Morgan Stanley

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 on the earnings release and strategic update. Within the strategic update, certain reported information has been adjusted and is noted in the presentation. These adjustments were made to provide a transparent and comparative view of our operating performance against our 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.

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 of E-Trade, 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 billion 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 an 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 billion while remaining disciplined in our risk management. Those revenues, by the way, are up from $34 billion 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 Solium. And in 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 10 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 MSIM's robust international distribution with Eaton Vance's strong U.S. distribution. Please turn to slide number 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 and our interconnected businesses are the foundation for our first growth driver, gaining market share. Our integrated investment bank produced $26 billion in revenue on a pro forma basis. Our wealth and asset management platforms is among the largest globally with over $5 trillion 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 million of revenues from transactions through wealth management referrals. Wealth management in turn gained $20 billion of client assets, and investment management saw $6 billion 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 billion 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 E-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 reach 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 billion of assets this year new to our firm. That's 6% of beginning period assets on a pro forma 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, and this was likely 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 million. 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 $1.4 trillion in assets under management. Since 2017, Morgan Stanley Investment Management has grown assets under management by over $360 billion, 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 end of 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 forma basis, we will have over $5 trillion in client assets creating further revenue opportunities. Our efforts to enhance and build out these businesses have led to strong growth. Our former 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 million more in synergies than originally projected. We also expect to capture significant incremental revenue opportunities through these deals And they're outlined in a little bit of detail down the right-hand side of this slide. So turning to 16. Expense discipline is a fundamental tenet of the way we manage Morgan Stanley and has enhanced record pre-tax profits. And you see our efficiency ratio has come down from 2014 at 79% to just on 70% this past year. and obviously that has driven the pre-tax 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 billion buyback program for this year. We restarted our share and 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 then together we look forward to taking your questions. Thank you.

Thank you and good morning. The firm produced revenues of $48 billion in 2020, records both with and without E-Trade. Saw continued momentum into the fourth quarter with revenues of $13.6 billion. Dynamic markets, incredible volatility, and consistent client engagement across all three businesses drove results. Excluding E-Trade integration-related expenses, our ROTCE was 18.7% and 15.4% for the fourth quarter and full year, respectively, and EPS was $1.92 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 2019. NOW TO THE BUSINESSES. IN INSTITUTIONAL SECURITIES, OUR BUSINESS ACHIEVES VARIOUS RECORDS THROUGHOUT THE FULL YEAR. OUR REVENUES WERE $26 BILLION, 25% HIGHER THAN OUR PREVIOUS BEST YEAR. WHILE ALL REGIONS CONTRIBUTED TO THE RESULTS, GROWTH IN ASIA WAS A STANDOUT. REVENUES WERE $7 BILLION IN THE QUARTER, MARKING THE STRONGEST FOURTH QUARTER IN MORE THAN 10 YEARS. THE TRADITIONAL SEASONAL SLOWDOWN WAS NOT EXPERIENCED, AND CLIENTS REMAINED ACTIVE UP UNTIL THE WEEK OF CHRISTMAS. INVESTMENT BANKING REVENUES WERE $7.2 BILLION FOR THE FULL YEAR, 26% HIGHER, in 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&A financing. Quarterly results were the strongest in over a decade, generating revenues of $2.3 billion, 46% higher versus the prior year, driven by record underwriting and advisory results. with each region contributing revenues well above average run rates. Overall, the investment banking pipeline continues to be healthy across products. The pace of M&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 healthcare 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 $9.8 billion 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 $2.5 billion 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 $8.8 billion for the year. Clients were highly engaged in a year marked by higher volumes in volatility, active capital markets, and wider bid-ask spreads. Fourth quarter revenues of $1.7 billion 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 plans. 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 billion 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 Q4. ISD provisions were $14 million, while net charge-offs were approximately $40 million, 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 de-risked this portfolio by close to $2 billion 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 to decline. Turning to wealth management, on October 2nd, 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 7 regarding the combined business. In the quarter, revenues were $5.7 billion. Excluding integration-related expenses of $231 million, 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 billion for the year, and fee-based assets are now $1.5 trillion. We added $18 billion of loans or 22% growth in 2020, and loans are nearly $100 billion. Asset quality continues to be excellent, and loans and forbearance are under $400 million, down from approximately $2 billion at the end of Q1. Deposits continue to grow and were supplemented by $54 billion from E-Trade and are at $306 billion. The network generated net new assets of $66 billion in the quarter and on a pro forma basis over $200 billion in the year. We remain a destination of choice for advisors and continue to add strong teams and retain our productive advisors. These underlying fundamentals and the realization of synergies position us well for the future. In the quarter, asset management fees were $3 billion, benefiting from higher asset levels and $24 billion of fee-based flows. Transaction volumes remained elevated and revenues were strong, even after excluding approximately $350 million of DCP as clients were active across both advisor-led and self-directed channels. Net interest income was $1.2 billion 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 the purchase accounting adjustments associated with premium amortization, which is approximately $50 million 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 billion 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 billion 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 Q2. 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 $1.5 billion of additional NII interest. compared to the estimated $1 billion we disclosed in our queue prior to completing the acquisition. We continue to expect $800 million 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 million 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 energy during the year. Investment management reported revenues of $1.1 billion in the fourth quarter, representing the second highest quarterly level in over a decade. For the full year, revenues were $3.7 billion in line with the prior period, but reflecting a greater contribution for more durable management fee revenues and less from carried interest. Total AUM rose to a record high of $781 billion, of which long-term AUM was also a record at $493 billion. Long-term net flows were $8.5 billion in the quarter. Our global equity strategies continue to deliver strong performance and attract positive flows. Total net flows were $25 billion. The global nature of our platform remains an advantage as inflows across regions led to record long-term net flows of $41 billion 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 billion since October. The overall tone of the business is strong, and their momentum continues. Turning to the balance sheet, total spot assets were $1.1 trillion, and standardized RWAs increased to $454 billion, 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 23% and 22.5% 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 enter 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.