The operator welcomes participants to Morgan Stanley's Second Quarter 2024 Earnings Call and provides disclaimers. CEO Ted Pick reports on the firm's strong performance in the second quarter, with $15 billion in revenue, $1.82 in EPS, and a 17.5% return on tangible. The institutional securities division saw a 50% increase in revenue, driven by investment banking and fixed income underwriting. Wealth management also performed well, with a 27% margin and total client assets of $7.2 trillion. The firm also announced a dividend increase and strong operating leverage.

During the quarter, we built $1.5 billion of capital and our CET1 ratio is 15.2%, providing us with flexibility to support dividend growth, clients, and stock buybacks. Our major segments, wealth and institutional securities, had balanced top-line and profitability. Our businesses are working together to maximize opportunities. In the investment bank, we are being deliberate in risk management and focusing on delivering solutions and capturing share. In wealth management, we are focused on aggregating assets and delivering strong advice. In investment management, we are investing in growth areas. Year-to-date, net new assets in wealth management have grown over 5% and fee-based flows have been strong. We are navigating uncertainty and remain focused on talent and infrastructure to support ongoing growth.

Morgan Stanley's strategy is to advise individuals and institutions on raising, managing, and allocating capital, while maintaining strong earnings and returns, robust capital levels, and a durable growth narrative. They executed this strategy successfully in the second quarter, with revenues of $15 billion, EPS of $1.82, and a ROTCE of 17.5%. The US economy and stable interest rates supported client conviction, leading to strong performance in institutional securities and wealth management. The firm's efficiency ratio was 72%, benefiting from scale and expense reductions. They remain committed to prioritizing investments in client and asset growth, technology, and infrastructure.

The businesses of the company had a strong quarter, with institutional securities revenues increasing by 23% due to higher activity in Asia. The investment banking sector also saw a 51% increase in revenues, with investments being made in talent and lending. Completed M&A activity has increased, and there is a growing backlog in diverse sectors. Equity and fixed income underwriting revenues also improved, with a strong global market footprint being a key factor. The investment banking backdrop is improving, led by the US, and there is healthy pipeline across regions and sectors. Inflation data has also stabilized, leading to increased confidence in the boardroom and sponsor reengagement.

The investment banking sector is expected to see a rebound as buyers and sellers work towards closing the valuation gap. The company's integrated investment bank is well-positioned to serve clients. In terms of equity, the company has seen strong results globally, with higher client engagement and strong performance in Asia. Fixed income revenues also increased, driven by macro and micro results. The company also saw solid results in commodities. In the quarter, ISG provisions were driven by individual commercial real estate loans and net charge-offs were primarily related to commercial real estate loans. The company's Wealth Management division will be discussed in the next paragraph.

The Wealth Management division of the company had a strong second quarter, generating $6.8 billion in revenue with record asset management fees. The division's pretax profit was $1.8 billion, with a reported margin of 26.8%. The company's asset gathering strategy is showing progress, with fee-based flows of $26 billion in the quarter and $52 billion year-to-date. Net new assets were $36 billion, although there were headwinds from seasonal tax payments. Overall, the division's net new assets are $131 billion year-to-date, representing 5% annualized growth. Transactional revenues were $782 million, with a 5% increase excluding the impact of DCP.

The increase in the bank's earnings was mainly due to higher equity-related transactions. Bank lending balances and total deposits remained stable, with a decline in sweep deposits offset by growth in CDs. Net interest income decreased slightly due to the seasonality of tax payments. The Wealth Management business performed well, with assets growing, fees generated, and benefits from scale and differentiated offerings. The bank plans to make changes to advisory sweep rates in the third quarter, which may result in a modest decline in NII. However, NII is expected to increase next year as a result of pricing changes and expectations for client behavior. The bank's Wealth Management strategy focuses on gathering assets, meeting lending needs, and offering advice. Asset management fees reached a record high this quarter, contributing to a strong margin. The bank also continues to invest in order to deepen client engagement.

The use of AI tools has helped Wealth Management advisers increase their client base and assets. Investment Management saw an 8% increase in revenue, driven by higher asset management fees. The company recorded long-term net outflows of $1 billion, but continues to see strong momentum in areas of strategic focus. The balance sheet shows a decrease in total spot assets and a standardized CET1 ratio of 15.2%. The company has actively supported clients and grew its CET1 capital by $1.5 billion. The most recent stress test results reaffirm the company's strong business model and capital position. The company has announced a quarterly dividend increase for the third year in a row.

The company has generated strong earnings and has a robust capital base to support clients. Investment Banking pipelines are healthy and there are opportunities for retail clients to engage. The company is now open to questions. The first question from an analyst is about the impact of the change in rate paid on deposit in advisory accounts on the company's net interest income (NII). The company clarifies that the change will only affect a small portion of their overall BDP and that it will be offset by the repricing of their investment portfolio.

In this paragraph, Glenn Schorr asks Sharon Yeshaya about the focus on repricing in the adviser-led channel. Yeshaya explains that sweeps are mainly focused on transactional accounts and clients have a lot of options in those accounts. The next question is about NII and pretax margin. Yeshaya says that they expect an inflection in NII in the next year due to potential rate cuts and stabilization of balances.

The Wealth Management line has been reaching its target level of transactional cash and will likely continue to do so. With the potential for rate cuts, there may also be inflows into the BDP. Additionally, the repricing of the portfolio and growth in lending products are positive signs for future NII. The 30% pretax margin target is seen as achievable and sustainable, with high confidence from the company. The Wealth Management line has three components: asset management, transactional, and net interest income. Asset management fees are up 4% sequentially and 16% year-over-year, and net new assets into this category were $26 billion last quarter. The transactional component is also showing growth.

Ted Pick and Sharon have stated that the transactional line has been weak, which is linked to the overall weakness in capital markets activity. However, they are confident that the rebound in investment banking will continue through the summer and beyond, as evidenced by their growing backlog. They believe this is the real deal, despite previous predictions of a rebound being delayed. They attribute this confidence to the tempering of inflation and normalization of rates.

The market is expanding and corporate finance activity is increasing, particularly in the areas of convertibles, IPOs, and M&A. This is a sign of a multi-year investment banking-led cycle, which is expected to continue as long as the economy holds up and regulatory normalization occurs. While interest rates may be higher than in the past, this is not expected to significantly hinder deals.

The author believes that the current economic period will see a return to normal levels of M&A activity, as the financial sponsor community has become more sophisticated and capable of working with corporate partners to finance deals. This will be aided by the release of a large stockpile of assets and dry powder, as well as the ability to navigate varying levels of sovereign risk and cost of capital. The author also mentions the potential for bespoke offerings and other services from leading global investment banks.

The company has been targeting high-quality investment bankers and has seen success in various industries. They expect this trend to continue in the coming years. In terms of Wealth, the assets are coming from various channels, with the biggest drag being from taxes. The contribution from existing and net new clients in the advice-based channel is particularly interesting, with some of the new clients coming from workplace relationships.

Ted Pick and Sharon discuss the importance of understanding the interplay between different channels in a differentiated platform. They also mention the success of the workplace sector in indirectly attracting potential clients through the institutionalized effect and educating on financial wellness. Brennan Hawken asks for more information on the repricing change mentioned by Sharon, specifically regarding the slow pace of repricing in the securities book.

Devin Ryan asks a question about the impact of tax season and increased client spending on GWM flows. Sharon Yeshaya explains that the increased spending is due to higher net worth and income bands, and it is unclear if this trend will continue.

The data shows that the cohort is using its cash in different ways and various investments. The company has seen this trend in their data and believes that it is an interesting dynamic. The company's integrated investment bank, which has been ongoing for seven or eight years, is a critical facet of their business strategy. The company believes that it has a special advantage in the market due to the relationships built across fixed income, equities, and banking through their capital markets new issue business.

The paragraph discusses the importance of having world-class investment bankers who can provide bespoke products and high-quality advice to clients. The success of the fixed income business is attributed to the collaboration between different departments within the Integrated Investment Bank. This expertise and global reach are seen as a key factor in generating above cost of capital returns for the investment bank.

The speaker is confident about the structure and leadership of the investment bank and believes that the upcoming financial cycle will be different from the last one. They also have strong relationships with the financial sponsor community. The next question is about operating leverage within ISG and the speaker mentions the efficiency ratio targets for the firm. The sustainability of incremental margins depends on where the revenues come from.

The enterprise is expected to have a 30% margin, with different jurisdictions and periods of higher BC&E related activity. There is also seasonality in the business, with fixed income and investment banking having their strongest quarters in the first and fourth quarters respectively. The equities business has reached $3 billion and is in high demand, while the investment banking business has reached an inflection point. Both Morgan Stanley and its wirehouse peers have announced similar actions on deposits.

Gerard Cassidy asks Ted Pick and Sharon Yeshaya about the recent pricing actions and if there was any feedback from regulators that prompted the decision. They do not comment on regulatory matters. Gerard also asks about the potential impact of a stronger investment banking market on the workplace channel and if it could lead to increased revenues for the company. Sharon agrees and mentions the potential for higher values of assets associated with the workplace channel as more corporations issue stock to employees and grow their employee base. This could lead to an increase in participants and net flows for the company.

The company has successfully integrated Solium, E*TRADE, and workplace platforms, allowing for more financial opportunities for customers. The company has also been able to grow organically and through acquisitions, and they plan to continue prioritizing dividend policy and investing in clients. They have also been buying back stock and have a buffer of 170 basis points.

The speaker discusses the company's current G-SIB buffer and the potential for external growth opportunities in the future. However, the company's focus in the short-term is on dividend, investing in clients, and achieving operating returns. They are happy with recent acquisitions and are determined to generate operating leverage and hit efficiency ratios. The next question is about the outlook for the company's sales and trading businesses, which have consistently generated $18-20 billion in annual revenue post-pandemic.

Ted Pick discusses the current market backdrop and how it may impact their ability to maintain or gain share in the business. He emphasizes the importance of growing durable share with their core client base and mentions their strong global footprint in equities. He also notes the potential for growth in the stock picking business due to the current market conditions.

The speaker believes that there will be ongoing uncertainty in the US due to macro challenges and the actions of the next administration. This could result in opportunities for the rates business, especially in regards to corporate catalyst activity. The speaker also discusses the importance of growing responsibly and maintaining a strong ROE, though it is still early to determine a normalized ROE for the Institutional Securities division.

The speaker discusses the uncertainty of predicting returns in the future due to various factors such as seasonality, geopolitical events, and regulatory issues. However, they mention that there has been operating leverage in the Investment Bank and they are measuring the returns in order to contribute to the overall efficiency of the firm. The conference call then concludes.

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