Morgan Stanley

Good morning. On behalf of Morgan Stanley, I will begin the call with the following disclaimer. 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 to 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.

Good morning, everyone, and thank you for joining us. The first quarter of 2023 was very eventful for our industry, but not so eventful for Morgan Stanley. The firm delivered strong results with revenues of over $14.5 billion, net income of 3 billion, ROTCE of 17%, and net new asset flows of 110 billion. At the same time, we brought back 1.5 billion of stock while maintaining a CET ratio of 15.1%. In many ways, it was an excellent test for Morgan Stanley and the opportunity to show the strength and stability of our business model. Let me just touch briefly on the turmoil in the banking sector. In my view, we are not in a banking crisis, but we have had and may still have a crisis among some banks. I believe strong regulatory intervention on both sides of the Atlantic led to the cauterization of the damage. I consider the current issues as not remotely comparable to 2008. I was pleased that Morgan Stanley, along with the other large U.S. banks, became part of the solution by providing an uninsured deposit line of $30 billion to First Republic Bank. As someone who lived through the darkest days of 2008, when Morgan Stanley was seen as part of the problem, it's indeed rewarding to be here 14 years later as part of the solution. Turning back to our own company. While the performance of the overall business was strong, the results reflected the impact of the environment. In wealth management, positive flows of $110 billion were a very strong result, reflect continued growth in the model together with the flight to quality. This obviously gives us a good start to our one trillion every three years target. Diversive management also benefited from diversification as long-term outflows moderated and we saw strength in parametric and also in the liquidity product. Overall margin of the wealth management business was 26% impacted by modest increases in credit reserves, slightly lower growth of NII versus forecast, and ongoing integration expenses. We continue to focus on the levers within our control with an eye towards expense management. In ISG, underwriting and M&A remain very subdued. As I've said previously, these are revenues delayed, not dead. Already, we're seeing a growing M&A pipeline and some spring-like signs of new issuance emerging. That said, it largely remains a back-half 2023 and full-year 2024 story. On the positive side, our fixed income and equity trading teams performed very well in managing through some historic rate moves. Total trading revenues were solid. I expect the markets to remain choppy through this earnings season and for the next several months. However, absent any geopolitical surprise or limited progress on bringing down inflation, I think 2023 is likely to end on a constructive note in most areas. Morgan Stanley is very well positioned, not just for 2023, but for several years ahead as we see significant growth opportunities across all three of our client platforms. I'll now pass it over to Sharon for more details on the first quarter.

Thank you, and good morning. The firm produced revenues of $14.5 billion in the first quarter. Our EPS was $1.70, and our ROTCE was 16.9%. The firm's results demonstrated the durability of our business model, evidenced by the resilient ROTCE, robust asset consolidation, and wealth, and our stable capital and liquidity levels. In institutional securities, fixed income and equity supported our clients while navigating volatile markets. Wealth management showcased $110 billion of net new assets, and investment management continued to benefit from the investments we have made to diversify our offerings. The firm's first quarter efficiency ratio was 72%. Deferred cash-based compensation plans negatively impacted our firm's efficiency ratio, by approximately 60 basis points. Ongoing technology and marketing and business development investments, as well as higher litigation costs, increased operational expenses versus the prior year. Given the broader market uncertainty and the inflationary environment, expense management remains a priority, although we continue to prioritize investments in our long-term goals. Now to the businesses. Institutional securities revenues were $6.8 billion, an 11% decline from the very strong prior year. Fixed income and equity results partially offset weakness in banking, as we helped our clients intermediate markets through this period of heightened uncertainty. From a regional perspective, Asia delivered its third highest quarter ever, with strength in areas of both fixed income and equity. aided by the policy dynamics in Japan and the China reopening. Investment banking revenues decreased year over year to $1.2 billion. Solid revenue and advisory supported results, while ongoing market volatility continued to pressure equity and non-investment grade underwriting. Advisory revenues were $638 million, benefiting from the completion of previously announced transactions. Revenues were down versus the strong prior year on the back of lower announced volumes in 2022. Equity underwriting revenues were $202 million, down 22%, largely as a result of depressed IPO activity. While IPO and follow-on activity remained muted, issuers selectively accessed market windows. Fixed income underwriting revenues were $407 million. Results were supported by an open investment grade market and opportunistic loan activity. Clients are engaged as we help them navigate an uncertain backdrop. And our investment banking backlog is building. Financial sponsors continue to look for opportunities to invest. Within underwriting, we are encouraged by the issuance activity during constructive windows. Of course, further conversion from pipeline to realize is predicated on clarity around macroeconomic conditions, stable financing markets, and increased corporate confidence. Equity revenues were $2.7 billion, a solid quarter against an uncertain and volatile backdrop. We continue to be a leader in this business, and the results reflect our global and diversified footprint. Cash revenues decreased versus the prior first quarter on lower global volumes. Derivative results were solid compared to a strong quarter last year, as we helped clients navigate challenging markets. Prime brokerage revenues were down as equity market levels declined. Clients remained engaged, and balances increased steadily throughout the quarter. Fixed income revenues of $2.6 billion were strong, though lower versus the prior year's elevated results. which was impacted by the beginning of the Fed rate hiking cycle and the start of the war in Ukraine. This quarter's performance was driven by rates and credit. Macro revenues were down modestly year over year, with relative strength in rates versus foreign exchange in the comparison period. The volatility created by varying expectations around global central bank policy aided results across regions. Micro results were up versus the prior year, supported by client engagement. Commodity revenues moderated meaningfully compared to the robust results in the previous first quarter, largely due to reduced volatility in European markets and the mild weather in the U.S. Other revenues of $245 million improved versus the prior year, largely driven by higher revenues on corporate lending activity. and gains related to DCP. Turning to ISG lending and provisions, our allowance for credit losses on ISG loans and lending commitments increased to $1.3 billion. In the quarter, ISG provisions were $189 million, and net charge-offs were $70 million. The increase in provisions was driven by the higher recessionary probability and worsening outlook for commercial real estate. The charge-offs were substantially all from a handful of specific loans. Turning to wealth management, revenues were $6.6 billion. Movements in DCP positively impacted revenues by approximately $100 million, compared to a negative impact of nearly $300 million in last year's first quarter. Net new asset growth of $110 billion was a standout. as we continue to execute on our long-term strategy. Free tax profit was $1.7 billion, and the PBT margin was 26.1%. The margin reflects a more favorable revenue mix, offset by higher credit provisions and an increase in expenses as we continue to invest in our business, inclusive of integration-related expenses. Credit provisions were $78 million, including those that impacted revenue. and the integration-related expenses for the quarter were $53 million, in line with our expectations. Forward growth drivers remain robust. Net new assets were very strong at $110 billion for the quarter, representing a 10% annualized growth rate of beginning period assets. While NNA will be lumpy and should be looked at on a full-year basis, the results illustrate our ability to attract assets, and the payoff of our investments to support growth. We saw contribution from all channels, with notable strength in the advisor-led channel, particularly amongst existing clients. The events in March and the rising interest rate environment over the past year impacted client behavior. Clients increased their allocation to cash equivalents, such as money market funds and US treasuries, by over 60% versus last year. At the same time, deposits declined in the quarter by 3% to $341 billion. We believe investable assets stayed within Morgan Stanley as our clients worked with advisors to help navigate the volatile markets. Today, advisor-led assets invested in cash and cash equivalents stand at a peak of 23% compared to a historical average of approximately 18%. Over time, we believe clients will reinvest these balances across more assets when the market outlook improves. In the interim, given our broad product offering, clients are choosing to invest in cash with Morgan Stanley through the cycle, positioning us to provide them with more reinvestment choices down the road. Net interest income was $2.2 billion, up 40% year over year. Results reflect the impact of higher interest rates and lower suite balances. Fee-based flows of $22 billion were strong. Asset management revenues were $3.4 billion, down 7% versus last year, reflecting lower market levels. Transactional revenues were $921 million. Excluding the impact of DCP, revenues were down 12% versus last year due to fewer new issuance opportunities and reduced activity levels compared to the beginning of 2022. Lending balances declined this quarter to $144 billion, led by pay downs in securities-based lending, reflecting the higher interest rate environment. Importantly, our strategy is working, and we are seeing channel migration from workplace to advisor-led. Advisor-led flows originating from workplace relationships reached $28 billion in this quarter alone, double versus this time last year. And this compares to the approximate $50 billion we saw annually over the past three years. Furthermore, almost 90% of these flows were from assets held away, also consistent with what we have seen historically. Our strategy remains in place to best serve our clients and support the firm's path to reach $10 trillion in client assets. Moving to investment management, revenues of $1.3 billion declined 3% year over year, primarily on lower AUM due to the decline of asset values and the cumulative effect of outflows over the prior year. Total AUM ended at $1.4 trillion. Long-term net outflows were $2.4 billion as equity outflows moderated in the quarter. In fixed income, outflows in floating rate loans were partially offset by high yield and emerging markets. Finally, alternatives and solutions delivered strength, driven mostly by demand for parametric fixed income customized portfolios, as well as inflows into private credit. Liquidity and overlay services had inflows of $13.9 billion. Positive liquidity inflows of $37 billion were partially offset by outflows related to a single client relationship. Asset management and related fees decreased versus the prior year to $1.2 billion due to lower average AUM, partially offset by higher liquidity fee revenue. Performance-based income and other revenues were $41 million. Results were supported by gains in our private alternatives portfolio. reflecting the diversity of the platform. Integration-related expenses were $24 million in the quarter, in line with expectations. A key focus area remains maximizing our global distribution capabilities, and we continue to see momentum internationally, particularly from the Eaton Vance fixed income team. Our investments across a broad array of strategies and capabilities, including active ETFs, Parametric customization and alternatives position us well to benefit from the diversification as well as to serve our global client base. Turning to the balance sheet, spot assets were $1.2 trillion, largely in line with the prior quarter. Our standardized CET1 ratio stands at 15.1% and SLR at 5.5%. Standardized RWAs increase quarter over quarter, primarily on client activity consistent with seasonal patterns. We continue to deliver on our commitment to return capital to our shareholders, including buying back $1.5 billion of common stock. Our tax rate was 19.3% for the quarter. The vast majority of share-based award conversion takes place in the first quarter, creating a tax benefit. We continue to expect our full year tax rate to be approximately 23%, which will exhibit some quarter to quarter volatility. As James discussed, the fallout resulting from the events in March is not indicative of the systemic stress that the industry faced during the global financial crisis. Our clear and consistent strategy allowed us to enter this environment well positioned. The outlook for the remainder of this year is difficult to predict. We are keenly aware that opening and functioning markets and economic stability are integral in aiding confidence moving forward. In the interim, we remain focused on supporting our clients and attracting assets to our platform. With that, we will now open up the line to questions.