Morgan Stanley

Good morning. Welcome to Morgan Stanley's second quarter 2022 earnings call. On behalf of Morgan Stanley, I will begin the call with the following information and disclaimers. This call is being recorded. 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 that 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.

Thank you, Operator. Good morning, everyone, and thank you for joining us. We're doing the call a little differently this time. I'm in London, Sharon's in New York, so if we have any logistical gaps for a second or two, please understand, but I think we'll be just fine. The firm delivered a very solid quarter against obviously what is a more challenging backdrop. Businesses proved resilient, reflecting an important aspect of our strategy, and that is to, as we've said many times, deliver stable performance in a difficult environment while remaining well capitalized. The integrations of E-Trade and Eaton Vance continued to expand our opportunities to reach new clients, grow assets, and support the firm's overall stability. Net new assets in wealth management of over 50 billion, despite the volatility and clients' tax-related withdrawals in the quarter, underscored the scale of our business and its power to attract assets. And in the face of a sharp decline of equity markets, wealth management delivered a strong PBT and improved margin, supported by the benefits of rising rates. Investment management benefited from its diversification, and we saw continued momentum in private alternatives, parametric customized portfolios, and the countercyclicality of our money market business. Finally, in institutional securities, our strong franchise in equity and fixed income helped materially counter what everybody knows to be limited activity across investment banking. Our results this quarter also reflected two notable headwinds that are worth calling out. First, we saw a significant movement in the investments related to deferred cash-based compensation plans. While the marks on these investments substantially offset in compensation expense, they created significant drag on top line revenues in the quarter across the firm, particularly in wealth management, where the impact of revenues exceeded $500 million. Secondly, the quarter results also included the legal costs of $200 million that reflects the likely resolution of regulatory investigations by the SEC and the CFTC regarding employees' use of unapproved personal devices and the firm's record keeping requirements. This has been the subject of industry-wide scrutiny. Our ROTC excluding integration expenses for the deals that we've done was 14.3%, down 20% in Q1 and from last year. As I said at the outset, our objective to demonstrate resilience and balance in a more difficult economic cycle was achieved this quarter. helped in part by the acquisition of E-Trade and Eaton Vance in what was otherwise a challenging environment. Finally, the Fed stress test further affirmed our differentiated business model. Our diversified business mix, as well as our strong capital position, provide us the flexibility to invest for future growth and support our robust capital return program. As such, we increased our quarterly dividend by 11%, and announced a $20 billion multi-year buyback program. Having a dividend that's aligned to the more stable earnings from wealth and investment management is a leading priority of this firm. And by the way, today's stock price, the current dividend, has a yield of approximately 4%. With the buyback, we wanted more flexibility than an annual fixed commitment allows. Given the nature of our business model, it's especially appealing to have this additional flexibility to deploy capital at what we believe to be attractive valuations. I'll now turn the call over to Sharon, and as always, at the end, we'll take your questions.

Thank you, and good morning. The firm produced revenues of $13.1 billion in the second quarter. Our EPS was $1.39, and our ROTCE was 13.8%. Excluding integration-related expenses, our EPS was $1.44 and our ROTCE was 14.3%. Our results reaffirm the stability of the franchise against the challenging backdrop and the benefits of a balanced business model. The integrated investment bank continues to serve clients' evolving needs in a dynamic environment. Wealth management benefited from its scale and rising rates. Despite the decline in global asset prices, our expanded product set and investment management proved supportive to that business. The firm's year-to-date efficiency ratio, excluding integration-related expenses, was 70%. This includes the $200 million legal matter related to the firm's record-keeping requirements that James discussed. Given the broader market uncertainty and inflationary environment, we are focused on discretionary spend, while balancing continued investment initiatives and ensuring the right controls are in place to support future growth. As a management team, our priority is to diligently address what we can control given the market realities. We will continue to review incremental spend as we regard efficiency as a critical performance objective. Now to the businesses. Institutional revenue of over $6 billion demonstrates the power of our balanced franchise against the difficult market backdrop. Revenues declined from the exceptionally strong prior year, while the backdrop was challenging for investment banking, particularly underwriting. Fixed income and equities led the strength of the quarter as clients navigated volatile markets. Investment banking revenues were $1.1 billion, down significantly from the prior year. Heightened volatility led clients to delay strategic actions and new issue activity. Advisory revenues were $598 million, reflecting lower completed M&A volumes. Equity underwriting revenues declined to $148 million. Results were in line with global equity volumes, which fell meaningfully versus the prior year. Fixed income underwriting revenues were $326 million, also down compared to the prior year. as bond issuance was muted across both investment-grade and non-investment-grade companies. The investment banking pipeline remains solid. Conversion, to realize, will largely be dependent on market conditions and corporate confidence. Equity revenues were $3 billion, reflecting the strength of our business against a volatile backdrop. Prime brokerage revenues