Morgan Stanley (MS) Earnings Call Transcript & Summary

Good morning. This is Martin Cohen, Corporate Secretary of Morgan Stanley, and we welcome you to our Virtual Annual Shareholders' Meeting. Today's meeting may include forward-looking statements. Please refer to our annual report on Form 10-K, quarterly reports on Forms 10-Q and current reports on Forms 8-K for risks and uncertainties regarding such statements.

Good morning, everyone. I will call the annual meeting to order. I'm James Gorman, Chairman and CEO of Morgan Stanley. On behalf of my fellow directors, I'd like to welcome you to this, our first virtual meeting of shareholders and our 2020 Annual Meeting of Shareholders, so thank you to everyone who is currently listening in. Joining me here today is Eric Grossman, our Chief Legal Officer; Jon Pruzan, our Chief Financial Officer; and you just heard from Marty Cohen, Vice President, Counsel and Corporate Secretary. Also on the line are my fellow directors who are all standing for election with me today. Their bios appear in the proxy statement, and they're available on the virtual meeting website, and they are Alistair Darling; Elizabeth Corley; Tom Glocer, who also serves as our Independent Lead Director; Bob Herz; Nobu Hirano; Steve Luczo; Jami Miscik; Dennis Nally; Take Ogasawara; Hutham Olayan; Mary Schapiro; Perry Traquina; and Ray Wilkins. I'd also like to introduce John Rhodes and Sal Davide, who are partners of Deloitte & Touche, our independent auditor, and they're available to answer your questions. So let me begin with the CEO report. It has been an extraordinary few months. The global public health crisis is causing massive humanitarian issues as well as economic ones for millions of people around the globe. COVID-19 has presented extraordinary challenges to governments, the economy and markets. Swift monetary and fiscal stimulus has been put in place to help the markets to help businesses and those individuals who are suffering, but the stress on the economy is real and will take time to recover. Despite these incredible challenging times, our businesses at Morgan Stanley have been operationally resilient. We're helping our clients navigate these markets, from providing capital to corporates to facilitating trading in the volatile markets. On the wealth management side, our financial advisers are well prepared to work with clients in managing their investment portfolios to secure their financial futures. We have the capital and balance sheet to support our clients and markets. The banking system is being leveraged to be a critical part of the solution this time around, and we, at Morgan Stanley, are doing our part. We're doing this while also taking the measures you would expect to prioritize the health of our employees and their families. We've benefited from robust business continuity planning and from years of investment in our technology infrastructure. As a result, more than 90% of our employees are currently working from home. I'm so proud of the commitment our employees have shown to our clients and to our firm in these extraordinary circumstances. As we now plan the return to the workplace, the safety and health of our employees will continue to be our first priority. We're also working with organizations that greatly need our support. To that end, the firm has committed $25 million to support organizations that are providing COVID-19 relief efforts, from fighting the rising rates of hunger, to those who are caring for the sick and vulnerable in our communities. We're partnering with employees to contribute to local food banks and meal programs. Our Community Affairs team has been working tirelessly to provide grants and services to those being impacted by the crisis, and we've made a number of direct product donations to hospitals in the U.S. and Europe. We also are running our business. And turning to those results, our full year 2019, which seemed so long ago, and our first quarter 2020 results serve as a testament to the stability of the business mix and the balance we work diligently to achieve over the last decade. 2019 was a strong year for Morgan Stanley. Our performance was one of the best in our history. Our results held up remarkably well also in the first quarter this year. But that being said, the outlook is obviously much more important. Shorter term, the direction of asset prices, zero interest rates and activity levels will impact our results. With respect to our strategic objectives, which we outlined at the beginning of the year, what we said we assumed was a normal market environment. This environment is anything but normal. Given the current circumstances, the objectives we laid out will likely take longer to achieve. The duration and scale of the pandemic and economic slowdown remains uncertain. We do expect, however, to have much greater visibility to discuss our objectives towards the end of this year. The key to long-term sustainable success lies in broadening and building and enhancing our culture and the diversity of our employees. As we head into this new decade, we're committed to investing in our culture and attracting the most talented and diverse people to our firm so that our workforce reflects the diversity makeup of the societies in which we operate. We have a deep bench of talent in our businesses. The experience of our leadership team goes hand in hand with the stability of the business. The average tenure of our operating management committees is 23 years and 20 years, respectively. And nearly 20% of committee members are women, a percentage we are committed to improving over the coming years. I have great confidence in our senior leaders, and we're excited about the future. I'd like to end by thanking the Board of Directors for their incredible support and guidance over the past year under the leadership of our Independent Lead Director, Tom Glocer. We're grateful to all of them for helping position us for long-term success. For our shareholders, we thank you for your ownership and support of employees -- have supported Morgan Stanley's employees. To our employees, we thank you for your courage in fighting the COVID-19 humanitarian crisis and doing what you're supposed to do in your jobs at the same time, just an incredible effort. So now I'll turn it back to Marty to walk through the agenda of the meeting.

Good morning. I want to add my welcome to everyone listening in. Thank you to our shareholders joining us virtually today. American Election Services, the inspector of elections for this meeting, is represented by Christopher Woods. The inspector of elections has taken the oath of office, and a copy of his oath will be filed with the meeting minutes. He has determined that we have a quorum to conduct business at this meeting. First, I will review the meeting rules and procedures, then we will consider the proposals that are being voted on, and I will deliver the preliminary report of the inspector of elections. That will conclude our formal meeting. As set forth in our meeting rules that are posted on the virtual meeting website, during the annual meeting, shareholders may submit questions pertaining to the proposals by typing them in the space provided on the virtual meeting screen. Shareholders may also submit questions on topics other than the proposals being voted on that will be addressed during the general question-and-answer session. We ask that shareholders include their name in the field provided when submitting questions. I now move the following company-sponsored proposals that appear in the proxy statement: the election of your directors; the ratification of the Audit Committee's appointment of Deloitte & Touche LLP as the company's independent auditor for 2020; and the approval of compensation of executives, as disclosed in the proxy statement. Thank you. The proposals on the agenda are now before the meeting. We will now address any questions on the proposals.

Marty, there are no questions on the proposals.

Thank you. The voting is now ended, and the polls are closed. I will now present the preliminary report of the inspector of elections. The preliminary report of the inspector of elections indicates that at least 97% of the votes cast for and against have voted for the election of each director nominee; approximately 97% of the votes cast have voted for the ratification of the Audit Committee's appointment of Deloitte & Touche LLP as the company's independent auditor for 2020; and approximately 94% of the votes cast have voted for the approval of the compensation of executives, as disclosed in the proxy statement. That summarizes the preliminary report of the inspector of elections. The official report of the inspector of elections will be reported on a Form 8-K filed with the SEC.

Thank you, Marty. That concludes the formal part of our annual meeting, and the annual meeting is now adjourned. I'd like to thank and congratulate our directors on their reelection, and we will now proceed to the general question-and-answer session. And the way this is going to work is if you're submitting your questions electronically, Mr. Grossman will read those questions to me, and I or my team here will answer the questions from shareholders. So with that, I'll turn it to Mr. Grossman, do we have any questions?

We do have some questions. Mr. Gorman. First question is from [ Gerald Williams ], who represents the carpenters' union pension funds, which have a collective ownership position of 871,400 shares of Morgan Stanley's common stock. I'll just read you Mr. [ Williams' ] -- Mr. [ Matthews' ] question. We would first like to wish you continued good health. As long-term investors, we appreciate the company's actions to prioritize the health and safety of company employees and their families in response to the COVID-19 pandemic. Along with the other members of the financial services forum, the company has agreed to suspend its share repurchase activities to reserve capital to support the liquidity needs of customers and the nation. The company reserves the right to initiate share repurchases as soon as circumstances warrant. While much certainty -- uncertainty lies ahead, what factors will the Board or senior management consider in making the decision as to when it would be prudent to again repurchase shares? Thank you.

Well, thank you, Mr. [ Matthews ]. Appreciate your question and your concern. Obviously, we're -- given where we are in this crisis, the question of reinstating our share repurchases has not come to the Board of Directors or myself, and it's not something that we would anticipate certainly in the near term. What we need to do is ensure, overall, the safety and soundness of Morgan Stanley and work with our regulators in that regard. We are very well capitalized, thank goodness, from the work of the last 10 years. We've learned a lot of lessons from the last financial crisis. And fortunately, the firm entered this crisis with a very strong capital and liquidity base. As you point out, we voluntarily agreed, along with the other members of financial services forum, to suspend share repurchases in order to ensure that whatever extra capital we have can be used to serve corporations and individuals around the world who make up our clients. I do anticipate that period will pass as the economy starts to stabilize. And at that point, we would seriously undertake a review of instituting share repurchases. But right now, it's premature.

Next question. Mr. Gorman, the shareholder did not identify themselves. The question is, how will your company fare in an era of low or possible negative interest rates?

Firstly, I would just ask each shareholder asking a question, out of respect, just to identify yourselves, please, if you would, which is the natural course when we hold our in-person meetings. It's a good question. We're a very balanced business mix. We do have a bank, obviously. And with that bank, with the deposits we take and the loans that we give, interest rates materially affect the performance of that part of the firm, but it's a relatively small part of the firm. We manage over $2.5 trillion, I believe it is, of our clients' wealth. If anything, with lower interest rates, they would be more active in buying different forms of noncash-related investments. Obviously, low interest rates would impact our trading businesses. It might encourage our clients to finance acquisitions, so it could improve the M&A outlook. So the short answer is there are multiple sort of pluses and minuses to a low interest rate for Morgan Stanley, but the overall impact of it, I think, our firm would actually perform on a relative basis well against our sector. On an absolute basis, it could impact our performance in the short run. And a broader macroeconomic question obviously is whether negative interest rates are constructive or not constructive, and I personally am of the view that negative interest rates would not be constructive to broader economic activity.

The next question, Mr. Gorman, is from the Sierra Club. It's lengthy. Morgan Stanley recently announced an updated environmental policy that rules out direct financing for oil and gas exploration and development in the Arctic, including the Arctic National Wildlife Refuge. The policy also rules out direct funding for new coal-fired power plants and thermal coal mines and commits to phase out financing of thermal coal mining companies. The Sierra Club commends Morgan Stanley for taking these critical steps forward to avoid investing in some of the most destructive fossil fuel projects on the planet. However, the Banking on Climate Change 2020 report shows that Morgan Stanley is still one of the world's largest funders of fossil fuels. Over the past 4 years, following the signing of the Paris Climate Agreement, which Morgan Stanley claims to support, the bank has provided at least $92 billion in lending and underwriting to the fossil fuel industry. These investments are directly fueling the global climate crisis and putting communities and millions of lives in danger. Morgan Stanley's investments are still nowhere close to being aligned with the goals of the Paris agreement to keep global temperature rise well below 2 degrees Celsius. So what is Morgan -- so here's the question. So what is Morgan Stanley's plan to phase out its investments in fossil fuels and align its investment portfolio with the goals of the Paris Agreement?

Well, Morgan Stanley acts on behalf of our clients. We invest only through our various private equity and infrastructure funds, which are 97%, I believe, of which are client-driven capital. They're funded by very small capital base for our firm. But Morgan Stanley itself does not go out to invest in any specific companies. We hold shares as custodians on behalf of our clients, and we stand by our principles. And we stand by what we've said and what our sustainability institute is built now over 6 or 7 years. As a regard specifically to fossil fuel companies, many of those companies, themselves, are undergoing transitions to identify and build capability in alternative energy sources. That's something that should be encouraged, and they need financing to do that. Those companies, themselves, are going through a transition. And until we have alternative sources of fuel that can sustain a global economy the size that we have, we're obviously in a transition period as a globe. But Morgan Stanley's principles are clear, and I think you've outlined them very well in your question. But we also have a duty to respect what our clients are doing in buying and selling certain securities and providing a market-making capability and custodian for those clients. That is not Morgan Stanley investing directly itself. It's our clients investing and Morgan Stanley operating as a market maker or custodian for them.

The next question that shareholder did not identify themselves. Here's the question. Will associates be working from home remotely for the rest of 2020?

Okay. I would just -- listen, I want to be pretty straightforward about this. You should identify yourselves if you're going to ask questions. We do that when we're in person. As a matter of record, this is a SEC-regulated meeting. It should be done properly. I will answer that question, but I'm not going to answer questions when shareholders are not identified in the future. So if you've asked a question without identifying, just resubmit it with your name on it, we would appreciate that. The question is are associates going to be working from home for 2020. The answer is not everybody. At the moment, 90% of our employees are working from home. Whether they're associates or vice presidents or managing directors or in any form or function all over the world, it varies by office and locations. Some countries, Hong Kong, are more advanced. And the number of employees physically in offices, in our case, I think it's about 45% of employees there. In New York City, where I am, it's a very, very, very small number. I would not expect at all for 100% of our employees to be back in the office this year. In fact, I expect a much lower percentage of that, probably closer to 50% by the end of this year. We're working on a series of programs to provide a safe environment for our employees to come back, but under no circumstance will be employees forced to come back in 2020 to their desks when they have any concern or fear over their health and safety, which remains our most important priority.

The next question is from shareholder, [ Gary Frederickson ]. Mr. [ Frederickson ] asks, has the Board and upper management taken a pay cut to help the cause?

The Board and our upper management's compensation will be determined at the end of this year and as it is in every year. And rather than making a sort of off-cycle adjustment, each of us are contributing in our own meaningful ways personally to support COVID-19 and those who have been affected by it. And the Board will obviously take that into consideration -- take compensation in consideration with the broader performance of the firm and the overall economic environment.

Another question from Mr. [ Frederickson ]. He loves Morgan Stanley but wondering how much of the firm's business is dependent on China.

Mr. [ Frederickson, ] I love that you love Morgan Stanley. And if you're here and I could give you a hug, I would, but I can't give you a hug in any circumstance. So how much of the business is dependent on China? Relatively small amount. China is the world's second-largest economy. It's nearly, I think, $11 trillion economy. The U.S. is about $18 trillion. And I believe global economic output, at least last year, was about $70 trillion. So China is very important for the globe. A lot of Chinese companies trying to expand out of China, trying to modernize, U.S. companies doing business in China. Our own company recently owned a majority share in our license of Huaxin Securities at 51%, so it remains a part and will continue to remain an important part of Morgan Stanley's future, but it's a relatively small part for what we do globally. At least 2/3 of our business is U.S.-focused, and the rest is spread around all other countries in the world, one of which is China.

We have no further questions, Mr. Gorman.

Well, thank you, and thank you, shareholders, for your attention and interest. We're honored to serve you. And there being no further questions, I will now declare this virtual meeting of Morgan Stanley shareholders 2020 closed. Thank you.