Morgan Stanley (MS) — Q2 2023 Earnings Call Transcript

Hi. 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 that it was likely to be resolved, there is no doubt it created unnecessary uncertainty in the markets in April and May. Thirdly, after rapidly raising rates over 15 months, the Fed reached a pause, if not a plateau at its recent meeting. 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 U.S. 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 progressed positively supported a more constructive tone in the markets, particularly evidenced 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 longstanding partner, MUFG, further evidence of how our businesses can work together over time to best serve our global clients. Importantly, we received the most recent results of CCAR, and we're 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 $0.075, 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 in 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 in 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. Altogether, the firm delivered net revenues of over $13 billion, up 2% from last year when conditions were very different. This translates into an ROTCE of 12%. Finally, our CET1 ratio was 15.5%. While we knew this would significantly exceed our capital requirements, it did reflect 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, Basel III upcoming Endgame proposals, and certain other pending matters. I committed to the Board that I would lead our response to those issues, and when I do transition out of the CEO role, I will 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 $0.14 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. In Wealth Management, we witnessed a moderation of sweep outflows as well as the 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 Vance, 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 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-on and convertibles, encouraging signs that equity and equity-linked markets were opened at times for regular weight 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. Prime 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 outlook 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. Pretax 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 with the impact of DCP, these three factors were a drag in 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 advisers with tools to service current clients better and prospect new business more efficiently, including from our workplace channel. Also significant, as James mentioned, we are pleased to share that we've 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 paydowns 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 sweep 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 by $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 income. Within alternatives and solutions, Parametric customized portfolios, private credit, and private equity continue to be 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 in 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 CET1 ratio was 15.5%, up approximately 40 basis points versus the prior quarter. Standardized RWAs declined by 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 $0.075 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 market, 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.

Thank you, and good morning.

Good morning.

I guess maybe first question, James, for you. Thanks for the update on the succession. As we think about what you built in terms of the franchise, and I think you talked about the unfolding Basel Endgame rules that are expected over the next week or two, from a shareholder perspective, do you see these rules as game-changing where investors will have to reevaluate the value proposition of Morgan Stanley as a franchise? And you, as a management team, would have to review strategic targets that you've laid out? Give us a sense. And I know plenty of unknowns. But I think the question we get from shareholders is the comfort around the ability of the firm to manage through what could be pretty radical changes.

It's an important question, and you're right that I've commented on it before. Let's clarify where we stand now. There has been a lot of speculation about the Basel III Endgame, and I'm not sure it's being fully implemented in Europe. I believe U.S. banks actually have more capital. That said, we received a speech from the Vice Chair, and it's crucial to consider its title, which was "holistic capital review." This means it will factor in all aspects of CCAR, stress tests, and SCB buffers as these are implemented. We haven’t seen the actual rules yet, but there should be a proposal coming soon, followed by an extensive comment period. There are clearly different opinions regarding the U.S. banking system's need for additional capital. Looking back at the last few years, U.S. large banks have performed well despite challenges, including the issues faced by regional banks during COVID and high inflation. Morgan Stanley's capital position has improved consistently over the past four years under CCAR, making it hard for me to claim that we won’t assert that we are very well-capitalized. The comment period will be extensive, and I expect the final outcome to differ significantly from the initial proposals. The goal is to strengthen the U.S. banking system, not to harm it, and there will be a lengthy transition period. I recently read the Vice Chair's speech, where he mentioned that all proposed changes would undergo the standard notice and comment rule-making process, providing ample time for interested parties to respond. He also noted that final changes to capital requirements would come with appropriate transition times and would not take effect for several years. As of now in 2023, I don't anticipate any significant developments before the end of 2026. Given the timeline, what emerges one year from now will likely differ from the initial proposals. Personally, I have concerns about applying a standardized risk-weighted asset hit on operating risk based on fee income, as suggested in the current European proposal. Fee-based businesses are designed for stability, not to create operating risk. We've communicated our stance to regulators, and I believe they are considering it. In summary, while there will be changes, I don’t foresee any major strategic shift for Morgan Stanley as a result.

That is helpful, and 'nuts' sounds about right. One quick question, Sharon, for you. You mentioned NII not seen as expanding from here. I guess, is it implied in the expectation that NII should stabilize in the back half, give or take, within a few percentage points?

It really depends on the deposit mix. There were encouraging signs in terms of that mix as we consider the second half of the quarter. The liability mix and what is happening with sweeps will be the main factors affecting net interest income in the near term.

Hey, thanks. Good morning. I just want to touch on the Institutional Securities. And you had ultimately, I think, a pretty good quarter relative to the backdrop. And you mentioned that engagement really accelerated towards the back half of the quarter. So, I'm assuming on the other side of the debt ceiling debate, things started to normalize a little bit. So, just want to talk about some of the puts and takes, and whether maybe the second quarter results, which are still the softest results, I think, since 2019 second quarter, if this is kind of a more normal outcome, or if you actually think that what you saw in that recovery in the back half of the quarter is normalization and so therefore, we could actually bounce back from the outcome of the second quarter? Thanks.

Sure. Let's take all of ISG first. So, when we think about what we've discussed at length really about normal, post-COVID has been for the overall ISG wallet to land between 2019 and 2020. Our view there broadly has not changed. In terms of where we expect ourselves to be, we've laid out a pretty clear sort of market share guidelines in terms of where we are from a wallet perspective. When you look specifically, you talked about fixed income, we've moved from 6% wallet share to 10%. So, I think the dramatic change that we've made in that business has really been around a client-centric franchise and making sure that we're there and able to service our client base. What we talked about, as you highlight, is that there was less client activity for us this second quarter compared to last year's second quarter. But interestingly, as you mentioned, and you're right, we saw a dramatic change in that activity level, specifically in fixed income right after the debt ceiling debate. So, I think what we're looking to do is capture our fair share of the wallet. And that overall wallet in terms of normalization, we think will likely land between 2019 and 2020.

Okay. Great color there. And then, just in terms of just this green shoot and kind of normalization theme, we are seeing in the equity capital markets, debt capital markets some normalization. M&A has still been pretty lackluster. And so, just curious whether you just feel like maybe that's more on a lag basis as capital markets recover, then M&A recovery would come next? Or is there something else kind of idiosyncratic to that market that may hold back results in that business? Thanks.

Yes. Remember that, of course, advisory is always going to be lagged just because of the announcement. So, we're digesting the fact that we had a very muted or a dearth of announcements if we look back six, nine months. If we think about the last month of the quarter, we began to see more announcements. And we're seeing that really in sector-specific that have a strategic dialogue around them. So be that financials where you might see industry consolidation, energy where you're seeing transitional discussions and reasons to actually have strategic dialogue. So, what gives us confidence is that you're seeing a broadening out of those strategic dialogues. Our backlog is building, and we're seeing it across various sectors we're having both backlog and discussions. But it is fair to say that advisory will likely lag simply because you are dealing with a lagged announcement pipeline from the last six to nine months.

Hi, thank you. I want to clarify a bit more about the $90 billion. I understand it can fluctuate, but I didn't expect it to be influenced by workplace production. Could you explain what went well this quarter and in the first half of the year? It looks promising for your plan to double pre-tax income for Wealth. I'm just curious about what has been driving this positive variability lately, especially since you're well ahead of your $1 trillion every three-year goal.

Thank you, Glenn, for your question. I believe referring to Andy's speech, which some of you may not have heard, is beneficial because it outlines our asset-led strategy for future expansion in that business. In this quarter, we typically mention that no single channel contributes more than 25% of new net assets. Notably, this quarter, the advisor-led channel played a significant role. Additionally, a major factor in our success was the assets held away from existing clients. This strategy has been part of our discussions since 2015, aimed at giving advisors more time to prospect new clients while also improving the advice they provide to their current clients. Therefore, you may start to see the results of our efforts in aggregating these held-away assets, and we continue to see this as a significant opportunity for growth in our asset base.

I want to elaborate on this a bit since it's been a key focus for me for many years. The run rate, Glenn, for the three years prior to this was $1 trillion, which translates to about $330 billion a year. This year's run rate, if extended, would be higher, around $400 billion. However, you're correct that it will be variable, and we might see a quarter with $50 billion, but I wouldn’t get overly excited about that. Just as I remain calm, we are ahead of the run rate. What truly matters to me, and what excites me, is that this is substantial. This isn’t a temporary situation; we have many wealthy clients. The dividends, interest from their accounts, the inflow of money, and the shift from workplace accounts and E*TRADE accounts indicate that this is genuine. We mentioned a $10 trillion figure, which I believe is achievable. With a 5% annual increase in portfolio value and $1 trillion every three years, this will materialize in a bit over five years. It's a robust trend, though we can expect some fluctuations along the way. I don’t know when these will occur, but there will be variations. This has been an excellent year, and I am optimistic. We are clearly on track for $10 trillion, which would equate to $50 billion in revenue at 50 basis points. If you calculate the compounding, which some might find hard to believe, and considering this is the end of my tenure, if you project 5% growth over 14 years, we could reach $20 trillion, resulting in a $100 billion revenue business. Although this might seem distant, I began this role 14 years ago when we had significantly less than the $6.3 trillion we have today, so it is within reach.

Wow. Maybe just one quickie, Sharon. You talked about sweeps, and it's too early to tell if we've settled in. I'm curious if you have any stats you can share on what percentage of FAs and/or what percentage of clients have accounted for most of the moving? I'm not sure what's room for you here, but curious on how widespread across the FA and client base the shifts have been or concentrated.

Yes. Regarding the transition from sweeps to savings products, we still have over 80% of our deposit base coming from our own clients. It's notable that we've observed a change in the behavior of sweeps. In June, we began to see some of those funds moving into various assets, rather than just into money markets or other cash alternatives, a trend we hadn't seen since January. This indicates that some clients are starting to invest their excess cash or cash equivalents in the marketplace.

Hey, good morning. So James, I appreciate your comments on Basel III Endgame. It might be helpful if you could just speak to how the lengthy transition period informs your near-term buyback appetite if at all? And given the RWA inflation could be quite meaningful, what are some of the mitigating actions you can pursue to alleviate some of the pressure on your businesses?

I think we need to wait for the proposed rule to see how things unfold. I've had discussions with the relevant regulatory bodies, and I'm optimistic about their willingness to listen to industry feedback. They recognize that changes in capital across the industry need to lead to beneficial economic outcomes for the country, and the stability of banks, especially the top eight G-SIB banks, reflects that they are well capitalized. I don't want to speculate on specific mitigation strategies yet, but we do have some flexibility with our risk-weighted assets. For this quarter, we reported a CET1 of 15.5%, which wasn't solely driven by Basel III considerations; rather, it was a response to the current environment, especially after three bank failures early in the quarter that raised concerns. We're committed to our dividend policy, and we view half of the company as a yield stock, which we've reiterated numerous times. The recent dividend increases are fully justified, and I anticipate they will continue in the years ahead, though I won't specify the amounts. Regarding buybacks, we'll be cautious and take advantage of stock price weakness when it presents itself. Despite the challenges this quarter, we generated $2 billion in profit. We're expecting to see the proposed rule soon, and we'll continue with buybacks this year, although we won't utilize the full $20 billion authorization from the Board. This process will take time, and I wouldn't expect it to be fully resolved until late 2026, which is a significant timeframe in our industry.

No, it's a fair point, James. I mean, immediately, we all had the experience with Basel III when it wasn't going to get fully implemented for a period of years and the impacts were fully loaded. So, I think we're all just trying to prepare for maybe some expectation that it gets priced in a little bit more quickly.

It could. We will adjust, but our strategy will remain unchanged. I will strongly advocate where I believe some of these regulations do not align with what is best for the U.S. financial system and the U.S. economy, rather than just Morgan Stanley's interests.

No, helpful perspective. If I could squeeze in one more here, just on Investment Management. The 30% margin goal that you've laid out for Wealth and IM, Wealth, when we adjust for the specials, of about 300 bps, you're within spitting distance of that 30%. The Investment Management margin, it's running in the mid-teens. And I recognize you're still integrating Eaton Vance. But what are your margin aspirations for that business? And what are some of the actions you're taking to maybe help close that gap?

So, Steve, our margin goals have primarily focused on Wealth Management. I appreciate your point; we have set larger efficiency targets for the entire firm. There are areas where adjustments exist between ISG and IM. Remember, less than 18 months ago, we were nearing 30% margins in the IM business. Over the past year, we've experienced the cumulative effect of outflows due to shifts in investor appetite, especially in active equity, as well as fluctuations in asset levels tied to the market. What matters to us is the platform's diversification and our commitment to invest in areas where we see significant changes in the business, more broadly within the industry landscape. For example, customization has consistently attracted net inflows every quarter, regardless of top-line variations. We also discussed a solutions-based product this past quarter. We're focusing on industry opportunities, and as we grow assets—much like we've done in Wealth Management—it should help support the margin in the Investment Management sector, which we view as a stable business over time.

Operator, maybe we go to the next one and come back to Brennan.

Hi. Well, this is the first chance we have to ask you about the CEO change, James. And just...

Mike, you asked me about CEO change in 2012. So, that's your second chance to ask me.

Yes, well, you survived and thrived, so there you go.

Thank you. I appreciate that.

But this is Wall Street, and it's about what you've done recently and what to expect in the future. First, I don't understand the role of Executive Chairman. I hope you will resume in-person shareholder meetings like in the past. What does it mean to be Executive Chairman? What are your thoughts on the timing of naming a new CEO? What considerations are influencing this decision? We can speculate about the candidates mentioned in the media, but I would like to hear your direct thoughts and the Board's perspective, as they ultimately make that decision.

We will no longer hold in-person shareholder meetings. In my experience before COVID, there were often more security personnel present than actual shareholders. To be honest, it was a significant waste of time and money. While a few may prefer to ask questions in person, I don't believe it's a worthwhile use of resources. Additionally, I think we should move to semi-annual earnings reports instead of quarterly ones. Those would be my immediate changes if I were in charge of finance. Regarding the CEO transition, I previously mentioned about five years ago that I would step down in about that timeframe. I reiterated three years ago that it would be around that time, and nobody really believed me. So, I felt it necessary to clearly communicate my plan at the annual meeting that I wouldn't be in the role by the next meeting. This makes it clear that there are 12 months left, and we're already two months in. The exact timing of my departure is not particularly important; it will occur sometime between now and the next annual meeting. There are a few things I hope to accomplish during my remaining time that will set the new CEO up for success, which is my main focus. I want the next person to excel in this role. The timing of my departure will be influenced by that goal. Given the questions about Basel III Endgame, it's something I want to address in the upcoming months. We've just completed the CCAR and dividend processes, and I'm working through the remaining components. Ultimately, the Board will make the final decision through their established process, led by the Compensation, Management Development, and Succession Committee. They will independently select the next CEO based on who is best suited to handle the complexities of managing a global bank, rather than just looking at current business operators. I believe it's crucial to respect the Board's process, and I’m here to assist as needed. I hope that provides some clarity.

Yes, just one follow-up. There seem to be three contenders for the top position, which suggests that two people may not get the job. What is a good strategy for your firm or any firm to ensure that those individuals who do not secure the top role remain engaged and continue to be part of the organization and its ongoing initiatives?

Wall Street has a history of not seeing this happen. I believe we will challenge that history. We have an incredible team that has worked together for at least eight years, all of whom have been on the operating committee. We also have an outstanding group of executives surrounding them. Sharon, who you’re hearing on this call; Eric Grossman, our Chief Legal Officer; Clare Woodman, who leads Europe and the Middle East; and many others. We have a wealth of talented executives. It will be my responsibility to help navigate this path, but these roles, whether CEO, President, or COO of these global companies, are substantial. We are one of the largest companies in the world, so I am confident we will achieve great success.

Hopefully you can hear me now.

Go ahead, Brennan.

Sorry about the earlier misunderstanding. Sharon, you previously mentioned that the net interest income and deposit cost were significantly impacted, but the trends in deposit costs were mostly in line with our expectations, and net interest income actually exceeded our forecasts. Could you clarify if there were developments on the asset side that allowed for the repricing of some assets? How much more potential repricing do we anticipate going forward?

There were some places where we benefited from the asset side. But as you know, we'll have to look at the ALM mix and it will be dependent on some of the market rates that we see going forward. So, unfortunately, there's not that much more clarity I can give you other than what is leading us as we go forward is largely that liability mix. And so that's the trend that will drive NII from here.

Okay. Thanks for that. And then, I noticed, I know it can diverge sometimes, but the trends for firm-wide NII were different, down about $300 million quarter-over-quarter. So, could you help us maybe understand why was that the firm-wide NII deferred substantially from the Wealth Management trends?

Yes, that was mainly related to the trading position. As you know, it depends on various factors, including the products involved, their booking locations, the methods of booking, the types of instruments used, and different funding costs. Essentially, when we manage the business specifically on the trading side, taking into account our portfolio and approach to our bank compared to the broader broker-dealer, we do not manage it on a net interest income basis. When we consider net interest income, it is clearly influenced by the Wealth Management side.

Thanks. Good morning. Another question on wealth and acknowledging the strong NNA number in aggregate. What do you think we need to see for the fee-based NNA to begin to get closer in size to the total NNA? And maybe what you think longer-term that mix will look like?

Great question. We've looked a lot at fee based and thought about sort of as we think about the funnel. One thing that we highlighted to you last year, or last quarter rather, was that from the advisor-led side, we still had around 23% of those assets in cash and cash equivalents. That is a historical average of the last five years is around 18%. So, in our mind, a lot of it has to do with the way that people are looking at the markets right now. And the idea that when you're moving into a fee-based asset, specifically on the retail side, you are doing so and you're actually, obviously, actively investing in different market assets. And so what is encouraging is, as I highlighted on, I think, to the question Glenn asked, is that in the last month of the quarter, we began to see individual retail clients actually put that money into markets. So that's an encouraging sign, but we do think that a portion of that is market dependent.

Thank you. Good morning. Sharon, can you give us some color, when the E*TRADE deal was closed, I think it was back in October of 2020, one of the real attractions, I think, for Morgan Stanley was the workplace channel. And you guys are, obviously, a dominant player in this workplace channel. Are there any metrics that you can share with us on the success you're having in increasing the penetration in that channel?

We've discussed extensively in our last two quarterly updates about the changes we've observed in channel migration. This involves a portion of workplace assets moving into the advisor-led segment. As a result, we are beginning to see assets held away starting to come in. Over the first three years of this transition, that figure was approximately $150 billion, averaging around $50 billion per quarter. In the first quarter of this year, we recorded $28 billion for that single quarter. When assessing the first half of this year, we are nearly on track with the full annual rate from the previous year. This indicates that we are seeing positive signs. While we cannot predict exactly where that number will settle, it is undoubtedly trending in a favorable direction. Additionally, it demonstrates that the workplace can serve as a valuable starting point for conversations between clients and advisors. You can see that about 10% to 20% of the assets brought in through migration are coming from this channel, while roughly 80% are derived from assets held away.

Very good. And then, James, just to circle back to the capital comments that you made with the Basel III Endgame and we've heard from some of your peers about the engagement with the regulators appears to be stronger this time maybe than in past. Can you share with us your feelings when you think about what you guys all went through post the financial crisis and the new regulations that came from Dodd Frank? Do you think the regulators are really listening to you folks more so this time than in the past, or is that not the case? I think it's early to make a judgment. We still need to see the rule. Listening is one thing, but acting is another. The real test will be how the regulatory community incorporates feedback from industry groups, which are very well coordinated. We need to consider how their input compares to what European banks have done with their regulations. It doesn't feel right to me to simply adopt a gold-plated European standard for the U.S. We should prioritize what's best for the U.S. financial system. They do seem to be listening and are interested in feedback from various stakeholders. However, the true test will be how things unfold over time. The comment period could take a year, and this is a significant matter. It’s worth noting that Basel III Endgame was first proposed in 2017, so it has taken six years to reach this point. Now, we have to evaluate what aspects we agree with and what we don’t. I’m staying positive because I believe everyone wants to find the right solution. I don’t think that issues like those experienced by Silicon Valley Bank or First Republic are particularly related to this situation, but that’s a discussion for another time. Ultimately, I hope and expect them to listen, as we should all be listening to each other.

Good morning. Thank you for taking my questions. I want to revisit the topic of Basel III. Your comments regarding European banks needing more work stand out, as many of them are forecasting impacts on a quantitative basis at the lower end, possibly below 50 basis points. I'm curious if you have identified any specific factors that could help level the playing field between European and U.S. banks. Moving on to the U.S. banks, we are aware of the significant impacts highlighted by Jerome Powell and Michael Barr. One of your competitors mentioned that this could refer to operational risk weighted assets being added to the total standardized risk weighted assets, which isn't currently considered under the standardized approach. I would like to know your thoughts on this matter and whether you believe it's less relevant, given that it may pertain to historical RMBS losses from several years ago. How do you view this situation?

I'm not going to provide further details about the European banks. I was merely noting that the system was established years ago under Basel, with some European banks fully compliant and others not yet. In the U.S., the system was created under CCAR, meaning we've had a capital stress test framework for over a decade. That was my point. Regarding the operational risk standardized approach to risk weighted assets, it's clear that this will be part of the Basel III proposal and included in the initial readout. My stance on where the U.S. proposal will end up is well-known. However, linking standardized risk weighted assets to fee-based business does not make sense to me. Until now, we have conducted unique evaluations of specific bank operational risk, and regulators are attempting to move toward a standardized approach. It remains uncertain how and when we will reach that goal, and there is much work ahead.