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. We started the second quarter with significant headwinds and uncertainties and it's fair to say that we ended the quarter overall in a better place with a better tone. The headwinds reflect the ongoing market transition from a high inflation, low rate environment to a higher rate, lower inflation environment. In addition, there were several other issues impacting the markets. April started on the heels of the first bank crisis since 2008, which had the risk of bleeding into the broader financial system. Prompt action by regulators and what turned out to be idiosyncratic stories of the failed banks, combined with the strength and support from the large U.S. banks, helped to rebalance the system. Second, we found our country moving headlong into a debt ceiling crisis. While our view was it was likely to be resolved, there is no doubt it created unnecessary uncertainty in the markets in April and May. Thirdly, after rapidly rising rates over 15 months, the Fed reached a pause, if not a plateau, at its recent meetings. And while we may not be quite at the end of rate increases, I believe we're very, very close to it. Finally, strong rhetoric from government leaders from both the US and China in recent weeks is evident, but there's now been recent efforts to normalize relations, and a constructive dialogue is surely welcome. Seeing these four not insignificant macro concerns progress positively supported a more constructive tone in the markets, particularly evidence in the last few weeks of the quarter. Beyond more macro issues, we at Morgan Stanley completed a significant part of the E-Trade back office integration, with the final part to be completed after Labor Day, and we're very pleased with how it's gone. And today, we announced new institutional initiatives with Japanese Research and Equity and in foreign exchange with our long-standing partner, MUFG, further evidence of how our businesses can work together over time to best serve our global clients. And importantly, we received the most recent results of CCAR, who pleased our performance under the stress test has improved for the fourth consecutive year, every year since the SCB was introduced. Given our strong results, we increased our dividend by 7.5 cents, the same as we did last year. That brings our total annual dividend per share to $3.40 annually with a dividend yield of about 4% given the current stock price. As to the financial performance of the firm this quarter, certain key metrics were encouraging. Net new assets and wealth management grew by 90 billion, and combined with inflows from investment management, we saw over $100 billion, bringing our year-to-date net new assets to approximately $200 billion in six months. Our year-to-date growth is well ahead of pace, and while obviously any quarter can bounce around, and that will happen, Our consistent growth in net new assets and wealth management is evidence of our scale and our expanded channels and the clients that we serve. Second, our institutional businesses navigated a choppy environment well. And altogether, the firm delivered net revenues of over $13 billion, up 2% from last year when conditions were very different. This translated into an ROTCE of 12%. Finally, our CET1 ratio was 15.5%. While we knew this would significantly exceed our capital requirements, and it did, it reflects our desire to remain highly capitalized in the face of the new, unfolding Basel III endgame. It's too early to predict the rate of market improvement through the rest of 2023, but the more positive tone and activity seen later in the quarter across many parts of our business is promising. Of course, how much it moves through the balance of the year remains unknown. That said, the fundamentals of our business model remain strong. Finally, a brief comment on succession. At the annual meeting in May, I made it clear I would transition out of the CEO role before next year's annual meeting. Succession planning should be intentional and managed just like strategic planning for the firm. or any of our critical talent management processes. We are and have been dealing with a number of uncertainties, including but not limited to the CCAR results, business environment, puzzle three upcoming end game proposals, and certain other pending matters. I committed to the board that I lead our response to those issues, and when I do transition out of the CEO role, I'll remain as executive chairman for a period of time. We are fortunate indeed to have three very strong internal candidates that the board continues to evaluate along appropriate processes for their readiness to step up as the next CEO of Morgan Stanley. I'll now turn the call over to Sharon to discuss the quarter in greater detail, and then together we'll take your questions. Thank you.

Thank you, and good morning. The firm produced revenues of $13.5 billion. Our EPS was $1.24, and our ROTCE was 12.1%. Reported results include severance charges of approximately $300 million. This reduced EPS by 14 cents and ROTCE by about 140 basis points. As James discussed, sentiment and activity improved towards the end of the quarter, evidenced by green shoots that emerged across our businesses. In institutional securities, client engagement progressively picked up. And in wealth management, we witnessed a moderation of sweep outflows as well as a stabilization of retail investments into cash and cash equivalents. The firm's year-to-date efficiency ratio was 75%. In addition to severance, expenses for the quarter included $99 million of costs associated with the integrations of E-Trade and Eaton Advance, approximately 75% of which relates to E-Trade. Together, severance and this year's integration represent an impact of about 175 basis points to the year-to-date efficiency ratio. For the balance of the year, our expectations for total integration expenses are broadly in line with our prior guidance, with approximately $150 million remaining. Looking towards the back half of 2023, we continue to balance investments with the operating environment. Now to the businesses. Institutional securities revenues of $5.7 billion declined 8% versus last year. With overall client activity, while overall client activity was lower compared to the prior period, results improved as the quarter progressed alongside better market conditions. Investment banking revenues were flat compared to a year ago. Although advisory remained under pressure, a pickup in underwriting supported results. Advisory revenues of $455 million reflected lower completed M&A volumes. Equity underwriting revenues were $225 million. While IPO activity remained muted, results were supported by follow-ons and convertibles, encouraging signs that equity and equity-linked markets were opened at times for regular way issuance. Fixed income underwriting revenues were $395 million. up year over year, driven mostly by investment-grade bond issuance, where corporates and financials took advantage of constructive markets in May and June, respectively. Investment-grade markets remain resilient against an uncertain backdrop. Across investment banking, client activity trended positively as the quarter progressed. The preannounced M&A backlog grew consistently throughout the quarter, with a potential plateau in rates and lower implied volatility, client dialogue is currently active. We continue to invest in the franchise and have made selective senior hires to enhance our footprint to best position for the opportunity. While we are cognizant of the typical summer slowdown, and it is hard to know whether positive trends will continue for the near term, current conditions remain encouraging, certainly for the medium-term outlook and especially for 2024. Equity revenues were $2.5 billion, down 14% compared to strong results in the previous second quarter due to lower activity and lower market volatility. Time brokerage revenues were solid, supported by increasing average client balances consistent with rising market levels. Cash and derivatives declined versus last year on lower global volumes and lower market volatility. Fixed income revenues of $1.7 billion decreased compared to last year's elevated results. Solid performance reflects tempered client activity and prudent risk management. However, improved market conditions in June shifted client sentiment and supported the quarter's overall results. Macro revenues were down year over year, attributed to the declines in foreign exchange and a challenging environment and reduced activity. partially offset by the pickup in client engagement following the resolution of the debt ceiling debate and performance in rates. Micro results declined versus last year, predominantly on the back of lower client activity. Results in commodities were down significantly compared to the robust prior year, which benefited from volatile energy markets. Other revenues of $315 million improved versus last year, largely driven by lower mark-to-market losses, net of hedges, and higher net interest income and fees on corporate loans held for sale. Turning to ISG lending and provisions, our allowance for credit losses on ISG loans and lending commitments increased to $1.4 billion. In the quarter, ISG provisions were $97 million. The increase was driven by continued negative outlooks for commercial real estate and modest portfolio growth. Net charge-offs were $30 million and were substantially all from a handful of specific loans from our corporate lending portfolio. Turning to wealth management, revenues were $6.7 billion, a record. Excluding the impact of DCP, revenues were $6.6 billion and increased 5%, supported by higher net interest income. Results demonstrate the strength of the business model and our ability to continue to serve clients throughout different market environments. Free tax profit was $1.7 billion, with a PBT margin of 25.2%. Severance charges were $78 million, and integration-related expenses were $75 million. Taken together and with the impact of DCP, These three factors were a drag on the margin of approximately 300 basis points. Despite the challenging market backdrop, the business model continued to deliver against our core objectives. Most notably, wealth management delivered $90 billion of net new assets, demonstrating our platform's ability to grow in various market environments. Net new assets were driven by our advisor-led channel. Existing client consolidation and net recruiting were strong and offset seasonal tax-related outflows in April. Our early investments in technology, including data and AI, are providing advisors with tools to service current clients better and more efficiently prospect new business, including from our workplace channel. Also significant. As James mentioned, we are pleased to share that we have accomplished an integral part of E-Trade's back office integration, converting over 3 million E-Trade accounts to Morgan Stanley's unified platform. We did this with virtually no client disruption, which has always been a critical priority. We expect to finish our integration efforts on time in the second half of this year. Moving to our business metrics in the second quarter, performance was solid down the line in light of the environment. Asset management revenues were $3.5 billion, down 2% versus last year's second quarter, primarily reflecting lower market levels. Transactional revenues were $869 million. Excluding the impact of DCP, revenues declined 2% year over year, reflective of lower client activity for most of the quarter. Fee-based flows were $22.7 billion. Bank lending balances grew by $1.1 billion, driven by mortgages, offsetting pay downs in securities-based lending. Total deposits of $343 billion were up slightly quarter over quarter. Sweep outflows moderated during May and June compared to April, which included seasonal tax outflows. The recent month's trends are encouraging, but it remains too early to be declarative. Net interest income of $2.2 billion was virtually flat versus the prior quarter. The impact of lower sweep balances and higher funding costs were offset by higher rates. Looking towards the rest of the year, we do not expect NII to expand. Results will be a function of our deposit mix and the trajectory of various rates. Similar to the institutional business, Retail sentiment improved as the quarter progressed. For the first time since the beginning of the year, June saw positive monthly flows into equity markets from advisor-led suite balances. We are encouraged by this more recent activity and remain well positioned to support ongoing asset growth and our clients through market cycles. Turning to investment management. Revenues of $1.3 billion declined 9% from the prior second quarter, primarily reflecting lower performance-based income and the cumulative impact of lower asset levels over the course of the year, commensurate with the market environment. Asset management and related fees were $1.3 billion, declining 3% year over year, reflecting the stability and diversification of our client franchise. Performance-based income and other revenues declined year over year due to the challenging investing environment in certain asset classes and markets, such as real estate and Asia private equity. Solid performance in other areas of our private alternative strategies acted as a partial offset, reflecting the diversity of our platform and our capital-light, client-driven alternative franchise. Total AUM increased $1.4 trillion. Our integration with Eaton Vance continues to progress well. Integration-related expenses were $24 million in the quarter. Long-term net flows were positive. Inflows were driven by ongoing demand in alternatives and solutions, which offset outflows in equities and fixed incomes. Within alternatives and solutions, parametric customized portfolios, private credit, and private equity remain consistent sources of net inflows, underscoring the benefits of our diverse platform. Additionally, this quarter, alternatives and solutions benefited from a significant inflow related to a portfolio solutions mandate. Liquidity and overlay services had inflows of $9.7 billion, supported by ongoing demand for money market funds. We continue to be very well positioned in secular growth areas, such as customization and private markets, across geographies, and with our global client base. Turning to the balance sheet, total spot assets decreased $35 billion from the prior quarter to $1.2 trillion. Our standardized CET run ratio was 15.5%, up approximately 40 basis points versus the prior quarter. Standardized RWAs declined about $9 billion from the prior quarter to $450 billion due to market conditions and continued prudent resource management. Recent stress test results reaffirmed our strong capital position and our durable business model. We announced a quarterly dividend increase of 7.5 cents and renewed our $20 billion multi-year repurchase authorization. Our tax rate was 21% for the quarter, reflecting our global mix of earnings. While we outperformed our tax guidance in the first half, we expect a tax rate of approximately 23% in the second half of this year, consistent with our initial guidance. Although we cannot be sure how the backdrop will play out for the rest of 2023, our priority as a management team is to diligently address what we can control, given the market realities. Should stable and higher asset levels prevail, wealth and investment management are poised to benefit, particularly as we continue to attract net new assets, a testament to our asset growth strategy. Within institutional securities, while advisory will lag the financing markets, the backlog is building and underwriting trends are positive. Open and functioning markets remain key to supporting client conviction and activity levels. Most critically, our business continues to advance our clear and consistent firm strategy, driving long-term growth while remaining well capitalized. With that, we will now open the line up to questions.