Morgan Stanley Q2 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Glenn Schorr - Evercore ISI - Analyst : I appreciate all the upfront commentary on NII and wealth. I wanted to drill down a little bit on what you said. So if you have $2 trillion in client assets in advisory, and they keep a handful of percent of money in cash, that change you're making in rate paid on advisory -- on deposit and advisory accounts, can add up to like a good amount of money. So I wanted to get a little more sharper focus on what you said 2025 NII, and then what exactly did you say the offset is on the NII. Thanks.

Question: Glenn Schorr - Evercore ISI - Analyst : Okay. And is there a particular reason why you only have to focus on repricing in this small portion of the advisor-led channel, meaning not for all? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 16, 2024 / 1:30PM, MS.N - Q2 2024 Morgan Stanley Earnings Call

Question: Ebrahim Poonawala - Bank of America Merrill Lynch - Analyst : Maybe sticking with NII and, more importantly, on pre-tax margins, right? You had an extremely strong quarter. The stock's weaker this morning, and it has to do with the NII drag on wealth, revenues, and margin. So one, I think, Sharon, your level of visibility into NII, lots of moving pieces around client behavior, maybe we get interest rate cuts. Just give us a sense of if you see any guide on what rate cuts would imply for client behavior, or is there cash to assets that you're looking at that gives you comfort around NII potentially stabilizing post 3Q. And then, maybe for you, a question -- go ahead. Yeah.

Question: Ebrahim Poonawala - Bank of America Merrill Lynch - Analyst : That's helpful. And I guess my second question was this -- talking to investors, when we look at the 30% pretax margin target, the question is whether this is aspirational, whether the bar is set too high, given how competitive the business is. So remind us in terms of your comfort level on that 30% pretax margin. And to the extent you can, the timeline of when we get there and when we get there, should that be a sustainable pace for the business? Thanks. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 16, 2024 / 1:30PM, MS.N - Q2 2024 Morgan Stanley Earnings Call

Question: Mike Mayo - Wells Fargo - Analyst : Hi. Ted, you've said this, and Sharon repeated this, that the industry is only in the early innings of an investment banking rebound. I have to say, we've heard that for a couple of years. And now is this time -- why is this time real? Do you expect the rebound to continue through the normally slow summer period before the election? How many years? What gives you confidence that this is for real? How much is your backlog up quarter over quarter?

Question: Mike Mayo - Wells Fargo - Analyst : And just one pushback. I mean, with interest rates so much higher than they've been in the past, don't you think that could get in the way when people are looking to borrow money for deals and the like? Is this a matter of simply waiting for rates to go lower? Or that's not going to get in the way?

Question: Dan Fannon - Jefferies - Analyst : Good morning. I was hoping to get a little bit more color on the flows in the quarter within wealth, maybe the breakdown from the channels and contribution. Last quarter, I think we saw family office being an outsized contributor, but hoping to get a little bit more color on where the flows were sourced in 2Q.

Question: Brennan Hawken - UBS - Analyst : Yeah, good morning, Ted. Thanks for taking my question. I'd like to just drill down a little more, give a second follow-up here on the repricing change that you mentioned in your prepared comments, Sharon. So the repricing that we've seen in the securities book has been slow. So I'm just kind of curious as to why you think that will help offset the repricing actions that you're taking on the deposit side. Is that because it'll be a phased repricing, and therefore, there's an ability to have the phased benefit in the asset side offset. And then just a nitty-gritty question on it, is the switch going to be to money fund sweep rather than higher yielding deposits, and then that way you can just slowly replace that funding as you see fit? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 16, 2024 / 1:30PM, MS.N - Q2 2024 Morgan Stanley Earnings Call

Question: Brennan Hawken - UBS - Analyst : Okay, got it. And then is this going to be focused on the advisory relationship, similar to what we've seen from some other wirehouse competitors? And could you just -- is it the changes that have recently been announced by Wells and BofA? Is that what you mean by competitive dynamics, or is there something else that I'm not aware of?

Question: Devin Ryan - JMP Securities LLC - Analyst : The first question, just on -- another one on the GWM flows. Sharon, you mentioned tax season is a factor, which you completely get, but then you also mentioned increased client spending. And I just wanted to drill into that, just whether that's something that could continue, whether it was seasonal or influenced by inflation, just trying to understand that component of the impact on flows.

Question: Devin Ryan - JMP Securities LLC - Analyst : Okay. Got it. Thank you. And then a follow-up just on the interplay between investment banking and trading, and appreciate the commentary on kind of the improving capital markets backdrop, which is great to hear and kind of the expectation from our end that there's going to be a lot more primary issuance and equities maybe in debt as well as M&A picks up. So just trying to think about what that means for the trading businesses, equities and fixed income, and whether you guys feel like we could maybe sustain around these really high levels or even -- maybe even the wallet could move higher just as you get a stronger primary issuance market. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 16, 2024 / 1:30PM, MS.N - Q2 2024 Morgan Stanley Earnings Call

Question: Steven Chubak - Wolfe Research, LLC - Analyst : So maybe just starting off with a question just on operating leverage within ISG. Year to date, the incremental margins are quite strong, just north of 80%. You spoke constructively on IB and trading inflecting positively. Just want to better understand what you believe is a sustainable incremental without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 16, 2024 / 1:30PM, MS.N - Q2 2024 Morgan Stanley Earnings Call margin as activity steadily builds, especially given some of the growth, at least from here, may skew a little bit more heavily towards investment banking, which tends to be more compensable.

Question: Steven Chubak - Wolfe Research, LLC - Analyst : No, thanks for that perspective. And just a follow-up on the deposit discussion. Both you and your Wirehouse peers announced similar actions on deposits, which you noted, Sharon. You mentioned it was informed by competitive dynamics. But I wanted to better understand if there was any feedback you or your peers had received from regulators that prompted the decision. Because from our vantage point, the timing of these pricing actions at this stage of the rate cycle is simply difficult to reconcile.

Question: Steven Chubak - Wolfe Research, LLC - Analyst : Okay. Fair enough. I had to try. Thanks for taking my questions. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 16, 2024 / 1:30PM, MS.N - Q2 2024 Morgan Stanley Earnings Call

Question: Gerard Cassidy - RBC Capital Markets - Analyst : You gave us good insights into your thinking about what the capital markets could bring, especially in investment banking. And I think you touched on in your comments with trends, or maybe you have, Sharon, that the transactional numbers could benefit from a stronger ECM business. Can you then take the next second derivative and share with us from your experience with Solium? Should we see that business pick up the workplace channel, if more of these maybe private equity sponsor companies go public, should the workplace channels see stronger revenues potentially in a stronger investment banking market over the next 12 or 18 months?

Question: Gerard Cassidy - RBC Capital Markets - Analyst : Very good. And just as a follow-up, Ted, if I take a step back, obviously, you guys have done a very good job in the last 10 years of growing organically, but then complementing that growth with acquisitions. Once we get the Basel III endgame final proposal, maybe some G-SIB relief, can you share with us, as you look out over the next two, three years, is there any parts of the picture today that you'd like to enhance possibly with acquisitions? Or are you a good way you are today?

Question: Saul Martinez - HSBC - Analyst : So I wanted to follow up on the earlier question on the outlook for your sales and trading businesses. You've kind of consistently done about $18 billion to $20 billion of annual revenue in post-pandemic period in FICC and equities. And right now, we have a backdrop where we're going to see rate cuts. Markets are strong. Issuance activity may pick up. At the same time, you have perhaps more competition from foreign banks who have lost share. So how do you see -- do you have a view on how you see the wallet evolving for these businesses, your ability to maintain or gain share in this backdrop? And I guess ultimately, do you think you can grow revenues here from a base that is materially higher than what it was pre-pandemic?

Question: Saul Martinez - HSBC - Analyst : That's helpful. Thank you. Just, I guess, a quick follow-up, related follow-up. The ROE, 14% in ISG in the first half of the year, early on, as you highlighted, in an investment banking cycle. Do you have a view on where the institutional securities ROE can get to as the investment banking cycle kind of plays out? Is there a view on sort of what a normalized ROE would be here?