Morgan Stanley (NYSE:MS) Q3 2023 Earnings Call Transcript

So that’s a positive use of that. That’s an example of how being on the same platform is helpful. The same goes for workplace, right? Everything flows into the same places. Again, that should be helpful as we move forward. It’s also very helpful from a bank rails perspective. So as we think about banking products, as you can use, remember E-Trade had bank rails on their platform. Again, a lot of that can be used as we are now looking to potentially grow portions of the bank or grow lending or grow deposits. Those are all things that now that the platforms are put together on a consolidated basis. So I would look at it more from a revenue synergy perspective than necessarily a cost synergy perspective.

Devin Ryan: Okay, terrific. Thanks, Sharon. Quick follow-up here just on an interest income trajectory in GWM. So, we can make some assumptions around the trajectory of deposits, but how should we be thinking about the asset yield trajectory from here if we use the forward curve? I guess what are some of the puts and takes to be thinking about there?

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

So what I would try and do is you should take both quarters, for example, into consideration when you’re thinking about the relationship between sweeps in NII. And of course, asset yields will be determined by market factors more broadly.

Operator: We’ll go next to Brennan Hawken with UBS.

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

Sharon Yeshaya: Thanks for the question, Brennan. As you would expect, it’s a balance, right? We’ve made changes to our expense base over the course of this year, but we want to make sure that we’re investing for long-term growth by being able to offer both technology, platforms, solutions, et cetera, so that our advisors. The most important thing about the investment is to create opportunities where the advisors have more time. More time that the advisors have, the more they’re able to prospect new business and bring new assets to the top of the funnel. So that’s how we’re prioritizing the investments in order to get the operating leverage as the market begins to turn.

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

Sharon Yeshaya: We would see ourselves in a position — we’re not — we have put out those targets and we have been, it’s not that there is a shot clock in terms of the timing of those targets spread in. The goal is to create a business model that has the opportunity to do that on a more sustained basis. And the way that one is to do that from an asset-led strategy is to grow the asset management revenue streams and the transactional streams. And that’s what you’re seeing over the course of this quarter alone. You’re able to grow assets. You’re able to deploy those assets into different transactional products, which helps the transactional line. And eventually, it also moves into the advice-based relationship product, which has a higher annuity stream as well. And so that’s the strategy, and you’re seeing it play out as we move forward.

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

Brennan Hawken: Great. Thank you for that. If you could, Sharon, maybe just one more clarification, because you talked about the asset side and looking at market yields. What’s the duration that we should be thinking about if we’re trying to calibrate? Because the disclosure on the asset side for the wealth is not as robust. We have to kind of use a couple creative metrics within the filings?

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

James Gorman: We’re going to try and get in the last three questions quickly here, so we might run five minutes over.

Operator: We’ll go next to Jim Mitchell with Seaport Global.

Jim Mitchell: Hey good morning. Maybe just pivoting to the trading business, fixed trading, up sequentially a bit unusual in a seasonally slow third quarter. So maybe just talk a little bit about the drivers, how sustainable you think they are, at least in the near-term and maybe overall thoughts on industry wallet into next year?