Morgan Stanley (NYSE:MS) Q2 2023 Earnings Call Transcript

Morgan Stanley (NYSE:MS) Q2 2023 Earnings Call Transcript July 18, 2023

Morgan Stanley beats earnings expectations. Reported EPS is $1.24, expectations were $1.15.

Operator: Good morning. On behalf of Morgan Stanley, I will begin the call with the following disclaimer. This call is being recorded. During today’s presentation, we will refer to our earnings release and financial supplement, copies of which are available at morganstanley.com. Today’s presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release. This presentation may not be duplicated or reproduced without our consent. I will now turn the call over to Chairman and Chief Executive Officer, James Gorman.

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.

Sharon Yeshaya: Thank you, and good morning. The firm produced revenues of $13.5 billion. Our EPS was $1.24, and our ROTCE was 12.1%. Reported results include severance charges of approximately $300 million. This reduced EPS by $0.14 and ROTCE by about 140 basis points. As James discussed, sentiment and activity improved towards the end of the quarter, evidenced by green shoots that emerged across our businesses. In Institutional Securities, client engagement progressively picked up. And in Wealth Management, we witnessed a moderation of sweep outflows as well as the stabilization of retail investments into cash and cash equivalents. The firm’s year-to-date efficiency ratio was 75%. In addition to severance, expenses for the quarter included $99 million of costs associated with the integrations of E*TRADE and Eaton Vance, approximately 75% of which relates to E*TRADE.

Together, severance and this year’s integration represent an impact of about 175 basis points to the year-to-date efficiency ratio. For the balance of the year, our expectations for total integration expenses are broadly in line with our prior guidance, with approximately $150 million remaining. Looking towards the back half of 2023, we continue to balance investments with the operating environment. Now to the businesses. Institutional Securities revenues of $5.7 billion declined 8% versus last year. With overall client activity — while overall client activity was lower compared to the prior period, results improved as the quarter progressed, alongside better market conditions. Investment banking revenues were flat compared to a year ago. Although advisory remained under pressure, a pickup in underwriting supported results.

Advisory revenues of $455 million reflected lower completed M&A volumes. Equity underwriting revenues were $225 million. While IPO activity remained muted, results were supported by follow-on and convertibles, encouraging signs that equity and equity-linked markets were opened at times for regular weight issuance. Fixed income underwriting revenues were $395 million, up year-over-year, driven mostly by investment-grade bond issuance, where corporates and financials took advantage of constructive markets in May and June, respectively. Investment-grade markets remain resilient against an uncertain backdrop. Across investment banking, client activity trended positively as the quarter progressed. The preannounced M&A backlog grew consistently throughout the quarter with a potential plateau in rates and lower implied volatility, client dialogue is currently active.

We continue to invest in the franchise and have made selective senior hires to enhance our footprint to best position for the opportunity. While we are cognizant of the typical summer slowdown and it is hard to know whether positive trends will continue for the near term, current conditions remain encouraging, certainly for the medium-term outlook and especially for 2024. Equity revenues were $2.5 billion, down 14% compared to strong results in the previous second quarter due to lower activity and lower market volatility. Prime brokerage revenues were solid, supported by increasing average client balances, consistent with rising market levels. Cash and derivatives declined versus last year on lower global volumes and lower market volatility.

Fixed income revenues of $1.7 billion decreased compared to last year’s elevated results. Solid performance reflects tempered client activity and prudent risk management. However, improved market conditions in June shifted client sentiment and supported the quarter’s overall results. Macro revenues were down year-over-year, attributed to the declines in foreign exchange and a challenging environment and reduced activity, partially offset by the pickup in client engagement following the resolution of the debt ceiling debate and performance in rates. Micro results declined versus last year, predominantly on the back of lower client activity. Results in commodities were down significantly compared to the robust prior year, which benefited from volatile energy markets.

Other revenues of $315 million improved versus last year, largely driven by lower mark-to-market losses net of hedges and higher net interest income and fees on corporate loans held for sale. Turning to ISG lending and provisions. Our allowance for credit losses on ISG loans and lending commitments increased to $1.4 billion. In the quarter, ISG provisions were $97 million. The increase was driven by continued negative outlook for commercial real estate and modest portfolio growth. Net charge-offs were $30 million, and were substantially all from a handful of specific loans from our corporate lending portfolio. Turning to Wealth Management. Revenues were $6.7 billion, a record. Excluding the impact of DCP, revenues were $6.6 billion and increased 5%, supported by higher net interest income.

Results demonstrate the strength of the business model and our ability to continue to serve clients throughout different market environments. Pretax profit was $1.7 billion, with a PBT margin of 25.2%. Severance charges were $78 million and integration-related expenses were $75 million. Taken together and with the impact of DCP, these three factors were a drag in the margin of approximately 300 basis points. Despite the challenging market backdrop, the business model continued to deliver against our core objectives. Most notably, Wealth Management delivered $90 billion of net new assets, demonstrating our platform’s ability to grow in various market environments. Net new assets were driven by our advisor-led channel, existing client consolidation and net recruiting were strong and offset seasonal tax-related outflows in April.

Our early investments in technology, including data and AI, are providing advisers with tools to service current clients better and more efficiently prospect new business, including from our workplace channel. Also significant, as James mentioned, we are pleased to share that we’ve accomplished an integral part of E*TRADE’s back-office integration, converting over 3 million E*TRADE accounts to Morgan Stanley’s unified platform. We did this with virtually no client disruption, which has always been a critical priority. We expect to finish our integration efforts on time in the second half of this year. Moving to our business metrics in the second quarter. Performance was solid down the line in light of the environment. Asset management revenues were $3.5 billion, down 2% versus last year’s second quarter, primarily reflecting lower market levels.

Transactional revenues were $869 million. Excluding the impact of DCP, revenues declined 2% year-over-year, reflective of lower client activity for most of the quarter. Fee-based flows were $22.7 billion. Bank lending balances grew by $1.1 billion, driven by mortgages, offsetting paydowns in securities-based lending. Total deposits of $343 billion were up slightly quarter-over-quarter. Sweep outflows moderated during May and June compared to April, which included seasonal tax outflows. The recent month’s trends are encouraging, but it remains too early to be declarative. Net interest income of $2.2 billion was virtually flat versus the prior quarter. The impact of lower sweep balances and higher funding costs were offset by higher rates. Looking towards the rest of the year, we do not expect NII to expand.

Results will be a function of our deposit mix and the trajectory of various rates. Similar to the institutional business, retail sentiment improved as the quarter progressed. For the first time since the beginning of the year, June saw positive monthly flows into equity markets from advisor-led sweep balances. We are encouraged by this more recent activity and remain well positioned to support ongoing asset growth and our clients through market cycles. Turning to Investment Management. Revenues of $1.3 billion declined 9% from the prior second quarter, primarily reflecting lower performance-based income and the cumulative impact of lower asset levels over the course of the year, commensurate with the market environment. Asset management and related fees were $1.3 billion, declining 3% year-over-year, reflecting the stability and diversification of our client franchise.

Performance-based income and other revenues declined year-over-year due to the challenging investing environment in certain asset classes and markets, such as real estate and Asia private equity. Solid performance in other areas of our private alternative strategies acted as a partial offset, reflecting the diversity of our platform and our capital-light, client-driven alternative franchise. Total AUM increased $1.4 trillion. Our integration with Eaton Vance continues to progress well. Integration-related expenses were $24 million in the quarter. Long-term net flows were positive. Inflows were driven by ongoing demand in alternatives and solutions, which offset outflows in equities and fixed income. Within alternatives and solutions, Parametric customized portfolios, private credit and private equity continue — excuse me, remain consistent sources of net inflows, underscoring the benefits of our diverse platform.

Additionally, this quarter, alternatives and solutions benefited from a significant inflow related to a portfolio solutions mandate. Liquidity and overlay services had an inflows of $9.7 billion, supported by ongoing demand for money market funds. We continue to be very well positioned in secular growth areas, such as customization in private markets, across geographies and with our global client base. Turning to the balance sheet. Total spot assets decreased $35 billion from the prior quarter to $1.2 trillion. Our standardized CET1 ratio was 15.5%, up approximately 40 basis points versus the prior quarter. Standardized RWAs declined about $9 billion from the prior quarter to $450 billion due to market conditions and continued prudent resource management.

Recent stress test results reaffirmed our strong capital position and our durable business model. We announced a quarterly dividend increase of $0.075 and renewed our $20 billion multi-year repurchase authorization. Our tax rate was 21% for the quarter, reflecting our global mix of earnings. While we outperformed our tax guidance in the first half, we expect a tax rate of approximately 23% in the second half of this year, consistent with our initial guidance. Although we cannot be sure how the backdrop will play out for the rest of 2023, our priority of the management team is to diligently address what we can control given the market realities. Should stable and higher asset levels prevail, Wealth and Investment Management are poised to benefit, particularly as we continue to attract net new assets, a testament to our asset growth strategy.

Within Institutional Securities, while advisory will lag the financing market, the backlog is building and underwriting trends are positive. Open and functioning markets remain key to supporting client conviction and activity levels. Most critically, our business continues to advance our clear and consistent firm strategy, driving long-term growth while remaining well capitalized. With that, we will now open the line up to questions.

Q&A Session

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

Ebrahim Poonawala: Thank you, and good morning.

James Gorman: Good morning.

Ebrahim Poonawala: I guess maybe first question, James, for you. Thanks for the update on the succession. As we think about what you built in terms of the franchise, and I think you talked about the unfolding Basel Endgame rules that are expected over the next week or two, from a shareholder perspective, do you see these rules as game-changing where investors will have to reevaluate the value proposition of Morgan Stanley as a franchise? And you, as a management team, would have to review strategic targets that you’ve laid out? Give us a sense. And I know plenty of unknowns. But I think the question we get from shareholders is the comfort around the ability of the firm to manage through what could be pretty radical changes.

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.

Ebrahim Poonawala: That is helpful, and nuts sounds about right. One quick question, Sharon, for you. You mentioned NII not seen as expanding from here. I guess, is implied in the expectation that NII should stabilize in the back half, give or take, within a few percentage points?

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.

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

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.

Sharon Yeshaya: Sure. Let’s take all of ISG first. So, when we think about what we’ve discussed a lot at length really about normal, post COVID has been for the overall ISG wallet to land between 2019 and 2020. Our view there broadly has not changed. In terms of where we expect ourselves to be, we’ve laid out a pretty clear sort of market share guidelines in terms of where we are from a wallet perspective. When you look specifically, you talked about fixed income, we’ve moved from 6% wallet share to 10% wallet share. So, I think the dramatic change that we’ve made in that business has really been around a client-centric franchise and making sure that we’re there and able — to be able to service our client base. What we talked about, as you highlight, is that there was less client activity for us this second quarter compared to last year’s second quarter.

But interestingly, as you mentioned, and you’re right, we saw a dramatic change in that activity level, specifically in fixed income right after the debt ceiling debate. So, I think what we’re looking to do is capture our fair share of the wallet. And that overall wallet in terms of normalization, we think will likely land between 2019 and 2020.

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.

Sharon Yeshaya: Yes. Remember that, of course, advisory is always going to be lagged just because of the announcement. So, we’re digesting the fact that we had a very muted or a dearth of announcements if we look back six, nine months. If we think about the last month of the quarter, we began to see more announcements. And we’re seeing that really in sector-specific that have a strategic dialogue around them. So be that financials where you might see industry consolidation, energy where you’re seeing transitional discussions and reasons to actually have strategic dialogue. So, what gives us confidence is that you’re seeing a broadening out of those strategic dialogues. Our backlog is building, and we’re seeing it across various sectors we’re having both backlog and discussions. But it is fair to say that advisory will likely lag simply because you are dealing with a lagged announcement pipeline from the last six to nine months.

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

Glenn Schorr: Hi, thank you. So, I want to drill down a little bit more on the $90 billion. I know it can be lumpy, but I didn’t think it was [due to] (ph) workplace produced. But I wonder if you could drill down a little bit on what happened to work so well this quarter and this first half of the year. I mean, it bodes well for your doubling of pre-tax margin — I’m sorry, doubling of pre-tax income for Wealth. But just curious on what’s contributing to the good lumpiness lately, so obviously, well ahead of your $1 trillion every three-year pace.

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.

James Gorman: I just want to add on this a little bit because it’s obviously been a focus of mine for many decades. The run rate, Glenn, as you know, for the three years before this was $1 trillion. So we’re running about $330-ish billion a year. This year run rate, if you extend it would obviously be higher than that, it would be around $400 billion. But I think you’re right, it’s going to be lumpy. I mean you’re going to have a quarter in here somewhere that’s a $50 billion quarter, and I wouldn’t get too excited about that. And just as I don’t get too excited, we’re ahead of the run rate. What I really care about, what I’m really excited about is it’s a real thing. This is not just something that’s going to stop. We’ve got a lot of wealthy clients.

Just the dividends, the interest they get on their accounts, the money they’re bringing in, the migration from the workplace, the migration from the E*TRADE accounts, it’s the real deal. And I know we put out this $10 trillion number, which I think is — I think this is going to happen. And at a 5% increase in the value annually on the portfolio with a $1 trillion every three years, it happens in a bit over five years. And it’s just a pretty much unstoppable force, but there will be lumpiness in it. I’m sure of that. I don’t know when, but there will be lumpy. This happened to be a great one. And I’m excited about it. I think we’re heading to — we’re clearly heading to $10 trillion, which is at 50 basis points, $50 billion in revenue. And if you do the math compounding, and I know people are going to call me crazy, and I know it’s the end of my tenure, so I get to do this kind of stuff.

But if you do 5% over 14 years, you end up at $20 trillion, which is a $100 million revenue business. Well, that seems like a long way out, but I started this job 14 years ago, and we had much, much fewer than the $6.3 trillion we have today. So it’s possible.

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.

Sharon Yeshaya: Yes. In terms of the shift in terms of moving out of sweeps into savings or seeing savings products, we still have over 80% of our actual deposit base is coming from our own client base. What’s interesting in terms of the movement of sweeps, which might be your question, I’m not sure I’m totally answering it, Glenn, is that we began to see some of those sweeps not just — remember, we used to see them move into money markets or other cash alternatives. In June, we began to see some of those dollars actually move into markets, so various assets. We hadn’t seen that trend since January. So that just shows that some of the clients are actually also deploying excess cash or cash equivalents actually into the marketplace as well.

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

Steven Chubak: Hey, good morning. So James, I appreciate your comments on Basel III Endgame. It might be helpful if you could just speak to how the lengthy transition period informs your near-term buyback appetite if at all? And given the RWA inflation could be quite meaningful, what are some of the mitigating actions you can pursue to alleviate some of the pressure on your businesses?

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.

Steven Chubak: No, it’s a fair point, James. I mean, immediately, we all had the experience with Basel III when it wasn’t going to get fully implemented for a period of years and the impacts were fully loaded. So, I think we’re all just trying to prepare for maybe some expectation that it gets priced in a little bit more quickly.

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.

Steven Chubak: No, helpful perspective. If I could squeeze in one more here, just on Investment Management. The 30% margin goal that you’ve laid out for Wealth and IM, Wealth, when we adjust for the specials, of about 300 bps, you’re within spitting distance of that 30%. The Investment Management margin, it’s running in the mid-teens. And I recognize you’re still integrating Eaton Vance. But what are your margin aspirations for that business? And what are some of the actions you’re taking to maybe help close that gap?

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.

Operator: We’ll move to our next question from Brennan Hawken with UBS. Please go ahead. Mr. Hawken, your line is now open.

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

Operator: We’ll move to the next question from Mike Mayo with Wells Fargo. Your line is now open. Please go ahead.

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

James Gorman: Mike, you asked me about CEO change in 2012. So, that’s your second chance to ask me.

Mike Mayo: Yes, well, you survived and thrived, so there you go.

James Gorman: Thank you. I appreciate that.

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?

James Gorman: Well, to take a few of those pieces, we’re not going to have in-person shareholder meetings. Since the years I did this before COVID, we have more people from security than we did shareholders physically in the meeting. So, let’s just be honest, it was an enormous waste of time and money. And while one or two people might ask — like asking question in-person, I just don’t think it’s a good use of time and money. But that along with my pet peeve that we shouldn’t have quarterly earnings reports, they should be every six months. That’ll be two immediate changes I would make if I was God of Finance. But that’s not what you really asked about. On the CEO stuff, I mean, Mike, we — I said about five years ago, I’d stepped down about five years.

I said three years ago to be three years, and nobody believed me. So, I said the best way to get people to believe and the Board agree with this strategy was that the annual meeting to say I won’t be in the job of the next annual meeting. So that makes it very clear. it’s 12 months. We’re already two months in. When exactly that happens, frankly, just isn’t that relevant. I mean whether it happens tomorrow, it happens on May, whatever it is 15th or something next annual meeting is irrelevant, it will happen somewhere between those dates. There’s a few things I think just given my tenure, I can probably get done that will help the new CEO get off to a great start. And that is my intent. I want somebody to do this job as well better than I’ve done it for the next several years and to thrive in it.

And the best way to help them is to get them off to a good start. So the exact timing will be just driven by that. Obviously, given the questions here on Basel III Endgame, that’s an important thing for me to dig into over the next few months. We just got the CCAR stuff done. We got the dividend done. We’re chipping away at what I call the remaining pieces. The Board will ultimately decide. We have a process. It’s a committee, the Comp, Management Development Succession Committee chaired by Dennis Nally, runs that process. He reports to the Board, obviously, and the full Board will ultimately choose the next CEO. And I’m sure at some point, they want my formal input on that, but they’re doing their processes, they should independently. And I think it’s very healthy.

So the criteria you look for, obviously, not necessarily who’s the business operator running a given business on a given day, but who’s best equipped to deal with the multiple constituencies and challenges of running a global bank. And that’s what the Board will figure out. So saying more than that, I think, would be inappropriate because it gets ahead of the Board’s process. And that’s their job. And I’m just here to help along the way. So hopefully, that clarifies it, Mike.

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?

James Gorman: Wall Street had a history of that not happening. I think we will — frankly we will challenge that history. We have an unbelievable team that worked together for at least eight years. I think they’ve all been on the operating committee and we have an unbelievable team of executives around them. Sharon, who you’re hearing on this call; Eric Grossman, our Chief Legal Officer; Clare Woodman, who runs Europe, Middle East; and so on and so on. So, we have a lot of very talented executives. That’ll be for myself, frankly, to help navigate that path, but these jobs are enormous jobs, whether it’s CEO or President or COO of these global companies and we’re one of the largest companies in the world. So I’m confident we’ll end up in a great place, Mike.

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

Brennan Hawken: Hopefully you can hear me now.

James Gorman: Go ahead, Brennan.

Brennan Hawken: All right. Sorry about that before. So, Sharon, I know you mentioned before about the NII and the deposit cost having a big impact, but actually the deposit cost trends were roughly in line with what we were looking for and yet NII turned out to be a little better than expected. Could you tell us — we don’t have great visibility on the asset side. Did something happen on the asset side were you able to reprice some assets? And how much more of that do we have potentially on the come?

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.

Brennan Hawken: Okay. Thanks for that. And then, I noticed, I know it can diverge sometimes, but the trends for firm-wide NII were different, down about $300 million quarter-over-quarter. So, could you help us maybe understand why was that the firm-wide NII deferred substantially from the Wealth Management trends?

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.

Operator: We’ll move to our next question from Dan Fannon with Jefferies. Your line is now open. Please go ahead.

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?

Sharon Yeshaya: Great question. We’ve looked a lot at fee based and thought about sort of as we think about the funnel. One thing that we highlighted to you last year, or last quarter rather, was that from the advisor-led side, we still had around 23% of those assets and cash and cash equivalents. That is a historical average of the last five years is around 18%. So, in our mind, a lot of it has to do with the way that people are looking at the markets right now. And the idea that when you’re moving into a fee-based asset, specifically on the retail side, you are doing so and you’re actually, obviously, actively investing in different market assets. And so what is encouraging is as I highlighted on, I think, to the question Glenn asked is that in the last month of the quarter, we began to see individual retail clients actually put that money into markets. So that’s an encouraging sign, but we do think that a portion of that is market dependent.

Dan Fannon: Understood. Thank you.

Operator: We’ll move to our next question from Gerard Cassidy with RBC Capital Markets. Your line is now open. Please go ahead.

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?

Sharon Yeshaya: Yes. We’ve talked a lot in the last two quarterly updates around just the movement that we see in terms of channel migration is what we’ve called it. So, workplace assets that are then some portion of it is moved into the advisor-led side. And then, from that sort of as a core, you see assets held away beginning to come in. For the first three years that we had that, that number was around $150 billion, so call it $50 billion a quarter. And then, in the first quarter of this year, we were — for that one quarter, we saw $28 billion. And when you look at the first half, we’re largely running almost up to a full year rate of last year. And so, what that puts into account is we are seeing encouraging signs. We don’t know exactly where that number will land, but obviously, it’s trending in a good direction.

And what it shows again is that workplace can begin to be sort of a seed to the conversation that people have with advisors. And you see that being 10%, 20% of the assets that are brought in through the migration, the other 80% or so are coming in from assets held away.

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?

James Gorman: Well, I think, Gerard, it’s early. We need see the rule. The test — there’s one thing to listen and there’s another thing to listen and act. The test is, once the regulatory community receives feedback from the industry groups, which are very coordinated, I will say, what input do they take into account? Frankly, how do we compare what the European banks have done on their own regulations? So, I think bringing the U.S. to sort of a gold plated European standard just doesn’t feel to me like the right end outcome. I think we should do what’s right for the U.S. financial system. Yes, I think they’re listening. They’ve shown an interest in — a strong interest in getting the feedback from the industry, the communities, the legislative bodies, et cetera.

So — but the proof will be in the putting. We’ll find out over the next — I don’t know how long it will take the comment period. I’m assuming it could be a year or so. I mean, this is a big deal. Remember, Basel III Endgame first proposed in 2017, so it’s taken six years to make its way in a small sailing boat across the Atlantic. And here it is. So, now we’ve got to decide what we like about, what we don’t. So, I’m maintaining constructive tone, because I think everybody wants to end up in the right place. I don’t happen to think and this is contrary to some people’s views that the Silicon Valley, First Republic have a whole lot to do with this stuff, but that’s a different discussion for later days. So, yes, I would hope and expect that they’re going to listen, because they — we should be listening to each other.

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

Andrew Lim: Hi, good morning. Thanks for taking my questions. I’d like to circle back again on Basel III as well. So, I think your comments about European banks having maybe a bit more work to do, a lot of them are guiding towards impacts on the quantitative basis at the low end, sort of like below 50 basis points. So, I was just wondering if you saw something a bit more specific that might level the playing field for the European banks versus U.S. banks debate? And then, turning over to the U.S. banks, obviously, we’re all familiar with the large impacts that have been talked about by Jerome Powell and Michael Barr. One of your competitors was a bit more forthcoming saying that that might allude to operational risk weighted assets being added to total, standardized risk weighted assets, which currently isn’t the case under the standardized approach.

So, I was wondering if you had any like specific thoughts about that, or whether you thought that was a bit more — a bit less relevant given that, that would allude to legacy RMBS losses from many years ago. How do you think about that?

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.

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.