MORGAN STANLEY Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Revenue and Growth: Delivered strong revenues of $15.4 billion, $3 billion net income, 17.5% return on tangible. Year-to-date revenues $15 billion, sequential EPS $2.02, $1.82, $1.88, year-to-date returns on tangible 18%.
• Client Assets: Total client assets across Wealth and Investment Management reached $7.6 trillion, on track to $10 trillion. Organic growth in Wealth and Investment Management $200 billion through nine months, total client assets up almost $1.4 trillion last year.
• Operating Leverage: Year-to-date efficiency ratio improved by ~300 basis points to 72% through disciplined spend prioritization, including real estate footprint review and lower litigation/consulting spend.
• Strategic Investments: Investment in Integrated Investment Bank reflected in share gains, global team supporting clients through volatility. Wealth Management's multichannel model driving durable growth with investments in technology and expanded offerings.

Segment Performance

• Institutional Securities: Revenues were $6.8 billion. Investment Banking revenues increased to $1.5 billion, driven by strength in underwriting (debt and investment grade) and advisory. Equity underwriting revenues were $362 million, fixed income underwriting revenues more than doubled to $555 million. Equity revenues were $3 billion, fixed income revenues $2 billion. ISG provisions were $68 million, with net charge-offs of $100 million in commercial real estate and corporate loans.
• Wealth Management: Record revenue of $7.3 billion, with client assets reaching $6 trillion. Fee-based flows were strong at $36 billion for the quarter, fee-based assets at $2.3 trillion, net new assets $64 billion year-to-date. Loan growth was $4 billion, total deposits $358 billion, net interest income $1.8 billion.
• Investment Management: Revenues $1.5 billion, up 9% year-over-year. MSIM's total AUM $1.6 trillion. Long-term net flows approximately $7 billion, with inflows in liquidity and overlay services led by Parametric overlay strategies. Performance-based income and other revenues $71 million.

Guidance

• NII Outlook: Expect NII to be modestly down from Q3 results in Q4, largely due to lower rate expectations.
• Capital Allocation: Accreted ~$2 billion of Common Tier 1 capital, CET1 ratio 15.1%. Dividend raised to $0.925 per quarter, bought back $750 million of common stock. Investing in businesses across Wealth Management, Investment Management, and Investment Bank opportunistically.
• Market Outlook: Believes in early stages of multi-year capital markets recovery, with healthy pipelines and growing corporate/sponsor activity.

Risks

• Macroeconomic Risks: Cognizant of broader macroeconomic risks at play.
• Basel Uncertainty: Basel re-proposal uncertainty likely lasting through the election, with advocacy efforts aligned with industry and specific Morgan Stanley points.

Q: Steven Chubak asked about the sustainability of higher-marginal margins and idiosyncratic factors in Wealth business.

A: Sharon Yeshaya responded that efficiency is a multi-year process, involving self-funding investments, balancing costs in professional services and growth investments, with momentum in Wealth due to advice-based engagement and market improvements.

Q: Ebrahim Poonawala inquired about capital priorities and NII with rate cuts.

A: Ted Pick discussed 15.1% CET1 buffer, investing in businesses across segments, and Sharon Yeshaya noted NII delta vs last year, with asset management fees offsetting NII decline.

Q: Glenn Schorr asked about RWA increase and business mix.

A: Sharon Yeshaya said RWA increase related to lending growth in Wealth and Investment Bank activity, with no material shifts in business mix expected. Ted Pick added on operating leverage and measured risk in Investment Bank.

Q: Devin Ryan asked about second-order impacts of lower interest rates on NII and new clients in Wealth.

A: Sharon Yeshaya mentioned potential refinancing, SBL activity, and technology investments in matching new clients with FAs through human referrals and AI.

Q: Glenn Schorr followed up on IPO pipeline and Investment Management profitability.

A: Ted Pick spoke on sponsor dry powder and IPO potential, while Sharon Yeshaya discussed asset mix, secular growth investments, and long-term profitability through asset aggregation.

Q: Brennan Hawken asked about NII deposit costs and IPO pipeline.

A: Sharon Yeshaya talked about deposit cost trends, deposit mix, and Ted Pick on IPO pipeline from sponsor dry powder.

Q: Christian Bolu asked about loan growth and deposit pricing in Wealth.

A: Sharon Yeshaya discussed loan growth potential with FA penetration and deposit pricing considerations based on competitive dynamics.

Q: Gerard Cassidy asked about prime brokerage revenue drivers.

A: Ted Pick explained growth from existing clients with platform economics, and expansion in regions like Middle East and Scandinavia.

Q: Mike Mayo asked about AI chapters at Morgan Stanley.

A: Sharon Yeshaya and Ted Pick discussed AI tools in Wealth Management for FA productivity, with AIMS (AI @ Morgan Stanley) as the first chapter.

Q: Saul Martinez asked about fee-based asset flow durability.

A: Sharon Yeshaya explained momentum in fee-based flows due to migration of assets into fee-based wrappers, including fixed income and alternatives, and durable revenue from asset management fees.