Morgan Stanley

Good morning. This is Sharon Yashaya, Head of Investor Relations. During today's presentation, we will refer to our earnings release, financial supplement, and strategic update, 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. This presentation may not be duplicated or reproduced without our consent. Within the strategic update, our reported results for 2014 have been adjusted to exclude several significant intermittent items, which were highlighted in our 2014 annual report on Form 10-K. Likewise, our reported EPS and ROTCE metrics for 2019 have been adjusted to exclude the impact of intermittent net discrete tax benefits. These adjustments were made to provide a transparent and comparative view of 2014 and 2019 operating performance against our strategic objectives. The reconciliation of these non-GAAP adjusted operating performance metrics are included in the notes to the presentation. I will now turn the call over to Chairman and Chief Executive Officer James Gorman.

Thank you, Sharon. Good morning, everyone. Thank you for joining us. 2019 was a strong year representing one of the best in our history. Results were within our target ranges with contributions from each of our business lines. John will discuss the details of 2019 in a moment, but first let me take you through our annual strategic update presentation. Please turn to slide three. I think about our firm's transformation in five-year increments. Over the first five-year period, we worked aggressively to clean up the issues from the financial crisis, stabilize the firm, integrated Smith Barney into our franchise, and reset our strategy. Over the next five years, we made significant investments in our business around digitalization, technology, talent, and the balance sheet. We grew revenues by 20% while we managed expenses tightly, doubled net income, and materially increased capital returns. Our ROTCE now stands at nearly 13%, and EPS has more than doubled, excluding intermittent discrete tax benefits. Today, we will discuss the next phase of our evolution. The goal continues to be to shift our business further, emphasizing more durable sources of revenue within institutional securities and from wealth and investment management. The continuation of this evolution should, by design, help support a base level of profitability during periods of market disruption. Drilling a little deeper into this, throughout this decade-long journey, we defended and expanded our institutional securities footprint, which we show on slide four. Our brand is closely tied to our institutional presence and leading integrated investment bank. Our premier institutional franchise remains a key competitive advantage, which has allowed us to take share and grow revenues despite a shrinking wallet. At the same time, the contribution from wealth and investment management continues to grow, as shown on slide five. Over the last five years, we've increased the profitability of our wealth management business while still making investments in the US banks and our modern wealth platform. Of particular note, on nearly 100% of business days, we have revenues greater than or equal to $60 million, nearly three times that which it was five years ago. We also invested in our investment management platform. We put together a new growth-oriented leadership team and focused on clients, solutions, and new products. We highlight the growth in long-term net flows, which reflects strong long-term performance. With combined revenues of approximately $21 billion, our wealth and investment management businesses are among the largest platforms in the world, And now we have an untapped opportunity to further scale our wealth management channel through our workplace offering. Meeting these ambitions for future growth would not be possible without a strong culture and a cohesive team. On slide six, we described our culture and the tenure of our leadership team. We have an eight-year track record of stating and meeting various public goals. We continue to invest meaningfully in our culture and diversity efforts to ensure we remain an employer of choice for our top talent. And further, Morgan Stanley has been at the forefront of sustainable finance. We founded our global sustainable finance group over a decade ago with the mission to accelerate the adoption of sustainable investing across capital markets. I want to spend most of my time providing a bit more detail about the future opportunities we're excited about and that we see across our franchise. Across our segments, we have platforms with scale benefits and we're positioned for growth. Let's start with institutional securities on slide seven. Our institutional footprint and franchise is extremely strong. In the face of a declining wallet, we've gained share over the last five years across our institutional businesses. and we reasonably believe these gains are sustainable. Our business has benefited from the stability of the leadership and commitment to a global client footprint. We expect to continue to hold and gain share across the division. On slide eight, we take a deeper look at wealth management. 2020 marks a new chapter in our wealth management strategy. The significant investments we make in the digital space, the acquisition of Solium, position us to efficiently service the mass affluent population and capture new clients and assets through the workplace. Moreover, we can leverage the corporate relationships we've built through our institutional offering as we look to add new corporate clients. We've completed the Morgan Stanley at Work offering to span beyond just share works by Morgan Stanley, our stock plan administration platform. We're enhancing and investing in our financial wellness and retirement offerings. This more fulsome suite of products allows us to deliver services to an even larger base of employees. And this will help ensure that our touch points are not limited to stock plan participants. As illustrated on this slide, we're continuing to win new mandates. The combination of the state-of-the-art ShareWorks platform and the Morgan Stanley Wealth Management capabilities is being very well received in the marketplace. We expect to fully convert all of our existing corporate clients to the Morgan Stanley Work Model by the end of 2021. To date, nearly 40% of those plans on the legacy Morgan Stanley system have been transitioned to ShareWorks. and the remainder will be accomplished by year end 2020. And by the end of 21, individual employees of our corporate clients will gain access to financial coaching, exclusive educational content, and our self-directed brokerage offering, providing them with an introduction to our wealth management services. Over the next five to seven years, we expect to convert over one million employee participants to either wealth management digital or advisory channels, adding to the more than 3 million client relationships we have today. We'll be able to provide a compelling offering for all our relationships servicing the ultra high and high net worth segment with financial advisors and more mass affluent clients with our virtual advisor or digital solutions. Moving to slide nine. We've been clear that we believe that supporting advisors with cutting edge technology and enabling them to deliver a unique product and set of services to clients will be our competitive advantage going forward. The investments we made with our digital initiatives have been embraced by our advisors and anecdotally, these tools are supporting asset consolidation. Additionally, of course, we've seen over 250 billion of assets flows in advisory over the last four years and continue to believe that at least half of our client assets will migrate to advisory over the medium term. Let's talk about investment management on slide 10. The asset management sector is both very large and extremely fragmented, lending itself to opportunities for growth in areas where we believe we can deliver differentiated value to our clients. And to me, one of the most exciting things we've done to capture this opportunity is product innovation. illustrated by the number of new products we've developed. These products have broadened our revenue base, made us more relevant across the client spectrum, and translated into material revenue and asset growth. Since 2016, we've launched many new products successfully, leveraging our global client franchise. We've already seen significant contribution from these products, generating 90 billion of incremental assets under management and almost 500 million of incremental revenue in 2019 versus 2016. These strategies, continued new product launches, and investments in our client franchise more broadly will be a very important component of future growth. Another key driver of growth is our existing diverse alternatives client franchise. If you see on slide 11, our alternatives client platform is at scale. and there is strong secular growth in private alternatives. In addition to new private alternative product launches noted on the prior page, we're seeing strong organic growth in our existing high-performing private funds. For example, our infrastructure number three fund, which closed in the fourth quarter, is over 50% larger than infrastructure two, raising $5.5 billion of institutional capital versus $3.6 billion, respectively. Further, we continue to see very strong organic growth in our premier institutional core real estate strategy. Our alpha products across both private and public markets, as well as our world-class global solutions capabilities, will be critical contributors to investment management's revenue growth. In our public active equity strategies, our strong performance and global client footprint has driven robust net flows. We believe we ranked number one in organic growth since 2017 among the top publicly traded active equity managers. So let's turn to slide 12. We expect that these and all our other growth initiatives, along with expense discipline, will drive further ROTCE expansion. In 2015, we communicated that we believe we were capital-sufficient. It's since that time we've continued to deploy our capital to meet our strategic objectives. We look forward to the transition to the new capital regime and expect Morgan Stanley will be able to return excess capital to shareholders while continuing to invest for future growth. Our robust capital position will enable us to pursue opportunities to invest in the franchise and return capital. We're confident in our ability to deliver two-year ROTCE expansion of 13% to 15%. I'll conclude with our updated strategic objectives. The targets we expect to achieve in 2021, as well as our longer-term aspirational targets, are shown on slide 13. We've meaningfully and with intent transformed this business into what it is today. As we execute on the next phase of the firm's journey, The objectives listed here, assuming a normal market environment, should result as a natural consequence. We believe that in 2021, wealth management will be a 28% to 30% pre-tax margin business and will exceed 30% over time. This business has compelling scale benefits. Between our core competency of serving ultra-high and high net worth individuals and our newer expansion into the workplace, there is clearly room to grow from here. Beyond wealth management, we're making numerous investments across all of our platforms to enhance the digitalization of our firm and overall technological capabilities, given our scale and other efficiencies. We have largely been able to self-fund these investments. Between this and revenue growth, we expect to achieve an efficiency ratio of 70% to 72% in 2021 and below 70% in the long term. As a result of these and all the other efforts, we expect our return on tangible common equity to rise to 13% to 15% in 2021. And over the long term, we aspire to have a return on tangible common equity of 15% to 17%. Given our established track record, our competitive positioning, and our continued investment into our business, we're confident in our ability to achieve each of these objectives. I will now turn the call over to John, who will discuss our fourth quarter and annual results, and then together we will take all of your questions. Thank you.

Thank you and good morning. The firm produced a record level of revenues in 2019. We had strong momentum through the quarter and finished the year on solid ground. In the fourth quarter, firm revenues were $10.9 billion, increasing 8% sequentially, contributing to full-year revenues of $41.4 billion. Fourth quarter PBT was $2.7 billion, and EPS was $1.30, resulting in an ROE of 11.3% and ROTCE of 13%. In the fourth quarter, severance expenses of $172 million related to a December employee action and intermittent net discrete tax benefits of $158 million largely offset each other. For the full year, ROE was 11.7% and ROTCE was 13.4. Total non-interest expenses were $30.1 billion for the year. Non-compensation expenses were essentially flat to 2018 at $11.3 billion, demonstrating our ability to self-fund incremental costs related to absorbing and integrating sodium. and increased technology investments through continued discipline over our more controllable expenses, particularly marketing and business development and professional services. We continue to actively review efficiency opportunities, including optimization of our global workforce through reduced dependence on contingent workers and leveraging our global in-house centers. We also see opportunities for vendor consolidation across the firm over time. This focus will result in continued momentum to control our non-compensation expenses and help us achieve the objective that James just discussed. Compensation expenses increased 7% on a full year basis. This rise included severance charges and significant movements in deferred compensation plans as well as increased revenues. Our full year expense efficiency ratio was 72.7% below our 73% target. Now to the businesses. Our institutional securities business reported revenues of $5.1 billion, marking the best fourth quarter in over 10 years. Results were driven by strengths in investment banking, especially advisory. Additionally, we did not see the seasonal slowdown in sales and trading or underwriting typical of a fourth quarter. For the full year, ISG revenues were $20.4 billion, slightly below last year's record level. The compensation ratio for the quarter rose to 40.7%, reflecting $124 million of severance related to the December action and the impacts of movements in investments associated with employee deferred compensation plans. After considering the impact of these items, the fourth quarter compensation ratio was approximately 36%, and looking at the full year, again, after considering these adjustments, the compensation ratio was under 35%. DCP creates some volatility in this ratio, but as we have said many times in the past, it has a very limited impact to the bottom line. Investment banking had the strongest fourth quarter in a decade, generating revenues of $1.6 billion. The sequential increase was driven by strength in advisory and seasonally robust results for underwriting. Overall, pipelines are healthy across products. The pace of M&A remains strong, and we would expect the period of activity to extend. The global equity pipeline remains robust as many issuers target capital raises in the first half of 2020, particularly across healthcare, consumer, and technology. As we said before, the conversion from pipeline to realized remains dependent on market condition. In equity sales and trading, we retained our leadership position and are number one globally for the sixth consecutive year. Fourth quarter revenues were $1.9 billion, down 4% sequentially. Strength in the Americas was offset by declines in EMEA and Asia. In cash, we continued to expand our share across regions, which partially offset the impact of global market volumes. Prime brokerage performed well as client activity rose during the quarter, with equity markets trending higher. and derivative revenues declined sequentially as lower volatility weighed on results. Fixed income sales and trading produced revenues of $1.3 billion, down 11% from a robust third quarter. We continue to deepen our relationships with our client base. Results were driven by strong performance across the credit complex. Micro produced another solid quarter with well-diversified performance. Healthy levels of client engagement supported results. We continued to invest in our secured lending businesses, which performed well, and witnessed increased client interest from commercial real estate products. Balance sheet velocity remains a focus in this business and on a full-year basis improved from the prior year. Macro results declined versus the third quarter due to lower client activity. Commodities revenues also declined sequentially. However, client activity and further geographical diversification of the revenue mix supported results. On a full-year basis, fixed income was up 11%. Strong performance in micro outweighed the decline in macro, where a difficult environment weighed on results in FX and rates. Turning to wealth management. We reported fourth quarter revenues of $4.6 billion and pre-tax profit of $1.2 billion, resulting in a PBT margin for the quarter of 25.4%. Strong revenues were offset by higher seasonal expenses, as well as a $37 million severance charge, which had an 80 basis point impact on the margin. On a full year basis, the PBT margin was 27.2%, representing 100 basis point expansion over last year. The business continues to illustrate the benefits of scale. While investing in this business and absorbing the Solium expenses, non-compensation expenses declined 3% from 2018. Transactional revenues were $829 million, up 39% sequentially. Results were principally driven by gains in investments associated with employee deferred compensation plans, as well as improved retail engagements. Asset management revenues were essentially flat versus the prior quarter. On a full year basis, asset management revenues were also flat as the large market decline in Q4 2018 impacted first quarter results. Total client assets of $2.7 trillion increased 5% sequentially and 17% versus the prior year, reflective of broader market movements. Over the last several years, we have seen net new assets of approximately 4% of beginning period client assets. While these flows are an indicator of the health of the business, we continue to believe fee-based flows are a more relevant driver of near-term results. We had $25 billion of fee-based flows in the fourth quarter, a record. The shift towards advisory continued, and fee-based assets now represent 47%. of total client assets up from 45% last year. Loan growth continues to be strong across products. Lending balances increased to $80 billion or 11% versus the prior year. We continue to see strong receptivity in our lending offering. Our investments into technology have better enabled our advisors to identify clients who would benefit from our lending product suite. This has been especially effective in securities-based lending. We expect to continue to see strong receptivity, resulting in loan growth of mid-single digits in 2020. Total deposits rose 5% sequentially. Within our bank deposit program, we have seen stable deposit levels since May, with a seasonal uptick in the fourth quarter. We continue to invest in new banking products, and our high-yield savings product has also continued to gain traction. Our new money savings campaign has raised close to $14 billion since its March launch. Net interest income was in line with last quarter. On a full year basis, NII was up slightly, including the impact of prepayment amortization. Over the next year, we would expect the full impact of 2019's three rate cuts, the realization of the forward curve, and the continued diversification of our deposits to offset the benefit of our lending growth. As James discussed, we will continue to invest in our workplace offering and also build out our U.S. banks to drive further growth. That being said, we would expect the margin to rebound nicely in Q1 from its fourth quarter seasonal low. Investment management reported revenues of $1.4 billion in the fourth quarter. For the full year, revenues were $3.8 billion, representing a $1 billion increase from the prior period. Total AUM rose 9% to $552 billion, of which long-term AUM was $356 billion. We continue to generate strong, positive net flows across major high-conviction active strategies. Long-term net flows were $6.7 billion, the strongest in eight years. And we had another strong capital-raising year capped off with the close of our $5.5 billion Infrastructure III Fund. Asset management fees of $736 million grew 11% versus the third quarter. Recall, a significant amount of performance fees are recognized in the fourth quarter. Performance fees for the quarter were driven by strong results in our core real estate strategy, and management fees increased on higher average AUM. On a full year basis, asset management fees increased 7% to $2.6 billion. Investment revenues were up $565 million in the quarter and $1 billion for the year. This line is primarily driven by carried interest, which is earned from clients who are invested in our private funds. The increase this quarter and year was primarily due to an underlying investments IPO subject to sales restrictions within an Asia private equity fund. This event generated a significant amount of accrued interest revenue. the ultimate realization of which will depend on the monetization of the underlying position in the fund. As we have previously said, this line is lumpy. Other revenues were impacted by an impairment of a legacy equity method investment in a third-party asset manager. Total expenses increased 52% sequentially. In particular, higher compensation costs are reflective of higher accrued carried interest compensation, which was primarily related to the event I just discussed. Non-compensation expenses were driven by higher BC&E expenses related to the launching of new products and reflecting our continued investment into this business. This business continues to grow, and we expect it will be an increasingly meaningful contributor to total firm earnings. We continue to look for organic and inorganic opportunities to grow this business to end to effectively meet the needs of our clients. During the fourth quarter, we repurchased approximately 31 million shares, or $1.5 billion of common stock, and our board declared a 35 cent dividend per share. After considering $158 million and $348 million of intermittent net discrete tax benefits, our tax rates were 21.4% and 21.3% for the fourth quarter and full year, respectively. We expect our 2020 tax rate to be slightly higher, or approximately 22% to 23%, and we'll exhibit some quarter-to-quarter volatility. Taken in full, we are pleased with the firm's results this year. We enter 2020 with asset levels at new highs, healthy pipelines, constructive markets, engaged clients, and a right-sized expense base. With that, we will now open up the line to questions.