Q2 2024 Earnings Summary
- Morgan Stanley's Wealth Management business is confidently progressing towards its 30% pretax margin target, having achieved 27% GAAP margin and 28% core in the recent quarter, driven by asset management fees up 4% sequentially and 16% year-over-year, with $26 billion in net new fee-based assets last quarter.
- The firm is experiencing real operating leverage in the Investment Bank, with expectations of continued growth as the investment banking cycle picks up, supported by their world-class equities business, which reached $3 billion in revenues, maintaining a #1 or #2 position globally for over a decade.
- Morgan Stanley expects Net Interest Income (NII) to inflect higher over the next year, due to stabilization of balances, portfolio repricing, and lending growth, signaling an encouraging outlook for the Wealth Management segment's profitability.
- Morgan Stanley expects Net Interest Income (NII) in Wealth Management to decline modestly in the third quarter, mainly due to changes in advisory sweep rates and ongoing client behavior, potentially putting pressure on near-term revenues.
- Increased spending by high-net-worth clients is leading to higher cash outflows, which may negatively impact net new assets and flows in the Wealth Management segment.
- Regulatory uncertainties, including potential impacts from Basel III and CCAR stress tests, could constrain Morgan Stanley's capital position, affecting its ability to pursue growth opportunities and potentially limiting returns in the Institutional Securities Group.
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Investment Banking Rebound
Q: Why is the investment banking rebound real this time?
A: Ted Pick explained that despite past delays, they are now seeing signs of an investment banking rebound due to tempering inflation, rate normalization, and market broadening. Early indicators include significant increases in global convertible activity, which typically precedes IPOs and M&A. They are witnessing bake-offs running at triple-plus year-over-year rates, the launch of traditional IPOs, and an active M&A pipeline. He is confident they are in the early stages of a multi-year investment banking-led cycle. -
Net Interest Income Outlook
Q: What is the outlook for Net Interest Income (NII)?
A: Sharon Yeshaya expects an inflection in NII over the next year. As rate cuts occur, they anticipate sweep deposit balances to stabilize and potentially increase. Additionally, portfolio repricing and lending growth will contribute positively to NII. They have seen encouraging signs, such as lending growth this quarter for the first time since interest rate hikes began. -
30% Pre-Tax Margin Target
Q: Is the 30% pre-tax margin target achievable, and when?
A: Ted Pick expressed high confidence in reaching the 30% pre-tax margin target over time. He noted that asset management fees are up 4% sequentially and 16% year-over-year. While transactional revenues have been weak due to capital markets activity, NII is expected to inflect. By continuing to grow assets and scale the business, they intend to achieve operating leverage and reach the target in the coming quarters. -
Capital Allocation and Acquisitions
Q: Are there plans for acquisitions given capital levels?
A: Ted Pick stated that their priority for capital use is dividend policy, increasing the dividend to $0.925. They are also investing in clients and have returned over $2 billion through dividends and buybacks this past quarter. While external inorganic opportunities may be considered in the future, they are not focusing on acquisitions in the short term and are satisfied with their past acquisitions. -
Trading Revenue Outlook
Q: Can trading revenues grow from current levels?
A: Ted Pick believes they can grow durable market share in trading businesses connected to their core client base. By offering products to global asset managers and alternative asset managers, they aim to incrementally increase revenues responsibly over time. With their global footprint and potential asset price momentum broadening, they see opportunities for growth. -
Deposit Repricing Impact
Q: How will deposit repricing impact NII?
A: Sharon Yeshaya indicated that changes to deposit pricing will occur in the third quarter and are based on competitive dynamics. The increased pricing on a small portion of adviser-led sweep balances is expected to be offset by the repricing of the investment portfolio as it matures. -
Client Spending Effects
Q: Is increased client spending affecting flows?
A: Sharon Yeshaya noted increased spending by higher-net-worth clients, which is influencing flows. They observe higher spending in purchases of homes and various tailored investments. This trend could continue as part of client behavior. -
Workplace Channel Growth
Q: Will capital markets rebound boost the workplace channel?
A: Sharon Yeshaya affirmed that as workplace assets rise with new corporations issuing stock and growing employee bases, it will add participants and net flows. The integration of Solium, E*TRADE, and the workplace platforms allows clients to transact, enhancing the ecosystem. -
Operating Leverage in ISG
Q: What is the expected operating leverage in ISG?
A: Sharon Yeshaya emphasized focusing on the firm's efficiency ratio target of 70% over time. While operating leverage depends on revenue mix, achieving a 30% margin across the enterprise is the goal. -
Regulatory Feedback on Deposits
Q: Did regulators prompt deposit pricing changes?
A: Sharon Yeshaya declined to comment on regulatory matters.