Morgan Stanley

Good morning. This is Sharonia Shai, Head of Investor Relations. During today's presentation, we will refer to our earnings release and financial supplement, copies of which are available at morganstaling.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. 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.

Good morning, everyone. Thank you for joining us. 2019 has started well. In the first quarter, our businesses produced solid results and rebounded from the fourth quarter's market dislocation and idiosyncratic events. In our institutional businesses, client participation and balances steadily improved alongside confidence and asset prices. While activity was not as robust as early 2018, improvement in sentiment, CEO dialogue and boardroom conversations are all encouraging. Our wealth business absorbed lower fourth quarter asset levels and delivered strong results. The margin demonstrated the business's ability to withstand shocks to asset values. In investment management, we've posted very strong investment results, particularly in private real assets and private equity. Broad client relationships have driven net inflows in our global equity strategies, where long-term performance continues to attract investors. We remain confident in the firm's outlook in broader economic activity, but we're cognizant that global risks are more balanced. Against this backdrop, we remain very focused on expense discipline, while still investing for growth. This focus is evident in the results. On a year-over-year basis, total non-interest expenses declined 4% even as we continued our investments. Across the board, ROE, ROTCE, the firm efficiency ratio and wealth management margin are in line with or at the higher end of our strategic objectives, ensuring a very solid start of the year. Consistent with our objective to invest for growth, we announced our intent to acquire Solium Capital, a leading global software provider for equity administration, financial reporting, and compliance. This transaction will enable us to bring together a major stock plan administration platform with the leading wealth management business, positioning us to be a top-tier provider in the workplace wealth space. Through Solium, we gained a new scalable channel and direct sales force. giving us the ability to target another client population, particularly a younger demographic, in its wealth accumulation phase. On a combined basis, we will now have direct exposure to over 2.5 million individuals via Solium's workplace services, complementing the over 3 million wealth management clients our financial advisors already serve in our traditional business. What excites us is the expansion into the workplace, delivering financial wellness services to clients and offering financial advice, education, and the ability to transact through their employer. This deal is aligned with our strategic objective to round out our product offerings with complementary bolt-on acquisitions, and we will continue to look for similar opportunities. We recently announced that Colm Keller would be retiring from the firm effective June 30th. As all of you know, Colm was the Chief Financial Officer during the global financial crisis and was critical in helping navigate the firm through those challenging times. Over the course of his 30-year career, Colm has served in a number of important roles across our businesses, most recently as President of the firm. I'm extremely grateful to Colm for his contributions and it has been a great privilege to call him my partner for the past decade. As we move forward, the Board and I are very focused on long-term development of our management team. So now I would send the call over to John to discuss this quarter in greater detail. Thank you.

Thank you and good morning. January opened with fragile sentiment and lackluster conviction. While we witnessed a gradual improvement as the first quarter progressed, signs of a December hangover and the U.S. government shutdown were evident. Clients took time to regain confidence, and industry volumes declined, impacting our ISG businesses. Lower asset values at the end of 4Q impacted wealth management and investment management fee revenues. Still, the firm produced solid results. Revenues of $10.3 billion declined only 7% year over year compared against the strongest quarter in the firm's history, XDVA. On a sequential basis, revenues increased 20%. PBT was $3 billion and EPS was $1.39. The firm delivered returns at the high end of our target ranges with an ROE of 13.1 and ROTCE of 14.9. We continue to focus on expenses while investing in the business. Total non-interest expense was $7.3 billion, down 4% from 1Q18. We remain committed to funding investments through tight focus on our more controllable expenses, such as marketing and business development and professional services. The firm's non-compensation expenses were down 2% year over year, despite elevated Brexit-related expenses and ongoing investments in technology. Now to the businesses. Institutional securities generated revenues of $5.2 billion in the first quarter, a 35% sequential increase. EMEA rebounded nicely, and Asia also demonstrated strength. We saw client activity and engagement gain momentum in the back half of the quarter. Non-compensation expenses were $1.8 billion for the quarter, a 3% decline from the prior year. Compensation expenses were $1.8 billion, resulting in a compensation-to-net-revenue ratio of 35%, consistent with last year's ratio. In investment banking, we generated revenues of $1.2 billion, a 19% decrease relative to the fourth quarter. After a slow start, momentum and confidence picked up. Advisory revenues for the quarter were $406 million, down 45% sequentially. Completed M&A volumes declined 38% relative to an active fourth quarter. Importantly, there has been a pickup in activity levels and pipelines are healthy. Turning to underwriting, new issue market conditions were more challenged at the outset, but issuance built momentum as the quarter progressed. Our equity underwriting franchise remained strong. Revenues of $339 million were up 5% quarter over quarter. The sequential strength in blocks, follow-ons, and convertibles offset weak IPO revenue. IPO volumes witnessed a sharp sequence of decline of 79%. Many issuers were sidelined by the U.S. government shutdown. Fixed income underwriting revenues increased 13% sequentially to $406 million. We saw an increase in bond issuance volumes across investment grade and high yield, while our leveraged loan activity remained muted. Overall, investment banking pipelines remain healthy and diversified across products, regions, and sectors. CEOs remain engaged. The global equity pipeline has built through the quarter, particularly IPOs, and market volatility is subdued. However, as demonstrated by recent market dynamics, future activity may be impacted by macroeconomic uncertainty and geopolitical events. In equities, we retained our leadership position and expect to be number one globally. Revenues were $2 billion, declining 21% year over year, and increasing 4% quarter-over-quarter. On a sequential basis, derivatives and cash revenues improved, with derivatives benefiting from improved markets and corporate activity. In prime brokerage, sequential and year-over-year revenue declines were driven by lower average balances. Clients gradually relevered and balances partially recovered over the course of the quarter and continued to build. While market indices have rallied materially and sentiment has improved, clients remain cautious. First quarter fixed income results were strong following the traditional seasonal pattern. Revenues in one Q were $1.7 billion, more than doubling week fourth quarter results. Overall, client activity improved over the quarter. The market was generally characterized by tightening credit spreads, declining interest rates, low volatility, and uneven client activity across business lines, as well as benefits from structured client activity. Macro rebounded broadly on a quarter-over-quarter basis. Compared to prior year, our macro performance reflected dampened volatility, impacting structured rates and FX. Macro investors remained sidelined, lacking conviction and awaiting clarity around central bank policy, Brexit, and U.S.-China relationships. Micro results were robust, both sequentially and annually, driven by particular strength in corporate credit. Tightening credit spreads and increased secondary trading activity resulted in higher client revenues. We saw increased velocity of the balance sheet in the quarter. Commodities had strong, broad-based results with solid trading performance and lower structured revenues in Q1. Eighteen. Wealth management reported quarterly revenues of $4.4 billion and pre-tax profit of $1.2 billion. Despite lower starting asset levels, the business produced a PBT margin of 27.1%, demonstrating resilience despite large market drawdowns in the fourth quarter. Total client assets ended the quarter at $2.5 trillion, an 8% increase versus the prior quarter, reflecting positive asset flows to the firm and the rebound in asset prices. Net fee-based asset flows were $15 billion, and additionally, we continue to see improvement in the productivity of our advisors. Transactional revenues were $817 million. Movements in deferred compensation plan investments, which significantly impacted fourth quarter revenues, partially reversed in the first quarter. Excluding the impact of the gains on the plans, transactional revenues were down slightly quarter over quarter. Revenues were impacted by clients' defensive posture and the relatively slow syndicate calendar. In particular, we witnessed a rotation out of equities into short-term fixed income products. Asset management revenues were $2.4 billion. The 8% decline from the prior quarter was primarily driven by last quarter's lower ending asset levels. Total bank lending ended the quarter at $71.5 billion. While funded balances declined slightly quarter over quarter, driven by a handful of large paydowns in the tailored lending book and a modest decline in security-based lending, commitments did rise. The rise in commitments and solid mortgage growth over the quarter are encouraging, and we continue to expect mid-single-digit percentage loan balance growth for the full year. Net interest income growth of 3% to $1.1 billion was primarily driven by the benefit of the December rate increase, and the corresponding impact on our investment portfolio yields. Additionally, we benefited from the increased level of deposits at the beginning of the quarter, which was partially offset by higher prepayment speeds. Strong non-compensation expense discipline and the benefit of the retention note roll-off more than offset the effect of lower asset values, resulting in a margin of 27.1%. As demonstrated during the quarter, we have leveraged to protect the margin while still investing for growth. Investment management produced very strong results. Revenues of $804 million were up 18% sequentially and were the highest for the segment in over five years. This was driven by $191 million of investment revenues. Investment strength was broad-based across products. The sequential increase was supported by the rebound in global markets and the absence of last quarter's impairment charge. As noted historically, this line item has the potential to be lumpy. Total AUM of $480 billion was up 4% versus the prior quarter, with long-term AUM of $321 billion increasing 7%. The increase in long-term AUM was primarily driven by strong market-related growth. Asset management fees of $617 million were down 2% sequentially. The higher management fees on the back of improved average AUM over the quarter were offset by lower performance fees. As we have mentioned before, as a result of the revenue recognition accounting rule implemented in 2018, a significant amount of any year's performance fees will be recognized in the fourth quarter, with a small amount being recognized in this first quarter. Total expenses increased by 3% quarter-over-quarter, driven by higher carry compensation, which offset a decline in non-comp expenses. Turning to the balance sheet, total spot assets of $876 billion increased 3%, driven by client activity, primarily in equity sales and trading and ISG lending. The higher balance sheet drove an increase in RWAs, resulting in a decrease of our common equity Tier 1 ratio to 16.5% from 16.9. During the quarter, we repurchased approximately $1.2 billion of common stock, or approximately 28 million shares, at $42, and our board declared a 30-cent dividend per share. Our tax rate in the first quarter was 19.9, excluding $101 million of intermittent net discrete tax benefits. We continue to expect our full-year tax rate will be similar to the 2018 tax rate, excluding intermittent items. The vast majority of our share-based award conversions took place in the first quarter. Markets in the second quarter have been constructive. Pipelines are healthy in investment banking, and higher asset levels will support fee-based revenues in our wealth management business. We are keenly aware that open and functioning markets and economic stability are instrumental in supporting confidence and activity levels moving forward. With that, we will now open the line to questions.