Morgan Stanley (NYSE:MS) Q2 2024 Earnings Call Transcript

Morgan Stanley (NYSE:MS) Q2 2024 Earnings Call Transcript July 16, 2024

Morgan Stanley beats earnings expectations. Reported EPS is $1.82, expectations were $1.65.

Operator: Good morning. Welcome to Morgan Stanley’s Second Quarter 2024 Earnings Call. On behalf of Morgan Stanley, I will begin the call with the following information and disclaimers. This call is being recorded. During today’s presentation, we will refer to our earnings release and financial supplement, copies of which are available at 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. Morgan Stanley does not undertake to update the forward-looking statements in this discussion. 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 Chief Executive Officer, Ted Pick.

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.

Sharon Yeshaya : Thank you and good morning. In the second quarter, the firm produced revenues of $15 billion. Our EPS was $1.82 and our ROTCE was 17.5%. Results highlight the power and scale of our integrated firm. The resilience of the US economy and a more stable near-term outlook on rates supported conviction amongst clients. Institutional securities drove performance, led by strength and equity and a pickup in investment banking. Wealth management also delivered on our established strategy, reporting record durable asset management fees and strong fee-based flows. Together, improved confidence and higher client engagement along with our focus on prioritizing investments, yielded operating leverage, and profitability. The firm’s year-to-date efficiency ratio was 72% benefiting from scale and reductions in our expense base.

Year-to-date expenses benefited from lower litigation expenses, the absence of back office integration related costs and severance, as well as our dedicated effort to prioritize our current spend. On prioritization, we remain committed to client and asset growth, technology, and targeted investments to ensure robust infrastructure that supports growth and addresses ongoing regulatory expectations. Now to the businesses. Institutional securities revenues of $7 billion increased 23% versus last year, capturing the strengths of the integrated investment bank across US, and international markets. Higher activity in Asia contributed to results. Strong performance in institutional equity, as well as debt underwriting, demonstrate the breadth of our client franchise.

In our markets business, opportunities unfolded on the back of global political events and macroeconomic data. Investment banking revenues were $1.6 billion. The 51% increase from the prior year was broad-based. We continue to invest in investment banking across talent and lending, broadening and deepening our global coverage footprint in key sectors, including financials, healthcare, technology, and industrials. These investments are beginning to have an impact as capital markets improve and activity picks up. Advisory revenues were $592 million, reflecting an increase in our completed M&A activity versus the prior year. The pre-announced M&A backlog continues to build and suggests diversification across sectors. Equity underwriting revenues of $352 million improved versus the prior year, driven by increases across most products, but remain below historical averages.

From a geographical perspective, we brought a number of transactions to market in Europe and Asia, demonstrating the importance of having a strong global market footprint. Fixed income underwriting revenues were $675 million, well above five-year historical averages. Results reflect a meaningful pickup in non-investment grade loan and bond issuance, as tighter spreads and strong CLO issuance provided opportunities for refinancing. The investment banking backdrop continues to improve, led by the US, the advisory and underwriting pipelines are healthy across regions and sectors. Inflation data has continued to moderate, which has helped stabilize front-end rates and support boardroom confidence and sponsor reengagement. As buyers and sellers make progress to close the valuation gap, we expect that we are still in the early innings of an investment banking rebound.

Subject to changes in [rate past] (ph) expectations and geopolitical developments, our integrated investment bank is well-positioned to service our clients. Turning to equity, we continue to be a global leader in this business. Equity revenues of over $3 billion, up 18% compared to last year, reflect strong results across business and regions. Higher client engagement, dynamic risk management, and strength in Asia all contributed to performance. Prime brokerage revenues were strong and increased from the prior year as client balances reached new peaks. Regionally, we witnessed higher client activity in Asia and seasonal patterns in Europe. Cash results increased versus last year, reflecting higher volumes across regions. Derivative results were up versus last year’s second quarter as client activity was higher and the business navigated the market environment well.

Further, the business benefited from corporate activity on the back of convertible issuances, additional evidence of the integrated firm at work. Fixed income revenues of $2 billion increased year-over-year. Macro performance was up versus the prior year. Despite lower realized volatility, clients were engaged around elections and political events in the quarter. Micro results improved year-over-year, driven by the growth of our more durable revenues as we continue to support our clients with financing solutions. Solid results in commodities were in-line with the prior year. Turning to ISG lending and provisions. In the quarter, ISG provisions were $54 million, driven by certain individual commercial real estate loans. Net charge-offs were $48 million, primarily related to two commercial real estate loans for which we had previously already taken provisions.

Turning to Wealth Management. Wealth Management generated strong results generating revenues of $6.8 billion with record asset management fees. Our PBT margin continued to make progress towards our goal, demonstrating our ability to grow and generate operating leverage through the cycle. We are delivering on our differentiated, scaled multichannel asset gathering strategy. Wealth Management client assets reached $5.7 trillion. Moving to our business metrics in the second quarter. Pretax profit was $1.8 billion up year-over-year with a reported margin of 26.8%. DCP negatively impacted our margin by approximately 100 basis points. The margin demonstrates the inherent operating leverage of our asset gathering strategy. We are improving the efficiency with which we run the business.

Asset management revenues of $4 billion were up 16%. That is more than $500 million in fees versus the prior year. It’s driven by higher average asset levels and the impact of cumulative positive fee-based flows. In the quarter, fee-based flows of $26 billion were strong, marking the seventh consecutive quarter of over $20 billion, bringing the year-to-date fee-based flows to $52 billion. We are seeing a steady migration of assets from adviser-led brokerage accounts to fee-based accounts, evidence that investments in our client acquisition funnel are paying-off. Fee-based assets now stand at $2 trillion. Net new assets were $36 billion reflecting headwinds from seasonal tax payments. Year-to-date, net new assets are $131 billion representing 5% annualized growth of beginning period assets.

Net flows will be lumpy in any given period of time and impacted by both the macroeconomic environment and business specific factors. We believe both tax-related outflows and increased spending, particularly among high net worth clients, impacted flows this quarter. Still our first half NNA growth remains solid. Transactional revenues were $782 million. Excluding the impact of DCP revenues were up 5% versus last year. The increase was primarily driven by higher equity-related transactions. Bank lending balances grew by $4 billion to $151 billion evidence that as the macroeconomic backdrop stabilizes, our lending capabilities can be met and can meet our diversified client needs. Total deposits of $343 billion remains stable, with sweep deposits down approximately $10 billion sequentially mostly offset by growth in CDs. Net interest income was down modestly to $1.8 billion reflecting the decline in sweeps, which was largely attributable to the seasonality of tax payments.

The Wealth Management business continued to perform well, aggregating assets, generating fees and benefiting from scale and our differentiated offering, consistently earning approximately $100 million a day. In the third quarter, we intend to make changes to our advisory sweep rates against the backdrop of changing competitive dynamics. The impact of these intended changes will be largely offset with the expected gains from the repricing of our investment portfolio. Therefore third quarter NII will be primarily driven by the path of sweeps, and NII could decline modestly in the third quarter. Importantly inclusive of these pricing changes, the rate path and our expectations around client behavior, we believe that NII should inflect higher as you look out into next year.

Our Wealth Management strategy is predicated on gathering assets, meeting our clients’ lending needs and offering advice. Asset management fees, the core of our Wealth Management strategy, continues to produce strong results reaching a record this quarter. Taken together, we delivered a strong margin, and we continue to work towards 30% margins over time. This quarter, we reached approximately $19 million in relationships across our three channels, and we continue to invest in order to deepen engagement. AI tools are helping advisers grow, and Wealth Management’s partnership with institutional securities is increasing connectivity around our workplace offering. These investments have supported flows to our adviser-led channel, where average client duration is nearly 15 years and growing.

The steady progress supports our journey towards $10 trillion-plus in total client assets. Turning to Investment Management. Revenues of $1.4 billion increased 8% from the prior second quarter, supported by higher asset management revenue. Asset management and related fees were $1.3 billion up 6% year-over-year, reflecting higher average AUM. Total AUM ended the quarter at $1.5 trillion. Performance-based income and other revenues were $44 million as gains were driven primarily by our infrastructure, US private credit and US private equity funds, reflecting our investments in secular growth areas. We recorded long-term net outflows of approximately $1 billion. We continue to see strong momentum across areas of strategic focus, namely Parametric.

Consistent with current industry trends, we saw outflows in our active equity strategies. Our business is well-positioned given strength in areas of secular growth, such as customization, direct indexing and private alternatives. Our continued focus on global distribution combined with our deep structuring and product creation capabilities, should support incremental growth. Turning to the balance sheet. Total spot assets decreased $16 billion from the prior quarter to $1.2 trillion. Our standardized CET1 ratio was 15.2%. Client activity was strong and markets were open. We actively supported clients with a focus on velocity of resources. We also grew our CET1 capital by $1.5 [billion] (ph), reflecting strong earnings and continued capital distribution.

The most recent stress test results reaffirm our durable business model and strong capital position. For the third year in a row, we announced a quarterly dividend increase of $0.075. Having generated over $3.85 of earnings per share and an 18.6% ROTCE year-to-date, we enter the back half of the year from a position of strength, with a robust capital base to support clients. Investment Banking pipelines are healthy and diverse, dialogues are active and markets are open. In Wealth Management, strong fee-based flows and the realization of operating leverage continue to demonstrate that our strategy is working. As capital markets become more active, we see opportunities for retail clients to engage and over time deploy their cash and cash equivalent balances into fee-based products.

With that, we will now open the line up to questions.

Q&A Session

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.

Glenn Schorr: Hi, there. Thank you.

Ted Pick: Good morning, Glenn.

Glenn Schorr: Good morning. Sharon, I appreciate all the upfront commentary on NII and Wealth. I wanted to drill down a little bit on what you said. So if you have $2 trillion in client assets in advisory and they keep a handful of percent of money in cash, that change you are making in rate paid on advisory — on deposit in advisory accounts, can add up to like a good amount of money. So I wanted to get a little more sharper focus on what you said about 2025 NII? And then what exactly did you say the offset is on the NII? Thanks.

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.

Glenn Schorr: And is there a particular reason why you only have to focus on repricing in this smaller portion than of the adviser-led channel, meaning not –.

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.

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

Ebrahim Poonawala: Hi, good morning.

Ted Pick: Good morning Ebrahim.

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.

Sharon Yeshaya: Yes. So why don’t I take that, and then you can ask your second question. So you are pointing at a great point Ebrahim, as we look ahead through time, which was the second point of my guidance, is that when we look over the next year, we’re seeing and we expect that we should see an inflection in NII. And that is predicated on the points that you mentioned, which is that as you see rate cuts, we would expect those balances to stabilize. Remember, outside of the tax quarter this particular quarter, we had been seeing a stabilization in those sweep deposits. So it’s important to recognize that, that has been happening, reaching that frictional level of transactional cash. So that would likely continue. And then over time, you would also begin to see a benefit as rates to be cut, that BDP could actually see inflows, which you’ve seen from a historical perspective.

But in addition to that, you have two other factors. One is the repricing of the portfolio, which I’ve also already mentioned. And the second piece has to do with lending. We look to continue to support our clients with lending products, and you are beginning to also see that potentially reach an inflection. This is the first quarter that we’ve seen this type of lending growth since the interest rate hikes began. We’ve seen now use of SBL products rather than just it being offset by paydowns. So those are all encouraging signs when we look ahead over the course of the next year for NII.

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.

Ted Pick: Thanks, Ebrahim. Confidence level, high. If you take a step back, there are three pieces to the Wealth Management line; asset management, transactional, net interest income, as you know. In the asset management context, those are fees that are going to fee-based accounts, advisory-led. Those figures are up 4% sequentially and 16% year-over-year. That is fee-paying advice. Last quarter, the net new assets into that category was $26 billion. So fee-based flows — that continues to be a growth piece of the Wealth Management store. The second cylinder is transactional. Transactional has been relatively weak, which is a link to general weakness in overall capital markets activity. And as you hear from our bullish commentary with respect to overall corporate finance activity in the investment bank, that will bleed through over time to the transactional line.

And then third, the net interest income line. And as Sharon said, that will inflect and should inflect over the next year. You put those together, the scale of the business, the funnel, and the processing of $100 million of revenues a day that continue to grow, we are going to continue to achieve operating leverage. It’s that simple. We’re investing in E*TRADE. We’re investing in the traditional advisor, and we’re spending a lot of time top of house focused on workplace, which we think is an enormous opportunity across our corporate and sponsor base. In January, I had said 30% was the goal. We were in the mid-20s. We just printed 27% GAAP, 28% [Ex-CPE] (ph). It’s a core stated objective. It will take some quarters to get there, but we intend on achieving it over time as we continue to grow assets and scale in the business.

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

Ted Pick: Good morning Mike.

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?

Ted Pick: It’s an excellent question because you’re exactly right that a number of folks have been calling for this and it has been sort of a delayed shoots if you will. But I think now we are seeing some tempering of the inflation prints and some normalization rates. We are also beginning along with that to see the market broaden-out. You of course have seen that over the last number of weeks. And I think, we can now expect broader corporate finance activity to quicken, whether that is across the corporate community or sponsors or other institutions. And the early sign of this kind of activity can be seen in the convertibles product. Global convertibles activity is up significantly. And as you know, on the margin ladder, it typically goes converts, IPO, and then M&A.

In the context of bake-offs and the like, in some spaces we are seeing bake-offs running at triple plus the year-over-year rate that they were at for sectors and for some of our client groups. We’ve been seeing now the launch of traditional IPOs and we are seeing M&A pipeline kicking in. So corporate community, sponsor community, cross-border community, I think we are in the early stages of a multi-year investment banking-led cycle. If you believe the economy is going to hold up led by the US, you should expect then to see that if there is some regulatory normalization too across a whole bunch of the sectors that are typically most active. So we are quite convicted on this call.

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?

Ted Pick: I mean it’s a fair question. You’ve written about this in the context of what was the normal before financial repression, right? And I would take the view that in the context of the last 15 years, even some normalization, because I don’t know that we are going to go into a full-blown rate cycle to your point, some normalizations of rates will still have you at 3% or 4% on the front-end and even some steepening potentially. So now we are just back to the old weighted average cost of capital of mid-90s in most normal economic periods. And the game will have to go on because there is just been some activity that has been suppressed by any kind of measure percentage of asset stock percentage of market cap. And the stickiness that we are seeing in the sponsor community, too needs to unglue.

There is an enormous, as you know multitrillion-dollar stockpile between the two sides of sitting on inventory that needs to be released and then dry powder that’s been raised. That will act as a competitive weapon against the competitive bid from the corporate community that has to contend with the reality of a smaller world with real sovereign risk and real cost of capital differences from one jurisdiction to another. So in short, unless you were to tell me we are going to go into a full-blown recession, which none of us can call, and that even if we saw rates normalize to something that is along the lines of the historic 4% on the front end, I think you will see over the next number of quarters and really over the next number of years, a resumption of more normalized M&A activity, with the key difference being that the financial sponsor community is now institutionally come of age.

They have global reach. They can work the entire capital structure. They will work in concert with corporate partners, as you know. They don’t actually have to act as a lone wolves, and they can work with us to finance the package. So it is not just the straight M&A advise or the straight IPO, it would also be bespoke offerings in the private public space, interest rate and foreign exchange hedging and the other ornaments on the investment banking tree that a couple of the leading global investment banks can bring. And this is really why, over the last couple of years, the extent we’ve done a so-called front-office hiring, it really has been to target several very high-quality investment bankers who typically have spent their entire careers at one firm and have decided to come to the Morgan Stanley platform.

And we are seeing the fruits of that across industries. So I am quite bullish on it. Certainly take your point that has been a number of quarters on sort of on the promise. But I think as we get into 2025 and the election coming and then the election behind us, we should see that activity continue on a sustainable pace.

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

Ted Pick : Good morning Dan.

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.

Sharon Yeshaya: Sure. I’ll take that. It’s — we continue to see broad-based sourcing in terms of where those assets are coming from. In this particular quarter, as I mentioned the biggest offset and drag though, is really from taxes. So it’s — you still have a workplace accounts. You still have the advice-based account directly. You still have self-directed. All those places remain contributors. What continues in my mind to be most interesting though, isn’t just the contribution that you are getting from the three various channels, but the fact that you have in the advice-based channel, it’s not just coming from existing clients, but it’s split with existing and net new clients. And some of those net new clients are also relationships that are being sourced from workplace.

So I would not just directly focus on what channel is it coming from, but how are you seeing those channel in that interplay work, because that’s actually the power of the differentiated platform. Once you have somebody who wants more differentiated advice for self-directed speaks to an advisor, that advisor sees net new clients, bring in assets, and then that’s new acquisitions into the funnel and eventually into fee-based. So it’s really the whole ecosystem that I would call your attention to, rather than just one isolated leg.

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.

Dan Fannon: Great. Thank you.

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

Ted Pick : Good morning Brennan.

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)?

Sharon Yeshaya: So thanks, Brennan, I’ll take that question. No, all the changes that we’ll make will happen, are expected to happen in the third quarter. And so those different changes will be made, and they’ll be based on various competitive dynamics.

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?

Sharon Yeshaya: That’s exactly as I stated it, and it will just be limited as you said, to the sweeps that are dealt within the advisor-led channel.

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

Ted Pick : Good morning Devin.

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.

Sharon Yeshaya: Yes. I think that’s a really interesting question. I did call it out. We’ve seen increased spending by higher net worth, and so higher income bands are certainly spending. We see that in the data alongside actual spending. We see that in purchases of homes. We see that in various tailored investments. So they are — that cohort, so to speak, is using its cash in different ways and its various investment in different ways. So I do think that — that’s an interesting dynamic that’s playing out. I know that others have mentioned it within their portfolios as well. It’s only something we are seeing in our data.

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?

Ted Pick: Well, I know that competitive set will naturally speak to areas where integration can be an asset. Here, we have — we believe, something really special inside of our Institutional Securities business, our so-called integrated investment bank, which has been ongoing for — now we are getting on seven or eight years. Now under Dan Simkowitz’s direction. And this is a sort of critical facet of business strategy at our place because you have now the appropriate and important relationships that have been built across fixed income, equities and banking through our capital markets new issue business. You have those now having been compounded and advanced by the mobilization of some folks from one division to another. So there is real familiarity now with the work product.

A lot of the work product, as you know, is not traditional vanilla IPOs. Yes. There are some on the horizon that are quite substantial, and we’d expect that to be an important part of the calendar. But there is also a more bespoke product, whether it be convertibles or products in the private area or products that effectively necessitate high-quality structuring and advice, and that can only be brought to the boardroom if you have world-class investment bankers who can lean on the expertise of their colleagues, not just in the new issue business but as appropriate, in institutional equities and in fixed income. And if you look at our fixed income business, for example and fixed income underwriting, you’ll see that the share gains have been quite extraordinary.

And that the year-over-year revenue number, I believe is up 71%. That speaks to the fine work that’s been done by folks, not just in the debt capital markets business which is housed inside of our new issue business linked to banking, but also working closely with fixed income professionals, whether they are in the securitized products group and our commodities area broader credit or in our macro space, i.e., interest rate and foreign exchange. So when you get into the knitting of ISG, our Integrated Investment Bank, you see that part of the reason that we are bullish, not just to Mike’s earlier question on the denominator, but also on our ability to increase the numerator, is not so much because we think there is a need to deploy a lot more capital.

We will do so as appropriate when the markets demand it. But that we are able to get the kind of bespoke advice for clients that comes from the familiarity of our people, the quality of the advice that is differentiated and importantly, that it’s global, so that we can bring it to the client base. So that is part of, I think, the secret sauce that we’ve been working hard on to generate above cost of capital returns, inside the investment bank on a stand-alone basis. And that obviously doesn’t include even the synergies that we’d see across the Firm into Wealth and Investment Management. But your question is on the investment bank specifically. And I feel really good about the way it’s structured, the leadership that we have within it, the experience set, and then our ability now to tap into this next cycle which will be different than the last one.

Rates will be well higher than that of financial repression. We’ll be toggling between some bouts of inflation and potential recession. We’ll be dealing with the unpredictability going to not only our own cycle, US election cycle, but the world around us. But also the coming of age and the institutionalization of the financial sponsor community, where we have very strong relationships with that leadership group from top to bottom across the Investment Bank, Wealth and Investment Management.

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

Steven Chubak: Hi, good morning.

Ted Pick: Good morning Steve.

Steven Chubak: So maybe just starting off with a question just on operating leverage within ISG. Year-to-date, the incremental margins are quite strong, just north of 80%. You spoke constructively on IB and Trading and inflecting positively. Just want to better understand what you believe is a sustainable incremental margin as activity steadily builds especially given some of the growth, at least from here, may skew a bit more heavily towards Investment Banking, which tends to be more compensable.

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.

Ted Pick: Yeah. The only thing I would add to that is, of course as you know, there is real seasonality in the business. Fixed income tends to have its strongest quarter, street-wide in the first quarter, Investment Banking typically in the fourth quarter. That’s not every year, but that’s typically out shakes out. Third quarter tends to be weaker in the summer months, and then it’s sort of all about September. And obviously, this September will be one that will be driven in part by sentiment around the upcoming elections. So that’s kind of the seasonality piece. The other is just the scale within the businesses, I’d be remiss again, not to sort of underscore the importance of having reached $3 billion in the equities business.

This has been a leading business where we have been Number 1 and Number 2 for the last dozen years. And we see the clients are much in demand of our services across cash, derivatives and prime brokerage. And then connecting to Investment Banking, I think that business has too hit an inflection point again where they can continue to prosecute high-margin business through the cycle. All of this, of course is dependent on the economy holding up and general asset price levels. But given where we are right now, we are feeling good about that, too.

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?

Sharon Yeshaya: I’m sorry, Steve, we don’t comment, as you know on regular matters.

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

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

Gerard Cassidy: Good morning Ted, good morning Sharon.

Ted Pick: Good morning, Gerard. How are you?

Sharon Yeshaya: Good morning.

Gerard Cassidy: Good. Thank you. You gave us good insights into your thinking about what the capital markets could bring, especially Investment Banking. And I think you touched on it in your comments with Ted, or maybe you Sharon, that the transactional numbers could benefit from a stronger ECM business. Can you then take the next second derivative and share with us from your experience of Solium, should we — that business pick up the workplace channel, if more of these maybe private equity sponsor companies go public. Should the workplace channel see stronger revenues potentially in a stronger Investment Banking market over the next 12 months to 18 months?

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.

Gerard Cassidy: Very good. And just as a follow-up, Ted, if I take a step back, obviously you guys have done a very good job in the last 10 years of growing organically, but then complementing that growth with acquisitions. Once we get the Basel III end game final proposal, maybe some G-SIB relief, can you share with us, as you look out over the next two, three years — is there any parts of the picture today that you’d like to enhance possibly with acquisitions? Or — are you good where you are today?

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.

Operator: We’ll move to our next question from Saul Martinez with HSBC. Please go ahead.

Saul Martinez: Hi, good morning. Thank you for taking my question.

Ted Pick: Good morning Saul.

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?

Ted Pick: I think the answer to that is that we would like to grow share that is durable. We want to grow share in businesses that are connected to the core client base, whether it be global asset managers, the leading alternative asset managers, private equity and private credit players that have come to the floor, and then our lead corporate and sovereign clients. There are products that can be offered. There are very few firms that can do that globally. We continue to have a world-class market space, for example in Asia, where I believe we have the largest equities business. We’ve been growing the business quite assiduously on the continent in the UK, where our senior management has been putting in a lot of time and attention.

And as you know, we have a differentiated joint venture with our friends and partners at MUFG in Tokyo. So if you consider the global footprint of the firm — in a world that continues to be equities-based. It continues to be an equities world. You see it in the asset price momentum in the US. You see now the potential for that to broaden to more names and more sectors. And that obviously gives opportunity for folks in the stock picking business for example, where we’ve been very strong traditionally in equities, to do the [cash rise] (ph) and prime brokerage suite that we offer. You could see continued uncertainty based on how the next administration handles the significant macro challenges facing the US, whether you’ll see a steeper yield curve, where you’ll see activity on the front and to the belly of the curve.

That of course, offers all kinds of opportunities for the rates business. And connected to corporate catalyst activity, where, on an M&A acquisition, the acquirer may wish to inoculate themselves from rate or foreign exchange risk, and that’s the service that we offer. Again, I like the idea of growing durably inside the integrated investment bank. I like the idea that we are working in sandboxes with the appropriate capital controls around that. But that we are allowing enough breathing space so that when our lead clients are looking to engage in a — once in every few years catalyst event, that we can fully offer the entirety of the advice and financing spectrum to them on demand. So the answer would be to grow and grow responsibly. I’d like to think we can inch up the numerator along with the denominator, and then you would see that almost imperceptibly over the course of quarters and years.

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.

Ted Pick: We’re still early. We’re still early in the cycle. We’re watching it of course. To the earlier question on when the green [shoes] (ph) come through on the high-margin M&A product, the reality of seasonality, the uncertainty of rate path, geopolitics, US elections, it’s hard to put a pin on what the returns will be in a given forward quarter until we kind of see some normalization in those uncertainties, not to mention some of the regulatory stuff that we are dealing with as we speak, Basel namely. But yes, you’re right to point out that we are seeing some real operating leverage in the Investment Bank. And over the course of a number of years, as we think about not just the integrated firm, but the returns generated inside of Wealth and Investment Management. And then we look at the returns inside the Investment Bank, we are measuring that. And we are looking to have that contribute to the overall sustainable 70% efficiency of the firm.

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.