Morgan Stanley (MS) Earnings Call Transcript & Summary

Good morning. Welcome to Morgan Stanley's Second Quarter 2026 Earnings Call. On behalf of Morgan Stanley, I will begin the call with the following information and disclaimers. This call is being recorded. During today's presentation, we will refer to our earnings release and financial supplement, copies of which are available at morganstanley.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Morgan Stanley does not undertake to update the forward-looking statements in this discussion. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release. This presentation may not be duplicated or reproduced without our consent. I will now turn the call over to Chairman and Chief Executive Officer, Ted Pick.

Good morning. Thank you for joining us. In the second quarter, Morgan Stanley again delivered top line and bottom line record results, with revenues exceeding $21 billion and EPS of $3.46, marking an exceptional first half for 2026. The $42 billion of revenue, $690 million in EPS and a 27% return on tangible. Across wealth and investment management, Total client assets stand at $10 trillion, fulfilling a Morgan Stanley strategic milestone. Our client acquisition funnel will continue to drive wealth management's super performance. And with the passage of time, we seek to grow stand-alone wealth assets from the current $8 trillion to $10 trillion. Buoyed by active markets, our results reflect multiple years of disciplined investment and consistent execution, positioning the integrated firm to deliver strong results. Our advice-based businesses are working well together across our leading global investment bank and scaled wealth and asset management franchises to deliver industry-leading growth. In Institutional Securities, our deep client relationships, global footprint and connectivity across businesses drove a record top line quarter of $11 billion. Dialogue with clients remains high and strategic activity has momentum. In investment banking, Morgan Stanley led Landmark IPOs in the quarter while helping unlock broader client pipelines. As institutional clients sought access to global markets, our equities franchise provided client solutions around the world, resulting in an exceptional $6.3 billion quarter. With institutional activity strong and IPO markets to open, Morgan Stanley connected the integrated firm to translate institutional strength into client value through our adviser-led and eTrade channels. Wealth Management added a record $148 billion in organic net new assets. driven by large IPOs of late-stage private workplace clients. Growth led by workplace relationships reflects a cornerstone of our client acquisition funnel. Our ability to serve clients across the private to public continuum continues to attract assets to a world-class platform, delivering unique products, solutions and advice. Investor Management also grew in the quarter with AUM now reaching $2 trillion. This business remains a diversified source of strength with Parametric as an important differentiator of the integrated firm. The 4 pillars of Morgan Stanley, strategy, culture, financial strength and growth remain central to how we run the firm. Financial strength is top of mind. Over the last 10 quarters, we've accreted $18 billion of CET1 capital and now have a capital cushion that is at least 300 basis points with continuing stress test validation of our durable business model. This excess capital affords Morgan Stanley, the strategic flexibility to continue to support clients globally invest in our businesses and return capital to our shareholders. This quarter, we delivered on all 3 of those priorities, including announcing a 15% increase in our quarterly dividend to $1.15 per share. During the last 10 quarters, we have sharpened the effectiveness and connectivity of the integrated firm's core mission, which is to be the preeminent adviser to clients as they raise, manage and allocate capital. We have a 15-year record of successfully integrating acquisitions, and we are as a discipline, constantly evaluating potential inorganic opportunities to expand and attract to geographies, bolt on new capabilities, add new client relationships. As we've learned through hard fought integration success, strategic rationale and cultural fit, continue to be threshold criteria for any inorganic opportunity even before we consider transaction terms. So the bar must remain high. The very good news is that we are well placed across 2 major businesses, Global Investment Banking and Markets and U.S.-dominated wealth and asset management, where the core addressable markets in the current environment are growing at nominal GDP plus and where we continue to realize wild share gains. The integrated firm approach underscores that the organic growth opportunities right in front of us are compelling and deserve the first dollar of reinvestment. As I wrote in our March shareholder letter, 2 defining themes have come into sharper focus over the course of 2026. The first is the accelerating adoption of artificial intelligence, not only by consumers, but more importantly, across the enterprise or its potential for enhanced efficiencies and productivity is only beginning to be realized. The second is the return of geopolitics as a defining force in the global economy. As renewed competition among nation states and regional powers is reshaping supply chains, capital allocation and economic prospects across our client universe. These are the known unknowns that will continue to shape the environment in which we and our clients operate. They demand disciplined execution and the agility to adapt as conditions evolve. We continue to be well minded to proceed alongside our clients with the right combination of optimism and vigilance. Morgan Stanley enters the second half of 2026, operating from a position of strength. Our clients, retail and institutional are seeking advice on how to respond to complicated global markets and are interested in new products and innovation. Our role as financier, underwriter, allocator is to offer our clients market access and trusted advice globally. Morgan Stanley's first half performance demonstrates our business model's operating leverage when markets are receptive and clients take action with a clear and consistent strategy to raise, manage and allocate capital for our clients, we continue to be intensely focused on delivering higher highs and importantly, higher lows for our shareholders through the economic cycle. Thank you, and Sharon will now take us through the quarter in greater detail. Over to you, Sharon.

Thank you, and good morning. In the second quarter, the firm produced record revenues of $21.3 billion and record EPS, ex-DVA of $3.46. Our ROTCE was 26.6%. Institutional and retail client engagement remained strong throughout the quarter, and the integrated firm consistently delivered trusted advice and market access responding to ongoing client demand. The firm's year-to-date efficiency ratio was 65%. Top line growth and disciplined execution drove operating leverage through the first half, more than offsetting higher execution-related costs and continued strategic investments across the firm. Higher technology-driven spend relates to investments to support our infrastructure, AI-enabled efficiencies and ongoing business growth. Now to the businesses. Momentum in Institutional Securities continued in the second quarter an remained highly engaged. The segment delivered record revenues of $11 billion and record pretax profit of $4.3 billion. Results were driven by our leading Equities franchise and supported by investment banking. Our long-standing global footprint and our investments in talent, technology and research positions us well to advise clients. That strength was evident in every region contributing to the year-over-year revenue growth. Investment Banking revenues were $2.4 billion. The 58% increase from the prior year reflected strength across products as momentum built across capital raising and strategic activity. Advisory revenues increased year-over-year to $798 million on higher completed activity. Revenues remain diversified across sectors, including top contributions from industrial, technology and health care. Equity underwriting revenues were strong at $851 million. The significant increase versus the prior year was supported by a robust IPO market and strong follow-on and convertible activity. Fixed income underwriting revenues were a record $788 million, driven by bond issuance across noninvestment-grade and investment-grade companies. Issuers took advantage of favorable spread environment and an increase in strategic activity supported results. The investment banking outlook is constructive and pipelines are healthy. Client dialogue is broad-based across sectors. And while year-to-date activity has been led by the Americas, global activity is building. Large corporates are executing on their strategic objectives and the need for solutions and capital continues to grow and sponsor monetization is selectively gaining momentum. Turning to equities. Our franchise delivered an exceptional quarter with revenues reaching a record of $6.3 billion, driven by increases across all products and regions. Asia was strong with the breadth of activity extending across the region. Active markets and technology trends serve as tailwinds and our multiyear investments in our global franchise allowed us to prosecute greater levels of client engagement. Prime Brokerage revenues rose versus the prior year, driven by higher average client balances and strong activity in Asia. Cash results were strong, led by active client engagement and higher market volumes in the Americas compared to the prior year. Results in derivatives were also very strong versus the comparative period. Investments in technology centered on building scale and dynamic risk management tools are paying off. The business was well positioned to capture global activity. Fixed income revenues were $2.5 billion, demonstrating balance across products. The cumulative growth of our secured lending business and trading discipline resulted in solid performance. Macro results were roughly flat versus the prior year. Resilience in rates offset declines in foreign exchange, where volatility traded near historic lows. Micro results increased year-over-year, driven by strong performance in credit corporates, on the back of improved inventory management and robust primary issuance. Additionally, the cumulative growth of lending balances and securitized products further contributed to results. Commodities results improved versus the prior year, supported by higher client activity and structured transactions. Activity moderated sequentially following an exceptionally strong first quarter that benefited from energy market volatility. Other revenues reflected a loss of $152 million, largely driven by mark-to-market losses on corporate loans held for sale, inclusive of hedges. Turning to Wealth Management. The business generated a record of $8.9 billion in revenues and total client assets stand at $8 trillion. The execution of our strategy, particularly our sustained investments in our client acquisition funnel allowed us to reach more clients and deepen existing relationships. We remain the industry leader with record net new assets of $148 billion and strong fee-based flows of $39 billion. Our financial advisers, our culture of continued innovation, our ability to provide unique capabilities and products are the foundation of our business. Together, they underpin a scaled, differentiated platform with $3 trillion in fee-based assets. Further, the connectivity of our integrated firm sets us apart positioning us to deliver for our clients. Revenues of $8.9 billion and pretax profit of $2.7 billion, were both a record, supported by rising asset levels and robust retail engagement. The pretax margin was 30.5%, a reflection of the scale of our business and the intentional strategic investments for our future. Asset management revenues were $5.3 billion, driven by expanding markets and the cumulative impact of strong fee-based flows. Transactional revenues were $1.2 billion, up 20% year-over-year, excluding the prior year's positive impact from DCP. Results reflect highly engaged retail clients across both adviser-led and self-directed channels. Loan growth remained strong in the second quarter with balances growing $9 billion. In a quarter with tax obligations, we saw an increase against lending of equity portfolios. Sequentially, deposits grew to $436 billion and net interest income increased to $2.3 billion. NII outperformed on higher-than-expected sweep balances and strong loan growth. For the third quarter, we expect a modest sequential increase in NII. Lastly, net new assets were a record of $148 billion. Stock plan IPO flows represented just over half of the overall NNA this quarter, more than offsetting seasonal taxes illustrating the strength of the workplace channel as a strong contributor to the top of the funnel. With strong capital markets, the power of our client acquisition funnel is becoming increasingly evident. Workplace brings relationships and assets onto the platform, and we are well positioned to support these new relationships. Our investments are extending our runway for growth. We continue to deliver advice and solutions to new and existing relationships, supporting the build in our fee-based assets. We are investing from a position of strength and believe these capabilities set us apart. Turning to Investment Management. AUM now stands at a record $2 trillion. Long-term net inflows were $7.7 billion for the quarter, driven by ongoing demand for alternatives and solutions, including Parametric as well as our fixed income strategies. Parametric remains a key differentiator with over $760 billion in AUM today, continued education initiatives and ongoing client demand have supported financial adviser adoption across our suite of Parametric custom solutions. Revenues of $1.6 billion increased 6% compared to the prior year. Results reflect higher asset management and related fees, driven by higher average AUM. Performance-based income and other revenues were $130 million. The current quarter primarily reflects net mark-to-market gains in our private funds. As we look ahead, our ongoing investments in technology, distribution and product innovation position our diversified franchise to better serve our global client base. Turning to the balance sheet. Consistent performance has generated strong capital accretion and strengthened the firm's financial position. Total spot assets grew to $1.7 trillion and standardized RWAs grew to $590 billion, supporting increased client activity. We repurchased $1.5 billion of common stock, and our standardized CET1 ratio ended the quarter at 14.8%. Reflecting the strength of our capital position, we announced a quarterly dividend increase of $0.15, bringing the quarterly dividend per share to $1.15. While the Fed's most recent stress test does not impact our current capital requirements, it serves as further recognition of the durability of our business model. Our quarterly tax rate was 23.1%. We continue to expect our annual tax rate to be between 22% and 23%, which similar to prior years, will exhibit some quarterly volatility. We entered the second half of the year with $10 trillion of total client assets across Wealth and Investment Management. Together with a strong capital position and a building backlogs the integrated firm is well positioned to provide advice and to support clients in an increasingly complex environment. With that, we will now open the line up to questions.

[Operator Instructions] We'll take our first question from Ebrahim Poonawala with Bank of America.

Maybe just obviously very strong quarter. Two questions, both on Wealth. One, maybe talk to us in terms of, are we at peak flows as far as workplace channel is concerned, when we look at the NNA growth, both the environment when we think about IPO activity, driving the flows, combined with the actions you all have taken as part of this integrated firm? Or can we do better? Just kind of what inning are we in, in terms of growth tied to the workplace channel and just overall NNA growth as you look out over the next year and over the medium term?

Sure. Why don't I take that, Ibrahim, I think it's a great testament to the investments that we've made over the course of many years. always talked about the workplace channel. We've talked about the fact, I think I said it in the last call that IPOs can serve as a form of where we get NNA and the top of the funnel. Why don't I take a step back and just remind you that we have about 70% of the top 100 unicorns by market cap in terms of our workplace pipeline. So we've spent a lot of time thinking about how do we service some of these companies at the very early stages. We've talked about private. We've talked about how we support a different private companies, think about equities then, and all of the investments that we've made. So that gives you sort of the framework of really some of the top of the funnel are other places in workplace, right? There are 401(k)s, there's relationships with eTrade, their savings products, et cetera. Now as you go through the funnel, we've talked about increased from the IPO pipeline. And that should help as you think about different companies coming to market and again, providing that with different opportunities. Of course, that will ebb and flow. We've seen that. We've had different quarters where you have different movements in NNA that comes through these IPOs or might come through large integrated firm relationships, and we've talked about that, too. And what we're focused on now is really making sure that what we're doing is retaining those clients. We're providing them with advice, so we often talk about, well, where are the dollars of investments going? They're going into product capabilities. They're going into creating our referral models. They're going into products like Lead IQ that will allow us to match individuals with advisers. And our goal is to be their principal financial adviser. Again, you might have differences in where people decide to spend their money, their relationships -- but we're -- this is a long game, and it's been a long game, and we will continue to invest in the long game. And what you see this quarter, and you've seen in the most recent quarters is really the activity in all of this playing out as we think about the longer-term top and then that migration of those flows into fee-based and path to advice.

That's helpful. And just talking about the dollar spend towards investments, talk about when we think about the Wealth Management pretax margin pretty strong 30.5%. I guess the average shareholder of Morgan Stanley would think that this pretax margin is probably drifting into the low-30s or even the mid-30s over the medium term. One, is that a reasonable assumption? Appreciating, you've not changed your strategic targets? And second, around maybe the investments that you're making how much of -- what percentage of those investments, if you can frame it that way, will lead to a more productive business looking out the next few years?

Yes. We're pretty disciplined, as you know, about not moving the targets during the course of the year, which is why we go through the discipline of the annual strategy deck and we're comfortable with the way it's been laid out. And in periods where things are very busy, and there's a considerable amount of activity, you're going to see greater PBT, and you might also see greater margin. . It's going to move around. The reality is that 30 is a benchmark now we've hit a number of times but it's not a number we're solving for. What we're solving for is a lot of what Sharon just talked about, which is to continue to drive further PBT gains. If over time, it's clear that the margin hurdle is not enough, and we want to take it up. we'll do that. But that's something we're going to want to give a real consideration to in light of the ongoing investment we're going to make to continue to take wallet. It's not that we're just taking advantage of an open TAM. It's that we are actually gaining wallet in each of these spaces as assets migrate their way through the funnel. So that's something that would be addressed at the end of the year. But as you see, we've now surpassed the 30 a couple of times, so it's something we will keep an eye on.

We'll take our next question from Glenn Schorr with Evercore.

Maybe start out with a follow-up on the NNA. Maybe we could drill down a little bit. Maybe you could talk a little bit about new versus existing clients? And then on the piece that comes from workplace and IPOs, I think it's instructive for the future given that you have such a big position with the unicorns and there's a big IPO pipeline. I'm curious to see when the recognition comes in, meaning does everything come in on the IPO? Or is there a vesting schedule? And then curious what went into adviser-led versus self-directed. Is it all self-directed and then we build towards adviser led. Just looking for a little more color because I expect a lot more of the same.

Sure. Let me try and take that and I wrote some of your questions down. So if I missed something, apologies. But overall, I'd say that it's a mix, right? So there are new accounts. There are existing clients that may have already had accounts and that can be both on the workplace side and on the individual side. I mean on the adviser led that already exists within advisor-led but also those clients that might come in through workplace might already have existing accounts. So it would be a little difficult to exactly tell you where that is. The point is that for those that might not yet have the advice-based relationship, we're working on that referral model. And that's something that can begin as early as the financial education spot, and it can also begin -- like I said, we have examples with 401(k) and new 401(k) assets that come in is not necessarily an IPO-specific workplace where we're really giving people that ability to better understand where they could use advice. So there's a lot to unpack just on those pieces, but I'd say those are contributions. Now as you move forward through -- you asked the question, I think, also about vesting schedules and when I -- it does depend. I will not suggest that all IPOs are exactly the same. You -- it comes through a -- when you actually receive it, will be a function of the vesting schedule and there might be different IPOs that you might -- if it's over the course of a quarter that you would have it, then you might have to wait a couple of days. It's not necessarily instantaneous. But in this particular case, we spoke, there were large IPOs, more than 1 that took place over the quarter, and that's largely what you're seeing here as reflected in our numbers. Now the way to think about it on the forward, the last point that I would make is that you're going to see different flows from different parts of the capital structure. That is worth noting. And here, in this particular case, these are really employee flows. That's a positive as you think about the employees that we're going to have more relationships. We're currently at 20 million relationships. Do you remember when those numbers Glenn, it's not that long ago, we were talking about 10. We were talking about 12. We're talking about 14, and those are big numbers. We have 20 million touch points, and that's a lot of people and a lot of business to potentially prosecute over time.

That's big. Ted, maybe a quick follow-up on your comments on always looking for bolt-ons you put up great returns on a really high capital base. And I guess my question is, do you keep this capital base this high for a reason, meaning while times are good and you're still putting up incredible returns, why not run the optionality? Or are there other reasons why you're hanging on to all this excess capital.

Well, I like your answer to the question, actually, Glenn, because I think that the the pillar of financial strength of this firm is something that we have put some substance behind an accreting $18 billion of CET1 over the last 10 quarters. That is no small matter. Part of that was during a period where we didn't know where the regulator would come out, and hopefully, we're in the last innings of that. You're right, we have -- depending on how you measure it, 300 to 350 basis points of excess CET1 capital depending on which test, which period and all that, and we have a real SLR capacity, too. So the question becomes, is there demand for that capital. And I can tell you that there is a lot of demand for that capital inside the 4 walls of our global firm. and clients wish us to do more, too. And that demand is coming from the investment banking client set. It's coming from the fixed income client set, in credit, and in macro, it's certainly coming from our equities client base in prime brokerage and in derivatives. It's coming from our wealth management client base. It is a long list of folks who would like to get more of our capital. But we are quite ruthless about how we are playing this game, which is to not squeeze out every quarter. We like the idea of there being a reasonable buffer. We like the idea of being able to, therefore, play through the cycle. We have been putting capital out to clients part of the upside of the last number of quarters is even with that, we've accreted additional capital, which then allows for more capital to be put forward on a running basis. We look at these ratios very closely. We like where we are. What I would say as a -- as a matter of discipline per the comments I made, Glenn, is, on the 1 hand, we believe strongly as a senior management team, that the next dollar of assets should go straight into feeding the integrated firm and fulfilling the mission of the strategy, which is to raise manage and allocate capital not to wander and to do that for our most durable important clients, whether they be individuals or institutions, that is the plan and demonstrably in this environment where clients are active. And clearly, there's some power of pricing extraction, we are doing that, and we will continue to do that. Full stop. It is the case that there are attractive geographies, new capabilities, new relationships that could be bolted on inorganically. And as you know, our firm very well, we've done the long life of 15 years of successful acquisitions, both from the post-crisis period all the way through equities last year. It's a lot of work. It's a lot of work to get it right. We think we're pretty good at it, but we have real humility around it. But are we seeing opportunities come across the transom that are interesting? We are. Are we potentially looking at stuff that could bolt on to the strategy? We are. But I would tell you right now, the bias continues to be to go organic. Now you can do both. You could -- because of the capital surplus, we could continue to expand organically and build something on. That is certainly achievable when you're 300-plus over and with the kind of SLR capacity that we have. But what I would tell you is we are very much focused in as a disciplined matter, reviewing candidates for bolt-on. Again, if they get us closer to clients, add clients, add some adjacent capabilities, expanding the geographies we like. But I think the most likely case, Glenn, over the next term with markets as active as they are and clients looking to access our capacity is that we will continue to thoughtfully and prudently put out capital to those clients. And we will see where the capital buffers go. But they also have to be contextualized against a much larger market cap. So yes, the buffers are nice, and they're important and they think they are -- we believe it's a differentiator with shareholders and with folks like you, which is very important. But to underscore, there is demand, both from clients and from some of the folks running businesses that they'd love to get more -- get some more of that firepower out to clients because clearly, we're in a moment of operating leverage.

We'll take our next question from Mike Mayo with Wells Fargo Securities.

Ted, so it's about a year ago when you said we were approaching the moment of Wow, W-O-W. And I guess we're there. I'm not sure, and I was looking for some context around this CapEx AI-driven super cycle. And you had spoken about this going over the course of several years. Can you put any numbers around this? I mean we see press reports of trillions and trillions of that? And how much has been raised, and how much do you expect to be raised or some meat on the bones, if you could.

Well, Mike, it's an excellent and important question. The short answer is it's really early. And I'm not sure we all together now because of the known unknown element of this. So that would be my short answer. My longer answer though, looking to try to give you some meat on the bone would be that AI CapEx expectations continue to move up. The forecast for 2026 on data center CapEx that was taken late last year around November of '25 was that $575 billion would be spent this year and it's coming in at about $850 billion. And that for 2027, the view was it would be around $700 billion, and now it's projected at $1.3 trillion. And 2028 could be at $1.2 trillion, our excellent research team, led by Kate Huberty, would observe that each major tech cycle has produced a tenfold increase in compute capacity. -- applied to AI that would suggest a progression from roughly the last transformation, I think we'd agree was cloud, roughly $1 trillion of cloud compute, x10 is $10 trillion of AI compute. So if you think about the numbers I rolled out before, the $575 million feels like $850 million, the $700 million feels like $1.2 trillion for next year and then maybe $1.2 trillion after that. you're basically looking at us being around 10% to 15% of the way through the investment cycle. And it's totally reasonable to say that there are going to be periods when technology or capital investment is ahead of adoption or that the fight for primacy and a piece of this chain will deliver poor allocated investment outcomes that we know, and that there will be technology and power bottlenecks and constraints. But I think we'd agree, Mike, that the market for intelligence for the digital meets human loop for real productivity enhancement is absolutely here. And so the question becomes is $10 trillion right? And how long to get there and how big is that number? And the answer there is it's a really large number, right? Global GDP is $120 trillion. As you know, S&P is $67 trillion. I looked this morning, Will share $75 trillion. But $10 trillion spent over 10 years in the search for additional intelligence which could bring an additional boost to aggregate productivity value. It's on the 1 hand, hard to imagine, but on the other hand, it could be imagined. That's something like $10 trillion spent over many years. Now our role, as you know, is to raise manage and allocate capital as adviser finance your allocator. What does Morgan Stanley have? We have global reach. We have sector specialty. We anticipate what's next through that advice. We have structural expertise. We have knowledge of private and public markets. We can match sources and uses of capital. We can steward the wealth creation. We also act as a principle to Sharon's earlier point with 20 million wealth clients given the size and scale of the business. But again, Mike, it's early and the numbers I just took a stab at could be dramatically altered by chip innovation, nation state involvement, supply chain, geography, long list. So 1 has to have a few million all of this, but you asked a direct question. And there's my humble attempt.

All right. Well, if you're going to do a doctoral dissertation I guess that's your thesis. So -- and I appreciate that. Your role -- the industry's role -- and let's just say the $10 trillion right just for how much involvement would you have in raising capital? Is it like 10%, 20%, 50%. These copies will have cash. They don't always need to raise debt or equity. What's your percentage role in capital raising, let's just use the $10 trillion number just as a an example?

Well, some of that capital is going to be raised point-to-point between players in the ecosystem. Obviously, that's not the best outcome for firms like ours. We want to intermediate that. It is clear that structuring capability and creativity around how to think about planning that kind of CapEx over many period -- many years in a given period, means that there's got to be a real trusted relationship between the private placement or public underwriter. . So I think the answer is that some of it can just be done naturally through cash flow generation of the leading hyperscalers, but some of it is going to have to be with fresh capital, whether it be debt or equity, and a bunch of it is going to have to be done very creatively to access the right investor base. So on that one, I would say we're really early. What we do know is that the capital is available. The aggregate capital between all the players in the private and sort of semi-public sector that can put this to work over the course of many years is there. So this is a question of how does this race play out between the various wood bees? Where is the need inside the chain? What geography is actually needing the capital at what period of time, which helps therefore to have a global business able to allocate outside the U.S. So on that one, I'd say I wouldn't attach a percentage to it, but I would say it's going to be meaningful.