sort of reemerging a little bit in some countries. And then Europe is obviously – is fighting the hardest right now because of the war in the Ukraine, because of the pressure on gas and gas prices and so on. So when I look at Morgan Stanley, sort of added all together, we did exactly what we wanted to do this quarter. Yes, it’s the lowest ROE for a couple of years after, I think, 3 consecutive record years, but hey, this is the most difficult environment we’ve been in decades. So I’m okay with the lower ROE, particularly when it has a ten-handle on it. We have – CET1 capital ratio is 200 basis points above our requirement. Our ROTCE was nearly 14%. If you look at the Wealth Management margins, we did a 27% margin, including integration this quarter, 28% without it. Those numbers were unheard of a few years ago. So you add it all together, the environment, very complicated, lots of uncertainty. But frankly, for our business model, I think we fare relatively well. And evidence of that is our confidence in the future, and I’m sure we will talk about that in terms of capital and so on.

Sharon Yeshaya:

Well, multiyear obviously means more than 1 year. So sort of just to put that in perspective, but I think that the most important thing about the buyback and also the capital more broadly is we’ve been very prudent and efficient around our capital usage. I think that we’ve always said that capital is very much tied to strategy. They are one and the same. And so we think about them holistically. When we think specifically about the buyback and the concept of a multiyear repurchase plan, right, two points

Operator:

Thank you. We will take our next question from Glenn Schorr with Evercore.

James Gorman:

Well, it’s – Glenn, this is sort of the ultimate question. We’ve built through a decade of, frankly, hard work and discipline, a great excess capital position. Not for nothing along the way, we did two major acquisitions. So we’re using it on deals and two small ones, Solium and Mesa West, you recall, the majors, of course, E*TRADE and Eaton Vance. We’ve taken the dividend. Last year, we doubled the dividend. And this year, we took it up another 11%. It wasn’t so long ago, our dividend was $0.05 a quarter. The incremental change this year is $0.075 a quarter. So we’ve used on that. We’re investing in the business everywhere, particularly around the workplace retirement space. We’ve invested in the digital bank and building out the wealth space. We’ve invested in asset management and our capability, and we’re going to be doing more of that, taking the Eaton Vance Funds internationally, expanding the Parametric program. And then we’re investing in banking. I mean, obviously, the banking calendar has been terrible the last few months, but that’s not – we’re interested in the next 10 years, not the last few months. So the only thing we haven’t done with excess capital is do a special dividend. And that’s something I’m just personally not a fan of. I just don’t – I think it’s like giving shareholders a problem and saying, we don’t know what to do with their money. Here, you take it. So what we like to do with that money, invest it in the business, check; give you a smart dividend with a 4% yield, check; and do buybacks and have flexibility around it when the stock is trading. At the beginning of the year for every x dollars we spent, we’ve got 4 shares retired. Now we’re retiring 5 shares. I like that.

Sharon Yeshaya:

Sure. Let me start with the last. No, no change in opportunity. I think we continue to actually work very closely with different alternative managers as we go forward and think about – educate FAs, educate FAs, educate their clients and use that relationship to continue to create the right products for our clients, all based on education through both channels. In terms of what are they doing with that money, I think what you do see is a lot of the money ends up moving into fee-based over time, right? So look at the fact that we aggregated all these net new assets over recent quarters that first often does come into the system as cash when they are brought over. And then that cash is then deployed into various types of fee-based asset accounts. I think it’s worth noting and just repeating that those fee-based assets are now 50% of our adviser-led channel and those assets, which is a big move from those somewhat 40s, low 40s that we had seen in previous years. In terms of very specifically what we’ve seen over the course of the first half of this year in terms of different types of products, we were sitting at the end of the fourth quarter with cash levels at around 17% to 18% around the self-directed and the advice-based channel. We’re now around 21%. Of course, that could be reflective of some of the equity asset values and the other asset values coming down to increase. But there is somewhat of – there is a pause, I think, people are waiting and observing in certain end markets to deploy that cash. And I think that, that’s just – you can see that in the transactional coming down a bit and/or it’s coming down a bit, but I don’t want to suggest that the engagement isn’t there, because we still are at levels where our engagement as thought about by the most DART metrics and just what we’ve seen in transactional, it’s still higher than levels where we were from a pre pandemic basis. So people are engaged, people are active, and they are seeking advice from their FAs.

Steve Chubak:

Hi, good morning. So wanted to ask a follow-up question on the deposit outlook, as you noted in the prepared remarks, just lots of crosscurrents this quarter on the deposit side, tax seasonality, cash sorting and maybe some offset from higher market volatility? And given the NII guidance, Sharon that you had laid out, I was hoping you could speak to what you’re assuming for deposit betas and the deposit growth trajectory given the myopic focus on cash sorting and recognizing that you already laid out some pretty explicit guidance on the loan growth side?

Steve Chubak:

Very helpful color, Sharon. And maybe just a follow-up on the earlier discussion on organic growth, I mean the 4% number, which, considering the more pronounced tax seasonality, elevated market volatility, was certainly an impressive result. If the market volatility persists, should we view this as a reasonable floor on organic growth? And I was also hoping you could just speak to the cadence of flows from April to June, just to give us a sense as to how organic growth is trajecting over the course of the quarter?

Operator:

Thank you. We will take our next question from Dan Fannon with Jefferies.

Sharon Yeshaya:

It’s a great question. I am sure you will see the disclosure also that will come out in the Q specifically for this business. But just to give you a sense, the fee rates themselves haven’t changed. What changes – what has changed is the mix of the actual flows themselves. So we’ve seen a decrease over the course of the last two quarters in some of those equity accounts, for example, which, as is disclosed, could be higher – can have higher fees. But what we have seen is an increase in balances. In things like liquidity, we’re now not seeing the fee waivers since we’ve moved off that zero-bound floor. We had given you previous guidance of $200 million that we expected to see as an incremental fee positive over the course of the year as those waivers went away because rates came off of that zero-bound. We stand behind that guidance, and you’ve continued to see that flow into the numbers. I think, though, what is important is, obviously, where could you see things change, is the liquidity balances, right. It’s a rate time balance question, as I said before. And the balance is in this case, I think, is a testament to the amount of time and the investment we’ve put into this business to find relationships also across the integrated investment bank where we’ve worked with partners in Institutional Securities, for example, to help forge relationships that will help bring in some of those deposits into those money market products.

Sharon Yeshaya:

So the first point that I would highlight to you is that ex integration, our efficiency ratio is at 7%, and that includes the legal charge that James mentioned this quarter. So I think we have shown and continues to demonstrate discipline around our expense base, very similar to the way we think about capital. Resources, we think about it very holistically and part of our strategic decision-making process. As we walked into the second quarter, we were aware that the environment was changing, and we all had been seeing the same events that – we’ve all witnessed together as it relates to the geopolitical front and the macro side. And we came in and we took a look – a hard look and we continue to do so, individual product by product, investment by investment, project by project to understand where are the potential growth in expenses coming from, how are we thinking about balancing, as James said, that near-term investment, making sure that we need to get on certain things. We always need to ensure that as we invest also with a longer-term horizon, the right controls are in place as we continue to grow the business efficiently, but are there projects that can be delayed that we might be doing on the margin? So I’d say that, that work is in flight, has been in flight. It’s not new information, and it’s certainly something that we are keeping our eyes on.

Ebrahim Poonawala:

Hi, good morning. Just one more follow-up on the Institutional Securities business. So you talked about market share opportunities, which you clearly have. Would love to hear your thoughts around just the health of, one, how is the plumbing in the capital market functioning? We saw a bunch of headlines around hung deals, et cetera, during the quarter. So just how are clients holding up on the institutional side? And given how strong the franchise already is on the Prime Brokerage side, is there more opportunity there? I realize that was a big driver of the growth this quarter. So would love to hear your thoughts?

Ebrahim Poonawala:

Thanks for that. And just on the fixed income. So, appreciate that you all right-sized the business a few years ago. Like given the capital constraints at your peers, does it make sense maybe, James or Sharon, to like lean in and revisit areas where you could actually pick up share on the fixed income side or no?

Operator:

Thank you. We will take our next question from Brennan Hawken with UBS.

Sharon Yeshaya:

Yes. I think the better – I mean I think that one quarter would be a little bit difficult to kind of draw those conclusions. I think the way I would think about it, Brennan, is a little bit differently, which is some of the questions I know we have received are, well, why didn’t your beta come down because you had E*TRADE. And so those balances should be in a position where you should have an average weighted beta that’s lower over time. So, I think the best way to kind of answer your question a little bit more head on in terms of where the underlying crux is, is we have seen balances also increase in the higher account level. That’s built into the model. It’s built into our expectations. It’s built into the forecast. And we have said, as I said directly in my remarks, we also saw the deposit behavior very much in line with what we expected. And so it is working in terms of that predictability. But why is the beta then higher, some of that beta just has to do with – you have some higher balances. Why, because you accumulated them likely at periods of time where yields were lower, and there was excess cash that was sitting in position. And so some of that higher balanced amount begins to leave seeking out higher-yielding payments. So, I think that can help give you a little bit of construct in terms of what’s going on from the balance perspective to more directly, I think answer the question rather than just look at one quarter’s behavior.

Sharon Yeshaya:

Yes. So, the LTVs are very well managed. No, it’s okay. Okay. I am just trying to remember it all. So, from the LTV perspective, as you would expect, we are very much actually in line with where we have been from historical years. And the reason for that is it is a very well-managed book. And why any uptick at all, as you would expect, obviously, the value of the underlying has gone down. But from a historical basis, we have always been within that – sort of given a 40% range or low-40% range, we are in that range, and we are very much, like I said in line over the last couple of years. Now as it relates directly to what we are looking forward and seeing, I think what’s important here is that from a mortgage perspective, you might see some slowing just obviously given where rates are. Now, why would the SBLs come down, you just might not have as much interest or engagement in the product with lower asset values. So, I don’t look at it in terms of, oh, there is a management issue, rather that is a very well-managed portfolio where we haven’t seen issues in a lot of different market environment with the calls from an operational perspective more broadly, etcetera, but rather just the engagement from that relationship side, is this the right product to be using now. You might not have those conversations as much with the asset values coming down. So, a very practical answer to the question that you gave.

Mike Mayo:

Hi. Just a follow-up on the loan growth, the $20 billion loan growth target from the start of the year, it looks like you are still looking at that. But how are you thinking about loss rates on those new loans given perhaps a new economic forecast? We note that provisions for wealth losses are already tripled with the level of last year. Kind of what’s the risk in that portfolio? And does it make sense to have a loan growth target? It’s always easy to make loans. It’s just tough to get paid back sometimes. Thanks.

Mike Mayo:

And so did you have any extra CECL provisions this quarter?

Operator:

Thank you. We will take our next question from Gerard Cassidy with RBC Capital Markets.

Sharon Yeshaya:

It’s a great question and you draw a good point distinction. No, those are just the value – it’s just the value of the assets themselves have gone down that those holders have. Now the increase in participants has a lot to do with the fact that we just continue – as we continue to – we mandate, we have seen that increase the number of participants. What I would say in terms of just an opportunity in terms of engaging with those clients is, obviously, it is a difficult time in environment for some of those individuals. And we do – we continue to educate and use financial wellness as a tool, especially in these environments, to explain the advice-driven model and provide us with an opportunity actually in this kind of environment to discuss what financial advice and what financial wellness is, specifically as people see different declines in their potential portfolio.

Sharon Yeshaya:

Skew, there are – there is a good portion, I would say of technology companies that would be in that sector that you can see as you see those asset values declined, but there is a balance on the other side of different types of companies. And as we win mandates, it’s not just on the tech side. We are winning mandates across different institutions, especially as people better understand that financial wellness offering.

Matt O’Connor:

Good morning. Appreciate all the details on Slide 11 here, the allowance for credit losses. Maybe you have had it before, but more relevant now, and good detail. If you had to kind of guesstimate in a moderate recession that $1.2 billion of total ACL, where does that go?

Matt O’Connor:

Okay. Any way to frame, does it double or triple? Obviously, a lot of the loans are in Wealth Management, which is just not going to – you would think have as much loss content, but any way to frame generically how high it could go?

Sharon Yeshaya:

I mean you know what I would do – I would say is why don’t you think about it as it relates to COVID, right. You can think about where we were from a COVID perspective. And so let’s talk ISG specifically. The provisions this quarter are 82%. It was almost 4x that when you think about where we were from a COVID perspective.

James Gorman:

I would just point out that – sorry. I would just point out that the Wealth Management piece, ACL percentage is 0.1. These are very different kinds of loans from traditional consumer banking loans. So, you are just not going to see at least for that part of a major, major move. For the others, I think it’s just – you can’t project. I mean who knows what kind of recession – a recession might be, how long it might be and so on. But we manage this business conservatively and we don’t have a big traditional middle market, small business loan book. We just don’t have that kind of business.

Sharon Yeshaya:

It’s non-material per business line, which is why we don’t call out the number.

Operator:

Thank you. We will take our next question from Jim Mitchell with Seaport Global.

Sharon Yeshaya:

Yes. It was both is the way I would answer it. There are obviously market declines that had to do with it as well. But this was a very thoughtful use and approach around efficient uses of RWAs. And where does it make sense from a business perspective given the uncertainty, and I think there is a very – as I said, the same way when we think about the expenses, it’s about being efficient and thoughtful and very prudent and flexible with all of that environment. So, it’s both of those things that were taken into account when thinking about the RWA decline.

Jim Mitchell:

Right. Maybe as a follow-up on that, James, I think you have talked about hoping the change in the mix of your business over time would push your DFAS losses and SCB down slightly. This year is probably a period of victory relative to what some happened to your peers. But do you think there is still room to see that come down over time given your changing mix?

Operator:

Thank you. We will take our next question from Mike Mayo with Wells Fargo Securities.

James Gorman:

No, it’s not. We are overwhelmingly in the U.S. We had 6% revenue growth in the Wealth Management business, produced ex integration 28% margins. This is a business we definitely don’t want to harm in this environment. And we are managing, I mean I guess it’s quasi plan B., managing the RWAs as we just said in the balance sheet, reflecting a more stressed environment. We met as a Management Committee last September, I think and I spoke to the Management Committee about I felt there was much more downside risk to the market. The magnitude of it, I didn’t have a strong feeling for, but I thought it was somewhere between significant and are really significant. And I think we are in the sort of significant phase right now. So, we started pulling back, Mike, at that point. We have got a very clear handle on headcount growth and where that growth is. We have also got a lot of regulatory obligations. We have got to continue to fulfill as all the banks do. But right now, we are definitely not in a sort of crisis mode at all. I mean that’s what – if we were, we wouldn’t be buying back $20 billion increase in the dividend 11%. On the other hand, balance sheet growth will be very measured. I think we will pick up share by banks coming back to us, not necessarily us having to move forward. And as I think Sharon articulated very well, we are doing a pretty systematic review of the prioritization of all the projects going on around the firm and also in a big company like this with $60 billion of revenue, we have a lot of stuff going on, and we have choices as to when we do it. So, I would call it a sort of plan A minus, not a plan B, if you will, but that’s mindset we are in. However, if things get worse, and in my career, I have seen a lot of recessions, a lot of crises, a lot of damage done to the environment, if things really deteriorated, particularly in the U.S., then we take a much more aggressive position. And we obviously have the ultimate weapon, which is comp.

James Gorman:

Thank you. Good morning, everyone. Thanks for joining us. I know you have a very, very busy morning, so we did our best to keep these earnings uncomplicated for you. Heading into 2022, we anticipate, as everybody did, a more volatile market, and obviously, we saw that in the first quarter. The year started with rising inflationary pressures, accelerated expectations for tightening of monetary policy, and most notably, and sadly, the invasion of Ukraine. This backdrop injected significant uncertainty into the markets and further tested resiliency of our franchise. Against this quickly evolving market environment, our diversified business model again generated high returns. The firm produced revenues of $14.8 billion and a ROTCE of 20%. I am pleased to report that our first quarter results continued to exemplify Morgan Stanley’s strength and affirm our long-term strategy. First, Institutional Securities delivered another very strong quarter, with revenues of $7.7 billion, making it one of its highest performances ever. Compared to last year’s record first quarter, we saw a different mix of businesses driving the strength of this segment. While underwriting was muted, Advisory was a highlight. Equity and fixed income again delivered exceptional results, particularly in Asia and Europe, as we supported our global clients amid a turbulent backdrop. Global balanced Institutional businesses are complex. They require many years to build and an enormous amount invested in human capital. The breadth and depth of our franchise today is a competitive differentiator. Wealth Management showcased its resiliency in the quarter. Notwithstanding, fluctuating market levels, the business generated a margin of approximately 28% excluding integration-related expenses. The E*TRADE integration continues to go very well, and given the current path we are on, a significant portion of the integration will be done by the end of this year. By the end of 2022, we expect to no longer separate our integration expenses. Net new assets for the quarter were $142 billion. That included an asset acquisition. Nonetheless, organic growth in our existing business remained very strong. In a volatile market, this is very affirming of the model. Further, we saw our first rate hike in the year in the first quarter, and with our strong and growing deposit base, this will have a near immediate economic impact to our business and it supports our path to delivering the margins that we projected in excess of 30%. In Investment Management, the increased diversification of the business supported results in a very choppy market. Fee based asset management revenues, which were $1.4 billion in the quarter, have grown with the addition of Parametric, Calvert and the broadening of our alts and fixed income platforms. We have performed better with these franchises than we would have without it and it has brought much more balance to our asset management business. And with respect to the Eaton Vance integration, it progresses very smoothly as well. The teams remain stable, and culturally, it’s a terrific fit. Our markets continue to evolve, we remain confident about our position and the many opportunities ahead. Finally, a brief word on the Russian invasion of the Ukraine. In managing a global business, particularly a market-based global business, we must always remain vigilant about the potential for shocks or unexpected events. Obviously, the invasion of the Ukraine is one such event. First of all, and most importantly, our hearts go out to the Ukrainians and all those have been impacted. As it relates to the business, apart from the volatility it’s created, there’s been very limited financial impact to Morgan Stanley. A few years ago, we decided to give up our banking license and we significantly scaled back operations in Russia. Further, as a result of these actions and the current war, we are not entering into any new business in the country and our activities are limited to helping global clients address and close out pre-existing obligations. I am very proud of how our team has managed through a difficult market backdrop, and going forward, we continue to navigate the turbulent markets and broader geopolitical environment with confidence. I will now turn the call over to Sharon to discuss the quarter in greater detail and together we will take your questions.

Operator:

[Operator Instructions] The first question is from Glenn Schorr with Evercore.

James Gorman:

Glenn, it’s a high class problem and its great position to be in. We have been very protective of keeping a sort of buffer on a buffer, because you never know in this world and I think what we have experienced with the markets in the last quarter were extremely volatile and you just have to -- you have to anticipate the worst and make sure you are prepared for that. We clearly have done that. We have been chipping away at the excess capital. If you add back the OCI, we are running about 15% CET1. We were well above 16%. So, clearly, we will see where our CCAR results are. I think last year, they are around 13.2% or 13.3%. I’d be surprised if there’s material changes. But let’s see. So we are still sitting on a significant buffer. Listen, we are clearly going to keep pushing capital distribution through buyback and dividend to shareholders. That’s clearly the case. We have just done two major acquisitions with about $21 billion. We would do more deals if as they -- if they fit with our strategy, we won’t do things that take us offline, off piece. We want to stay true to our strategy and our strengths in our three core businesses. So, yeah, continued buyback, but also a lot of investment in the business. I mean, we are doing a lot on the tech side. Obviously, we want to stay completely compliant with our regulatory responsibilities and we will continue to invest to make sure we are best-in-class there. But a lot of investment technology and a lot of investment around the retirement workplace platform, which I think is sort of the next frontier. And we are just in baby steps, we are very early days of that, but I think that’s a huge opportunity. And finally, I do think that there are opportunities outside of the U.S., even though we are along the US and that served us incredibly well, and I think, will serve us very well for the next decade. But I think in the Wealth and Asset Management spaces internationally, we punch below our weight. On Institutional Securities we don’t and we had a very strong quarter in Europe and Asia in Institutional Securities. But I think there’s clearly more we can do internationally, so sort of watch that space.

Sharon Yeshaya:

I think it’s a great question and we -- as you said, we continue to invest in it. We have obviously seen the alternative players creating more product and you see that from peers, but you also even see that from our own from MSM as a secular growth trend in a place that we are investing. They have obviously created products now that are more appropriate or more suitable for retail and our platform is there. We are working very closely together. There’s clearly more that we can do. As Jim said, we are continuing to invest. But I agree with you that this is a place where we have seen an uptick. We noted it over the course of this quarter. It was interesting to us, as I know we have discussed it individually as well, Glenn, and I think, it’s a place where you will just continue to see that kind of growth investment from both us and also on the product side.

Brennan Hawken:

Okay. Good morning. Thanks for taking my question. Sorry, [Indiscernible]paper, I couldn’t even find the handset. So I had a question first on the Wealth Management deposits and thanks, Sharon, for that indication of updating the NII outlook. But when we think about the deposits and the potential beta, what’s your expectation for beta this time around and what percentage of your deposits are actually on the self-directed platform? We get the asset percentages, but it’s my sense that self-directed runs with a higher percentage of cash. So I am guessing the percentage of deposits would be -- would skew higher than the assets do on that platform and could that impact your beta this time around? Thanks.

Brennan Hawken:

Great. That makes a lot of sense. And then for the follow-up, sticking with the rate sensitivity, SBL growth has been quite remarkable this -- for the past many years. When we think about what happen last rate hiking cycle, I went back and I looked through, and the interesting thing is the SBLs weren’t often thought of as rate sensitive, but they continued to grow in the last rate hiking cycle. So, how do you think about this time around if the product is obviously mature, but more mature and so maybe could be more subject to some rate sensitivity, but also like advisors and customers, probably, understand the value of the product better, too. And so there’s a couple of cross currents and I can’t quite get my head around exactly how to think about it, but what are your thoughts on that?

Operator:

Thank you. Our next question is from Dan Fannon with Jefferies.

Sharon Yeshaya:

So why don’t I start with just saying, we will see more when it’s appropriate for our -- we are obviously continuing to look at this space. What these are, and as James said, when we are looking at retirement, we are looking at defined benefit. We are looking at understanding how workplace coincides with the FA advisor-led space together and the way that I would think of this is just an extension of our strategy. So the best kind of concept that you can say is, yes, we had a proof point in the third quarter of last year. We are obviously in a situation where we have acquired a similar plan and group of advisors. The group of advisors covered defined benefit contribution plans. Those defined benefit contribution plans have corporations associated with them that may also have participants. Those -- in this case, we have 1 million participants that were added. That -- those participants, if you go back to our strategy of the funnel, they are a top portion of that funnel that we begin to advise or educate or learn or teach people about financial wellness. We give them access to our services particularly that we have already developed in the workplace channel. And so that educational content has a crossover and then they now understand better what financial wellness is. They can say, I am interested in speaking to a financial adviser. So that’s where the channels begin to converge and merge, and where you are beginning to really think about the top of the funnel into potentially providing access and advice to clients over time.

Sharon Yeshaya:

Sure. So the companion accounts, what we have said is that, by the end of this year, approximately 90% of U.S. stock participants will be in a position to access a companion account. Should they want to or should they have the stock to invest into the account. So that’s the point there. The question around the retention of assets, we had given that metric at the beginning of -- in the January deck and we talked about aiming towards 30% and we have made improvements from the 24% that we gave you at the end of the quarter. So, all of those are milestones as you think about integration and integration-related expenses. And also the points that James had made around the investment in our business in technology and in this -- and in the integration more broadly.

Steven Chubak:

Hi. Good morning. So I wanted to start off with a question on M&A outlook. Organic growth has moderated granted versus what admittedly was a neck breaking pace that we had seen last year. And to what extent does the market volatility disrupt adviser movement across the wealth space and have you seen any improvement in breakaway broker trends or just the recruiting backlog more broadly as volatility has started to moderate versus the level seen in Jan and Feb?

Steven Chubak:

Understood. And just for a follow-up, just trying to clarify some of the NII guidance, I was hoping you could provide, Sharon, an update on the loan growth outlook, whether you are still comfortable with the mid-teens loan growth you had guided to previously and does the more than $1 billion NII benefit that you alluded to in your prepared remarks contemplate some continued loan growth or is that on a static balance sheet?

Operator:

Thank you. Our next question is from Ebrahim Poonawala with Bank of America.

Sharon Yeshaya:

So our money market guidance we gave you was about plus $200 million and we stand by plus $200 million, but I’d say, for the full year. It’s really based on two factors that are contributing into that. One is the balances, as well as the industry and the waivers, how quickly those waivers roll off. So we are -- $200 million for the remainder of the year for the increase for Investment Management.

Sharon Yeshaya:

Yeah. So a couple of things, first on the advisory pipeline in particular. Pipeline remains healthy and diversified. So taking a look at the underlying pipeline still diversified across sectors, which I think is another healthy sign in terms of the marketplace. As it relates to the underwriting calendar, that obviously you do have deals that didn’t necessarily come to market in the first quarter. They -- that pipeline to realize, that was associated really with the volatility and the uncertainty in the first quarter, as that recedes, to the extent it does, that would move things from the pipeline state to the realized state.

Mike Mayo:

Hi. I have a question and a follow-up. I guess no good deed goes unpunished. Going back to, you said, core net new asset growth for the quarter was 5.4%, if I got that right excluding the deal. And so that is down from where you were before, but it’s certainly up from where you guys have been a few years ago. So where do you expect that to settle out and what’s the relative contribution, say, E*TRADE versus the other legacy businesses?

Mike Mayo:

Okay. And my follow-up question is on the block trading investigation, which you guys highlighted in your filings. And I know you are limited about what you want to say, I know you can’t and shouldn’t give any expectations. But there might be some things that you could disclose around this. This might wind up being a non-event. I mean there’s investigations all the time. We get it. But every now and then one of these investigations lead to something. I am not saying that this is the case, but I just want to what investors ask me, what do you think the impact to the block trading investigation of Morgan Stanley could be? It would be nice for me and investors to have that answer, so with that big wind up. How much do you make from block trading per year and were these issues self-disclosed by Morgan Stanley to the regulators or did it come from an outside party? Thank you.

Operator:

Thank you. Our next question is from Gerard Cassidy with RBC Capital Markets.

Sharon Yeshaya:

Thanks, Gerard for the question. I -- actually I know a lot of the peers have released this morning. So I haven’t looked specifically at this quarter’s number in terms of this -- the public market share. But what I can tell you is that we have seen increased share over time. I think we are really proud of the position that we have made in both of the sales and trading franchises. A lot of that has to do with what James discussed more directly in his script, which is building these -- investing our people and talent both geographically and also making sure that we have it across different functions. So all of these things are important, I think it’s decades in the making rather than just one quarter, and we are really proud of the way that we thought about the continue -- the continuous velocity of all of our resources to make sure that we can better and more efficiently support client flows.

Sharon Yeshaya:

I think that will be very -- I think individual companies will make their own decisions in terms of where they have that from an advice driven perspective.

Operator:

Thank you. Our next question is from Jeremy Sigee with BNB Paribas.

Sharon Yeshaya:

So actually it’s an interesting question. Two things that struck me as we sort of went through and thought about the quarter. One is the fact that when you look at allocations of investors in the retail space in terms of where their positions were in equities, fixed income, cash, cash equivalents, et cetera, on a proportional basis. Over the last year or two actually, those percentages have actually also remained relatively stable. So the retail investors’ investment is something that hasn’t necessarily fluctuated based on the data that we have, that we have seen. Those positions have remained there despite the fact that there’s been volatility. The second point is, specifically on self-directed is, the E*TRADE, the fact that, this is what I tried to mention in the script was, where we are from the daily average trade levels, still very, very high, 3 times the high from when E*TRADE was a standalone company. And so I think it highlights the change that we have seen in the retail sentiment over the course of the last two years or three years.

Jeremy Sigee:

That’s very helpful. Thank you. And could I just ask a follow-up, I am sitting in Europe, you mentioned Europe was strong. Could you talk about which bits were driving that? What was so great in Europe this quarter?

Operator:

Thank you. Our next question is from Devin Ryan with JMP Securities.

Sharon Yeshaya:

Absolutely. I am actually glad you asked the question. I think it’s a really interesting space and I think it’s an example of connecting the dots. So over the course of the last couple of years, what we have realized is there’s a need for family offices to have access to services that we already offer Institutional Securities clients through our Fund Services platform. And so bringing together those conversations between what’s happening in the Institutional Securities Group and what strategy we are driving in Wealth Management is just an example of how the business is working more closely together to find those opportunities to service clients as family offices begin to feel more like Institutional accounts, and that back and forth in dialogue is really amongst the team, the leadership and then throughout the organization.

Sharon Yeshaya:

Absolutely. As you know, we are obviously offering some -- we have some offerings for different qualified investors that we have. But in this space, we are obviously taking the lead from regulators as it relates to what we can and can’t offer various clients.

James Gorman:

Thank you. Good morning, everyone. Morgan Stanley delivered another record year of profits and results in 2021, generating a full year ROTCE of 20%. Performance was strong in each business. In Institutional Securities, we showed strength and gained share. And in Wealth Management, we added over $430 billion of net new assets, bringing total client assets to nearly $5 trillion. We drove our strategic vision forward Investment Management, successfully closing our acquisition of Eaton Vance in the year and created a premier asset manager, which itself has $1.6 trillion of assets under management. Sharon will discuss the details of the quarter and the full year shortly. But first, as always, I will walk through our annual strategic updates. If you turn to the document and start on Slide 3. At the beginning of last year, we set two-year objectives with the expectation that 2021 would be a transition year as we work through our integrations. Clearly, the Firm's performance exceeded the expectations we had for 2021 heading into that year. With the early successes of the E*TRADE and Eaton Vance acquisitions and the Firm's overall momentum, we entered 2022 ahead of plan. Turning to Slide 4. First, I'll focus on our 12-year transformation and where the Firm is today. History offers perspective on our track record. Next, I'll highlight where we've built unique competitive advantages around each of our businesses and how we expect to grow and maintain our leading positions. Then I will address our continued commitment to return capital to our shareholders. And finally, I'll touch on how, when taken together, this should lead to further multiple expansion. To begin with our longer-term evolution, Slide 5 highlights the transformation of Morgan Stanley into a more balanced, higher returning firm today. Total revenues are more than double the level of 2009 with each business significantly growing and contributing to the Firm's enhanced profitability. Each of our businesses now have defensible and sustainable competitive advantages to protect and drive their leading positions. Start with Institutional Securities on Slide 6. Looking back to 2014, when we had recovered from the financial crisis, but before we reset our strategy and restructured some of this business, we've increased share both overall and individually across business lines. Share continues to aggregate to the industry leaders, and we expect this trend to hold. Our competitive position is strong, and as demonstrated in the very active markets for the last two years, we are confident in our ability to capitalize on opportunities to hold, if not gain, share across the division. Moving to Slide 7. Our integrated investment bank delivered $30 billion of revenues in 2021 and continues to demonstrate operating leverage, highlighted by our expanding margins. Our footprint is balanced around the world, putting us in a leading tier of investment banks with global scale. Our franchise has never been stronger, and we have seen tangible results from the collaboration between our segments. Shifting to Wealth Management on Slide 8. The growth we have seen in 2021 has been unprecedented. We added nearly $1 trillion in client assets in a single year. Scale advantages propelled growth, and we added $438 billion of net new assets in the last 12 months. This predominantly organic growth is the result of our consistent and focused execution on our integration and expansion initiatives and puts us in a leading position. The journey over the last few years has demonstrated the out of the possible. With respect to net new asset growth, this business has gone from very low single digits in the last decade to 4% to 6% more recently to unprecedented growth this year. Obviously, it's still early days, but the verticals are in place. Before we commit to specific guidance for net new asset growth, we need more time to better understand the power of these channels. But what I can tell you is that the proof points are strong, and we feel great about where we are today in the business potential. Turning to Slide 9. With the top advisor-led business in the industry, complemented by leading workplace and self-directed offerings, the wealth franchise we've built as a category 1. We already serve nearly $5 trillion of client assets, and overall revenue on assets remains high over 50 basis points, underlining this segment is -- underlining this segment as an economic engine for the Firm. As we think about the growth ahead, we are most excited about the nearly 15 million relationships we have across channels and the potential to deepen those relationships further and consolidate client on to the platform. On Slide 10, we look more closely at workplace, which I'm incredibly excited about for the future. As we've said before, we see this channel as a funnel for client and asset acquisition to sustain growth going forward. We now have over $500 billion of unvested assets in this channel and expect to retain an increasing proportion as they vest. In 2021, we had a 24% retention rate. That compares with 21% the previous year. Given our focused effort, our long-term goal is to reach 30% retention. This new metric illustrates the strength of the workplace business to augment net new assets to Wealth Management. Moving to Investment Management on Slide 11. Our platform has transformed into premier and growing asset manager. Our distinctive capabilities enable us to deliver differentiated client value as endorsed by $115 billion of net flows in the year. Total AUM is now $1.6 trillion, and our more durable asset management fees are nearly triple what they were in 2014. If you look closely with our Investment Management business on Slide 12, you can see we're a leader and growing where it matters most. Customization, specifically direct indexing through the premier Parametric brand, sustainability and alternatives are each areas of increasing client demand. We've strengthened our position across these categories with robust investment our capabilities, and we've seen meaningful asset under management growth as a result. Moreover, the complementary nature of distribution networks with Eaton Vance's powerful U.S. retail distribution capabilities and MSIM's strength in international distribution enhances our client reach. We're encouraged by early signs of success in leveraging the greater combined network, along with our world-class equity franchise and value-added fixed income platform, and we expect these areas will continue to drive growth into the future. Finally, on Slide 11, as we look ahead, we expect rates to rise. We expect approximately $500 million of incremental NII in Wealth Management this year based on the year-end forward curve. Additionally, we expect another $200 million this year from the reversal of fee waivers in our Investment Management business. To further measure our rate sensitivity, we look at what happens if there is an incremental 100 basis point parallel shift in rates beyond the curve. That would deliver another $1.3 billion, which largely goes to the bottom line. While we certainly don't expect this additional shift to happen this year, the Firm will clearly benefit substantially as rates rise over the next several years. Pivoting to our capital return strategy on Slide 14. Our increased earnings power, supported by revenues from more durable sources, has enabled us to double our annualized dividend to $2.80 just last year while, at the same time, executing on meaningful share repurchases. Notwithstanding the returns we're making to shareholders and the investments we make in our business, we continue to have an excess capital position. Our CET1 ratio was 16% at year-end after paying our dividend, executing on our repurchase plan and accounting for the impact of SA-CCR. And as further illustrated on Slide 15, a growing net income has provided us the flexibility to reduce our share count. While we added 300 million shares from our 2 large acquisitions of E*TRADE and Eaton Vance, we continue to execute on our meaningful buyback program and have brought back our share count back to just under $1.8 billion from $2 billion in 2014. Taking all this together, Slide 16 highlights the fundamentals we have in place to drive future multiple expansion. We have scale, significant growth opportunities in wealth and investment management, coupled with a leading institutional business, and a strong commitment to capital return. The Morgan Stanley brand has never been stronger. We've been fortunate enough to acquire additional brands in the last few years that have tremendous value in expanding our footprint. The sum of these elements supports multiple expansion for the combined company. Slide 17 shows our performance goals. Of note, we are increasing our ROTCE goal to reflect the earnings power we see in our business model. We are laser focused on delivering value to our clients, our shareholders and our employees, and we believe an ROTCE in excess of 20% is achievable. As we look to the longer term, with the support of our track record behind us, we're adding a new goal, a long-term goal to achieve $10 trillion in client assets across Wealth and Investment Management. As always, our targets are subject, of course, to major market moves or changes in the economic, political and regulatory environment. However, with the outlook we have now, we fully expect to achieve our goals. I'll now turn the call over to Sharon, who will discuss our fourth quarter and annual results. And together, we will take your questions. Thank you.

Operator:

We are now ready to take questions. [Operator Instructions]. The first question is from Christian Bolu with Autonomous.

James Gorman:

Good morning, Christian. I think you're talking about net new money, I assume, right?

James Gorman:

Yes. Yes. I mean it's not a simple answer because in the old days, it was simple. It was a function of money that you lost by financial advisors leaving and money you gain by recruiting financial advisors. And obviously, that's a sort of sorry way to run a business. It basically settles your P&L for the next nine years to buy a little bit of joy in the near-term. Fortunately, we've outgrown that. The source of net new money comes from several places. Number one, as you heard the retention in the workplace space is much better than what we did pre E*TRADE. I mean, we -- I think it went from 21% to 24% last year, but pre-E*TRADE, it was much, much lower and pre-Solium. Number two, the reality is wealthy people get wealthier quicker than people who are less wealthy get wealthy. And we've got a lot of them. We -- now with our -- the sophistication of our network, the linkages we have to invest in banking across our top financial advisors, the family office structure the team has put in place are all drivers of growth that we didn't have before. I mean just the new assets that are brought in from our Investment Banking relationships sort of across the house, whereas in the past, we never really introduced across the house. It's truly running like one Firm. Thirdly, we're just not losing many people. I mean that's the reality relative to previous years, where being significant net gainers. And that's not because we're doing stupid recruiting deals. That's because we're not losing a lot of people. Now we are doing recruiting deals. There are talented people in the market. They're not coming from one1 particular Firm or another. We don't focus on firms, we focus on individuals, and that has been doing well. Then you add in things like the technology the team has put in place in Wealth Management, sort of the virtual advisor type technology where you leverage the best talent we have across the whole country, all of the old platform that is being built out, where we now provide the product that you would have had to go to another Firm to get. And finally, you bring in the deposits and what we've done with the bank and the online banking. And then you throw on top of that E*TRADE and what that's been doing in growth. And so Christian, it's an interesting story. It's many, many parts, which is why we're confident it's going to keep going. Just recruiting, that's different. You turn that spigot on or off, but it's not just recruiting. So I think there's going to be strong organic growth. I mean these numbers, we said unprecedented for reason. It had never -- we've never seen -- it's 10%, 11% organic growth year-over-year. That's got to be the best in the industry, and overwhelmingly, the best in our history. And it's better than, frankly, many of the traditional faster-growing, so-called faster-growing companies. So we're really excited about it. I don't think 10% or 11% is realistic to hold. But certainly, we're not going back to anywhere near where we were in the old days.

Christian Bolu :

Okay. Thank you. For my second question, on expenses, really nice control in the quarter, but all your peers are speaking about elevated expense growth going forward to retain talent and just to invest for growth. Can you talk about just longer-term, how you're thinking about balancing sort of that good expense control that we like while continuing to invest for the long-term?

James Gorman:

Yes. I'd say, Christian, obviously, this is going to be a hot topic because it's all anybody wants to talk about all of a sudden is expense management for 2022. I'm not going to talk about competitors, but you've got to look at business models. I mean, we're a different business model. Just take our Wealth Management business, which is $24-plus billion in revenue. Those advisors are paid on a grid. There is no inflation on it. It's based upon what they produce. Most of our investment bank is similarly paid based on bonus and that's based on what they produce, what our performance is. If that goes up, they go up, which they did this year and we were thrilled to do that. So we've invested a lot in technology, but we've also bought companies. As I said before, we didn't just buy E*TRADE and Solium and Eaton Vance, we bought technology businesses within them, which we would have been developing ourselves, the online banking business within E*TRADE, the Solium workplace platform, which is basically -- it's basically software programming business, the Parametric platform with Eaton Vance, all of these are things which if we built would have been very expensive. So buy versus build, we made that trade-off. So it's a combination of all of those. We're very comfortable with our expense situation right now. And I don't know, we're just -- I guess, it's a different business model.

Operator:

The next question is from Brennan Hawken with UBS.

Sharon Yeshaya:

Absolutely. So this $200 million, what we're reflecting here, Brennan, it's a good question, is the forward curve. And so the forward curve has the first rate hike in effect that we looked at from December 31. So that's in the second quarter. So therefore, it's the amount that you would expect to realize this year, should that forward curve play out. That's the way this slide was illustrated. And just to drive the distinction, though, between what you see in the Q, the Q has all different types of waivers. It's not just money market waivers. But you're right to say that this number on a relative basis would be considered low if you're thinking about a full year context.

Sharon Yeshaya:

No, you're not. Thank you for clarifying that. That's 100% accurate. What we were referring to is the first quarter of 2022 and using this full year number as a good launching off point is sort of setting you up. That's obviously ex-integration for the first quarter. So yes, as the rate rises, that should increase the margin as it goes forward throughout the course of the year.

Sharon Yeshaya:

Sure. Don't worry, Brennan.

Sharon Yeshaya:

It's the fourth quarter. Those -- you see some of the rates moving up in the fourth quarter, Brennan. But overall, I think as you look forward and you think about fees more broadly, we obviously have a larger asset base. I think it all ends back to this idea of growth. And that's -- I think, really ties to James' slide as well, which really thinks about what are we trying to build, leaning into growth and really thinking about creating durable fee revenue streams over time.

Sharon Yeshaya:

No.

Sharon Yeshaya:

Yes. And we also disclosed them in the Q and in the K.

Glenn Schorr:

James, a little, tiny qualifier, if I could. Last quarter, I think you made the comment of, well, organic growth shouldn't be likely below 5%. Today, you said more like it won't be like the old days. Is it still like the old days, meaning that when you're in that 4% range pre all the additions and the opportunities you have in hand? Are we still looking at like should be 5 and above? I don't need to pin you down. I would just want to make sure I'm getting the right context.

Glenn Schorr:

Perfect. Exactly what I needed. Thanks. The other one, James, is the long-term goals, if you look at the last slide, I think those are great long-term goals. And if you could do that sustainably, I think you would get your multiple expansion, people would love it.

Glenn Schorr:

The high-class problem that you have is you kind of did some of them this year or last year, so maybe if -- again, if I could just have you part some more, then just go through, how to think about sustainability and what you're building towards what long-term means just so we don't do the up and down game every quarter. So like, "Oh, wait, you didn't hit your ROTC target this quarter…?

Operator:

The next question is from Steven Chubak with Wolfe Research.

James Gorman:

Steve, I have to say I love you. You're the first person in history to call a 30%-plus pretax margin Wealth Management as conservative. I mean we started we're like 3%. So listen, there's nobody in history, I think, has ever generated 30-plus percent number. I think it was back -- if you go back, it was Shearson in the fourth quarter of 1999, I believe, generated a 29% margin. And that was because they were doing, let's just say, a lot of Internet-based buy and selling, the clients back then. So that was like an artificial period. Listen, there is the reason we put the plus on it. We don't think 30% is the ceiling. But let's run before we sprint here. We've gone from 5 to 10 to 15 to 20 to 25. 27%, 28% margins with growth, that's a phenomenal story. If we can do 30%, which we will do because of the way rates are going, it gets even better. So 30%-plus, there's no great magic to it. It's just the math of how we think the business plays out the next couple of years. I don't know what the plus is going to be. It might be 0.1 or it might be 5.

James Gorman:

Maybe you're clairvoyant, I don't know.

Sharon Yeshaya:

Sure. Why don't I take the last one first, which I think the overarching theme is really around adaptation? As it specifically relates to SA-CCR, I think there was data mitigation that we were able to achieve. And I think we're proud of being able to focus and move forward. As it relates to Basel, no surprise that you asked the question, Steve. So it's nice to hear from you on that one. But obviously, there is no final rule yet. I think there's -- the difficulty in saying something is that there's often and can be offset between these rules. And so that's something that I would bear in mind as you think through it and as we all think through it. But what I think is really the point is that we have adopted really well. And we also have 280 basis points, I think, as James showed, of excess capital on the CET1 metric. And so I think we're really comfortable with our position, and we're comfortable to better understand the capital rules as they come our way.

Michael Mayo:

Since, James, you're looking for the 20% ROTCE permanently, how much longer do you plan to stay as CEO? And by setting such a high target, are you encouraging some extra risk-taking?

Michael Mayo:

Great. And then one follow-up. As far as the ins and outs, that's helpful to give the market share. And the numbers speak for themselves, 15% Investment Banking market share, 23% Equity share. But on the one hand, I think you're one of the biggest providers to the tech industry. And with tech having some pain recently, I wonder what percent of your Investment Banking business is to the tech sector. And then offsetting that, perhaps there are some other industries that are coming back online after the pandemic.

Operator:

The next question is from Matt O'Connor with Deutsche Bank.

Sharon Yeshaya:

Sure. I think the -- if you think about the industry wallet, -- There have been a couple of things that I would mention. One is, obviously, as I said, if you look specifically at Investment Banking, you've seen different types of activity. You see different types of corporates and sponsors, which has been one of the contributors of a greater wallet. But then if you also think about the Sales & Trading franchise and the movement there, the activity has changed. I think that you were looking back -- if you think back to pre-2018, '17, '19, there was obviously less activity with central banks all having a very similar approach and one rate. Obviously, as you inject rates rising, you do -- you would expect or one should expect different types of volatility and different diversification amongst products, which could contribute to a bigger or a different type of wallet that you saw in the early 2020 to period. That being said, I mean, obviously, none of us have a crystal ball. I think right now, what we do know is that activity is high. I think there's a lot of client differentiation and a robustness really in that type of wallet more broadly. But we'll have to see how it goes. And I think the point I was trying to make in my conclusion is we don't know how any of it will impact sentiment. And I think that's the big piece that is out there is a factor that we have to watch.

Sharon Yeshaya:

So I think that when you -- what we would point to is I think this is a really -- it's a scale-driven model. We've put a lot of moats in place. I think having a global reach across different pieces contributes to the ability to actually hold or gain share across the Investment Banking division and -- or excuse me, the Institutional Securities franchise more broadly. If you think about the equities, we have a very strong very strong franchise there. Investment banking, as I've said before, we continue to invest in that business. And then if you look at fixed income, I think we continue to feel good about that business, our client positioning, and we've gained share over the last couple of years, and we feel good about being rightsized and there for our clients as it relates to those needs.

Ebrahim Poonawala:

I guess, Sharon, I was wondering if, one, you could just get a mark-to-market in terms of an update on all the integration, where we are and when do we expect to fully get that behind us. And just tied to that, I think, James, you've in the past talked about looking at E*TRADE scaling that up globally. Just give us a sense of is there something that can happen in the near term. And what's the optionality there on E*TRADE and taking it global?

James Gorman:

On the international, I mean, E*TRADE already manages some plans internationally. We don't have immediate plans to take the platform outside the U.S., but it's certainly part of the long-term strategy. So I'd say right now, let's get the integration done. Let's prove out the case here, get the cost synergies we talked about sort of close the books on that, and then we're looking for further expansion.

James Gorman:

We've got a lot of clients. So I'm sure some of them are well positioned for rate hike. Some are -- it's very hard to predict that, that point suggests we're going to get 3 to 4 rate hikes this year and 3 to 4 next year. That feels kind of right. That gets us back to sort of near normal. Normal would be about 10 increases from here, gets us to about 2.5%. If people aren't positioned to manage getting back to normal, then it's kind of -- I mean, it's sort of their problem. It's not -- I'm not particularly worried about it, to be honest. And we don't try and project how people are going to change their positioning with what is a fairly predictable set of outcomes, which is we will have a normalization of interest rates at some point in the next couple of years.