Morgan Stanley

Good morning. Welcome to Morgan Stanley's fourth quarter and full year 2025 earnings call. On behalf of Morgan Stanley, I will begin the call with the following information and disclaimer. This call is being recorded. During today's presentation, we will refer to our earnings release, financial supplement, and strategic update, 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 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. The reconciliations Of these non-GAAP adjusted operating performance metrics are included in the notes to the presentation or 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 Ted Pick.

Ted, you may proceed. Good morning and thank you for joining us.

In 2025, the U.S. economy proved resilient as ever. As predicted, the capital markets are kicking in with well-capitalized corporates and higher-end consumers driving the economy forward. 2026 starts with the tailwinds of constructive fiscal policy and easier monetary policy. As the arc of history resumes, geopolitics are front and center with a broadening set of opportunities and challenges. While the higher plane of Morgan Stanley results tell a story of durable performance, we are mindful of the combination of geopolitical swirl and nebulant markets. The macro backdrop is complicated. On the one hand, the setup is ideal. We are monetizing the long-awaited conversion of capital markets green shoots across our investment banking and markets verticals, and we are scaling asset inflows and transaction activity across our wealth businesses. At the same time, we are well served to watch for any overreaching against ongoing global uncertainties and higher asset prices. 2025 results, and in fact the results for every quarter over the last eight, are a blueprint for Morgan Stanley's success. We expect this mix of tailwinds and headwinds to prevail in 2026 and are prepared to continue to execute. We will now walk through the 2026 strategy deck entitled The Integrated Firm, Executing on a Higher Plane. which can be found on the Morgan Stanley website. We will then detail fourth quarter and full year results. Turning to slide three, Morgan Stanley's 2025 results are summarized by $9.3 trillion in total client assets, $10.21 in earnings per share, and a 21.6% return on tangible. The firm's trusted advisor franchise delivered across all three metrics. Slide four shows that our average earnings per share and returns on tangible over the last decade reflect the transformation of Morgan Stanley's business model. The last five years are the result of share gains and operating leverage via consistent investment in technology, footprint, and the successful integration of key strategic acquisitions. Moving to slide five, we're well on track toward our firm-wide goals. We've compounded wealth and investment management client assets towards 10 trillion plus. In institutional securities, we gained 100 basis points of wallet share with clients across investment banking and markets, reflecting the strength of our integrated investment bank and global franchise. Please turn to slide six. We've moved up the firm-wide goals page for review in the context of the last two very strong years. 2025 results in the fourth quarter or on an annual basis broadly met or exceeded our firm-wide goals. Asset growth accelerated with last year's additional $1.4 trillion. Wells pre-tax margins are at their highest levels ever with the fourth quarter's 31% printed result. Institutional securities gained share across underwriting and equities trading, and we closed the year with a strong advisory result. In short, the firm is running at a higher run rate. We are executing from a position of strength. Multi-year investments in the core businesses client momentum, management stability, and growing capital excess. But as I observed in the opening, there are both macroeconomic and geopolitical tailwinds and headwinds. And in our view, while we are happy to have reached many of these firm-wide goals, perhaps earlier than some expected, this is not the time to overreach. These last eight quarters memorialize consistent execution against different mini macro uncertainties, and our multi-year growth plan contemplates both secular growth in available wallet, and continued durable share gains. Our expectation going forward is that if this environment is welcoming, we are meant to execute at or above these firm-wide goals, as we did in 2025, and when the backdrop is more challenged, to endeavor to achieve higher lows. The longer-term cadence we seek is a higher plane of operating performance through the cycle as we compound earnings in a capital-efficient way. Now to the forward growth plan. Please turn to slide seven, where we review our major businesses. As you know, wealth has three channels. Our financial advisors workplace in E-Trade, each a category leader, which taken together comprise our strategic client acquisition model. In institutional securities, we have deep client relationships and a global footprint under the integrated investment bank. We have diversification in investment management led by parametric alternatives and fixed incomes. we continue to invest in each of our three business segments, wealth, institutional securities, and investment management via human capital and technology. Our growth plans embed the increasing adoption of AI tools throughout the enterprise and inside our client base. With each passing quarter, our confidence continues to increase in the potential for both the efficiency and the effectiveness of AI-related technologies across the business units and infrastructure. Slide eight. Our wealth management business is built for scale and performance. The financial advisor, workplace, and E-Trade channels are each thriving. The business had net new assets of over $350 billion last year. Over the last five years, the firm attracted $1.6 trillion plus of net new assets with a doubling of fee-based flows. For 2025, wealth achieved $32 billion in revenues, 29% margins. The funnel is working. Please turn to slide nine. With 20 million wealth relationships, future growth is embedded in the business. Our intense focus on the value of advice, which generates movement through the funnel, allows us to capture opportunities for advisor-led assets. In 2025, we saw accelerating flows across channels with 100 billion migrating to financial advisors. We're using our scale to invest in broadening capabilities for FAs that are difficult for others to replicate. Alternatives and privates. tax-efficient investing, digitized assets, family office and OCIO, and tailored lending. Collaboration across the integrated firm is felt by clients for both their corporate and personal wealth needs. Slide 10 dives deeper into institutional securities. We have an established global footprint and revenue base. Banking and markets gain wallet share delivering margins of 34 percent. Revenue growth supported by the recovery in investment banking is running roughly two times SLR and RWA growth since 2023, reflecting our continued focus on capital efficiency and operating leverage. Turning to slide 11, the institutional securities value proposition is reflected in the integrated investment bank. We approach client coverage holistically and provide comprehensive solutions with the support of integrated teams. The collegiality and Morgan Stanley tenure of the leadership teams across banking and markets, on average about 25 years at the firm, is critical in bringing the best of our intellectual capital to clients. The themes of the equitization of global markets and the full suite of expertise to advise on cross-border M&A are at our global core. ISG Sharegain's position as well for the global investment banking and capital market cycle in 2026 and beyond. Please turn to slide 12. In investment management, We continue to benefit from secular growth in investing solutions and the democratization of alternatives. Parametric is the industry leader in tax-efficient investing at $685 billion in AUM and stands to benefit as more clients and asset managers seek customized solutions. Our alternatives platform has more than doubled in five years, with investable assets now at $270 billion. These and other areas of strength are supported by ongoing investments in technology and global distribution. Slide 13 underscores Morgan Stanley's global presence. We have 30,000 people outside the U.S. in every business unit and in large tracts of infrastructure. Twenty-five percent of our revenues this year came from outside the U.S., with EMEA growing revenues by 40 percent and Asia by 50 percent over the last two years. We have leading businesses in Japan, thanks to our almost 20-year joint ventures with our close partner MUFG, and a world-class business in Hong Kong. We've grown in the EU and maintained leadership in the UK. In a world that is both de-globalizing and re-globalizing, our presence and footprint matter. Slide 14 illustrates why Morgan Stanley wins as the integrated firm. We have scaled capabilities and a business mix that can support our clients throughout an entire life cycle. Our Morgan Stanley work business with its exclusive partnership with Carta positions us as an early trusted advisor to over 50,000 private companies. As workplace companies grow, we can provide traditional institutional servicing. Employees across our workplace companies benefit from our management of equity compensation plans, liquidity opportunities, and our full service advice. We are focused on both the public and the private ecosystems, augmented by our recent acquisition of EquityZen. The objective is to cover growth companies and their employees from founding to their public maturity while broadening access for investors to the growing stack of private companies. Again, our technology, leadership, and wealth enables us to deliver a holistic client experience. Please turn to slide 15. Our durable business model and strong earnings profile have kept capital levels high during a period where the regulatory capital framework has normalized. As we've grown fee-based revenue streams, our regulatory minimum CET1 ratio has steadily come down. At a CET1 ratio of 15%, we have over 300 basis points of excess capital. With the passage of time, the continued durability of the business model may be enhanced by further regulatory relief. Prudent dividend growth comes first, and accordingly, we have raised our quarterly dividend by 7.5 cents for four years in a row to now $1 per share. As we've discussed in previous years, excess capital will be directed to continued dividend growth and to ongoing investment in clients and technology across the integrated firm. We will also continue to opportunistically buy back stock. We are keeping full watch on potential M&A adjacency, but we will continue to be patient. Because we have worked diligently through the acquisitions of Smith Barney, Solium, E-Trade, and Eaton Vance over the last 15 years, We know what level of focus and energy is required across the entire firm to make a multi-year integration successful. In short, we are endeavoring to keep the bar for acquisitions high, bearing in mind that many asset classes, private and public, trade at elevated levels, that there is no shortage of ongoing opportunities, and that the first call on capital must be to our clients and the continued growth of our core businesses. Concluding with slide 16, We're supported by our four pillars of the integrated firm, strategy, culture, financial strength, and growth. Morgan Stanley's strategy to raise, manage, and allocate capital is well understood by our clients, people, and our shareholders. Culture is about rigor, humility, and partnership. Financial strength is about capital, earnings power, and durability. And growth is about smart, strategic investment into wealth, institutional securities, and investment management, and across the firm globally. The result is growing assets and compounding earnings in a capital efficient way over the long term. Thank you. Now, Sharon will review our fourth quarter and annual results, and then we will both take your questions.

Thank you, and good morning. 2025 was an exceptional year for the firm, marked by deliberate execution of our strategy. Full year revenues reached a record of $70.6 billion, and the fourth quarter revenues were $17.9 billion. Expanding markets, increasing client demand for advice, and improving client engagement supported results across businesses. Concurrently, multi-year investments in our talent, the integration of acquisitions, workplace, and the integrated firm have significantly contributed to growth and momentum. Our ROTCE was 21.6%, and we generated record EPS of $10.21 for the full year, alongside fourth quarter ROTCE and EPS of 21.8% and $2.68, respectively. In 2025, we delivered operating leverage while continuing to invest for future growth and advancing productivity initiatives firm-wide. Our full-year efficiency ratio improved to 68.4%, underscoring disciplined execution and rigorous prioritization of investments. Now to the businesses. Institutional securities delivered a record full-year revenues of $33.1 billion, including $7.9 billion in the fourth quarter. We continue to invest in our global footprint and capabilities. resulting in competitive advantages and industry leadership. A strong macro backdrop, improving corporate confidence, and open capital markets position us well to continue to capture durable share. Investment banking revenues were $7.6 billion for the full year, reflecting year-over-year growth across products and regions. Fourth quarter revenues of $2.4 billion increased 47% from the prior year. Results were led by a record in debt underwriting and advisory crossing $1 billion for the second strongest quarter ever. Corporates leaned into constructive financing conditions to fund strategic priorities, while sponsors were also active, completing previously announced M&A transactions. Equity issuance led by convertibles and IPOs remain strong, driving consistent results in equity underwriting. Looking ahead to 2026, investment banking pipelines remain healthy, global, and diversified across sectors. Strategic activity is accelerating. Companies and sponsors are looking to access capital for growth investments, and the reopening of the IPO market creates additional opportunities for clients. Turning to equity, the business delivered record full-year revenues of $15.6 billion. Our global share gains this year were driven by increased client engagement and dynamic risk management. Revenues were $3.7 billion in the quarter. All businesses were up versus the prior year's fourth quarter on the back of higher client activity. Prime brokerage revenues drove the fourth quarter's results. client balances continued to rise, supporting the outlook for financing revenues. Cash results increased versus last year's fourth quarter, reflecting higher volumes across regions. Derivative results were up versus last year's fourth quarter as well, benefiting from our consistent investments in our client franchise and product offerings. Fixed income revenues were $8.7 billion for the full year. And importantly, investing in our lending businesses has contributed to increased consistency and stability of our franchise. Quarterly revenues were $1.8 billion. Micro and macro results declined versus the prior fourth quarter, reflecting lower volatility in foreign exchange and weaker performance in credit corporates. Commodity results declined, primarily due to lower power and gas revenues, which had benefited from several large structured transactions in last year's fourth quarter. Turning to wealth management, 2025 demonstrates the consistent execution of our strategy. We delivered full-year records across revenues and reported margins, reaching $31.8 billion and 29% respectively. Both net new assets of $356 billion and fee-based flows of $160 billion for the full year demonstrate industry-leading growth. Workplace and E-Trade relationships continue to seek out advice. Advisor-led assets originating from workplace and E-Trade relationships accelerated, growing to a record $99 billion for the full year, compared to historical averages of around $60 billion per year. Moving to our business metrics for the fourth quarter. Record revenues reached $8.4 billion, and the business delivered strong operating leverage, with the reported margin expanding to 31.4 percent. DCP negatively impacted the quarterly margin by approximately 95 basis points. Asset management revenues were a record $5 billion, benefiting from expanding markets and consistently strong fee-based flows. This marked our third consecutive quarter of fee-based flows exceeding $40 billion, a first for this industry. Transactional revenues were $1.1 billion. Elevated activity across both advisor-led and self-directed clients drove the strength. Additionally, net new assets for the quarter were robust at $122 billion, with contributions across all channels, Growth was supported by institutional relationships related to the integrated firm. Bank lending balances grew $7 billion sequentially to $181 billion. Driven by securities-based lending and mortgages, growth reflects our efforts to deepen client penetration with SBLs, leveraging technology to improve automation and facilitate the client acquisition openings as well as increasing education with our advisors and our clients. Sequentially, total period deposits grew $10 billion to $408 billion, and net interest income increased to $2.1 billion. The growth in NII was driven by the increase in sweep deposits and loan balances. Looking ahead to the first quarter, we expect NII to remain roughly flat quarter over quarter, as higher average sweeps and lending balances should help to offset the full impact of the two rate cuts in the fourth quarter. As we look ahead to the remainder of 2026, assuming the current forward curve, incremental loan growth, and our projections for the deposit mix, we expect NII to continue to trend higher. Before concluding, one update on DCP. Over the course of the first quarter, we will be transitioning all economic hedges for DCP obligations to derivative instruments. As previously announced, we will also increase the cash component of our advisor compensation. We are making these changes to reduce the accounting-driven volatility in revenues and earnings. While there will be some transitional costs, these changes support our overall investment into our financial advisors and will help simplify our compensation program. The full year, inclusive of momentum in the fourth quarter, exemplified our strategy to reach new relationships, grow assets, and deliver advice solutions to clients. Strategic initiatives, such as our recent acquisition of Equity Zen, expanded partnership with Carta, and collaboration with ZeroHash, all reflect our commitment to innovation. Together, they lay the foundation for sustainable growth to widen our competitive moats. Our intentional strategy to introduce and educate retail clients to the value of advice coupled with consistent education over the past several years sets our franchise apart and positions us to continue to outperform. Turning to investment management, our franchise delivered strong results this year. with durable management fee revenues reaching all-time highs. The margin continued to steadily improve. Total revenues were $6.5 billion, and we scaled to a record $1.9 trillion in AUM. The business has now generated six consecutive quarters of positive long-term net flows, with ongoing demand for parametric and fixed income strategies, supporting the full-year long-term goal net inflows of $34 billion. Long-term net inflows were approximately $2 billion in the quarter. Importantly, our broadened portfolio helped offset equity outflows, benefiting from the consistent strength in fixed income, parametric, and global distribution. Liquidity and overlay services saw $68 billion of inflows for the quarter, driven by institutional demand, some of which may be seasonal. Fourth quarter revenues were $1.7 billion, driven by higher asset management and related fees on higher average AUM. As a reminder, certain performance fees are recognized on an annual basis, largely in the fourth quarter, which drove the sequential increase. Performance-based income and other revenues were $71 million in the quarter. Gains in U.S. private equity and private credit more than offset markdowns in our infrastructure funds. Turning to the balance sheet, total spot assets were $1.4 trillion. Standardized RWAs increased sequentially to $553 billion. Our standardized CET1 ratio ended the year at 15%. For the full year, we bought back $4.6 billion of common stock, including $1.5 billion for the quarter. Our tax rate was 21.5% for the full year and 23.2% for the quarter. We expect our 2026 tax rate to be between 22% and 23%. And consistent with prior years, we do expect some quarterly volatility. As we look ahead into 2026, the firm enters the year from a position of strength. Our wealth and investment management businesses exited with $9.3 trillion in total client assets. Client engagement remains high, our pipelines are healthy, and our global footprint positions us well to continue to deliver advice and solutions across markets. We remain focused on investing for the future and scaling our business to perform through various market environments. With that, we will now open the lineup to questions.

We are now ready to take in questions. To get in the queue, you may press star and the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press star and the number two on your touchtone telephone. We'll take one question at a time and then we'll move to the next person in the queue. Please rejoin the queue for any additional questions. Please stand by while we compile the Q&A roster. We'll take our first question from Glenn Shore with Evercore.

Good morning, Glenn. Hi.

Good morning. Okay, so the results are pretty great across the board, and I think I appreciate your comments about environment, risks, your conservative guy, your risk manager. I do think people would love to hear a little bit more about why no change for the targets. Are there pieces of the business that you think are just at peak and over-earning? We don't want to set ourselves up. The market's up 80% for the last three years. and then just like cyclical caution basically versus anything underneath secular. So thanks so much.

Well, I think that's the important question for the day. We had a robust conversation about it, but in the end, the decision was really pretty easy. I think the view is that the shareholders ultimately want to see an enterprise that can operate at high levels with the kind of ballast that you began to see over the lows in the last decade, and that on the forward we can achieve effectively higher lows. And I think the tendency has been when a target is hit, the view would be, well, we hit it, let's take it up further. And there is no view that the net wins are headwinds. They are, in our view, secular and cyclical tailwinds that work for us, both in terms of wallet and in terms of market share across all of the major businesses. And we have even more operating efficiency that we think we can continue to nerve from the infrastructure by way of AI over time. But I think part of the premise of rigor and humility at our place is that we do this in a way where we compound earnings again and again, right through the cycle. And, of course, we will revisit these targets in the late year to come. And if then we've passed through them very clearly and it's time to take them higher, we will certainly consider that. But I think the view is we're a couple years in. Each of the quarters has been, by many measures, quite excellent. and the two years taken together, each on their own and then taken together, also excellent. But I think, you know, mistakes that I'll make, Glenn, this won't be one of them, which is to kind of hit the new target slide at the beginning of, you know, year three because we're feeling our oats. I think we have a very positive view of where the firm is positioned. We like the spaces we're in, but we think that – demonstrating our ability to compound earnings through the cycle is what the owners want to see, what you want to see, and that when things are bumpier, they're choppier, we'll have higher lows. And if we can continue to compound earnings at 20% returns, we're going to have happy owners.

We'll move to our next question from Dan Fannin with Jefferies.

Morning, Dan. Good morning.

So I guess just to follow up on that, given... the success of the wealth management business. Can you talk about the drivers of the margin from here? Is it just scaling and growth of the business or the things underneath from a cost or efficiency perspective that we should think about or mix of business that can drive those margins higher?

Thank you so much for the question. I think it's both. We have consistently added fee-based flows. That is demonstration that the funnel is working. So from the revenue line items, right, the drivers of continued expanded market are twofold. One is building out the fee-based revenues and the fee-based assets, and that is happening as we introduce new clients to the power of the advice-based model. But there are also clients who just want self-directed activity, and we have been investing in that business in the E-Trade franchise, in E-Trade Pro business, And you see that our transactional revenues are also increasing. So that's an investment story in technology. And the second piece that you mentioned is efficiency. We are also using technology to help us from an efficiency perspective, both on the cost and the revenue side. I'd note to you that some of the AI that we've been doing is actually also on the revenue side. So Lead IQ, for example, which is helping us introduce our advisors to our clients who are interested in advice. That's happening using AI. So there's technology that can be used both on the revenue side and on the expense side that should help us drive the margin on both the top and the bottom line.

Workplace is particularly exciting as a way to bring the entire enterprise together to help drive both the corporate client base and personal wealth into a broader Morgan Stanley funnel. So that plank of the funnel has been particularly extraordinary.

We'll take our next question from Brennan Hawken with BMO Capital Markets.

Morning, Brennan.

Good morning, Ted. How are you? Great. Excellent. Sorry to be a little repetitive, but I'd love to have another question here on the targets because we it does seem as though we've got maybe a shift in how you guys are thinking about them. And you made some comments around, I totally get not wanting to chase the dragon, right? And continuing to raise the targets and think about what the peak could look like. You spoke to higher lows in addition to higher highs. So is the right way to think about how you're framing the targets and how you're thinking about managing the business as more like a central tendency through the cycle? Or is it even feasible as you continue to scale to think about how this might be? You never want to use terms like floors in businesses like you have because of the market sensitivity and whatnot. But, you know, potentially what you could be looking to do even in more challenging markets as we continue to progress forward. Thanks for taking my question.

Sure. There is a chasing dragon element to this, of course. You hit some of the targets once, and you feel you've got to sort of bump and raise. We want this to work organically over the very long term. This is part of the reason on slide four we put up a decade of results. The area of cyclicality in the business, there is no philosophical reason a frame shift, though. I think we just now have the kind of confidence where we can start talking about what it would be like if there was a more challenging environment and our ability to still generate 17.5% returns on tangible with an environment where earnings could be below $8. We don't have that in the plan, but it is an important ballast when we think about the earnings multiple that you put on the currency, that there's a view that we can continue to generate real leverage, operating leverage through performance in tougher periods. That is a tough thing to tell the market you have confidence in unless you've done eight quarters as we have in these sort of mini macro uncertain periods where we've been able to see performance driven by the two major segments, separately and then together. It is the case, though, that with the compounding of earnings and the continued growth of these businesses, it is quite possible that we are going to be moving right through these firm-wide goals. By definition, the math should take us through the $10 trillion. It's compounding math, and you've seen our performance on that score over the last several years. And we printed wealth margins that were, in fact, above 30%. We continue to gain share inside the investment bank. As Sharon went through, we had margins for the enterprise, i.e., efficiency ratio that was below 70%, and our ROPSI was 21-22. So we demonstrated it. It's just not in our prudent kind of long-term thinking, that is the Morgan Stanley of today, that we should just move the targets higher because we've had a couple good years. I think the view is we are going to continue moving to compound earnings. We are going to not push on robust objectives when, in fact, 20% returns are pretty darn good if we're continuing to gain wallet and secure market share in the businesses that we care about, whether they are in core investment banking, in the mergers business. You see our advisory number was excellent this quarter in our equities business, which has become, again, the kind of competition that it was some years ago where the leadership group is moving away from the pack in fixed income secured lending where we have a great client touching business and then really across that wealth funnel which is really quite extraordinary. So there is an element of we're going to keep our heads down and execute as opposed to kind of here are some targets just to get everybody excited in the moment and then let's see if we ever hit them. I think our view is let's hit them again and again to the point where, you know, it kind of gets louder. Like, when are you guys going to take this up? Because it's sort of a no-brainer for you now. And when we get to that point, that'll be a happy day. But in the meantime, let's compound earnings. Let's do it the right way. Got a lot of long-term plans around the durability of the business model. And, you know, we're playing for the multiple, too. It's, you know, it's the P, as you know, it's the P and the E. And part of the way to get a premium multiple, earnings multiple, in the marketplaces to demonstrate our ability to say what we're going to do and just go out and do it again and again.

We'll move to our next question from Devin Ryan with Citizens Bank.

Thanks. Good morning, Ted. Good morning, Sharon. Morning.

Question on institutional trading. Obviously, wrapping up another great year for the firm, up 16%, and that's coming off of 19% growth in 2024. And clearly, Morgan Stanley, you guys are executing on your wallet initiatives and gaining share. But as we look ahead into 2026, can you help us think about some of the puts and takes of just assessing kind of the trajectory of the wallet? You know, just trying to think about kind of the baseline here after two really good years, you know, can the wallet continue to expand and, you know, kind of the secular dynamics versus the cyclical?

Thanks a lot. Yeah, we like the tailwinds. Sharon will improve my answer here. We really like this business. I think one of your colleagues likes to ask sometimes what inning we're in. I think in the capital markets business as a whole, I kind of put us in the third inning. Now, there are sort of exogenous outs, sort of, as I said, the geopolitical swirl. But the reality is the equitization of markets around the world is underway. It's why we put in the slides on the global presence that we have. It's not that we're trying to be all things to all people, where we are good, though, we wish to be very good. So we are differentiated in Tokyo. We are differentiated in Hong Kong. Hong Kong was the busiest issuer of equity in the world over the last year. That will continue. And of course, we have the sweet spot in the U.S. So there is a global theme to this. But as we talked about in prior calls, too, there have been reasons why there has been some sort of stuck boardroom mentality, understandably, as we went into the pandemic, and then we came out with our rates having roofed to try to combat inflation. But I think now there is really no more time to waste. The reality is that AI is now taking a whole endogenously, and you need to actually have some real scale to be able to defuse the teething of putting that into your core business. And so we should see consolidation. And the sponsors are just getting going. They are having bought some time and taking a look at what they want to keep and what they want to run through markets. They are beginning to unglue their asset base. And then, of course, we have very large private companies that are wildly successful that are probably going to start bridging to getting public. So I'm starting there because that's all about investment banking. And then in the equity space, you know, rates that are above the zero floor are foreign exchange that starts to trade, and then importantly, the institutionalization of the private credit class all speak to vibrant capital markets. And as you know, we are at some level stock house, M&A, wealth management, and then equities, and clearly getting our footing to be number one or number two in the equities business in a given quarter has been a priority of ours to do it the right way with clients. And importantly, within that, the growth of the derivatives business, a relative weakness of Morgan Stanley relative to the top tier competitors, a lot of that has now been erased. So we actually are coming across now as a derivatives house as well for clients. So I like what we like, what Dan has done quite brilliantly with the Integrated Investment Bank, which is sort of take it up another notch with clients right into the cycle where we have the global footprint and where we are ready to to put capital to work, as Sharon said, in places like M&A acquisition financing, prime brokerage, fixed income secured lending, and other durable businesses that accrete to the broader integrated firm. And then my last comment would be the beauty of this, and you heard it woven into my slides and Sharon's commentary, is that a whole bunch of what we're talking about has application across both the institutional and and wealth client set. Stock administration side of workplace has appeal both for the CEO and then for that firm for their wealth management business. So we're quite excited about it. The old rule of thumb is two times GDP. I would think two times GDP is not a bad way to go, nominal GDP even. So you could see The wallet in this business continue to grow by anywhere between 5% and maybe even 10% per annum. And then, as you can see, we are continuing to gain share from some of the lesser firms that have incomplete offerings, which should augur well for the largest established firms, frankly, the ones that reported this week being the ones to thoughtfully gain share here over the next number of quarters.

We'll move to our next question. Sorry, go ahead. We'll take our next question from Mike Mayo with Wells Fargo Securities.

Hey, Mike. Hey, I was going to ask you what inning you're in, but I think you just answered that.

I know, I know. I know. Sorry about that.

Well, it's the wrong season, too, so maybe I can put it in football terms.

I don't know. How about this? Maybe just ask the question again, and then I gave Pick a softball.

Look, as it relates to trading, I get investment banking and the equitization of markets globally, the institutionalization of private credit class, and I think that probably hits the mark, but the trading side is what I think you know, people wonder about it. You always put a forecast in there and it doesn't always turn out so correctly. And so how do you think about the trading business? You had unusual volatility last year. And when you say third inning, maybe it's the first or second inning for IB and eighth inning for trading, or how would you characterize that? And then as an overlay, how do you think about the AI opportunities and risks as it relates to your business?

Oh, that's sort of interesting where you put it. So I'll do the first part, Sharon will do the second part. Yeah, I could argue that the trading businesses in some respect have to be viewed, if you just, we were to look back on the earnings prints, you know, years from now, maybe they're in middle innings simply because we've had this huge move in asset prices. So by definition, you're off higher notionals and, you know, there's gross leverage and you've seen, you know, real sort of capital accumulation in places where we can monetize. And maybe we're in that sweet spot right now as opposed to the pure investment banking business, which is in the earlier inning. So I guess you could probably argue that. And is the case that if we have lower asset prices because we have a drawdown or we have kind of like a blip in the economy or the geopolitical thing kind of hits tails, Because there are tails, obviously. The base case, as we both know, the base case is positive, just given the health of the corporate, the consumer, and the general kind of tailwind of deregulation. But if some of that kind of creates periods where things are kind of risk-off, yeah, I would agree. If there are folks that are trading and have some inventory and kind of the risk that we all know gets kind of linked to trading, Could there be lower levels of performance? Absolutely, which is, by the way, also part of the reason that we are emphasizing for the purposes of the investment bank kind of durable share gains and wallet as opposed to trying to show a ton of volatility around returns. Now, we can't control asset prices, but we can sort of control that which we feel like is sort of mandate business with our institutional clients versus kind of just moment-to-moment sentiment. And that's part of the art of overseeing and risk managing these businesses, but that's something we're focused on.

On the second part of your question, Mike, you hit on a great point. The need for capital markets and structuring expertise in terms of what's going on within the AI ecosystem is clearly there. And I think that that's a part of what you're seeing both play out over the previous year, but also when you look ahead with companies needing access to capital markets. So these are places where we see ourselves playing that intermediary role in terms of our strategy of helping clients manage and allocate and get access to capital. And that will happen both as you think about the equity underwriting business and also in different parts of the project finance and potentially even the M&A space.

We'll move to our next question from Steven Chewbacca with Wolf Research.

Hey, Steve. Hey, good morning, and thanks for taking my question. So I did want to drill down into a broader question on firm-wide operating leverage. As we think about the earnings growth algorithm, you know, putting the decision not to change the targets aside, I can certainly appreciate the desire to be a bit conservative there. Now, given the expectation, though, for meaningful growth in both cap markets and wealth revenues in the coming year, and consensus really contemplating little to no improvement in margins versus the 50% incremental margin you achieved this past year, we're just hoping you could speak to the philosophy around operating leverage and whether you can still deliver those higher incremental margins if the revenue momentum is sustained and the operating backdrop remains constructive.

That was very clever.

You're effectively, I did read your report, you are trying to get at moving the goals without moving the goals. Yeah, I mean, Sharon put some meat on the bone, but of course, we expect there to be ongoing operating leverage if we are running these businesses as we have. And, you know, the market backdrop is constructive. you know, there's largely a fixed cost base. And sure, there's some variable costs as you go. But that is why we believe we're not overreaching in saying that even with the ongoing investments we're making, back to Mike's question on AI, in core technology or in ongoing AI efficiency and effectiveness tools, we would expect that if the markets are conducive and we execute, so those are two ifs, markets, you know, market is constructive and we execute across wealth and the investment bank, and I am as well, that we should continue to realize operating leverage. I don't think our view is that it's a linear model, but our view would be that that is why we thought that the efficiency ratio at 70 was a good number, and in periods of performance in the past, and certainly again this year, you saw it in the fourth quarter at 68, and you saw it for the year at, I believe, also 68 and change, that we should be able to continue to press that further in a thoughtful way as we compound earnings.

Absolutely. I mean, I highlighted a little bit, touched on AI, talked a little bit about the revenue side, but there on the expense side, there are definitely places where we see both investment that we will be making. We were a first user, first adopter of AI technology and And we're already seeing some of those productivity points play out. Ted mentioned it in his prepared remarks. But think about the operations space. We used to have two teams necessarily checking each other on different documentation to make sure things are right. We now have one human team and one AI team. And so when you're actually looking at those docs, you have ways to continue to see productivity gains and teams can do more work on a different type of cost base than you've had before. And we need the flexibility to also be investing in that technology as we move forward.

I really like the example Sharon gave because that one is sort of a very simply put example where there should be realized efficiency. From that, presumably there is effectiveness, i.e. productivity gains that come realized from insight that can then be applied to other infrastructure functions and then inside the business unit. The one thing I would say, which we all know but it's worth just putting on the table, is there's going to be teething pain on this stuff. I mean, we don't know what the combination of languages will be the sort of the ultimate best recipe for one institution or another, what the cost to sort of put that through the system will be, how we work the regulator, and then importantly, you know, how advanced our client base is with respect to some of this toolkit. So there will be some teething around that. You know, again, like the introduction of the Internet, it will take several years. But I did mention in the deck, and Jerome called out again, This is the kind of thing where we are seeing quarter by quarter, as we all are in our personal lives, that the substance underlying the progress, the technological advancement is real.

We'll move to our next question from Erica Najarian with UBS.

Morning, Erica.

Good morning. No good deed goes unpunished. To be fair, J.P. Morgan has been sticking to 17% ROTC through the cycle despite outperforming it. Maybe just approach it a different way, Ted and Sharon. You mentioned 320 basis points of excess capital. Clearly, the regulators are keen to redefine that. As you think about the forward and achieving higher highs and higher lows, where are you investing back in the business in terms of trying to build moats? And also, you know, given Sharon's response earlier on the wealth management pre-tax margin, you know, markets aside, there seems to continue to be structural opportunity to improve that underneath the surface. And I just wanted to make sure that we were taking away the right conclusion from that response.

Absolutely. You are taking away the right conclusion. We continue to see opportunities to expand our margins over time. really in all of the businesses. We get a lot of questions around, to your point, Erica, are there still opportunities to invest that are ROE accretive inside the building? And the answer is absolutely yes. You can see that in the results, particularly in the investment banking franchise. We have been adding talent and with additional talent resources, capital resources, to help service a broadening and a widening out of a corporate portfolio and different corporate clients that we cover. That has helped us gain share and gain durable share in the investment banking, both the advisory side, the ECM side, and the DCM side. So that's a very clear place where we've been putting capital work. You can see it in the loans and lending commitments in terms of the growth and balances. And then the outcome is evident in the results this quarter. Other places where we've been investing capital have been for secured lending. So again, a durable business line that has helped, as I mentioned, to stabilize the performance that we've seen in fixed income over the last number of years, and as well capital within our equities business to help service our clients. That's on the ISG side, and there are plenty of places in wealth. I talked a lot about SBL and mortgages. We're increasing our education to the clients and to our advisors as being able to have products that we can offer those clients and where we can deepen relationships. So it's across the enterprise, so to speak. And it has been and will, we think, continue to be ROE accretive.

Yeah, that's all right. And I would also, just to tag on there, I would also call out just the early days of the digital asset transformation side of wealth. We announced a partnership with Zero Hash last year. We're looking to expand our capabilities. We're well-positioned. now in the crypto and tokenized asset space. So, of course, that's probably a first or second inning type of phenomenon. And there is a lot for us to do there. There is continued work that we're doing in E-Trade to take a world-class platform and continue to make that interesting for our active self-directed community. And then in investment management, just to call that out, I mean, the success of Parametric, classic case of scaling an asset from within an acquisition, quite brilliant what the team did there inside of Eaton Vance to find this real gem and to scale it across wealth management and clients outside the building. I think there is a ton of work to do in alternatives, and we continue to invest in that. So some of those are sort of ongoing capital investments in businesses like equity derivatives, where they should just improve an existing product set. But I'd argue, too, that there are adjacencies that we are really like embryonically building inside of the institution in alts, in digital assets, inside of new customized solutions in the investment bank that are exactly kind of dovetail with the intellectual capital we're supposed to bring but are going to take time and investment.

We'll move to our next question from Gerard Cassidy with RBC Capital Markets.

Hi, Gerard. Hello. Again, thank you for taking the question. Sticking with capital, obviously, you guys are very well capitalized relative to your required levels. And we know, led by Secretary Besant, that this administration is really pushing deregulation within the banking industry, and we're seeing it. We're all expecting, of course, the Basel III endgame proposal, hopefully in the first quarter, G-SIB recalibrations, stress capital buffer recalibrations. If your requirement comes down even further from where you are today, at what point do you really have to look at giving back maybe even more capital since you've got an abundance of it already?

Thank you for your question. This is part of the Morgan Stanley of today where We are comfortable being in a position where we sort of sit at high ground. Yes, we have a capital surplus, and indeed that surplus is growing with a buyback that's been restrained and a dividend that's been growing prudently. But we continue to grow the buffer, and we're above 300 base points. So everything you said is correct. But I think we are in no rush. There are a ton of ideas that are coming at us. The bar for acquisition is super high, as I said. We know what it takes to kind of integrate an asset. Having done that four times, we have humility around that. We also know that it's kind of incrementally helpful to the institution and even to valuation that folks see that we are real stewards of our capital. Now, you're saying at a certain point it gets to be where we may wish to do something incremental to the capital beyond putting into the business, as Sharon and I outlined. Let's see when we get there, and we'll be talking about that. But we continue to find great places to put capital in the business, a whole bunch of business lines across the integrative firm. But yes, it is a nice place to be that we are above 300 base points. And it is also the case that we believe the business model speaks to real substance around the argument for our CT1 ratio to actually go further down. So you could argue that 300 could get bigger. And then if it does, we'll be talking more about how we want to prosecute against the alternatives.

We'll take our last question from Chris McGrady with KBW.

Morning, Chris. Hey, good morning, Tim. Thanks for coming in. I think in your prepared remarks, you talked about 25% of asset gathering being international. I guess I'm interested in your views for the business and the growth, international, domestic, over the medium term, certain markets, businesses, higher growth or higher ROE potential. Thank you.

Yeah, we continue to see assets coming from our wealth channels that are obviously based on the US. But I would note that I think that you might be discussing also there is international distribution that we're seeing in investment management. So when we bought Eaton Vance, one of the premises was they had a franchise that was basically very US driven from a distribution perspective. We are in a position where we are seeing, for example, our fixed income flows over the course of this quarter. 50% of that distribution was coming from international accounts. So there's plenty there. Now, in terms of the rest of the institution, obviously the global franchise has certainly helped from a capital markets perspective. When you think about the nine boxes we used to talk about in equities, we're seeing contributions from all of the regions across institutional securities. and in the equities business.

Now, we did think it was important to call out the non-U.S. businesses because the revenue growth and the margins attached to them have been quite impressive. And of course, our client base is global. And so you're speaking to the revenue contribution to the firm overall. And that is one that may not necessarily grow relative to the total as a geographic matter, but should compound nicely as we continue to grow, not just in the Americas, but in Amean Asia.

Ladies and gentlemen, this concludes today's conference call. Thank you everyone for participating. You may now disconnect and have a great day.