Morgan Stanley - Earnings Call - Q4 2020

Transcript

Speaker 0

Good morning. On behalf of Morgan Stanley, I will begin the call with the following disclaimer. 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. Please refer to our notices regarding forward looking statements and non GAAP measures that appear in the earnings release and strategic update.

Within the strategic update, certain reported information has been adjusted and is noted in the presentation. Few adjustments were made to provide a transparent and comparative view of our operating performance against such strategic objectives. The reconciliations of these non GAAP adjusted operating performance metrics are included in the notes to the presentation. On October 2, Morgan Stanley closed its acquisition of E*TRADE, which impacts period over period comparisons for the firm and wealth management. This presentation may not be duplicated or reproduced without our consent.

I will now turn the call over to Chairman and Chief Executive Officer, James Gorman.

Speaker 1

Thank you, operator. Good morning, everyone. Thank you for joining us, and I fully appreciate we're competing with a historic day here. So I particularly appreciate you listening in. We will be brisk as we always try to be.

Morgan Stanley delivered record results in 2020. We generated an ROTCE of 15.4%, while meaningfully driving our strategic vision forward. We successfully closed our acquisition Vtrade, received an upgrade from Moody's to A2, were placed on review for upgrade a second time and announced our intent to acquire Eaton Vance. Then last month, following the Federal Reserve's release of its second stress test result, we announced a $10,000,000,000 buyback program that we intend to execute in 2021. Our performance and competitive position serve as hard evidence that Morgan Stanley has reached an inflection point.

John will discuss the details of this year's performance in a moment, but first, let me walk you through our vision for the next decade and outlook focused on growth as outlined in our annual strategic update. This is something we've now done since, I believe, 2012. Let's turn to Slide three. Our strategy revolves around demonstrating stability in times of serious stress and delivering strong results when markets are active. 2020 for sure tested this thesis.

In a rapidly evolving operating environment, we responded to heightened volatility and supported open and functioning markets and client needs. We delivered record revenues of 48,000,000,000 while remaining disciplined in our risk management. Those revenues, by the way, are up from $34,000,000,000 in the time period 2010 through 2014. Turn to Slide number four. We enhanced our positioning in areas of secular growth with several strategic acquisitions.

In 2019, as you know, we advanced our workplace offering with the acquisition of Solim. Then in 02/2020, we took a leap forward when we announced our acquisitions of E*TRADE and Eaton Vance. Combining with E*TRADE positions us to reach clients in various stages of wealth accumulation in a scalable economic way. E*TRADE's technology, products and innovation mindset enhance our growth model. Further, E*TRADE serves the younger demographic who are on average over ten years younger than those we've historically served and who we can continue to service as their needs become increasingly complex.

With Eaton Vance, we will create a leading asset manager of scale. Eaton Vance brings new investment capabilities to our platform and leading positions in secular growth areas, particularly customization and sustainability. The deal will also expand our client reach, combining Emsim's robust international distribution with Eaton Vance's strong U. S. Distribution.

Please turn to Slide five. Having experienced periods of fragility, healing and stability, our firm is now at an inflection point. The next decade will be characterized by growth. Our growth drivers span across all three of our business segments. We'll focus on gaining market share, expanding and deepening our client relationships, realizing acquisition synergies and operating leverage, and finally, returning capital to our shareholders.

Please turn to Slide six. Scale in our interconnected businesses are the foundation for our first growth driver, gaining market share. Our integrated investment bank produced $26,000,000,000 in revenue on a pro form a basis. Our wealth and asset management platform is among the largest globally with over $5,000,000,000,000 in combined assets. Our breadth and depth of product offerings and services have enabled us to gain an increased share of client wallet, as you can see on Slide seven.

Our segments are working together to deliver holistic client coverage and are capturing asset and revenue growth. In 2020, International Securities generated over 300,000,000 of revenues from transactions through wealth management referrals. Wealth management in turn gained $20,000,000,000 of client assets and Investment Management saw $6,000,000,000 of net flows and commitments all from institutional securities referrals. Our second growth driver, expanding and deepening our client base, begins with institutional securities on slide eight. Our integrated investment bank benefits from our coordinated and client focused approach.

We built revenues meaningfully to a record $26,000,000,000 in 2020. The result of this growth, coupled with risk and expense discipline, was an operating margin of 35. Turn to Slide nine, which talks about our wealth management business. With the acquisition of B TRADE, we are now a top three player in each of the key channels in which investors manage their finances, and each presents unique growth opportunities. With our increased capabilities, we can deepen client relationships and provide more services to millions of households.

If we look at E*TRADE on Slide 10, you'll see the business had a remarkable year in 2020, setting new records across all material metrics. Unique backdrop dramatically accelerated digital adoption and meaningfully increased levels of engagement. Versus prior records, trading activity more than tripled and net new assets more than doubled. Deposits reached record levels. Extraordinary growth versus prior records is hard additional evidence that our decision to buy E*TRADE was indeed the right one.

On Slide 11, we illustrate our extraordinary accumulation of net new assets, bringing over $200,000,000,000 of assets this year new to our firm. That's 6% of beginning period assets on a pro form a basis. We've invested heavily over the years building our modern wealth strategy, enhancing our technology and building new businesses, and the addition of E*TRADE will only help. This year's net new asset growth was remarkable, and while net new assets tend to fluctuate obviously in any year, this is and this was likely at the high end of what is a likely range, we still expect net new assets to remain well above historic levels. On Slide 12, every year for the past decade, our revenues have increased.

And with E*TRADE, our daily revenues will be significantly higher in the future. In 2020, 65% of trading days saw revenues in excess of $70,000,000 That was compared to just 2% only four years ago. Let's talk about investment management on Slide 13. With our announcement to acquire Eaton Vance, we will create a premier global asset manager with 1,400,000,000,000.0 in assets under management. Since 2017, Morgan Stanley Investment Management has grown assets under management by over $360,000,000,000, and both MSIM and Eaton Vance have each individually attracted industry leading long term net flows over 20%.

We're really excited about this transaction and the integration planning is going well. Eaton Vance's businesses remain strong with increasing assets under management through the December. We expect to close the transaction no later than early in the second quarter. Slide 14 shows the power of our wealth and investment management platforms when taken together. On a pro form a basis, we will have over $5,000,000,000,000 in client assets, creating further revenue opportunities.

Our efforts to enhance and build out these businesses have led to strong growth. Pro form a client assets are more than double the amount we oversaw in 2014. Consistent with our predominantly advice driven business model, revenue on these assets, expressed in basis points on the right hand side of the page, is materially higher than our three larger competitors. Now let's turn to Slide 15, which includes an update on the acquisition synergies we expect to realize. The cost synergies we've previously outlined are definitely on track.

And on the funding side, with the additional liquidity and deposits we've added since the announcement, we expect £100,000,000 more in synergies than originally projected. We also expect to capture significant incremental revenue opportunities through these deals and they are outlined in a little bit of detail down the right hand side of this slide. Turning to 16. Expense discipline is a fundamental tenet of the way we manage Morgan Stanley and has enhanced record pretax profits, and you see our efficiency ratio has come down from twenty fourteen at 79% to just on 70% this past year, and obviously, that has driven the pretax profit expansion. So our fifth growth driver is highlighted on Page 17.

Over the past several years, we've consistently improved our returns despite holding material excess capital. We're excited about the opportunity to return that excess to shareholders and announced a $10,000,000,000 buyback program for this year. We restarted our share repurchase program this month and plan to increase our dividend when restrictions are lifted by the Federal Reserve. I'll now conclude with our updated strategic objectives, which are shown on Slide 18. While this year will be a transition year as we absorb two major acquisitions, our focus remains on positioning Morgan Stanley to achieve our long term strategic targets.

Our long term aspiration and, frankly, our belief is that Wealth Management will generate a margin over 30%. By 2022, and in that period, we expect to range from 26% to 30% as we continue to work through the e Trade integration. We also plan to invest in many aspects of our business for growth, but we'll balance this with discipline. In so doing, we're keeping our long term efficiency ratio below 70% and within the range 69% to 72% over the next two years. Finally, our long term aspiration for RoTCE is indeed to exceed 17%.

How quickly that occurs depends not only on our business performance, but also, of course, on capital distribution. In the meantime, we raised our two year target to the range of 14% to 16%. As always, these targets are subject to major moves in the economic outlook and any big changes in the political and regulatory environment. However, based on what we see now, we fully expect to achieve these as stated. That concludes the strategic part of the conversation.

I'll now turn the call over to John, who's going to go through the fourth quarter and annual results, and together we look forward to taking your questions. Thank you.

Speaker 2

Thank you and good morning. The firm produced revenues of $48,000,000,000 in 2020, records both with and without E*TRADE. We saw continued momentum into the fourth quarter with revenues of $13,600,000,000 Dynamic markets, incredible volatility and consistent client engagement across all three businesses drove results. Excluding E*TRADE integration related expenses, our ROTCE was 18.715.4% for the fourth quarter and full year respectively, and EPS was 1 point dollars 9 and $6.58 respectively. We continued to deliver on operating leverage in 2020 led by institutional securities.

Non compensation expenses for the year increased 15% driven by increased volume related expenses and higher credit provisions. These increases were partially offset by a decrease in marketing and business development. Compensation expenses increased 11% on a full year basis on higher revenues. Revenues for the full year were up 16% resulting in efficiency ratio of 70 down from 73 in 20 Now to the businesses. In institutional securities, our business achieved various records throughout the full year.

Our revenues were $26,000,000,000 25% higher than our previous best year. While all regions contributed to the results, growth in Asia was a standout. Revenues were $7,000,000,000 in the quarter, marking the strongest fourth quarter in more than ten years. The traditional seasonal slowdown was not experienced and clients remained active up until the week of Christmas. Investment banking revenues were $7,200,000,000 for the full year, 26% higher than 2019 driven by record underwriting revenues, particularly equity.

In response to the COVID environment, the year saw a rolling opening of markets beginning with debt and rescue financings, next with equity, and very recently, leveraged loans and corporate m and a financing. Quarterly results were the strongest in over a decade, generating revenues of $2,300,000,000, 46% higher versus the prior year, driven by record underwriting and advisory results, with each region contributing revenues well above average run rate. Overall, the investment banking pipeline continues to be healthy across products. The pace of M and A announcements has accelerated and client and boardroom dialogue is active. Equity issuance remains robust with a strong backlog from IPOs driven by leadership in health care and technology and follow on activity notably in The Americas and Asia.

After a record breaking year in investment grade and high yield debt markets, strategic activity should support increased acquisition related financing. In equity sales and trading, we remain number one globally for the seventh consecutive year. Full year revenues of $9,800,000,000 increased 22% from the prior period. This represents the strongest annual result in over a decade. This year's market backdrop was unprecedented and the strong performance across products reflected heightened client activity amidst elevated volatility and a double digit increase in global market volume.

Fourth quarter revenues of $2,500,000,000 and full year results were robust across products and regions with the biggest growth drivers from derivatives and Asia. Fixed income sales and trading revenues were the highest in over a decade, increasing 59% to $8,800,000,000 for the year. Clients were highly engaged in a year marked by higher volumes and volatility, active capital markets, and wider bid ask spreads. Fourth quarter revenues of $1,700,000,000 increased 31% year over year. Results in the quarter and full year were led by credit and foreign exchange.

For the full year, Asia showed particular strength. Across other sales and trading and other revenues, results this quarter improved versus the prior year. The increase primarily reflected lower provisions for loan losses and movements related to deferred cash compensation plan. Our ISG credit portfolio continues to perform well. Over 90% of our ISG loans and commitments are investment grade or secured.

ISG loans and lending commitments are up $9,000,000,000 this quarter as we continue to support our clients, while our funded ratio on our corporate book has continued to decline and is now close to pre pandemic levels. After building our allowance for loan losses throughout the first three quarters, it was essentially flat in q four. ISG provisions were $14,000,000, while net charge offs were approximately $40,000,000, primarily related to one commercial real estate loan secured by a hotel. While risk remains concentrated in our vulnerable sector portfolio, the portfolio continues to decline. We derisked this portfolio by close to $2,000,000,000 this quarter, and it now represents less than 10% of our portfolio.

Over 90% of this portfolio, like our entire ISG portfolio, is either investment grade or secured. Our reserve coverage remains stable and forbearance for the ISG portfolio continues Turning to Wealth Management. On October 2, we closed our acquisition of E*TRADE. This quarter's results include the combined business financials with virtually all of the E*TRADE revenues in transactional and NII.

Making comparisons to prior periods are difficult, so I will focus my comments on Q4 and how we are positioned for 2021. We have also included some new disclosure in the supplement on Page seven regarding the combined business. In the quarter, revenues were $5,700,000,000 Excluding integration related expenses of $231,000,000 the PBT margin was 22.9% and full year margin was 24.2%. The underlying drivers of this business remain extremely strong, reflecting comprehensive capabilities and strong client engagement and activity. We saw record fee based flows of $77,000,000,000 for the year and fee based assets are now $1,500,000,000,000 We added $18,000,000,000 of loans or 22% growth in 2020 and loans are nearly $100,000,000,000 Asset quality continues to be excellent and loans in forbearance are under $400,000,000 down from approximately 2,000,000,000 at the end of Q1.

Deposits continue to grow and were supplemented by $54,000,000,000 from E*TRADE and are at $3.00 6,000,000,000. The network generated net new assets of 66,000,000,000 in the quarter and on a pro form a basis over 200,000,000,000 in the year. We remain a destination of choice for advisers and continue to add strong teams and retain our productive advisers. These underlying fundamentals and the realization of synergies position us well for the future. In the quarter, asset management fees were $3,000,000,000 benefiting from higher asset levels and $24,000,000,000 of fee based flows.

Transaction volumes remained elevated and revenues were strong even after excluding approximately $350,000,000 of DCP as clients were active across both adviser led and self directed channels. Net interest income was $1,200,000,000 in the quarter and benefited from the incremental deposits and investment portfolio that came with E*TRADE. This is a reasonable exit rate to inform 2021 and includes purchase accounting adjustments associated with premium amortization, which is approximately $50,000,000 a quarter. This year, NII will grow due to the realization of our funding synergies and lending growth with limited impact from rates. On funding synergies, we onboarded approximately $4,000,000,000 of deposits that were previously swept off E*TRADE's balance sheet in the back half of Q4, and we expect to onboard approximately $20,000,000,000 in Q1.

As we invest these deposits and shed higher cost wholesale funding, we would expect to realize 80% of our revised higher funding benefits in NII in 2021 with the full impact of these actions reflected in q two. On lending, we continue to see strong lending demand and expect approximately 10% loan growth to benefit NII. Lastly, on rates, we do not anticipate any change to policy rates in the near term. However, we will benefit from the eventual normalization of rates. The acquisition of E*TRADE increases our U.

S. Bank's sensitivity to rates and a 100 basis point increase in rates would now contribute an estimated $1,500,000,000 of additional NII compared to the estimated $1,000,000,000 we disclosed in our Q prior to completing the acquisition. We continue to expect $800,000,000 of integration costs over three years with approximately 40% to be realized this year. Following the close of the transaction, we took actions to realize the $400,000,000 of cost synergies we outlined. Our efforts have been aimed at limiting disruption to the customer experience during the integration and will be measured.

2021, we will be exiting the E*TRADE branches, consolidating our bank entities and integrating HR and finance systems, and we would expect to realize approximately 25% of the cost synergies during the year. Investment management reported revenues of $1,100,000,000 in the fourth quarter, representing the second highest quarterly level in over a decade. For the full year, revenues were $3,700,000,000 in line with the prior period, but reflecting a greater contribution from more durable management fee revenues and less from carried interest. Total AUM rose to a record high of $781,000,000,000 of which long term AUM was also a record of $493,000,000,000 Long term net flows were $8,500,000,000 in the quarter. Our global equity strategies continue to deliver strong performance and attract positive flows.

Total net flows were $25,000,000,000 The global nature of our platform remains an advantage as inflows across regions led to record long term net flows of $41,000,000,000 for the year and an annual long term growth rate of 12%. We are excited about the transaction with Eaton Vance. Across businesses and strategies, Eaton Vance's assets under management increased by over $65,000,000,000 since October. The overall tone of the business is strong and their momentum continues. Turning to the balance sheet.

Total spot assets were $1,100,000,000,000 and standardized RWAs increased to $454,000,000,000 reflecting high levels of client activity and the closing of E*TRADE. Our standardized CET1 ratio was flat to the prior quarter at 17.4%. Our tax rates were twenty three percent and twenty two point five percent for the quarter and full year respectively. We expect our 2021 tax rate to be in and around 23%, which will exhibit some quarter to quarter volatility. We are pleased with our strong performance this year.

Our franchise is better positioned for growth than we have been in well over a decade. We entered 2021 with strong asset levels, healthy pipelines, engaged institutional and retail clients, and an extremely strong brand. We're confident in our ability to deliver on our objectives. With that, we will now open the line to questions.

Speaker 0

Thank you. Our first question comes from Brennan Hawken with UBS. Your line is now open.

Speaker 3

Good morning. Thanks for taking my questions. Just wanted to start on the net new asset disclosure that you guys provided here this quarter for the first time. Thanks for that. It's very, very helpful.

It seems as though the net new asset growth, the organic growth profile and the wealth business accelerated here in 2020. What do you think is driving that? Is that a, capturing a greater wallet share of existing clients? Is that an expansion of the client base? And it it seems, as though the, metric excludes fees and commissions.

Is do you have an estimate of what that would mean for a headwind to that growth rate? Because I believe most of the other competitors disclose it net of those fees. So just try wanna try and make it like for like. Thank you.

Speaker 1

Well, let let me me start, and John will talk about some of the disclosure stuff. And and as as you point out, Brennan, it's the first time I think we've done it in many, many years. And we just thought it was time to reflect the fact that the business has unbelievable growth. I mean, we hear about a lot of competitors and, you know, a lot of digital players with, frankly, you know, in absolute dollars, modest assets, and we were able to bring in 200,000,000,000 in a year. Now part of that is, obviously, it's pro form a basis.

Part of that is, you know, if you look at what E*TRADE is doing, they're doing great. Part of it is, you know, if you're in net attrition of financial advisers, you will be in net attrition of assets on those advisers' books. For the first time in twenty plus years, I've been doing this. We're not in net attrition, which is interesting given the IFA channels continue to grow, but they're not growing from us. So we're keeping assets of our advisers.

We're gaining assets from new advisers through the workplace initiatives through Solium and E*TRADE. We're gaining assets from the conversion and keeping of those assets at a higher rate than we were. So, you know, there it's a it's a whole variety of things that have been done within the wealth management business to look for ways to continue to accelerate our client asset growth at the firm, and it's it's no single thing. I do think 6%, you know, that's a as I've used the expression before, it's a sporty number, but it's a long way from the 2% or the 4% we're operating at. And I think it will be elevated.

I don't I don't think we're gonna go back to 2% and but maybe 6%, you know, that that feels high. Certainly, it's best in class what the street offers. But maybe John has more on the disclosures.

Speaker 2

Yeah. So the two critical exposures are net net new assets and then the fee based flows. And you can see from the footnotes on the net new assets, which is a concept of the assets that we bring into the the organization, net of the outflows that does not exclude the fees. You can figure see the fees on the asset baseline, in the disclosure about 10 or $11,000,000,000. The fee based flows do, exclude that as it as it a function about how much fee based assets that we have are that are generating a a return on those asset base.

Hopefully, clarifies the question. And I think for us, the net new assets given the different business models across the the the the the different business models, it reflects most people don't have the the level of asset based fees that we do, and we thought it was appropriate to disclose it that way.

Speaker 3

Yeah. It's no. That's great. That's very helpful clarification, and and agree. The the growth rate looks robust.

I I mean, you you regularly hear about how, you know, the traditional wealth management firms are just the providers of share, and and certainly a mid single digit, yeah, growth rate does not suggest you're providing exceeding share to anybody. So, agreed there. And then for my follow-up, sort of a weighted question, one of the things that that a lot of people and myself included think is is one of the more exciting opportunities for growth in the wealth business is the stock plan business where you really just have such a strong position competitively. And, you know, you flag a lot of that in the deck, which is really helpful. You talk about the retention opportunity of the 15 plus percent, which is what E*TRADE has pointed to historically.

Are you what's the plan to integrate the the stock plan platforms? How long do you think that might take? And is it right when we think about the opportunity set, you know, you got you've got the $435,000,000,000 of unvested assets. My guess is that's the opportunity set. About how much of that tends to vest per year?

Is it about a quarter, you know, or 30%? And it's right to think about that as evergreen. Right? Like, invest, and then they're replaced with new awards in subsequent year. Sorry about the multipart question, but I think it's an important So

Speaker 2

we have we have integrated the sales team. We're going to market to our corporate clients with a consolidated sales effort. As you would expect, we're gonna be very mindful of the integration of these platforms. I would, highlight that they were certain certainly different, different emphasis in terms of big and, big companies, small companies, private companies, and we will converge those platforms over time and upgrade them, both, to sort of bring the best of both of those platforms together. You're right.

The existing opportunity is the 435,000,000,000 of unvested assets and roughly 5,000,000 participants. Our expectation is we will continue to grow the number of corporate relationships we have and, therefore, the number of participants, and we've seen good closure rates since announcing both the Solium transaction and the E Trade transaction. So we feel very good about the momentum of the number of new corporate relationships we have in that channel. And then lastly, on the four thirty five, give or take 25 or 30% of that best each year. I think that's a pretax number.

So clearly, there's tax impacting that. But as you say, our expectation is that number will continue to grow as we bring on more and more corporate relationships. Thanks for the color.

Speaker 0

Thank you. Our next question comes from Mike Mayo with Wells Fargo Securities. Your line is now open.

Speaker 4

Hi. Well, you clearly gained share this quarter of the year in capital markets and trading. Aside from your gaining share, what is your outlook for the industry wallet? As you know, it it shrunk in trading for a decade, and now it it may or may not have turned more permanently. So, you know, some banks say we're planning for 2019 levels for trading.

Some think it can maintain this pace. Some say it's in between. Kinda where do you fall out and why? What do you see as the structural changes?

Speaker 1

Mike, it's it's it's it's very difficult to say. I mean, just look at what we've been through in the last twelve months and look at activity in the first quarter versus the second quarter, and then, you know, where the year finished. So clearly, there is a lot of activity in the market. There is enormous fiscal stimulus. Our rates remain very low.

I think the global economies are recovering, and I think the vaccine, you know, if we get in The US to a million doses a day for the next hundred and fifty days would be spectacular. So there are a lot of there are a lot of industries that are continuing to look at at share issuance, new IPOs coming, recapitalizations of different kinds raising debt. So there's a lot of market activity, I think, in the in the reasonable near term. Whether it it is at the level of 2,020, I mean, you'd you'd have to bet against that just on on pure odds, less than 50%. I think, you know but but who knows?

I mean, the year has started off strong, and, you know, we we count them one day at a time. And, you know, the year started off strong, the markets were active, the economies are recovering globally. Your administration has come in. It looks like we had a peaceful transition hopefully today. So, you know, I'm I'm I'm quite optimistic about it.

I can't, you know, I can't put a pin to say exactly where we're gonna end up, but, you know, we're clearly gaining share. Our fixed income franchise has well recovered from the 2015 restructuring and 2012 lows. Equities bounced, you know, and and retained their number one spot again in in what has been a a growing equity fee pool. And, you know, clearly, with the banking revenues above 2,000,000,000 for the quarter, there's a lot of m and a activity and a lot of underwriting activity. So I'm pretty optimistic.

I mean, I I can't put an exact number on it, but I certainly don't feel like we're going to make a major backstep at all here.

Speaker 4

On that last comment, in terms of backlogs, are they up quarter over quarter, near record, down?

Speaker 2

Yeah. Generally, I I think from my comments, Mike, we describe them as as healthy, across, all products and all regions with, IPOs, as a standout. As I said, m and a activity, dialogues, very active, pipeline very healthy. So James said, a very constructive start to the the year with very healthy pipeline.

Speaker 4

Alright. Thank you.

Speaker 0

Thank you. Our next question comes from Christian Bolu with Autonomous. Your line is now open.

Speaker 5

Thank you and good morning, James and John. Maybe back on Wealth Management organic growth and again echo the earlier comments, really appreciate the new information. But James, you seem to be really playing down the 6% this year as not sustainable. So I guess, you just maybe help us understand what exactly was elevated in 2020? Was just overall industry was elevated?

Was there something more specific to Morgan Stanley, like higher recruiting? I'm just trying to understand why you think it was it elevated. And then maybe more importantly, just looking forward, give us a sense of what you think the business can do sustainably, a sort of range for organic growth that you would expect for the business. Thank you.

Speaker 1

Christian, you probably know me well enough by now to know I'm not going to project a trend line based upon one point of data. Listen, we've had a decade of being growing net new assets around 2%, 3% and then 3%, 4%. Clearly, E*TRADE has fast growing asset growth capability that adds enormously. I think net positive financial adviser our actual numbers of financial advisers went up this quarter, I think, the first time in two years. So you know, I I just I just trend to the conservative until I see more data.

And, you know, do I think it's gonna fall back to 2%? Not at all. But, you know, if we could lock in 6% for the next ten years, and we'd be bringing you know, we're bringing 200,000,000,000 a year. I read about a lot of these online players who've got $20,000,000,000 in total, and we bring in $20,000,000,000 every five weeks. So we're effectively creating these companies every five weeks.

Now if it's gonna be four and a half percent, five and a half percent, I I I don't know. My just my my instinct is 6% on 4,000,000,000,000 is a lot of assets to bring in. And I think it's doable. I'm not saying it's not doable, but I'm not projecting that, and I wouldn't wanna guide you to that. On the other hand, I don't think we're going back to where we I think we've got a different kind of company.

The reason this the title of this presentation is called, Morgan Stanley, an inflection point, the next decade of growth is if there's one message I would like people to take away from it is we are in the growth phase of this company for the next decade. We've been in, as we said, from the crisis forward, sort of fragility, then healing, then stability, and we are unambiguously in a growth phase. We have the capital to invest in our businesses. We're gaining share across our businesses. We've got scale in the key businesses.

We've invested in a lot of technology improvements to the businesses to increase their efficiency. And I believe we're in a growth phase in this company, and one of those indicators of growth will be very strong net new asset growth.

Speaker 5

Fair enough. Maybe switching over to capital. With the stock now trading well above book value, how are you thinking about prioritizing, you know, buybacks versus dividends? You know, I I think in the past, you have spoken to an aspirational target of paying out all of wealth and asset management earnings as as a dividend. So maybe just some updated thoughts around how you're thinking about that prospect, and again, buyback versus dividend conversation here.

Speaker 1

Well, the the the third leg to that conversation, very important leg, is investing in the business. You know, if we if we're gonna grow let's pretend we're growing, I don't know, net earnings of 10,000,000,000, and we're paying out dividends at the moment of about 2 and a half billion. So if we're doing a buyback this year of 10,000,000,000, we're only eating into our buffer 2 and a half billion a year. We're we're not gonna chip away at it much. We're at 78.4, and I think the our threshold is thirteen two.

I'm looking, John. Yep. Thirteen two. Let's assume we carry, what, a fifty hundred basis point buffer on our on our SCB. So let's assume we we wanna run at fourteen two.

We're at seventeen four. We've clearly got We've clearly got some room to move. Obviously, we've got the Eaton Vance move coming in, which affects those numbers about 100 basis points. So as I think about it, I've described this before, half of our company has that sort of yield component to it, very stable revenues and earnings, and we could clearly move the dividend higher and will once the regulators permit that. We have clearly, we have the capacity.

On the book value, yes, I would actually preferred to be buying stock last year when we were at $27. Unfortunately, we couldn't do that. But I I'm not I'm not troubled by buying a little over book value, and I don't, you know, I don't think we can be too cute. We have, well, we have one point eight one point nine shares outstanding, obviously, through the issuance from the deal. So I'd like to get us back to 1,000,000,000 point type range over the next few years.

And we've got this capital. We don't there aren't enough things we can invest, you know, ten, fifteen b in a year in the business and generate the kinds of returns we expect to generate. So it's it's a mix of all three, but clearly, we'd like to see more action on the dividend. Clearly, we're going to be aggressively buying back and consistently. And clearly, we have capacity to increase our investment in the core businesses.

Speaker 5

I had less problem. Thank you.

Speaker 0

Thank you. Our next question comes from Steven Chubak with Wolfe Research. Your line is now open. Your line is muted.

Speaker 6

Sorry. Can you hear me? My apologies for I just wanted to start off with a question on funding and NII. I appreciate the disclosure on funding optimization and the drivers of some of the improved synergies from the initial guidance. Now curious how much room there is to cut deposit costs further.

It looks like your wealth management deposit costs of 24 bps. It's just running well above peers. And just a clarifying question regarding the NII guidance, Sean. Is the growth you're contemplating in 2021, is that versus the 4Q twenty twenty base, which reflects the full impact of the deal? Or was that a guide versus full year 2020?

Speaker 2

I'll do the first the last question first, which is that it was based on the fourth quarter. So it's sort of using a fourth quarter annualized as the right base to be thinking about. But, again, we did have the full impact of both, the transaction for the full quarter as well as the, the amortization of the premium, from the investment portfolio. You you're right. Our deposit costs were, 24 basis points, which were down 14 basis points for the, for the quarter.

We also saw an improvement, as you know, BDP or what we call our sweep deposits, obviously, at a lower rate, basically at one basis points relative to our wholesale that costs about a 100 basis points. So part of the funding synergies is really coming from replacing those wholesale funding, CDs and other, wholesale funding with the off balance sheet deposits that we're gonna bring back on balance sheet. So we started the quarter, I think, about 65% of our funding in the deposits were sweep. We're now at 75%. We would expect about 15,000,000,000 to $20,000,000,000 of CD roll off.

That's obviously based on the maturities. So we continue to think that we can drive, our average deposit cost lower as we continue to replace the wholesale with the, with the incremental deposits from each.

Speaker 6

No. That's great. And just for my follow-up, big picture question, James, if you'll indulge me. I was hoping you could help us reconcile versus your prior target of 15% to 17%, RoTE, Now what rate market and capital assumptions are underpinning your 17% plus ambition? And I guess if we start to think about the inflection in growth that you cited and maybe even some tailwinds from normalization, just higher rates, which should be more than 100 basis point benefit, greater realization of revenue synergy opportunities, further progress on the SCB.

The direction of travel there has been quite favorable. Now the 17% plus longer term still feels somewhat conservative. I'm wondering from your perspective, do you see even in upper teens or a 20% plus RoTE as a reasonable long term ambition just given the significant transformation that's underway?

Speaker 1

You're you're beginning to replace Mike Mayo. He usually asks me that. What what about the plus? What's wrong with plus? Plus means more.

Speaker 6

You can drive a truck through that range.

Speaker 1

Yeah. You know, listen. I I wouldn't put I wouldn't try and model too much science into this. This is an expression of our aspiration. And as I said, also happens to be our belief.

It's not just Disneyland. We're we we we believe we will deliver these numbers. And for some of the reasons you listed, rates being one of them, obviously, has a huge impact on this firm. But look at where we finished, you know, last year and and what our numbers were. These obviously become very plausible.

Whether it should be 17 plus 18 plus 19 plus I you know, listen. If if we'd said to you three years ago, our aspiration was to have a 17 plus ROTC, you would have thought we're, you know, we're off the planet. So I'm I'm very comfortable with these numbers. If if we could achieve this, then obviously, the stocks should be trading much higher than it is today. And embedded in it, we do we do do some math.

We start with our budget. We start with our operating performance in 02/1920. We look at our budget projections. We do sensitivities around revenues. We understand what our comp and non comp look like over the next couple of years, whether we have major litigation exposures or not, the integration costs that have got to work through and then the synergies of the various businesses.

And then we, of course, look at the capital question, which I discussed earlier, I think, with Christian on buyback dividend or reinvestment in the business and what our RWA growth is going to be in ISG and how that affects the CET1. And you put all of that in a big big washing machine, and now it spits a number with a plus on it.

Speaker 0

Thank you. Our next question comes from Glenn Schorr with Evercore. Your line is now open.

Speaker 7

Thanks very much. James, I wonder if we can look at slide 14 and talk to something that comes up a bunch. You show your 5,400,000,000,000.0 pro form a. If you look at that fee rate, there's only one other peer on that top 10 that that that has a fee rate equal or better than yours. And I think it's a good thing, but this comes up plenty.

So I'd love to hear you talk about it. And and the sustainability of that fee rate, I don't see price pressure in the wealth management business, but people ask on it all the time. Just curious to get your thought process over the coming years and what's kind of embedded in those your your medium and long term targets implicitly with that. Thanks.

Speaker 1

I I don't think you're gonna see price compression of any significance across the wealth or asset management platforms. It's it's really a function, Glenn, of of asset type. So for example, the wealthy of the clients, if you have clients with a $100,000,000, they're not paying 58 basis points. You know, they're probably paying, I don't know, close to 10 basis points or something. A client with a million dollars is paying close to a 100 basis points.

So it depends a little bit on the business mix as to what revenue you generate on those assets. Obviously, you know, some of the E*TRADE active trading clients have got higher velocity on them. They're going to have higher basis point numbers than a very passive position in restricted stock. So a little bit of that is you've got to sort of peel away what's going on under the numbers. But your broader question, do I see price compression across wealth management?

No, I don't. In fact, we'll probably generate more revenue as we build up the banking and, you know, the banking lending and deposit product. On the asset management side, I mean, listen, if you're driving performance in the active side, you can generate you can hold your fees as they are. It's the the underperformers lose their assets quicker than they lose their fees. So I'm not I'm not terribly bothered about it.

And if you knew the names of the three above it, you'd probably guess them. There's a reason. You know, they're more index oriented. They're it's a different business model. Now we generate a higher revenue per dollar of asset, but we pay a higher revenue comp structure per dollar of asset.

So it's not exactly, you know, a thirty, forty, 50 basis point win as as you know, obviously.

Speaker 7

Understood. Understood. Wanted to hear your words. Thanks. And then maybe if we could just bridge the gap.

I think I know the answer to this too, but this is a pretty strong environment. You consolidate. We trade the the adjusted margin in wealth management of 24%. Of the medium term target of two year target of 26 to 30, how do we get inside the range without the help of rates? Because the Fed theoretically is on hold for a few years.

Speaker 1

Well, the the, yeah, the business is growing. We had some, you know, we had some additional expenses this year. For example, we made more contributions to our overall, philanthropic and charitable efforts given what's going on with COVID. That cost is distributed across the businesses. We paid a onetime bonus to all employees earning less than, I think, dollars 150,000 who don't receive bonuses.

Given the headcount in Wealth Management, that disproportionately affects that business. So there's always a few things going on that you know, a a point of margin is worth about 45,000,000 a quarter, I think, if I'm doing my maths right, you know, 80,000,000,000, 180,000,000. So something something like that. So it's not small numbers can move it around a point or two, but I think with increased growth, increased efficiency, better conversion of the assets, more asset flows in generating this average 58 basis points is how you you bounce between the sort of 20, what did we say, 24 to 24 to 30 range. 20.

26 to 30. I'm sorry. 26 to 30. And, you know, depending on the environment, I mean, we've started the year strong. That probably helps a point if that held up.

There you go.

Speaker 0

Thank you. Our next question comes from Devin Ryan with JMP Securities. Your line is now open.

Speaker 8

Thanks. Good morning. First question, just want to come back to some of the questions on organic growth. And I like the Slide nine that shows the $8,000,000,000,000 in assets held away, essentially making the point that you already have the customer reach. And so just trying to think about whether you view kind of all of that as potential wallet that you can go after.

Or said another way, are there any products that maybe you don't line up with in that $8,000,000,000,000 And as the firm becomes more connected through technology, which I think you guys have done a great job over the past couple of years, how do you think about your strategies to connect with a greater percentage of that, call it $8,000,000,000,000? I know every business has a little bit of a different, you know, call it sales process, but but are there new strategies or or even financial incentives that you can think about to really accelerate, you know, the penetration into that?

Speaker 2

Sure. I'll that a crack. And, you know, we're not naive. We don't expect to have a 100 of the wallet of all of our clients. So clearly, we don't expect them to to bring in all 8,000,000,000,000 over time, but there's significant overlap as we as as you note in these channels and in in these in these wealth figures.

We continue, as you saw, through the net new assets, as as James mentioned. A lot of that was from existing customers consolidating their assets. A lot of that is being driven by the the technology that we've made and the investments that we've made in the platform that help our advisers, advise their clients. And we've seen people, bring in bring in more assets. So I think if you think about the opportunity set, I think we tried to line it up pretty, well, through the different channels on the workplace.

I think it's really around retaining cash and retaining vested assets, and then over time growing the relationships. Self directed at a minimum. We've seen people leaving, the E Trade platform as their needs got more sophisticated and they needed advice. We're clearly gonna capture that top part of the funnel, with our FA's, with the the FA led model that we have. So, again, a real opportunity, and I like the way you described it.

Just look at the numbers, two and a half million households, almost 5,000,000 participants, 6,700,000 households. The breadth and reach of the platform, is quite large, there is some overlap there, but it's still over 10,000,000, clients that we can provide, incremental services or bring in more assets from. In terms of activity, as you can imagine, we are collecting, and analyzing, data and working with our clients to try to figure out, incremental needs and services and products that they need. With the E Trade acquisition, we bring on incremental digital capabilities. And as you can imagine, this year, we're spending the year trying to figure out and piloting ways that we can work better and more efficiently with our clients.

We're gonna pilot around lead generation. We've defined the adviser group who's gonna work with new clients. We've got scoring systems. We've got artificial intelligence trying to help predict what people are gonna want, need, and next best action. So it's really a culmination of all the investments that we made plus the digital from wealth, and we're gonna use this year to try to get a very good understanding, of our client base with these pilots and how we can provide incremental service going forward.

Speaker 8

Okay. Terrific. Thanks, John. Just a follow-up here just on kind of the the core expense structure and and trying to think about, you know, some of the the benefits of 2020 with the pandemic that were deflationary, it would seem that as some of those benefits roll off, there's some inflationary aspects into 2021 kind of on a core basis. But longer term, obviously, I think we've learned a lot about the businesses through the past twelve months and opportunities potentially to drive some longer term savings or maybe core deflation in the expense structure.

So I'm just love to get some thoughts around how you guys are thinking about areas or opportunities to maybe drive more expenses out of the system based on what you've learned over the last twelve months.

Speaker 2

Yeah. We I I would say we're still learning. Crisis is not over. We clearly are hopeful around the rollout of the of the vaccine. I think there are gonna be some takeaways around some of

Speaker 7

the

Speaker 2

digital digital client experiences that we've been able to do, the work from home that we've been able to do, but I think it's just it's a little early to start making those decisions. Let's get through the crisis first.

Speaker 0

Thank you. Our next question comes from Mike Carrier with Bank of America. Your line is now open.

Speaker 9

Hi. Good morning, and thanks for taking the question. The strategic update and growth outlook are always helpful. Just on the efficiency ratio, given the 70% level in '20 and realized strong revenues in this environment, but with e trading and Eaton Vance operating at a better ratio, I think the longer term wealth management margin improving know, maybe 600 basis points. Just what drives the the conservative outlook?

Like, are there areas that you wanna invest significantly, you know, to continue to drive the growth, or are there areas for, you know, potential improvement, you know, on that 70%?

Speaker 1

Listen. I think we said under 70% after two years. So, you know, I don't think that's conservative. I we were Mike, we're at 79% just a few years ago. And when I started, we were, much higher.

So, you know, the long term position is we'll run this place with a 30% margin plus what happens in the next two years with, you know, the bounce around the market. So it's I don't know. Maybe maybe we're too conservative in the short run, but it's a it doesn't change our behavior, I guess, is what I would tell you. We we we are very determined to drive this company for growth and for efficiency and for returns. That's been unambiguous for a decade now.

So it doesn't change our behavior at all. It's just what do we think as reasonable people you should expect at a minimum to achieve in this time period? And that's what we try and put in the two year period. The longer term, we are much more aggressive, but, you know, deal with reality of two years. This year, as I said, if you annualize the way this year started off, we'll do better than we'll do better than the efficiency.

Right?

Speaker 10

Yeah. No. That makes makes sense.

Speaker 9

John, just one clarification on the wealth management. You you gave a lot of, you know, numbers on the outlook just in the trade deal. I just wanted to clarify on the funding benefit. Did you say 80% in '21 and most of that by q q? And then same thing on the expense synergy.

I heard a '25 and a 40%, so I just wanted to make sure I had the right number, you know, just in terms of what you're recognizing in '21. Thanks.

Speaker 2

I think all of those numbers that you gave are correct. The the funding synergies are really from this transition from the off balance to the on balance sheet and the runoff of the the wholesale deposits. So, again, that use more towards the back half and that, you know, the the 80%, that's a when you get into the second quarter, you'll be using a quarter a quarter number, not a full year, a full year benefit number. And then 25% on cost and approximately 40% on the, on the, integration cost. So, yes, those are the right numbers.

Speaker 10

Got it. Thanks a lot.

Speaker 0

Thank you. Our next question comes from Jeremy Siggi with BNP Paribas. Your line is now open. If your line is muted, please unmute.

Speaker 10

Sorry, apologies for that. I thought the comments on net interest income outlook in Wealth Management were very helpful. And I just wondered if I could get you to talk in a similar way about the asset management fees and the transaction revenues in Wealth Management. Because I versus my estimates, I thought asset management was a bit below. Maybe that's a lag with the rising AUM, but obviously transaction revenues were very strong.

So could you talk about those two revenue drivers within Wealth Management, please?

Speaker 2

Sure. On the asset management fee line, obviously, the exit rate, as you know, we, you know, we get the benefit now for the full year of the trillion and a half in fee based assets. You have averaging effect and exit exit effect in terms of 2021. So now at the 1,500,000,000,000.0 assets, we'll also have the benefit of the net new assets that we bring in over 2021, though on an average basis, but you would expect continued growth obviously in that line. We had over 10% growth year over year in that in that asset management fees.

And then on transactional, it's really gonna be around client engagement and client activity levels. Fourth quarter, we benefited from elevated transactional. I did say that that was helped by the DCP number, which presumably may or may not repeat next year, but that the margin on that revenue, as we've talked about in the past, is virtually zero. And so transactional generally has been declining. We now have the E*TRADE platform inside of Morgan Stanley.

So the commissions based on their options tradings as well as some of the flow dynamics will, will aid that number. So we'll be at a new level, but generally, that, that's going to be driven by volume related activity, we'll have to see how it plays out, recognizing the first eleven days have been pretty good.

Speaker 10

Thank you. And just to follow-up on the acquisition expenses, you sort of break out the amount of acquisition related expenses in here. I just wondered if you could talk to us about the split between sort of restructuring and amortization of intangibles. You said you're going be amortizing the intangibles. I just wondered about the amount of that and where we see it.

Speaker 2

Sure. Why don't I just give you a few? So, again, we we, issued $11,000,000,000 of equity or about 230,000,000 shares, generated 7 and

Speaker 11

a half

Speaker 2

billion dollars of goodwill and intangibles. You'll see that in the first couple of pages of the of the supplement of that goodwill and intangibles. About 3,000,000,000 is gonna be amortized at a rough rate of about fifteen years, so about 200,000,000. And that would be allocated in the non comps in the wealth segment.

Speaker 0

Thank you. Our next question comes from Jim Mitchell with Seaport Global Securities. Your line is now open.

Speaker 11

Hey, good morning. Maybe we could talk a little bit about the momentum at E Trade. I just want to confirm the numbers. If I looked at their second quarter sort of retail client base, it's around 5,800,000 self directed clients. And then I think at December, the fourth quarter was up to 6,700,000 Are those apples to apples?

And if so, that implies quite a bit of new account net new account growth of close to $900,000 Is that that's pretty good momentum. And just maybe you could discuss what's driving that and how you feel about that going forward.

Speaker 2

Yeah. I mean, I think, we tried to lay that out. As I said on page seven, you can see in, what pre closing so the September 30 number, shows the self directed assets within Morgan Stanley, before the deal closed. So, yes, the growth has really been, in the E Trade channel. Your number of about 900,000 is is accurate.

Again, I think from our disclosure going forward, we just we had to conform sort of definitions and whatnot, but they've had real strong growth with, with new clients, given the activity levels this year. It's a number we you know, you'll be able to track whether the the the self directed channel is growing through that number going forward. I don't think we're gonna be explicitly disclosing net new clients within the the self directed channel as we try to integrate, and bring these two businesses together.

Speaker 11

Right. I imagine that's better growth than you anticipated. Does that give you even more confidence in the revenue synergies from E*TRADE?

Speaker 1

Yes. Yes and yes.

Speaker 11

Okay, great. Thanks.

Speaker 0

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.