Morgan Stanley (MS) Earnings Call Transcript & Summary

Listen, I think we want to deploy our capital in the most best return risk-adjusted profile we can. And if acquisitions is that over buybacks, we'll do that. And again, at 16.5% versus 13.2%. We've had over 300 basis points of capital excess capital. We would expect that to grow with the closing of E*TRADE. So we have real flexibility and plenty of options. In terms of the criteria, listen, we told you we've been focused on IM and wealth management. I think wealth management is clear. We have E*TRADE. That's on track. We need to close it and we need to get the integration right. We're very excited about, again, the wealth management and that transaction, but I think that will keep us busy in that space for a while. And then on the IM side, just like every opportunity or acquisition that we look at, it's got to make strategic sense, it's got to have -- financially be sound and then culturally sort of fit together. And within the IM space, we've talked about scale in certain businesses, maybe fixed income, we'd like to be bigger. Select products, things that will add to the portfolio in our Investment Management business. We've had really nice success in the small transaction that we did 1.5 years, I guess, 2 years ago. We've done a lot of organic growth initiatives. You've seen our AUM grow quite well. We've sort of had leading net flows into our long-term strategy. So we feel very good about that business. We like the trajectory. We like the return. And if we can add selectively to that business, we will try to do that.

You mentioned E*TRADE. So maybe we could delve a bit more into that. And maybe discuss kind of the final preparations for the closing of the acquisition. And any insights from the integration process to provide you maybe more or less comfort around the deal. Obviously, you announced in a pre-COVID environment.

Listen, I think I'll go through each of those pieces because I think it's important. So I mean, we're on track to close in the fourth quarter. The integration and work streams are progressing well. We've got the org structure, all set up and ready to go, and we're excited to keep moving, get the deal closed and starting to integrate. I think through the process of spending more time with our new partners and with the company, I would say we're just -- we're more excited than we were when we first announced it. I mean one of the things that we're excited about is just the performance that they've had through this period, right? They've got more clients, they've got record net new assets, record clients, record levels of cash, record activity levels. And so we were excited about all of those engines, helping Morgan Stanley grow our wealth business and more broadly, the workplace in other parts of the area. And now we're buying a company that has more clients, more assets, more cash. And so all of that is a positive. Obviously, the NII story is slightly different. But the fundamental reasons why we bought the company are still intact. And I would say they're even more intact than they were when we did it in February. Synergies, we still feel very comfortable with both the cost savings as well as the funding synergies. And as we spend more time with our partners, I do think that there'll be real revenue opportunities as we get the companies integrated. And as we start bringing a lot of their capabilities to our existing clients and vice versa, some of our capabilities to there. So we feel very good about it. And as I said, it's on track for the fourth quarter.

Helpful. And just a reminder, for those in the audience, if you click the top left-hand corner of your screen, you can submit a question. Alternatively, email me, jason.goldberg@barclays.com. Just include MS in the subject. Jon, maybe sticking with the wealth management theme and talk to about your workplace offering. On the most recent earnings call, mentioned the selenium integration and the execution of MS at work strategy are on track and our important precursor trade integration. Maybe talk a little bit more about the strategy there, the kind of successes you've had the year-to-date, have seen some announcements in terms of geographic expansions? And do you maybe just provide an update?

Sure. Well, listen, I think the Solium deal was a very important transaction. As I said before, it's sort of a precursor and which will actually help us with the E*TRADE transaction. And actually the E*TRADE transaction, I think, accelerates and strengthen some of what we wanted to do with Solium. But when we think about Solium, there were really 3 components. We wanted to generate more corporate clients then we wanted to build credibility and trust with the participants of those employers, then ultimately, convert those participants to clients. So just briefly on each of those 3. As I said in the earnings call, we've seen really good receptivity. And we've seen an acceleration of the wins on the corporate client side. So that's gone better than actually expected. We also talked about we had to convert all of our existing programs and plans on to the Solium platform. We talked about that getting done by the end of 2021. We're actually going to be largely done by the end of this year. So that's ahead of schedule, and we feel very good about that. In terms of building trust with our new participants in the programs. We're doing that through content and education. Usually, that would be done in person, but just like this conference, mostly webinars now and really sort of the financial wellness component and just getting people familiar with who Morgan Stanley is and what our capabilities are. And then lastly, converting participants to clients, there were 2 components to that. And one was, as we talked about before, our old system we basically called our clients and said, you've had a vesting event, where do you want us to send the money or where do you want us to send the shares? So we had to get to a place where we had a Morgan Stanley account for those clients. We're in the process of converting and making sure that every participant has a Morgan Stanley account, and that will take some time. But we have had some real nice early successes in converting participants to clients. And I think the E*TRADE transaction is going to actually help with that because clearly, their self-aware and reactive functionality is better than ours, the quicker we can bring that functionality to our -- to the participants in our workplace work plan. Offering is going to be important. And we also, as you know think it's going to be a very important channel for us, the overall workplace channel because most wealth gets created in the workplace. This gives us a nice feeder with new clients, cash capture and all the things that we discussed. So we're very excited about the progress that we've made with Solium, and we're going to get even more growth, I think, out of that, again, out of that channel, both in the channel itself, but also a feeder into some of our other channels and whether that be a self-directed channel or a virtual adviser or a full-service financial adviser, we're very excited about it.

Helpful. Maybe sticking with that, you mentioned before kind of your FA population. Maybe just talk about in terms of what you're seeing in the recruiting process.

Sure. Listen, I think Morgan Stanley is sort of becoming a destination of choice for FAs. We've talked a little bit about the technology that we have. The brand is resonating very well. I think we've got good strong momentum. What we've also seen, and this is sort of anecdotal. But the FAs that we're bringing in today are bigger -- have bigger books of business. They're bringing more of their assets with them. And when they get on our platform, we're seeing them grow their assets probably faster than they could have at other places, and that is getting out, and we're seeing a very strong pipeline of people who want to join the firm. And net recruiting is a real important metric from just an overall sort of starting point. Historically, we've sort of been losing net a couple of hundred FAs a year, so losing more than we're recruiting. But with that, we've been losing any assets and revenues. And generally, those things sort of start us in the year at a detriment. I think what we're seeing this year, and now I think what we're seeing this year is net recruiting is sort of much closer to 0. We're not recruiting -- we're recruiting a little bit more, but we're clearly not losing as many FAs as we have historically. And what that does is it sets us up real well for future years because the revenues and the assets that we lose in the net recruiting situation has historically been negative, we would expect to be positive this year. And we expect, again, and Morgan Stanley is going to become a destination of choice for the FA population, and we're really excited about that.

And then maybe shift gears to just technology. Obviously, one of the big themes coming out of this conference. I think digitization has come up in every presentation. Maybe just talk to which areas do you think require the most investment in technology, given what's going on? And just how do you see Morgan Stanley positions relative to competitors? And I guess, are there any capabilities that others have that you feel like you need?

Sure. I mean, again, digitization, technology, automation, all of those are very current topics. And I think we've seen an acceleration really through the pandemic is, as we've seen a large part of the population start working from home for those who can. And so technology is always critically important to us. We think we're really good at it. Amset is a perfect example of state of the art trading platform and equities. We continue to invest in that area. We need to continue to stay current. The initiatives and investments that we made in wealth, the digital capabilities we have there. Particularly for the FA, has been very strong in terms of capabilities that we want. We're clearly picking up more capabilities with E*TRADE, filling some gaps where we thought we needed to fill. But broadly speaking, I think we've been very, very pleased with our technology and places not only from an offense perspective, but from a defensive perspective, I think the plant has held up extraordinarily well, right? We sent everyone home like everyone else. We are able to assess all of the volumes. We had no major issues, and we continue to be engaged and supporting our clients as the vast majority of our employees work from home. When we sent everyone home, we made sure they had the right technology, whether that was screens or laptops or sort of turrets or phones. And we've been able to obligate this really well, and we continue to invest and our remote capabilities, and I think our clients are seeing that.

We have about 10 minutes on the clock. So certainly time if the audience has any Q&A to submit may hit the button or e-mail me. Jon, when we ran through the businesses, we kind of or talked about it. We talked about local management. I didn't ask about Investment Management. Obviously, Morgan Stanley has a differentiated product offering in that space. Maybe just talk to -- update us in terms of what's going on there, just given kind of all that's going on in the world?

Sure. And again, I mean, in the second quarter what we started -- what we've been seeing is just real nice growth in that business. Our net flows, I think, are industry-leading. We had 18% net flows into long-term strategies in the second quarter. We continue to see our clients interested in our products. And we see -- continue to see real nice positive net flows, and this is really a flow story. So when you start to look at the composition of the revenues in our Investment Management business, today or this quarter, my expectation is you'll see a larger percentage of that coming from the fee-based flows and the fees that we make off of our AUM, given the growth that we've seen in AUM. We also really sets us up nicely for the go-forward periods. Carry, obviously, is volatile in any given quarter, we'll have to go through the process of seen that, but the values are good. So our expectation is for Investment Management to have another strong quarter. But we've been really excited about, again, a lot of the organic initiatives that we've put into place, your comments around the differentiated product has really led to leading industry flows. And that, again, sets us up well, more durable revenues, fee-based flows, fee based revenues, and we feel good about it. The one area that is under pressure is as we talked about earlier, with rates at 0, our liquidity business and money market business gets impacted by the low rates. But again, broadly speaking, very healthy flows and very healthy quarter for IM.

Helpful. We do have a question from the audience. Does better FA retention recruiting mean anything for your fee-based flows outlook?

Again, net recruiting positive is just a good for everything, whether that be fee-based flows, assets under management, our ability to generate deposits and/or loan growth, it's just a net positive across the board. Stability, less ins and outs, better also just organizationally in time. From a time perspective. So it's clearly a net positive. We continue to see strong flows into our fee based accounts. And I think we'll see a nice quarter this quarter. Again, also, we're not losing as many FAs, so we're not seeing as many assets and clients leave. So all in all, very underlying fundamentals of that business, very strong. So client engagement new assets, fee-based flows, deposits, loans and then obviously net recruiting positive.

Got you. Maybe we'll go to some of the audience polling questions. The first one that we've been asking every company is what's your position in the stock. For Morgan Stanley, 50% of the people say, overweight, which is certainly in an above-average answer that we've seen so far at this conference, but I guess not surprising given it doesn't have the same kind of credit risk characteristics at some of the other names. The second question we asked is, which of the following would be needed to become more bullish on the shares of Morgan Stanley. And I won't read all the answers because you could see them on your screen, but interesting, Jon, #1 was additional comfort around the benefits of the E*TRADE acquisition. So I know you talked about comfort on the funding side, the expense cut side. Maybe you could extract a little bit more on just what are some of the revenue synergy opportunities there.

Sure. And again, I think we're on track to close in the fourth quarter. I think we want to get the transaction closed in January, we'll have a little better sense of sort of where all the pieces are, and we'll spend some more time on the topic. But just broadly, there's real revenue opportunities. I mean the easiest is that we now know that about -- our existing client base has about $300 billion to $400 billion in assets in sales-directed accounts. With obviously, E*TRADE, self-directed functionality, being able to bring those assets to us and those self-directed assets to us is clearly one area. The workplace, again, I think their digital capability in their self-directed account, what you can do online, some of their banking products online will clearly help us with this conversion of workplace participants to clients. So there are just lots of areas, the loans. I think the SBL product, maybe some of the mortgage product could be very receptive into the E*TRADE client base. We've got products and research that we think will be well received in the E*TRADE client base. But our job is to integrate these businesses in a way that is not disruptive to each of the different channels and each of the different client bases. And then over time, add more capabilities and more functionality to improve the overall experience. So again, we're going to take it slow. We're very excited about it. We think there are real opportunities, and we're picking up a company that now has more clients, more assets and more cash. So we're really excited about it.

Makes sense. The next question we had asked was, when do you think Morgan Stanley will be able to achieve its longer-term ROTC aspiration of 15% to 17% on a sustained basis with 2022 or by 2023 as the most used responses for what that's worth? I won't ask you to comment when you think that will be?

I would say that's okay. Those are -- I will not comment. The one thing I will say is we are now, at this point, we've got a 14% year-to-date ROTCE and we're clearly carrying more capital than we thought we would when we sort of set out those targets in the beginning of the year. So we're very happy with the returns and the profitability that we've generated. And as I said, we'll revisit in January when we have a little bit more time to think about the economy as well as the Fed as well as the E*TRADE deal.

And then the last audience question was, what is the best incremental use of capital for Morgan Stanley. And 2/3 of the audience, maybe not surprisingly picked share repurchase, which I know we've talked about.

What was the other 1/3, though, I want to just -- this is interesting.

So 65% share repurchase, roughly 20% wealth management acquisition -- wealth management acquisitions, 8% Investment Management acquisitions and then 4% dividend increase, 4% Investment Banking higher end. So definitely a big preference. I know you mentioned dividends earlier, but a big preference to share repurchase over dividends for what that's worth.

Well, I appreciate that.

And then we got 2 minutes remaining. But we do have a couple of audience questions coming in now. Maybe just talk to a bit more -- maybe just talk about overall, just how you're managing expenses and kind of view on expenses in this environment. You talked a little bit about digitization and the like.

Listen, I mean, as you know, we've tried to continue to be very disciplined around expenses and sort of control what we can control. What we're seeing is, clearly, things like market and business development, professional services, some of the focus areas that we've had before, continue to do well, and we do well in those areas. Obviously, marketing and business development being significantly aided by the fact that no one's traveling. We're not doing in-person conferences, things of that nature. So we're saving money there. Where we have seen an increase in expenses, as you would expect, given elevated volumes and sales and trading businesses. Those businesses carry sort of the BC&E, the clearing and brokerage and clearing expenses, transaction taxes. So those variable costs have been elevated with the increase in revenue. So I think overall, we've done well, managing the expanded space. I think we showed in the second quarter the real operating leverage that we have when we really turbocharged the revenue side of the equation. And so we're very pleased with how that's being managed, but we are super focused on it. We will continue to make the tech investments to help automate and streamline processes so we can continue to maintain not only that expense discipline, but reinvest some of those savings continually into the business.

I think that's a perfect place to leave it. Jon, thanks so much for meeting with us virtually today. And I hope our next meeting is in person.

That would be great. Stay safe, and thank you for the opportunity.

Thank you.