The speaker begins the call by providing a disclaimer and then introduces the Chairman and Chief Executive Officer, James Gorman. Gorman then discusses the headwinds and uncertainties that the market faced in the second quarter, such as a bank crisis, a debt ceiling crisis, the Federal Reserve's rate increases, and strong rhetoric from U.S. and foreign government leaders.

Morgan Stanley has made recent efforts to normalize relations with the US and China. The firm has made progress on four macro issues and completed a significant part of the E*TRADE back-office integration. They have also announced new institutional initiatives with Japanese research and equity and foreign exchange with MUFG. They have also seen improved performance under the CCAR stress test and increased their dividend by $0.075. Net new assets in Wealth Management grew by $90 billion and the firm delivered net revenues of over $13 billion, up 2% from last year.

In the third quarter of 2023, Morgan Stanley reported revenue of $13.5 billion, an EPS of $1.24, and an ROTCE of 12.1%. The results included severance charges of $300 million, which reduced the EPS by $0.14 and ROTCE by 140 basis points. CEO James Gorman discussed the firm's capital requirements and succession planning, and Sharon Yeshaya took over the call to provide further details on the quarter.

In Institutional Securities, client engagement improved and there was a moderation of sweep outflows and stabilization of retail investments. The firm's efficiency ratio was 75% with integration costs contributing 175 basis points. Investment banking revenues were flat and advisory revenues were lower. Equity underwriting revenues were supported by follow-on and convertibles, and fixed income underwriting revenues increased due to investment-grade bond issuance.

Investment-grade markets have remained resilient despite an uncertain backdrop. Equity revenues decreased 14% due to lower activity and market volatility, while fixed income revenues decreased due to tempered client activity and prudent risk management. Macro revenues declined due to reduced activity and foreign exchange, while micro results decreased due to lower client activity. Commodities results were down significantly compared to the previous year due to volatile energy markets. However, improved market conditions in June shifted client sentiment and supported the quarter's overall results.

The company reported other revenues of $315 million, largely driven by lower mark-to-market losses net of hedges and higher net interest income and fees on corporate loans held for sale. The allowance for credit losses on ISG loans and lending commitments increased to $1.4 billion, with provisions of $97 million and net charge-offs of $30 million in the quarter. Wealth Management reported record revenues of $6.7 billion, excluding the impact of DCP, and pretax profit of $1.7 billion with a PBT margin of 25.2%. Despite the challenging market conditions, the business model delivered $90 billion of net new assets, driven by the advisor-led channel, existing client consolidation and net recruiting, and aided by early investments in technology.

In the second quarter, E*TRADE successfully converted over 3 million accounts to Morgan Stanley's unified platform with minimal disruption. Asset management revenues were $3.5 billion, down 2% year-over-year, and transactional revenues were $869 million. Bank lending balances increased by $1.1 billion, and total deposits of $343 billion were up slightly. Net interest income was virtually flat versus the prior quarter, and retail sentiment improved as the quarter progressed with positive monthly flows into equity markets from advisor-led sweep balances. Investment Management also saw positive results.

In the second quarter, BlackRock's revenues declined 9% from the prior quarter due to lower performance-based income and lower asset levels. Asset management and related fees decreased 3% year-over-year, while performance-based income and other revenues declined due to challenging investing environments. Total AUM increased $1.4 trillion and integration-related expenses were $24 million. Long-term net flows were positive, driven by demand in alternatives and solutions. Liquidity and overlay services had inflows of $9.7 billion. Total spot assets decreased $35 billion from the prior quarter and the standardized CET1 ratio was 15.5%, up approximately 40 basis points.

The quarter saw a decline of $9 billion in standardized RWAs due to market conditions and prudent resource management. The firm announced a dividend increase and renewed its repurchase authorization. The tax rate was 21%, but is expected to be 23% for the second half of the year. The management team is focusing on what it can control and Wealth and Investment Management are poised to benefit should asset levels remain stable. Institutional Securities is seeing positive trends in underwriting and advisory. The firm is driving long-term growth while remaining well capitalized.

James Gorman discusses the upcoming Basel Endgame rules and how they may affect Morgan Stanley's value proposition as a franchise. He emphasizes that the Basel III Endgame is not yet implemented in Europe, and that the title of the Vice Chair's speech was "Holistic Capital Review," indicating that all CCAR, stress tests, and SCB buffers will be taken into account. Gorman also explains that the U.S. banking system has not yet seen the actual rules, and there are different views on the need for more capital. He then points out that the U.S. large banks have done well during the last few years despite the high inflation and rate increases.

Morgan Stanley's capital position has improved under CCAR over the past four years, and they will be commenting on their well-capitalized position. The intent of the proposed changes is to strengthen the US banking system, but there will be a long transition period and a comment period. The Vice Chair mentioned that any proposed changes will go through a standard notice and comment rule-making process, and any final changes to capital requirements will occur with appropriate transition times. Morgan Stanley has expressed their disagreement with the current European proposal of a standardized RWA hit on operating risk based on fee income, as fee-based businesses are not built to create operating risk.

Ebrahim Poonawala asked Sharon Yeshaya about the expectation for NII to stabilize in the back half of the quarter, to which she replied that it will depend on the deposit mix and encouraging signs in terms of that mix. Devin Ryan then asked about the puts and takes of the quarter and whether the second quarter results were normal or if the recovery in the back half of the quarter is normalization.

ISG has laid out a clear market share guideline in terms of their wallet share. They have moved from 6% to 10% wallet share in fixed income and have seen a dramatic change in activity level after the debt ceiling debate. Sharon Yeshaya states that advisory will be lagged due to the lack of announcements in the past six to nine months, but that more announcements began to appear in the last month of the quarter.

This quarter, the advisor-led channel contributed significantly to the success of the wealth management business, particularly in terms of assets held away from existing clients. This is a noteworthy development, as no one channel usually contributes more than 25% of the total net new assets. The success of this quarter bodes well for the goal of doubling pre-tax income for the Wealth Management business.

James Gorman is discussing the strategy that was developed in 2015 to give advisors more time to prospect new clients and offer better advice to existing clients. He believes that this strategy is a great opportunity to grow their asset base, and that they are on track to reach the $10 trillion mark in revenue, which would equate to $50 billion. He acknowledges that there will be some lumpiness in the process, but that it is an unstoppable force.

James was asked about how the lengthy transition period for Basel III informs his near-term buyback appetite. He responded by saying that the transition period allows them to continue to have a strong capital position, which is a key factor in their ability to consider buybacks.

James Gorman discussed the possibility of mitigating the pressure on businesses due to RWA inflation. He had conversations with regulatory bodies and is encouraged by their response. Gorman mentioned the bank's stability over recent years and the flexibility around RWAs. He also mentioned that the bank is comfortable with the dividend and will take advantage of stock weakness with buybacks, but will be prudent. The rule is expected to be released in a couple of weeks, followed by the first range of comments.

James Gorman and Steven Chubak are discussing Morgan Stanley's buyback strategy and how it will be impacted by Basel III. Gorman is advocating for the U.S. financial system and economy, not just Morgan Stanley's self-interest. Chubak then asks about the margin goals for Wealth Management and Investment Management, to which Yeshaya responds that they have given larger efficiency targets for the firm and that they were close to 30% margins in the IM business less than 18 months ago.

James Gorman has been CEO of Morgan Stanley since 2012 and is now transitioning to Executive Chairman. Mike Mayo asked Gorman about the CEO change and what the Executive Chairman role means. Gorman responded by noting that he has been asked this question before and that he is thankful to have survived and thrived. Mayo then asked what the Executive Chairman role entails and if Morgan Stanley will return to in-person shareholder meetings.

James Gorman explains that he had announced he would step down in five years and then three years ago, but that the Board agreed with the strategy when he announced he would not be in the job for the next annual meeting. He states that the exact timing of his departure is irrelevant, as long as it happens between now and the next annual meeting. He further states that he wants to help the new CEO get off to a great start by getting a few things done before his departure.

James Gorman clarifies that the Board will ultimately decide who the next CEO of the firm will be, and that he will provide input when asked. He states that the criteria for choosing the CEO is someone who is best equipped to handle the multiple challenges of running a global bank. He also states that he will challenge the history of Wall Street, where people who do not get the top job do not stay with the firm, and that his team of executives have worked together for eight years and are on the operating committee.

Sharon Yeshaya discussed how the liability mix and market rates will affect NII going forward, and Brennan Hawken asked why firm-wide NII was down $300 million quarter-over-quarter. Sharon responded that there were some benefits on the asset side, but the biggest driver of NII going forward will be the liability mix.

Sharon Yeshaya discussed the factors that affect the trading position, such as the products booked, how they are booked, the instrument used, and the funding costs. She also noted that while the Wealth Management side drives NII, the fee-based NNA needs to get closer to the total NNA. She mentioned that historically, around 23% of the assets and cash equivalents have been from the advisor-led side, but in the last month of the quarter, individual retail clients began to put money into markets, which is an encouraging sign.

Sharon Yeshaya answered a question from Gerard Cassidy about the success Morgan Stanley is having in increasing the penetration of the workplace channel since the E*TRADE deal was closed in October 2020. She reported that while the movement of assets into the advisor-led channel was around $50 billion a quarter for the first three years, the first quarter of this year saw $28 billion. She also noted that the assets held away from the workplace channel are also increasing. James then circled back to the capital comments he made about Basel III Endgame and mentioned that engagement with the regulators appears to be stronger this time than in past.

James Gorman expresses his opinion that the U.S. should not aim for a "gold plated European standard" when it comes to new regulations from Dodd Frank. He believes that regulators are listening to feedback from industry groups, legislative bodies, and other stakeholders, but the true test will be in how much of the feedback is taken into account. Gorman is maintaining a constructive tone, as he believes everyone wants to end up in the right place. He also does not think that Silicon Valley or First Republic have much to do with this discussion.

James Gorman discussed the difference between the Basel III regulations in Europe and the CCAR regulations in the US, noting that the US has had a capital stress test system in place for at least 12 years. He also commented that the Basel III proposal will include a standardized approach to risk weighted assets, but he does not agree with the proposal to tie standardized RWAs to fee-based business.

Regulators are attempting to move towards a standardized approach of evaluating bank operational risk, but there is still much work to be done before this is achieved. This concludes the conference call.

This summary was generated with AI and may contain some inaccuracies.