Sharon Yeshaya: So let’s take the first question, which is the two different types of deposit mix. You’re right, you know, from a — if you think about the self-directed client versus a advisory-based client that we’ve had in the historical wealth management franchise, one has proven to be somewhat of a stickier deposit base than you would see on the wealth management side. And I think that, you know, on the — what I would say is the traditional wealth management side that we had historically had. So that does provide you with a sense of what’s going on in terms of which client base is seeing that. On the potential growth of NII going forward, again, that’s part of the same asset gathering strategy. Some proportion of these assets as they come over, be that into the self-directed or the advice-based relationship, will be held in some sort of transactional cash.
So that will be supportive over time of NII to some degree from a deposit perspective. But that also provides us with lending capabilities and opportunities. As you know, Glenn, we’ve seen tremendous, what we would call, sort of, household penetration in being able to offer new lending products to our various client bases, obviously with the SBL product. But we continue to see mortgages and growth in mortgages even in this right environment for new purchases and homes. As we better understand our client base, we’re able to do that more. And actually bringing together this E-Trade acquisition, putting everything on the same portfolio and the same franchise from a technology perspective is foundational and being able to integrate all of those bank relationships and what we used to call the bank rails that E-Trade had for a broader wealth offering that should also help support NII as we look into the future.
James Gorman: I think I don’t know. On the second bit, I just think there’s an optimal point. I mean, we went from zero rates to 5% in effectively the fastest period since the 60s, early 70s, fastest rate increase. What’s remarkable is we haven’t had a recession, by the way, but — and I personally don’t think we’re going to. But with that, I mean, if you’re an advisor and you’ve got a client sitting on a lot of cash earnings zero, I would hope you’re telling them to put it in treasuries or something. So that’s exactly what’s happened. At around 2% to 3%, it becomes a different kind of discussion. So I think there’s a trigger point and you’re seeing it across, as you said, the whole industry and that’s why you’re seeing a different behavior set for people in checking accounts where they haven’t gone to buy the money sitting in the checking account.
If they’re not paying attention, they’re still getting, I don’t know, 20 basis points or something. So as rates come down, the total cash we have in the book, which is 23%, will be coming down anyway, because it’s just — that’s an abnormality related to where rates are right now. As rates come down over the next couple of years, you’re actually going to see people much less price sensitive on what they’re generating in a return on the cash and just using it as a liquidity account to manage investments going in and out. So I think in some ways we overachieved relative to our particular business mix. So I’m quite encouraged about the future because of that. And think, in fact, you’re hearing some of that language coming out of the banks where they said, I forget what the words some of the other CEOs said, but it was effectively the same.
They’ve overachieved in that it’s sitting in checking accounts and they’re making an enormous amount of money on that, but that’s unsustainable. We’ve overachieved in that rates are so high, everybody wanted to be in cash, earning not cash sitting dormant. I don’t know if that makes sense to you, Glenn. By the way I have to say I did love your comment about, you know, Paul talked about green shoots, somebody forgot to water them. I’d give you that one.
Glenn Schorr: That’s better than a pummel. Thank you. Onde quick one, maybe I’ll get the pummel on this one. I know it’s the board decision, but the longer the CEO transition announcement takes place, is there any timeframe where it starts to put more strain on the organization or become a distraction as every reporter in the world is writing on it every day?
James Gorman: Yes, about three years from now. No, wait, listen, Glenn, come on. We said I will not be CEO, I said at the annual meeting I wouldn’t be CEO within a year. And I said that for a very simple reason that people didn’t believe that I was going to leave because apparently bank CEOs don’t. And I said I would and when I say I’m going to do something, I’m definitely going to do it. I would leave at the earliest possible moment that the board feels comfortable making that decision. And I’ve made that very clear to them. I think they’ve done a terrific job. Now that you’ve opened up the question, I’ll answer it more broadly. They’ve done a terrific job. Dennis Nally and the succession comp committee and Tom Glocer, lead director on the board, all the directors engaged, really thorough process.
And I don’t want to give you an exact time, because that’s sort of a spoiler. I already did that apparently talking about Logan Roy once. But we’re — shall I say we’re well into it. And I do believe there are diminishing returns at some point in time. We’re not there. The team is doing great. The businesses are moving forward. But yes, I want to get out of the seat and give somebody else a chance to see what they can do with it. And I think there’s a lot of things, the growth opportunities in this company, now that we’ve set it up with so many planks that are solid, you have an abundance of choices. And I just, you know, just look at what we’ve done with MUFG in Japan, the so-called 2.0 that you know, Ted has been driving with Hero, the CEO of MUFG of taking our Japanese business with them to a completely different level and I think there’s a lot of things we can do with them in Japan strategically taking advantage of the turnaround of the Japanese economy.
That’s just one example. So yes, we’re getting close. I’m certainly not a barrier to it. I’m a — I don’t know if the word’s enabler, but I’d like to get on with it, and I’ll help in the transition as Executive Chairman for a bit, and this place will go forth and thrive.
Operator: We’ll go next to Ebrahim Poonawala with Bank of America.
Ebrahim Poonawala: Hey, good morning. I guess, I just wanted to follow-up on something you said, James, around the optimal level of rates, and you talked about NII. But if the Fed were to hike a few more times, or if rates stay at these levels for longer, is there an argument to be made that just structurally the business will be challenged until we get to the other side of the rate cycle, given just client assets probably remain in lower spread products? Just talk to us in terms of how you think about if rates don’t get cut, is that a headwind to the business until we get to the other side?
James Gorman: No, I definitely don’t think there’s a structural issue. I mean, my goodness, the business is generating, I’m talking about wealth 26% margins with the various costs in there, and I think it’s 28% Sharon without them. If you’d told me a few years ago, I mean, I thought we’d get to 28%, but pretty much nobody else in the world did. So, no, there’s no structural issue here — there. I’m just saying as a — and I do think if, at the risk of making prediction, I suspect the Fed will do one more rate increase at some, you know, by the end of the year, I guess November. But that’s likely to be it. And I do not expect the Fed to cut rates in 2024, but I do expect going forward after that. So given that, we’re talking about 12-months.
The cash is largely moved. It’s moved, you know, on the margin you’re going to have a little bit of NII impact over the next 12-months, but that’s really not the real game. The real game is go forward after that. So, and the minute you see the Fed indicate they’ve stopped raising rates, the M&A and underwriting calendar will explode, because there is enormous pent-up activity. But Boards of directors are sitting there and saying, until we understand the cost of financing, it is very difficult to pull the trigger on some of these capital transactions. So I think you’re heading into, and unfortunately I’m not going to be around to enjoy it, but you’re heading into a really good patch here. And I don’t know if it’s six months out or nine months out or it starts three months out, but this thing is going to start turning and then rates will be the kick when they start coming down.
