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 in the earnings release. This presentation will 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 and thank you for joining us. The firm delivered another strong quarter and a record first half with year-to-date revenues in excess of $30 billion. We had strong inflows across wealth and investment management, And in the first six months of the year, we added over 250 billion of net new assets across both of those businesses. We now have over 13 million unique relationships in wealth management, and in investment management, our asset mix is increasingly diverse and well-positioned in key secular growth areas, such as customization, private alternatives, and sustainability. Finally, institutional securities also had a tremendous performance. Equity remains the preeminent leader in the industry, fixed income has maintained share gains, and our leading investment banking franchise performs strongly. Our business is further enhanced by our acquisitions of E-Trade and Eaton Vance and the progress on our integrations. Since the respective announcement of each acquisition, both businesses have performed better than we expected. Not only did the standard merger metrics such as synergies and funding benefits read positive, But much more importantly, we're seeing long-term business growth driven by exceptional client engagement. This quarter, our ROTCE was 19% and year-to-date we're over 20%. Obviously, we're exceeding our longer-term targets of 17% plus. We intend to formally revisit our goals next January. While we will not revisit targets mid-year, I want to assure you we're as focused on delivering top performance as ever. Though we're always subject to the broader macro environment, we will strive for continued outperformance. Now let me talk about the decision we announced two weeks ago on further capital distribution. During the financial crisis, we reduced our buyback to zero and cut our dividend quarterly to 5 cents per share. Over the past decade, it has been a slow, steady path of improvement as we grew our dividend from 5 cents ultimately to 35 cents and increased our buyback from $0 to $5 billion. I have said for a number of years that wealth and investment management contribute durable earnings that enable us to pay our shareholders substantially. And that is what we are doing. As a result, we reset our dividend, doubling it to $0.70 per share, and also increased our buyback for up to $12 billion over the next 12 months. We made this decision because of the confidence we have in our business model and our performance over the past three Federal Reserve stress tests. These tests confirmed what we've said for many years. Morgan Stanley has built a significant amount of excess capital, and we have the ability to invest in our business, do acquisitions, maintain a very healthy dividend yield, and increase our buybacks. Given our current earnings momentum, it may take some time to fully distribute our capital, but we feel strongly that this year is the time to make a big start. Now, Sharona Shire is here with me today in her new role as Chief Financial Officer. John Prusan, who was CFO up until midway through the second quarter, is also here with us. And as you know, John took on additional responsibilities as our Chief Operating Officer since June 1st. So let me turn it over to Sharon. We'll discuss the quarter in detail, and we look forward to all of your questions. Thank you.

Thank you, and good morning. The firm produced revenues of $14.8 billion in the second quarter, representing one of the top three quarters on record. Performance continued to be very strong, reflecting high levels of client activity across our businesses. Excluding integration-related expenses, our EPS was $1.89. Our ROTCE was 19%. Year-to-date revenues of $30.5 billion were a new record, highlighting the power of our firm, which has been further enhanced by our recent acquisitions. Investing for growth remains a priority, while also managing our expense base. On a year-to-date basis, total expenses were $20.6 billion, of which non-compensation expenses were $7.4 billion and compensation expenses were $13.2 billion. The increase in expenses versus the prior year reflects the addition of E-Trade and Eaton Vance and the integration-related costs. Year-to-date, our firm efficiency ratio declined to 67%. excluding integration-related expenses, underscoring the operating leverage of our business. Now to the businesses. Institutional securities revenue of over $7 billion demonstrates the power of the integrated investment bank. Revenues declined by 14% from the exceptionally strong prior year. Higher revenues in investment banking and equities were offset by lower fixed income results. Underwriting was particularly robust as issuance remained elevated, and despite lower volatility across asset classes, our sales and trading clients remained engaged. We ended the period on a strong footing as clients were active through June. Investment banking revenues were $2.4 billion. The 16% increase from the prior year was driven by advisory and continued strength in equity underwritings. From a geographical perspective, results in Europe and Asia were the strongest in over a decade. And while technology and healthcare remain areas of core strength, activity in financial institutions, financial sponsors, real estate, and other sectors supported higher revenues. Advisory revenues were $664 million. reflecting increased completed M&A activity versus the prior year. Year-to-date announced industry volumes reached record levels and clients continue to look for strategic opportunities as markets remain open and constructive. Equity underwriting revenues of $1.1 billion were the second highest on record and the third consecutive quarter over $1 billion. The increase from the prior year was driven by traditional IPOs, where activity remains robust globally. Fixed income underwriting revenues of $640 million were also the second highest, after a record second quarter of last year. Investment banking pipelines remain healthy across products and regions. CEO confidence remains high as companies look for strategic opportunities for growth. Equity revenues increased 8% from the prior year to $2.8 billion. We are number one in this business globally. Revenues were the second highest in over a decade. Results in Asia were particularly strong, reflecting increased interest in the region from both Asia and non-Asia-based clients. Cash and derivative results were robust but declined versus the prior year against the backdrop of lower volatility. Prime brokerage revenues were strong and increased versus last year as average balances reached new highs. Fixed income revenues were $1.7 billion. Revenues declined from the exceptional prior year as wider bid-offer spreads normalized across products. This quarter's results were broad-based across regions. Micro results were robust compared to historical averages. but declined from the prior year, as credit markets were relatively range-bound and bid-offer spreads compressed. Macro also declined versus last year, with lower revenue in both rates and foreign exchange on the back of lower volatility. Other revenues of $207 million declined versus the prior year. The decrease primarily reflects lower mark-to-market gains on corporate loans, net of related hedges. Higher year results benefited from significant credit spread tightening. Turning to ISG lending. Our allowance for loan, for credit losses in ISG loans and lending commitments was essentially flat in the second quarter at $1 billion. ISG provisions were $70 million and net charge-offs were $92 million, primarily related to one facility. Total ISG loans were flat. the decline in corporate loans was almost entirely offset by growth in all other lending categories. Lending commitments increased by approximately $6 billion relative to the prior quarter. Turning to wealth management, the prior quarter will be a more relevant benchmark as a comparison period rather than the prior year given the acquisition of E-Trade. Revenues were a record $6.1 billion. Excluding integration-related costs of $60 million, PBT was also a record of $1.7 billion, with a margin of 27.8%. Growth drivers of this business remain robust. Net new assets were $71 billion in the quarter, bringing year-to-date NNA to $176 billion, which represents a 9% annualized growth rate of beginning period assets for the first half. Net new clients, asset consolidation from existing clients, and stock plan retention all contributed to the strong result. Further, we continue to see strength in net recruiting and retention also contributing to NNA. While NNA will be lumpy and should be looked at on a full year basis, The first half of this year illustrates the tremendous growth potential inherent in this business. Transactional revenues were $1.2 billion. Excluding the impact of DCP, revenues declined 16% from the exceptional prior quarter. Client activity moderated from the first quarter's torrid pace, but engagement remained high. Self-directed daily average trades were 1 million in the second quarter, approximately 10% above average levels for full year 2020. Our client base continues to expand, and our households reach 7.4 million in the self-directed channel. Asset management revenues increased 8% sequentially to $3.4 billion. Year-to-date, these revenues increased 28%, Fee-based flows were $34 billion, bringing year-to-date fee-based flows to $71 billion, almost matching the amount for the full year of 2020. Fee-based assets are now $1.7 trillion, or more than double the level of only five years ago. Bank lending balances grew by a record $10 billion, and balances reached $115 billion in the second quarter. Year-to-date, balances have grown by 17%, exceeding our full-year expectation of 10%. This was driven by strong demand for securities-based lending. Net interest income was $1.3 billion, excluding prepayment amortization, which declined approximately $150 million sequentially NII was up slightly. The benefit of incremental loan growth was offset by the downward movement in the middle of the curve. We have realized the fully phased-in synergies that we expected for 2021. For NII going forward, $1.3 billion is a reasonable exit rate to inform the back half of the year. We expect NII to build from this level as we anticipate loans to grow more in line with 2020 levels. The integration of E-Trade is going well, and we continue to prioritize the client experience. While early, we are encouraged by continued client engagement and excited about the potential of our pilot programs around referrals. The workplace channel continues to show momentum as we win equity plans, and our number of participants now stands at 5.2 million. Financial wellness plans are also gaining traction. We had four times as many wins year over year. Moving to investment management. Because the timing of the close of the Eaton Vance acquisition makes comparisons to prior periods difficult, I will review the quarter mainly on an absolute basis. Revenues were $1.7 billion. Total AUM reached $1.5 trillion, and total net flows were over $48 billion. Since we announced the acquisition at the beginning of October, pro forma net flows were approximately $150 billion. The increased diversification of this business was a significant driver of results. Total AUM increased 7% from the prior quarter and stands at a record high, of which long-term AUM reached $1.1 trillion. The benefit of our broadened product offering and positioning in secular growth areas supported our net flows this quarter. Inflows across products resulted in over $13 billion of long-term net flows. We saw particular strengths in alternatives and solutions driven primarily by demand for parametric customized portfolios, as well as a $1 billion strategic multi-asset partnership mandate. We continue to see strong client momentum in our private credit and core real estate platforms. Loan strategies and fixed income were particularly robust. Asset management and related fees were $1.4 billion, more than doubling from the prior year, driven by strong AUM growth and the addition of Eaton Vance. Performance-based income and other revenues were $284 million in the quarter, reflecting broad-based strength across the private alternatives portfolio. With the integration on pace, our very strong position in customization, sustainability, alternatives, value-added fixed income, and high-conviction equity investing, positioning us all as a critical partner to global clients. Turning to the balance sheet, thought assets were essentially flat. Standardized RWAs increased to $461 billion. Our standardized CET1 ratio was flat to the prior quarter at 16.7% compared to our CET1 requirement, including the SCB, of 13.2%. During the second quarter, we repurchased approximately $2.9 billion of common stock, or 34 million shares. Our tax rate for the quarter was 23%. The second quarter results were strong and balanced. Looking ahead, while we are cognizant of the typical summer slowdown, we are starting the third quarter from a position of strength. Investment banking pipelines are healthy, dialogues are active, and markets are open. Wealth management continues to retain and attract new clients, new advisors, and new assets. Investment management should continue to benefit from the increased diversification of the platform. With that, we will now open the line to questions.