Q3 2023 Earnings Summary
- Morgan Stanley's Institutional Securities Group (ISG) has improved its Fixed Income trading performance, demonstrating resilience even in traditionally slow quarters due to business restructuring and effectively capturing market volatility.
- The Wealth Management division is close to achieving its 30% pretax margin target, with margins currently at 28% excluding integration costs. Management is confident in reaching this goal through an asset-led strategy focused on growing asset management and transactional revenues, leveraging technology investments, and attracting new clients and advisers.
- Morgan Stanley's Investment Banking backlog continues to rise, with diversified opportunities across sectors such as financial sector consolidation, energy transitions, and technology (including AI). The firm is investing in talent and international expansion, particularly in regions like Asia, the Middle East, and India, positioning itself for future growth.
- Declining Net Interest Income (NII) in Wealth Management is expected to continue, with management indicating that NII will be lower next quarter due to deposit rate trends, posing a headwind to revenues and margins. ,
- Challenges in achieving the 30% pretax margin target in Wealth Management without NII tailwinds, as the company balances investment in growth with margin improvement, potentially affecting profitability targets. ,
- Increased expenses due to competition for talent and severance costs could pressure margins and overall profitability, requiring careful expense management amidst investments for future growth.
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ROTCE Target of 20%
Q: How will you achieve the 20% ROTCE target?
A: Management emphasized that reaching the 20% ROTCE is achievable and not a remarkable feat, given past performance. They plan to bridge the gap by focusing on expense management, expecting banking revenues to recover, and benefiting from assets moving into annuitized products. Despite the current ROTCE of 14%, they are confident that improvements in the market environment will help them achieve the target. -
Wealth Management Revenue Growth
Q: Why hasn't asset growth translated into revenue growth in Wealth Management?
A: Management is impressed with the resiliency of the Wealth Management business, highlighting the capture of $235 billion in assets over the past year. They noted increased fee-based flows and believe their strategy to grow asset management revenues is working. With 23% of retail client assets in cash—higher than historical averages—they expect clients to deploy this cash into markets as conditions improve, boosting revenues. -
Impact of High Rates on NII
Q: Are high interest rates a structural challenge for Wealth Management NII?
A: Management does not view high rates as a structural issue. They explained that when clients can earn 4% to 5% returns by holding cash, they are less inclined to trade, impacting transactional revenues. As rates eventually come down, they expect clients to re-enter the markets, reducing cash levels and increasing activity. They anticipate that NII may be impacted over the next 12 months but are optimistic about future growth as rates normalize. -
International Expansion and M&A Strategy
Q: What are your plans for international expansion and M&A?
A: Management sees significant opportunities for international growth, particularly in regions like Japan, India, the Middle East, and Europe. They plan to pursue strategic transactions in Wealth and Asset Management over the next three years and are investing in partnerships like the MUFG 2.0 collaboration in Japan. They are strategically planning potential acquisitions to drive growth. -
CEO Transition Timing
Q: Is the CEO transition causing strain on the organization?
A: Management does not believe the CEO transition is causing strain. The Board is conducting a thorough process, and the transition will occur at an appropriate time. They emphasized that the team is performing well and are focused on ensuring a smooth handover without distractions.
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