The operator welcomes listeners to Morgan Stanley's Third Quarter 2023 Earnings Call and provides disclaimers. CEO James Gorman discusses the mixed market environment and the company's financial results, including $13 billion in revenues, $2.3 billion in net income, and a ROTCE of 13.5%. He mentions concerns about the tight employment market, high commodity prices, and inflationary pressures, but also notes increasing evidence of M&A and underwriting activity. Gorman states that the company expects momentum to continue into 2024 and highlights the successful completion of the E-Trade integration this quarter.

The company had a major project involving migrating 14 million accounts onto their platform, which was successful. This has allowed them to focus on their strategy and attract clients. They also bought back stock and have a strong capital buffer. The proposed Basel III endgame regulation is still being discussed and the company is confident in their ability to meet the requirements. Wealth management generated $36 billion in net new assets, which is consistent with previous quarters.

The third quarter for Morgan Stanley was successful, with a net new asset increase of $235 billion and an annualized growth rate at the high end of their target range. The firm's revenue was $13.3 billion and their efficiency ratio was 75%. Integration efforts and investment for growth remained a priority, with $68 million in integration-related expenses. Institutional securities revenues declined 3%, but equity and fixed income results were in line with historical averages. Investment banking revenues were lower, but leading indicators showed positive progress.

Investment banking revenues decreased to $938 million due to lower results in advisory and debt underwriting. Equity underwriting revenues were $237 million, with overall activity remaining muted. Fixed income underwriting revenues were $252 million, reflecting lower non-investment grade events. The pickup in announced M&A volumes in the third quarter suggests growing client activity. Equity revenues were $2.5 billion, with relative strength in Europe and Asia. Prime brokerage revenues were solid and client balances were modestly higher. Cash revenues declined, but derivative results increased year-over-year.

In the third quarter, Morgan Stanley's fixed income revenues were $1.9 billion, with micro results increasing and macro revenues decreasing. Other revenues improved due to lower mark-to-market losses on corporate loans and higher net interest income and fees. ISG lending and provision saw a slight increase in the allowance for credit losses and a provision of $93 million, driven by a negative outlook for the commercial real estate sector. Wealth management revenues were strong at $6.4 billion, with asset management revenues offsetting declines in net interest income. The completion of the E-Trade integration has further enhanced their ability to introduce clients and advisors and transition them into advice-based relationships. In terms of business metrics, pre-tax profit was $1.7 billion and the PBT margin was 26.7%.

In the third quarter, integration expenses and DCP negatively impacted the margin by 150 basis points for the company. Net new assets were $36 billion, with a total of $235 billion year-to-date. The growth was supported by new clients and positive net recruiting. Asset management revenues increased by 7% due to higher average assets and positive fee-based flows. Transactional revenues also increased by 7%, driven by new capital deployment into alternatives by retail clients. Bank lending balances remained stable, while deposits shifted to higher-yielding cash alternatives. Net interest income decreased sequentially due to a shift in the deposit mix. The company expects NII to trend lower for the rest of the year based on current conditions.

The wealth management business model aims to steadily increase assets and provide strong solutions and advice to clients while also growing fees and margins. The company is investing in its position and expects to see growth as the market recovers. In the investment management segment, revenues increased due to higher asset management revenues, but there were some outflows in certain strategies. The company is seeing demand for customized portfolios and liquidity solutions. Asset management and related fees also increased, while performance-based income and other revenues were supported by a diversified balance sheet. The company remains focused on secular growth areas and expanding its global presence.

The company has made ongoing investments in their businesses, positioning them well to serve clients. Their CET-1 ratio remains steady and they have bought back $1.5 billion of common stock. They are pleased with their resiliency and competitive positioning. As clients gain more conviction, they expect their institutional business to capture more opportunities and support asset growth. They will continue to execute growth strategies while managing their capital profile. In the Q&A, a question was asked about the strong organic growth in wealth management not translating to revenue growth. The company is focused on how to translate asset growth into revenue and the unit economics of their asset gathering strategy.

Sharon Yeshaya discusses the resiliency of the business and highlights the success in capturing assets and increasing fee-based flows. Despite a decline in NII, the company has been able to offset it with growth in asset management revenues. The strategy of growing asset management fees and offering clients the right solutions is working well, as seen by the increase in retail investors putting cash into markets and growth in new products and transactional revenues.

The interviewer asks about the company's target of 20% ROTCE and how they plan to bridge the gap from their current 14%. The CEO mentions that the low rates have affected secondary lines of revenue and that as rates eventually come down, there will be more activity and money in the market. He also mentions that achieving 20% is not a remarkable achievement as they have already done it in the past and that the firm has been investing a lot, making it stronger.

The speaker discusses the recent E-Trade deal and the investment made to integrate it into the company's platforms. They also mention the weak performance in banking and M&A, but express confidence in a strong pipeline for the next quarter. They believe that with expense management and revenue growth, they can easily reach their target of 20% return on tangible common equity. The next question is about the trends in wealth management and NII, and the speaker explains that the movement is in line with industry trends and cannot be quantified between historical mortgage families and E-Trade clients.

Sharon Yeshaya responds to James' question about the conditions needed for wealth management NII to stabilize and grow. She discusses the differences in deposit mix between self-directed and advisory-based clients and how this impacts the stickiness of the deposit base. She also mentions the potential for NII growth through the asset gathering strategy and lending opportunities, such as SBL and mortgages. As they better understand their client base, they are able to offer more lending products.

The speaker discusses the acquisition of E-Trade and how it will help integrate bank relationships and technology. They also mention the impact of interest rates on cash holdings and how it will affect investment decisions. The speaker is optimistic about the future due to these factors.

Some bank CEOs are claiming they have overachieved and are making a lot of money, but this is unsustainable. The speaker, James Gorman, responds to a comment about his previous statement on "green shoots" and CEO transitions, saying he will leave at the earliest possible moment and the board is currently engaged in a thorough process. He declines to give an exact timeline.

James Gorman believes that there may be diminishing returns at some point, but currently the team and businesses are doing well. He wants to step down from his role as CEO and allow someone else to take over and continue the company's growth. He mentions the potential for growth opportunities with MUFG in Japan and believes that the company is well-positioned to take advantage of the Japanese economy. In terms of interest rates, Gorman does not see it as a structural issue and believes that the business is still generating strong margins.

James Gorman discusses the Fed's rate increases and predicts that there will be one more before the end of the year. He also mentions that he does not expect the Fed to cut rates in 2024 and that there is pent-up activity in the M&A and underwriting market. He believes that once the Fed stops raising rates, there will be a surge in activity. Gorman also mentions that he will not be around to enjoy this, but it will be a good time for his successor. The interviewer asks about Gorman's successor and Gorman mentions the focus on secular growth and international expansion, with no plans for big M&A in the near future.

Sharon Yeshaya discusses the opportunities for international expansion in wealth management and private banking, particularly in India, Asia, and Europe. She mentions the potential for distributing investment management products and working with strategic partners in places like Japan. James Gorman also mentions the opening of an office in Abu Dhabi and the potential for growth in the Middle East, India, and Japan to offset the challenges in China.

The firm is expected to make transactions in wealth and asset management outside of the U.S. in the next three years. The team has a strategic plan for this and is being careful about diligence issues. In the third quarter, there was a pullback in flows, particularly in the workplace channel where people are selling stock instead of investing. However, there was an increase in NNA from new clients and recruiting.

The ability to attract new clients has been a major focus for Morgan Stanley, and their investments in technology and wealth management have been successful in attracting new recruits and clients. The stock plan participants have also increased, indicating positive metrics. In investment banking, there has been an increase in announcements and a rise in backlog levels. The financial sponsor community is showing optimism, but there are still some challenges with valuation gaps and deployment. One key theme in the backlog is financial sector consolidation.

The speaker discusses the importance of energy transitions and emerging themes in the investment banking and trading industry, such as technology and AI. They mention making key hires and investing in the franchise to navigate through the complex landscape. The next speaker asks about expense and margin outlook, and the speaker responds by saying they have been managing expenses through the cycle and have taken actions to reduce costs. They also mention the ongoing competition for talent in the industry.

The company pays competitively for talent, taking into account potential growth opportunities and investments in processes and technology. They aim for a balance between investing for the future and maintaining a reasonable expense base. The company has had low attrition rates, which is a reflection of their stable culture, but they are also actively seeking to bring in new talent to continue growing.

During a follow-up question about capital, James Gorman explains that the proposed Basel III endgame will not affect their ROTCE target and they do not plan on increasing capital. He also believes that the proposal will not be the final rule and they will continue with their buyback program. The final implementation of the rule is not until 2028, leaving plenty of time for changes to be made.

The speaker discusses the debate within regulatory institutions about the need for more capital in the industry and the potential impact on businesses with attached fees. They also mention their commitment to returning capital to shareholders through dividends and buybacks, with the size of the buyback being determined by opportunities for capital usage.

The speaker discusses the recent E-Trade conversion and how it has been beneficial in terms of revenue synergies. They mention the smooth integration and the potential for cost savings, but state that the main focus was on creating a clear foundation for migrating clients and utilizing the same platform for workplace and banking products.

Sharon Yeshaya, CFO of Goldman Sachs, discusses the potential for growth in lending and deposits as the bank's platforms are consolidated. She emphasizes the importance of revenue synergy rather than cost synergy. When asked about the trajectory of interest income in Global Wealth Management, Yeshaya notes that asset yields are largely determined by market factors and have been impacted by the recent regional banking crisis. She advises considering both recent quarters when analyzing the relationship between sweeps and net interest income.

The speaker is discussing the uncertainty surrounding the NII (net interest income) and its impact on the company's 30% pre-tax margin target. They mention making changes to their expense base and investing in technology and solutions to help advisors have more time to bring in new business. The goal is to create a sustainable business model that can achieve the target without relying on NII. The focus is on growing asset management and transactional revenue streams.

The company's strategy involves deploying assets into different transactional and advice-based products to improve the transactional line and increase its annuity stream. The current deficit against the 30% long-term target is less than 2%, and the company is confident it can reach this goal by taking 2% of costs out of the business. The duration of the AFS portfolio is under 2, but the deposit duration may shorten if interest rates rise.

James Gorman, CEO of Morgan Stanley, is answering questions on a conference call. He mentions that they will try to get through the last three questions quickly, even if it means going over the allotted time. One question is about the fixed trading business, which saw an increase in the seasonally slow third quarter. Sharon Yeshaya, CFO of Morgan Stanley, answers by saying that the industry wallet is above 2019 levels, which is positive for the business. She also mentions that the trading business has been restructured and is focused on serving clients efficiently. Another question is about the expected permanent improvement in global wallet shares for investment banking and trading in the next three to five years.

James Gorman, CEO of Morgan Stanley, discusses the global wallet share and the negative impact on NII. He believes that the global wallet share will trend higher than 2019 levels due to growth in non-U.S. markets. Sharon Yeshaya, CFO, adds that they are not giving guidance for 2024 but expect the next quarter to be lower due to client behavior. The question from Gerard Cassidy of RBC is about Morgan Stanley's appetite for mergers and acquisitions.

The speaker, James Gorman, discusses the company's appetite for acquisitions in the next three to five years. He mentions that the company has a strategic game plan and a strong integration machine led by Jim Hennessy. The company will only pursue sensible deals that align with their vision and have the potential to drive growth. The company has a team dedicated to pursuing and integrating these acquisitions. The speaker, along with another person named Sharon, answer a question about the company's approach to acquisitions and conclude the call.

The speaker thanks everyone for participating in the conference call and announces that it is now over. They instruct the participants to disconnect.

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