Morgan Stanley (MS) Earnings Call Transcript & Summary

Next up very pleased to have Morgan Stanley from the company, Dan Simkowitz, Co-President. He's directly responsible to the Institutional Securities Group, that serves in the operating management committee and who really talked about the firm as good as anyone. Before we begin, I'll be remiss because lately, this discussion may include forward-looking statements, which reflect Morgan sanity management's current estimates and subject to risks and uncertainties that could cause actual results to differ materially. Morgan Stanley does not undertake to update the forward-looking statements. This discussion, which is copyrighted by Morgan Stanley, may not be duplicated or reproduced without their consent, is not an offer to buy any security.

Yes. Maybe we could start big picture on the current environment. You've been very focused on building the business for the long haul and solving for higher highs and higher lows. Investors are debating where we are across a number of important cycles, capital markets, sponsor activity, AI-related investments, broader economic growth. Just how are you calibrating where you are today and how the firm -- and how is that shaping the way you position the firm?

First of all, thank you. It's a great conference. It's a great time to have the conference and you and Venkat and all the rest were really great partners with you. Yes, I certainly felt going into and out of the second quarter, there was a pretty big debate around peak earnings, I think, especially around more capital markets-oriented companies. And so we feel strongly that there are a number of big thematics around the market, which I'll touch on, which all lead us to believe that '26, as an example, is not peak earnings at Morgan Stanley. Last 4 quarters, we're almost $80 billion in revenue. I think that puts us at least in our TAM, what we do, the largest financial advice firm in the world and sort of across all of our client segments, we see TAM growth and market share growth in every single one. And so in that context, we're not at peak. But I think -- let me talk a little bit about thematics. I'd say the first one is not really a thematic. It's something I'm passionate about. I've talked to you about it in the past. But -- and I ran strategy, I ran ESIM and then I ran capital markets before this. When we look around the world of financial services, we still think the #1 growth opportunity in financial services at scale from here is Morgan Stanley Wealth Management. So even though they're #1, the path forward from here is pretty extraordinary. And I think that's driven by -- at the client level. If we start at the client value level, we think we're the best in the world in delivering value to the client. At the same time, we've gone from 2.5 million households to over 20 million households. And so via the workplace, we have the client acquisition powerhouse that no one has. And so we not only have the best value once we get the client, our ability has really been transformed. And so that 2.5 million was 2019, transformed so that we can go grab the clients. And we can service them both digitally, all the way to the adviser and everything in between. And we still feel with the help of technology, with the help of the brand, with the help of the investment bank and all that goes with it, and I'm sure we'll talk a little bit about space and a few of these things that we're still in early innings of monetizing that growth, that move from 2.5 million to 20 million, but also the events of the summer and some of the IPO activity, we are -- we're definitely not focused on 20 million. We're focused on much higher in terms of relationships in that context. And what I would say is to win takes immense focus. So the entire -- the leadership team, and my day job is running ISG, and I guess, Andy, and -- Andy and I, we have nice jobs running strategy. But every day is -- the leadership team is focused on winning big and wealth management. So that's a comment on our own strategic positioning and where we are in the innings of monetization. I think the second one, I'm sure we'll get in more detail and others -- we'll talk about it in other sessions today. We're still of a view that we're relatively early in the M&A capital markets cycle. So in '22, '23, even parts of '24, you had activity in M&A and IPOs way off the GDP curve. So you have a lot of pent-up demand pent-up demand at the corporate level, pent-up demand at the private equity level, and I'll go into some more detail, I'm sure, in a second, but you've got confidence at the boardroom and you've got private equity with a monetization backlog that's big and a dry plotter that's big. And then in a market context, we certainly are from a risk perspective and an adviser perspective, we're super focused on macro, super focused on $100 oil, 5% 10-year, $40 billion of debt, a war, but at the reality of getting deals done, credit is in really good shape. Spreads are tight, equities are close to highs. We are way off that GDP curve, and there is a little bit of call-to-action around the regulatory environment, which around M&A that could change. So we think we're early to mid-innings on M&A and IPOs. And I think what's hopefully really evident, but I hope it's even more evident by the time I'm done in 34 minutes and 5 seconds is that, that M&A and IPO cycle cascades down through all of Morgan Stanley. And I think the third one, anything is big and topical is -- and we'll talk more about it is AI, we still think we're in relatively early to mid-innings around the AI financing element, which is really just a bridging of the timetable until in essence, the build is build ahead of all of the revenue, but not the revenue path and there is a lot of equity and there's a lot of credit finance, and we're in the middle of that with really high share. But I think, again, that, and Ted answered it on the earnings call, we still think we're also early in middle innings, and you've seen just enormous announcements NVIDIA, Broadcom, Google and then the model players out there in that perspective. So I think in those 3 thematics that are pretty important, I would say, early to middle and none of them feel really late. And in that context, we don't think we're at peak.

Okay, a lot in there that I want to try to unpack. Just maybe first, we dive a little deeper into the investment banking landscape. You talked about M&A and IPO activity. And just maybe just talk about investment banking pipelines, what you're hearing from strategic and sponsor clients.

Yes. I'll give you -- I'm going to use some anecdotes, try to make it feel a little alive here. But at the macro sort of statistics level, very, very robust pipelines. They're very robust across product. They're driven by the dynamics I mentioned. Credit is in pretty good shape, GDP growth, 6.7% nominal GDP growth in the United States in the quarter. real matters. But if you're a corporate, you got to keep up with nominal equity near highs. All of those combined to make the product set at very, very strong investment banking. We were -- we were talking about this a few minutes ago. So in that construct, we remain very constructive around the investment banking environment, and it can all get done this quarter. It can't all get done in the fourth quarter. This is an 18- to 24-month cycle because especially -- well, a, you go public, and then you got -- most companies, if they're private equity owned or if they're venture-owned there's a cascade of secondaries or block trades or trading lockup releases that continue. Those are all revenue events for us. But I would say most discretely is M&A, which is if your competitor does an M&A deal, then you're going to react. And so we saw it at Morgan Stanley when we were doing M&A, others would react to us, we would react to them. But extend that through the entirety of the economy, when someone does something strategic, it causes every boardroom in the ecosystem of that sector to think about activity and then it happens. And then also when you buy something, the Board often will challenge you, well, what should you get rid of. And so you've got to carry on around M&A and that activity in the context of there being a period where we're way off the trend line where, again, as we've talked about, 18, 24 months, it may even be longer. I just -- my lens and someway, I had to cut off the lens as an example. Let me give you a little anecdote also on private equity because it is not easy around these monetizations. And so you can have ups and downs. So we announced, I think it was last week, consolidation, precision products. This is a company that Warburg Pincus bought in 2011 for under $1 billion. They sold it last week, the GE Aerospace for $12.5 billion. They moved it from fund to fund. They did 7 acquisitions. They recapped it with Berkshire Partners. In the midst of COVID, this -- the price at this price unthinkable. By the way, GE Aerospace is up 6x in the last 5 years. So again, the drop of execution there, they had confidence. These guys were real operators on the asset. They had patients, 15 years of patients and then the trade finally comes together at that moment. When I was running capital markets, to a degree, I thought OPE is all around the buy and the sell. Clearly, if there's 15 years in the middle, there's a lot more than the buy in the cell. We've got this incredible mid-cap U.S. PE business inside of MSIM, run by a gentleman, I'm Aaron Sack, and they taught me, they showed me what happens in between they buy the companies from entrepreneurs and families and it's pretty remarkable what some of these companies can do but it's not a straight path. And in fact, it's not a straight path. We're seeing that actually MSIM. On another fund, we have an infrastructure fund, which has a really strong track record, but they've got 2 European assets. The fund has accrued a lot of unrealized carry but those assets are doing as well. And so you have a couple of hundred million dollars of unrealized carry reversal, which is about $0.05 of EPS because it's just not straight awards. So PE monetization. But I come back to my macro comment if credit is pretty good and equity prices are there and corporate confidence is pretty high. And there is a lot of dry powder in PE. It may take a couple of years here to clear some of the backlog, but it's there. And by our count, there are 1,500 private equity companies worth more than $1 billion in the U.S. And the PE partner doesn't get paid until they -- or most of the fund gets monetized. So there will be incentives over time. There will be maybe not as extreme, the Warburg examples in that context, but we're up to -- Leslie is going to kill me and these are now we're up to over 100 private equity sell-side mandates in our pipeline. And so that is at a record level. And so this stuff will come. It just takes time, and you're going to have ups and downs, like I mentioned.

Maybe shifting gears to markets. Second quarter equity results were exceptional, a big debate in terms of investors I talk to, whether it's cyclical, structural, particularly what's going on in Asia. Maybe just talk about the durability of the markets while it broadly and just maybe what opportunities you see? And then also just where are you investing and where do you see watcher opportunities across equities and FICC?

Yes. Again, our focus is certainly on the investment side around, and we'll talk I'm at some point around capital is just to be disciplined and steady investing in the businesses. What I would say again on markets, and this one you get challenged even more, but I was getting challenged. I was going to see a competitor at the Morgan Stanley Financials Conference in Europe in the spring of '25, are we at peak, peak markets as an example, even today, and I'll get to it, we don't think '26 is peak markets, and I'll get into some of the dynamics. What I will say, we certainly don't manage to and invest long term to a single quarter. Second quarter of this year was pretty exceptional in markets. And I think it's safe to say, 3Q is no 2Q. But if you think about the long-term dynamics which we think are very much intact. In equities, you still have a lot of equitization still in front of us. And so yes, Asia is doing really well, but the Japanese market came from almost nowhere 5 or 6 years ago. Korea is back. Taiwan is embedded in the technology trade Greater China is motivated around economic growth. International investors want to be a participant to that. India will have its day and not have it stay and back to having its day. And that's before we get to sort of equitization in some other parts of the market. There's policy potential in both Mexico and Brazil, where we have high market share and high margin for equities to get rejuvenated Middle East war goes away and we're back on a train in the Middle East around equities. And again, what we do is we bring the same technology, the same capabilities, the same research quality into all of these markets to everybody in this room. It's a little weird to talk to all of my clients out here in the room, but that's the mantra, and then we can allocate our resources to the highest sort of ROI to the client and a harvest -- highest ROI to us. And we can do it in cash form, we can do it in derivative form. In the future, we'll do an in tokenization form as an example, all those are intact. And I'll just bring up one sort of Japan round 2 possibility, but we hired the Finance Minister of Germany to run Germany for us. The German capital market is dramatically smaller than it should be against the economy. That's an optionality around equitization in front of us. In fixed income, we're big bulls I think that we've talked about it here before, around credit asset managers, some of them the credit side are represented in this room, credit asset managers are fueling the economy around the world, whether that's energy transition, whether that's AI, whether that's private equity. And if they're fueling it, they want to work with Morgan Stanley. We help originate those assets. We help finance those assets. We help raise the LP money for those assets. So we think that's a secular trend, risk management and fixed income. We went from 0 to 5% on inflation. We've gone from 0 to 5% on rates. We got commodities going all over the place. We've got currencies going all over the place. So our corporate clients our private equity clients, our private credit clients, they all want to hedge, and we want to do more of that business and we restructured the bank in that and I use the word bank in 2 ways. We now can put that derivative, put that risk management business inside the bank as an element. And what I would say is we've got balance sheet and capital in front of us to go invest in these businesses in ISG, IBD, the markets businesses, wealth management lending, well over $400 billion of deposits, but we also have capital capacity. But as you would expect, we're going to be steady and disciplined, not do it all in one quarter, but it is in front of us. And so when we think about a little bit of TAM in both equities and fixed income and a little bit of share in fixed income equities, along with the cycle element admittedly, in investment banking, we feel pretty good about the next couple of years in the ISG business, again, 3Q is no 2Q, and the volume in the ball is a little down in 3Q, certainly. But long term, we feel pretty good about these businesses. And I think ROE in ISG is really in mid-20s ROE. So we're able to deploy a pretty good returns versus our cost of capital.

Makes sense. Before we move on to management, maybe just one question that comes up a lot with investors. And I know Ted addressed it on the second quarter earnings call, just around CapEx or AI-related CapEx spend, just how are you thinking through sizing and the risk of the AI financing opportunity? Just how does Morgan Stanley CA opportunities for the business overall? So...

I mean part of it is we step back and watch what we're doing. We step back and we listened to what our clients are doing around deployment, and so we're very fortunate around this ecosystem. We had Sam Altman come to our Board in May of '22 before chatGPT was released. We're really good strategic partners with Anthropic, xAI, Gemini and Microsoft. So we get the best of. They are helping us to deploy right now in some size, size dramatically higher than we would have anticipated a year ago. And the ROI on that is pretty extraordinary. And so when we think about it, I'll break it in the groups in research, broadly defined. That could be the research team to help support you to come with an initiation or a recommendation. That's the research and investment banking. That's the research and investment management, that's the research that sits at the desktop of every sort of frontline client-driven person the productivity that we're getting out of that is pretty extraordinary in research alone. A number of companies covered rankings from the buy-side rankings as an example, all going up but the sort of cost for that not going up in the same context. Financial advisers, too, we've gone from $2.5 million to $20 million. So we've gone -- we're now at $8-plus trillion of wealth management and the adviser count is not growing anywhere near those levels. So we're getting ROI off that, we started on an AI path in wealth management productivity in late '22 off of that board session. So we're getting good ROI there at the research level. We're getting ROI and -- we're putting capital to work and we'll get ROI longer term in cyber. We're getting it in customer service. Going from 2.5 million households to 20 million households, we're going to be a physical customer service monster and AI already has allowed us to get that really efficient and the ability to deliver customer service back to that instance. And then we've got a lot of processing at Morgan Stanley, and some of it bleeds into research about operations, accounting, legal, software development, all of that is going to create a system which we're already seeing, which is the revenue per employee at Morgan Stanley -- the ROI is pretty dramatic. And so when you take that and you then take some of what we're seeing, what we're hearing from some of our clients in the asset management business, what we're hearing from some of our corporate clients, there is an immense demand build. So we're big TAM believers on the AI just from our own bottoms-up research and it's got to get built out. and that CapEx still early. And it's pretty clear that the credit market is going to innovate around that. We've been at the center there. We've got really high market share. The equity markets will support it. Google or Alphabet and SpaceX, raise circa over $150 billion of equity. I think the entirety of the equity spend in AI infrastructure, well, clearly, by the cycle is over, get to well over $1 trillion of equity, not just credit as an example. And we're very fortunate because we got lucky. I sat in the same spot in our conference in March, I interviewed Jensen, and I presented them at tombstone from the original deal. Again, NVIDIA, a $47 million IPO for Morgan Stanley like mind boggling in that context, but we're big believers that compute equals intelligence and then intelligence can drive both revenue and expense base in that respect. And we're in the boardroom with every chip layer, NVIDIA, Broadcom, Google, AMD, et cetera, all the hyperscalers, all the a whole number of the neo clouds that are being generated, but they're all reacting to demand from enterprises and consumers around the world, and that's the other thing that's incredible is that the tools that we're using at Morgan Stanley to drive that ROI, some of those same tools can be used in emerging market countries where they don't even have landline telephones. It's in the hand of that. That's very powerful. You have a lot of safety and governance and competition and open source that all of that is going to require compute and we're in the middle of that ecosystem, which is equal.

Interesting. Maybe turning to Wealth Management. Last year on this stage, you called Morgan Stanley Wealth Management, the #1 growth opportunity in all financial services. Did it today, too?

It did.