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. These refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release and strategic update. Within the strategic update, certain reported information has been adjusted as noted. These adjustments were made to provide a transparent and comparative view of our operating performance against our strategic objectives. The recommendations of this non-GAAP adjusted operating performance metrics are included in the notes to the presentation of the earnings release. Morgan Stanley closed its acquisition of E-Trade on October 2, 2020, impacting annual comparisons for the Furman Wealth Management and closed its acquisition of Eton Vans on March 1, 2021, impacting period-over-period comparisons for the Furman Investment 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. Good morning, everyone. Morgan Stanley delivered another record year of profits and results in 2021, generating a full-year ROTCE of 20%. Performance was strong in each business. In institutional securities, we showed strength and gained share, and in wealth management, we added over $430 billion of net new assets, bringing total client assets to nearly $5 trillion. We drove our strategic vision forward in investment management, successfully closing our acquisition of Eaton Bank earlier in the year, and created a premier asset manager, which itself has $1.6 trillion of assets under management. Jerome will discuss the details of the quarter and the full year shortly, but first, as always, I will walk through our annual strategic updates. If you turn to the document and start on slide three. At the beginning of last year, we set two-year objectives with the expectation that 2021 would be a transition year as we worked through our integrations. Clearly, the firm's performance exceeded the expectations we had for 2021 heading into that year. With the early successes of the E-Trade and Eaton Vance acquisitions and the firm's overall momentum, We entered 2022 ahead of plan. Turn to slide four. First, I'll focus on our 12-year transformation and where the firm is today. History offers perspective on our track record. Next, I'll highlight where we've built unique competitive advantages around each of our businesses and how we expect to grow and maintain our leading positions. Then I will address our continued commitment to return capital to our shareholders and finally, I'll touch on how, when taken together, this should lead to further multiple expansion. To begin with our longer-term evolution, slide five highlights the transformation Morgan Stanley into a more balanced, higher-returning firm today. Total revenues are more than double the level of 2009, with each business significantly growing and contributing to the firm's enhanced profitability. Each of our businesses now have defensible and sustainable competitive advantages to protect and drive their leading positions. Start with institutional securities on slide 6. Looking back to 2014 when we recovered from the financial crisis, but before we reset our strategy and restructured some of this business, we've increased share both overall and individually across business lines. Share continues to aggregate to the industry leaders, and we expect this trend to hold. Our competitive position is strong, and as demonstrated in the very active market for the last two years, we're confident in our ability to capitalize on opportunities to hold, if not gain share across the division. Moving to slide seven, our integrated investment bank delivered 30 billion of revenues in 2021, and continues to demonstrate operating leverage highlighted by our expanding margins. Our footprint is balanced around the world, putting us in a leading tier of investment banks with global scale. Our franchise has never been stronger, and we have seen tangible results from the collaboration between our segments. Shifting to wealth management on slide 8, the growth we have seen in 2021 has been unprecedented. We added nearly $1 trillion in client assets in a single year, scale advantages, propelled growth, and we added $438 billion of net new assets in the last 12 months. This predominantly organic growth is the result of our consistent and focused execution on our integration and expansion initiatives and puts us in a leading position. The journey of the last few years has demonstrated the art of the possible. With respect to net new asset growth, this business has gone from very low single digits in the last decade to 4% to 6% more recently to unprecedented growth this year. Obviously, it's still early days, but the verticals are in place. Before we commit to specific guidance for net new asset growth, we need more time to better understand the power of these channels. But what I can tell you is that the proof points are strong, and we feel great about where we are today in the business potential. Turn to slide 9. With the top advisor-led business in the industry, complemented by leading workplace and self-directed offerings, the wealth franchise we have built is a category of one. We already serve nearly 5 trillion of client assets and overall revenue on assets remains high at over 50 basis points, underlining this segment as an economic engine for the firm. As we think about the growth ahead, we are most excited about the nearly 15 million relationships we have across channels. and the potential to deepen those relationships further and consolidate client assets onto the platform. On slide 10, we look more closely at Workplace, which I'm incredibly excited about for the future. As we've said before, we see this channel as a funnel for client and asset acquisition to sustain growth going forward. We now have over $500 billion of unbested assets in this channel and expect to retain an increasing proportion as they best. In 2021, we had a 24% retention rate that compares with 21% the previous year. Given our focused effort, our long-term goal is to reach 30% retention. This new metric illustrates the strength of the workplace business to augment net new assets to wealth management. Moving to investment management on slide 11. Our platform has transformed into a premier and growing asset manager. Our distinctive capabilities enable us to deliver differentiated client value as endorsed by $115 billion of net flows in the year. Total AUM is now $1.6 trillion and our more durable asset management fees are nearly triple what they were in 2014. If you look closer at our investment management business on slide 12, you can see we're a leader and growing where it matters most. Customisation, specifically direct indexing through the premier parametric brands, sustainability and alternatives are each areas of increasing client demand. We've strengthened our position across these categories with robust investment capabilities and we've seen meaningful asset under management growth as a result. Moreover, the complementary nature of distribution networks with Eaton Vance's powerful US retail distribution capabilities and MSIM's strength in international distribution enhances our client reach. We're encouraged by all these signs of success in leveraging the greater combined network, along with our world-class equity franchise and value-added fixed income platform, and we expect these areas will continue to drive growth into the future. Finally, on slide 11, as we look ahead, we expect rates to rise. We expect approximately $500 million of incremental NII in wealth management this year based on the year-end forward curve. Additionally, we expect another $200 million this year from the reversal of fee waivers in our investment management business. To further measure our rate sensitivity, we look at what happens if there is an incremental 100 basis point parallel shift in rates beyond the curve. That would deliver another $1.3 billion, which largely goes to the bottom line. While we certainly don't expect this additional shift to happen this year, the firm will clearly benefit substantially as rates rise over the next several years. Dividing to our capital return strategy on slide 14. Increased earnings power, supported by revenues from more durable sources, has enabled us to double our annualised dividend to $2.80 just last year, while at the same time executing on meaningful share repurchases. Notwithstanding the returns we make in the shareholders and the investments we make in our business, we continue to have an excess capital position. Our CMT1 ratio was 16% at year end, after paying our dividend, executing on our repurchase plan, and accounting for the impact of SACA. And as further illustrated on slide 15, growing net income has provided us the flexibility to reduce our share count. While we added 300 million shares from our two large acquisitions of E-Trade and Eaton Vance, we continue to execute on our meaningful buyback program and have brought back our share count back to just under 1.8 billion from 2 billion in 2014. Taking all this together, slide 16 highlights the fundamentals we have in place to drive future multiple expansion. We have scale, significant growth opportunities in wealth and investment management, coupled with a leading institutional business and a strong commitment to capital return. The Morgan Stanley brand has never been stronger. We've been fortunate enough to acquire additional brands in the last few years that have tremendous value in expanding our footprint. The sum of these elements supports multiple expansion for the combined company. Slide 17 shows our performance goals. Of note, we are increasing our ROTCE goal to reflect the earnings power we see in our business model. We are laser focused on delivering value to our clients, our shareholders, and our employees, and we believe an ROTCE in excess of 20% is achievable. As we look to the longer term, with the support of our track record behind us, we're adding a new goal, a long-term goal to achieve $10 trillion in client assets across wealth and investment management. As always, our targets are subject, of course, to major market moves or changes in the economic, political and regulatory environment. However, with the outlook we have now, we fully expect to achieve our goals. I'll now turn the call over to Sharon, who will discuss our fourth quarter and annual results, and together we will take your questions. Thank you.

Thank you, and good morning. The firm produced record revenues of $59.8 billion in 2021 and ended the year on a strong footing, with fourth quarter revenues of $14.5 billion. All three businesses contributed to the extremely strong full-year results, reflecting high levels of client engagement and active markets. Including integration-related expenses, our ROTCE was 20.2% for the full year and 20.4% for the fourth quarter, and EPS was $8.22 and $2.08, respectively. Even while investing in our business, we continue to demonstrate operating leverage, led by institutional security. The full-year efficiency ratio was 67.1%. including integration-related expenses, our full-year efficiency ratio was 66.3%, down from 68.4% in 2020. Total expenses in the year were $40.1 billion. The increase in total expenses versus the prior year reflects the addition of E-Trade and E-Invance and the integration-related costs, and higher compensation on higher revenues. Now to the businesses. Institutional securities delivered excellent full-year performance, with record revenues of $29.8 billion. In the fourth quarter, revenues were $6.7 billion. Our integrated approach, global footprint, and balance across business lines continues to distinguish our model. Underscoring the operating leverage in the business, pre-tax margin was 39.6% for the full year, increasing from 34.6% in the prior year. Investment banking revenues were a record $10.3 billion for the full year, while each business delivered record results, advisory and equity underwriting led to year-over-year improvement. Corporate clients actively pursued strategic opportunities and sponsored deployed capital. IPO issuances were exceptionally robust in the year, And from a geographical perspective, results were led by the Americas, along with sustained strength in EMEA. Fourth quarter revenues of $2.4 billion increased 6% from the prior year, driven by strength in advisory. Trends from the third quarter persisted, particularly as results benefited from a broadening of transactions across sectors. Although underwriting revenues moderated overall, equity issuance was strong, and elevated levels of event-driven activity supported fixed income. We continue to invest in our investment banking business. Our outlook entering 2022 is strong, and our pipelines continue to be healthy across products. CEO confidence remains high, and markets remain open and constructive. Additionally, advisory transactions should support strong capital market issuance. Equity full-year revenues were a record $11.4 billion, increasing 15% from the prior year, as client engagement remained high. The increase versus the prior year was driven by strength in prime brokerage and, from a geographical perspective, Asia. Revenues were $2.9 billion in the quarter. Increased revenues in prime brokerage on higher client balances were offset by decline in cash and derivatives on lower client activity versus the prior fourth quarter. This quarter also included a mark-to-market gain of $225 million on a certain strategic investment. Fixed income revenues were $7.5 billion for the full year, declining 15% from the last year's exceptional results. The full-year decline was driven by tighter bid-offer spreads in macro and credit corporates, partially offset by securitized products. Quarterly revenues of $1.2 billion were 31% lower than the prior year, reflecting a challenging trading environment in rates, and lower volumes and tighter bid-offer spreads in credit. Further decline in engagement tempered in December, reflecting seasonal patterns, impacting results. Turning to wealth management. For the full year, wealth management produced record revenues of $24.2 billion and a PBT margin of 25.5%. Excluding $346 million of integration-related expenses, the PBT margin was 26.9%. Fourth quarter revenues were $6.3 billion, up 10% from the prior year. and the PVT margin was 22.6%. Including integration-related expenses of $109 million, the PVT margin for the quarter was 24.4%. Quarterly margin was negatively impacted by seasonal expenses, and certain compensation and benefits decisions made to further support our employees. Given the full annual impact of these decisions was taken in the fourth quarter, The impact was amplified in this quarter's margin. Going forward, this will be spread throughout the year pro rata. As we look ahead to the first quarter of 2022, we expect the PBT margin to be more in line with the 2021 full-year margin, excluding integration-related expenses. This business continues to benefit from strong client demand across the platform. Fine assets grew nearly $1 trillion this year and now stand at $4.9 trillion. Fee-based flows were an incredible $179 billion in the year, reporting growth in fee-based assets to $1.8 trillion, or 25% higher than last year. In the quarter, asset management revenues were $3.7 billion. Net new assets of $438 billion in the year represent 11% annual growth of beginning period assets. Momentum was carried through the fourth quarter, which saw net new assets of $127 billion. We saw strong asset generation from both existing clients and net new clients, driven by the advisor live channel. We remain a destination of choice for advisers. and continue to add strong teams and retain productive advisors. Net new assets growth is further buoyed by positive momentum in our newer channels, namely workplace. Our results demonstrate the tremendous asset generation capability of our platform. Transactional revenues in the fourth quarter were $1 billion, declining 23% from the prior year. including the impact of DCP, which declined by approximately $300 million versus prior year, revenues were flat. The workplace continues to gain traction. Our total number of participants we now reach stands at 5.6 million, 14% higher than last year, and unvested assets now exceed $500 billion. As James mentioned, we are reporting on a new metric to show the percentage of stock plan assets that vest and remain within Morgan Stanley Wealth Management. E-Trade previously disclosed a similar metric. The definition going forward will measure the retention of the value of vested stocks on a rolling 12 to 24-month period. This new metric will allow us to measure the potential strength of Workplace to serve as a funnel to grow our asset base. We set 24% retention in 2021, which compares to 21% in 2020. As James mentioned, over time, we believe that number can reach 30% retention for our stock plan administration business. Going forward, we plan to disclose this metric annually. Bank lending balances grew by $31 billion in the year and now stand at $129 billion. Strong client demands for security-based lending, and mortgages throw the increase. Net interest income was $1.4 billion in the quarter, driven by strong lending growth and the benefit of fully phased-in funding synergies. The fourth quarter NII is a reasonable base to inform 2022. This year, NII will be impacted by the forward curve and lending growth. On rates, while the timing and the magnitude of the rate hikes is uncertain, we should benefit from rising rates. and the realization of the forward curve. This would imply an estimated $500 million of additional NII this year, largely weighted to the back half of the year. On lending, we continue to see strong lending demand. And while growth is likely to moderate some, we expect approximately $20 billion of loan growth in the year. Finally, the integration of E-Trade continues to go well. We are encouraged by continued client engagement and are seeing E-Trade clients take advantage of Morgan Stanley capabilities being introduced on the E-Trade platform. Building on our digital client experience, clients are now able to link their self-directed accounts via single sign-on. We have successfully merged E-Trade's bank legal entities with Morgan Stanley's. Throughout the integration efforts, we continue to focus on a unified client experience while providing clients choice. Completing this integration successfully remains a key investment priority. Moving to investment management. The timing of the Eaton Vance acquisition makes comparisons to prior periods difficult. So I will make my comments primarily on an absolute basis. Investment management reported annual revenues of $6.2 billion and quarterly revenues of $1.8 billion. Our results continue to demonstrate the diversification of this business. and a greater contribution from more durable management fee revenue. Total AUM rose to a record high of $1.6 trillion, of which long-term AUM was also a record at $1.1 trillion. Total net flows were $12 billion in the quarter, driven by liquidity and overlay services. Long-term net flows were slightly negative. For the full year, net flows were $115 billion. Asset management and related fees were $1.6 billion in the quarter. The 8% sequential increase was driven by higher performance fees. As a reminder, performance fees are mostly recognized in the fourth quarter. Performance-based income and other revenues were $166 million, reflecting broad-based gains in our diversified alternative platform. Finally, the integration with Eaton Vance remains on track. In the first half of this year, we will bring a number of Eaton Vance and Calvert funds onto our international distribution platform. We are also now offering MSM model portfolios on the E-Trade platform, and we are seeing positive traction. Turning to the balance sheet, total spot assets were $1.2 trillion. Risk-weighted assets were essentially flat for the prior quarter at $472 billion. We adopted SACR on December 1st. resulting in a $23 billion RWA increase. This was offset by a decline in activity and lower market levels towards the end of the quarter. Our SACR mitigation efforts were better than we anticipated and resulted in an impact lower than our initial guidance to produce a better outcome. We repurchased approximately $2.8 billion of common stock during the quarter. We remain well capitalized post the adoption of SACR and our standardized CET1 ratio now stands at 16%, flat to the prior quarter. Our tax rate was 23.1% for the full year, and absent any changes to tax law, we expect our 2022 tax rate to be in line with 2021, which will exhibit some quarter-to-quarter volatility. In terms of our outlook for calendar year 2022, the exit rate of our Wealth and Investment Management asset base and the integrations of our acquisitions set these businesses up to continue to perform strongly. In addition, as James discussed, the realization of the forward curve will only further support results. As it relates to institutional securities, while it remains difficult to forecast this business, the banking pipeline looks healthy, and the year has started off well. That said, a lot will depend on monetary and fiscal policy and its impact on sentiment. With that, we will now open the lineup to questions.