Morgan Stanley (MS) — Q3 2023 Earnings Call Transcript

Thank you. Good morning, everyone. Thanks all for joining us. As anticipated, the market environment in aggregate remained mixed continuing a pattern we've seen over the past several quarters. Notwithstanding, the net result for Morgan Stanley was generated $13 billion, a little over $13 billion in revenues, $2.3 billion in net income, and ROTCE of 13.5%. The concerns around a tight employment market, high commodity prices, inflationary pressures that may impact Fed policy provide additional challenges later in the quarter. But we are seeing increasing evidence of M&A and underwriting calendars that are building and while we expect momentum to continue this year, given the fourth quarter has some seasonal considerations, we expect most of the activity to materialize in 2024. Meanwhile, it's our job to control what we can control. Firstly, we successfully completed the E-Trade integration this quarter. That was a massive undertaking, and the expenses relating to that have been bleeding through the P&L for a couple of years, it involved us migrating 14 million accounts onto our platform and honestly it went incredibly well, really a seamless performance by the team. This conversion allows us to further execute on our strategy, building our revenue synergies across channels, and attracting clients to our best-in-class advice offering. Secondly, on the capital front, we bought back $1.5 billion in stock. We averaged a nearly 4% dividend yield over the quarter, and at the same time, delivered a CET1 ratio of 15.5%, which is 260 basis points over our most recent regulatory requirement. We clearly have a significant capital buffer. Also, you saw the full details of the initial Basel III endgame proposal. As you all know, this is a proposal, not the final regulation. And I'm going to repeat that, it’s a proposal. There is an enormous amount of energy being spent, conversations being had across industry groups and agency board members and I've been deeply involved myself along with Sharon Yeshaya and we've been told many times that the Federal Reserve strongly welcomes comments on this proposal. Given this, I anticipate that the agencies will be open to considering thoughtful changes before it's adopted as a final rule. But let me be crystal clear, because of the buffers we have built, even if this proposal were implemented today as written, we have adequate capital to meet the ultimate requirement. Needless to say there are many years between now and then. In the quarter, wealth management generated net new assets of $36 billion, that's obviously below recent quarters. It's consistent with what I've been saying for a long time. These numbers will bounce around and in any quarterly period, they're always idiosyncratic things. This year we've had two quarters where we had some surprise on the upside and in aggregate for the year, we're totally net new assets of $235 billion year-to-date. Our annualized growth rate is at the high end of the 5% to 7% range that we've been looking at. And it's consistent, in fact, it's spot on with our three-year target of a trillion dollars for net new money. Overall, this firm is in excellent shape, notwithstanding the geopolitical and market turmoil that we find ourselves in. My hope and expectation is to hand over Morgan Stanley with as clean a slate as possible and deal with a few of our outstanding issues in the next couple of months. I'm very excited about the future of this firm, its leadership, its strategy, and its culture. And I'll now turn it over to Sharon, who can discuss the quarter in greater detail. And then together, as always, we'll take your questions. Thank you.

Thank you, and good morning. The firm produced revenues of $13.3 billion in the third quarter. Our EPS was $1.38 and our ROTCE was 13.5%. Results in the third quarter were solid against a mixed market backdrop. The firm's year-to-date efficiency ratio was 75%. Together, severance and DCP impacted the year-to-date efficiency ratio by nearly 150 basis points. As we invest for growth, our integration efforts have remained a priority. Integration-related expenses were $68 million in the third quarter, and we anticipate a similar amount in the fourth quarter as previously communicated. Now to the businesses. Institutional securities revenues were $5.7 billion, declining 3% versus the prior year. Equity and fixed income results were in line with long-term historical averages. Investment banking revenues remained depressed on lower volume. However, leading indicators across advisory and underwriting progress positively, evidenced by a notable increase of Morgan Stanley's announced volumes in the third quarter on a year-over-year basis. Investment banking revenues decreased to $938 million. The change to the previous year was driven by lower results in advisory and debt underwriting. Advisory revenues of $449 million reflected a decline in completed transactions, due to lower announced volumes in prior periods. Despite the weaker quarterly results, we continue to see broad sector diversification of our completed deals and the backlog reflects a similar pattern. Equity underwriting revenues were $237 million. Overall activity remained muted relative to historical averages. While increased confidence supported early September issuances, a hawkish tone from the Federal Reserve, and resulting moves in interest rates serve as a reminder that this market remains window-driven. Fixed income underwriting revenues were $252 million down versus the prior year, primarily reflecting lower non-investment grade events. We are encouraged by the growing client dialogue and bake-off activity across sectors and geographies. The pickup in our announced M&A volumes in the third quarter speak to the trends we've observed at the end of the last quarter. But the landscape continues to evolve. As we look ahead, corporate confidence will largely be determined by the overall health of the consumer and the stability of input costs. While risks remain, including geopolitical threats, the underlying trends suggest activity is building and there is a desire among clients to pursue their long-term strategic objectives. Equity revenues were $2.5 billion. The business performed in line with historical averages with relative strength in Europe and Asia. Prime brokerage revenues were solid. Client balances were modestly higher, compared to last year. The results reflect narrower spreads and the geographic mix of those balances. Cash revenues declined versus the prior year on lower overall global volumes. Derivative results increased year-over-year, reflecting higher client activity with particular strength in Europe. Fixed income revenues were $1.9 billion. Micro results increased versus the prior year, supported by strength in securitized products, both in agency and non-agency trading. Macro revenues decreased versus last year's elevated results with lower revenues and rates in foreign exchange. Results reflect lower client conviction, particularly around the future of central bank policy. Commodity revenues increased year-over-year on the back of a constructive trading environment, particularly for oil. Other revenues of $277 million improved versus last year, driven by lower mark-to-market losses on corporate loans, net of loan hedges, and higher net interest income and fees. Turning to ISG lending and provision. The allowance for credit losses in ISG loans and lending commitments increased slightly to $1.4 billion. In the quarter ISG provisions were $93 million. The increase was driven by a continued negative outlook for the commercial real estate sector. Net charge-offs were $39 million, primarily related to one commercial real estate loan in the office sector. Turning to wealth management, revenues of $6.4 billion were strong, an increase from the prior year. The growth of asset management revenues more than offset the cyclical declines in net interest income, underscoring their durability. As designed, our asset led strategy provides steady fee-based flows that support asset management revenues. With this in mind, we remain focused on asset migration into our advisor led channel. This quarter, our long-term strategy took a critical step forward as we completed the last major milestone of our E-Trade integration, successfully converting nearly $900 billion of client AUM onto the Morgan Stanley platform. This will continue to enhance our ability to introduce clients and advisors and seamlessly transition them into advice-based relationships. Moving on to the business metrics in the third quarter, pre-tax profit was $1.7 billion and the PBT margin was 26.7%. Integration expenses, as well as DCP negatively impacted the margin by approximately 150 basis points. Net new assets were $36 billion, bringing year-to-date NNA to $235 billion, which represents over 7% annualized growth of beginning period assets. Net new assets in the quarter were supported by new clients and positive net recruiting into the advisor led channel. The multi-year buildup of assets provide a foundational pipeline into our advisor led channel, evidenced by fee-based flows of $22.5 billion in the third quarter alone. Asset management revenues of $3.6 billion increased 7% year-over-year. Higher average assets and the impact of cumulative positive fee-based flows over the past year drove the increase. Transactional revenues excluding DCP were $820 million, up 7% year-over-year. Results reflect opportunistic deployment of new capital by retail clients into alternatives, particularly into private equity and private credit. Bank lending balances were roughly flat versus the prior quarter. Growth in mortgages and tailored lending offset paydowns and securities-based lending. Total deposits of $340 billion remain stable compared to the prior quarter. Still, the deposit mix has shifted as clients continue to allocate rate-sensitive cash to higher-yielding cash alternatives available on the platform, including our expanded savings offering. In addition, the quarter saw consistent positive monthly inflows into equity markets from sweep balances, ongoing evidence of the improvement of the retail client sentiment. Net interest income was $2 billion. The sequential decline reflects a continued shift in the deposit mix. Looking towards the rest of this year, based on where we exited the quarter, we expect NII to trend lower. The magnitude will be a function of our deposit mix and the trajectory of rates. The wealth management business model is focused on steady asset aggregation, delivering strong solutions and advice to clients, while growing durable fees and expanding margin through the cycle. We are continuing to invest in our industry-leading position and the sustainability of our long-term growth. As the backdrop recovers, advisors remain well-positioned to capture greater asset opportunity supported by our multi-channel model that was built to attract new client relationships. Turning to investment management, revenues of $1.3 billion increased 14% compared to the prior year, supported by higher asset management revenues. Total AUM ended at $1.4 trillion. Long-term net outflows of approximately $7 billion were driven predominantly by headwinds to our active equity growth strategies, which continue to see redemption consistent with the industry. Including the segment's outflows, year-to-date long-term flows across the franchise were slightly positive. Within alternatives and solutions, we continue to see demand for parametric customized portfolios across both equity and fixed income strategies, a partial offset to the headwinds of the quarter. Liquidity and overlay services had net flows of $5.7 billion, driven by demand for parametric institutional portfolio overlay solutions and our liquidity strategies. Specific to parametric and across the entire franchise, overlay and long-term net flows in the quarter were almost $7 billion, underscoring strong trends in this business. Asset management and related fees were $1.3 billion, up 3% year-over-year on higher average AUM. Performance-based income and other revenues were $24 million, supported by the diversification of our balance sheet light platform. Results were driven by gains in U.S. private equity, offset by weakness in Asia private equity and real estate. Our strategic focus on secular growth areas and the expansion of our global footprint remains in place. Ongoing investments in our businesses, including our market-leading parametric franchise, as well as our continued growth and innovation in private markets, position us well to best serve our clients. Turning to the balance sheet, our CET-1 ratio stands at 15.5%, roughly flat versus last quarter. Standardized RWA has declined sequentially to $445 billion, reflecting our ongoing prudent resource management and market movements at the end of the quarter. We continue to deliver on our commitment to return capital to our shareholders, buying back $1.5 billion of common stock during the quarter. Taken in the context of the mixed environment, we are pleased with the firm's resiliency and our competitive positioning. As clients gain more conviction, we expect our institutional business to capture more opportunities, particularly in investment banking. This increased client conviction will also further support asset growth and wealth and investment management. We will continue to press our advantages and execute on our growth strategies all while currently managing our capital profile. With that, we will now open the line up to questions.

Good morning, James and Sharon. I wanted to just touch on wealth management, a bit of a longer-term question here. As you mentioned, you've enjoyed really strong organic growth in that segment over the last few years. But it doesn't appear to be translating to revenue growth. If I look at the wealth management revenues excluding NII, it hasn't really grown in three years, despite gathering significant amount of assets? So curious how you're thinking about the flow through from AUM or asset growth to revenues? And then maybe more broadly how you're thinking about the unit economics of your asset gathering strategy?

I'm quite impressed with the resilience we've observed in the business. This reflects the funnel we've discussed. Over the past year, we've captured approximately $260 billion, or $235 billion, in assets. Additionally, we're witnessing a steady increase in fee-based flows. Excluding the asset acquisitions from the past few years, we are nearing historical highs in fee-based growth. Since COVID, there has been substantial retail engagement, which has helped to counterbalance any declines in net interest income by supporting asset management revenues. Our goal is to continue growing our asset management fees and ensure we provide the right solutions for our clients. Looking ahead, we find ourselves in a mixed environment, with 23% of our retail client assets in cash, which is 5% above the historical average of 18%. Retail investors are starting to move their cash into the markets, and over the last four months, we've seen a consistent shift. In this quarter, we also noticed growth in alternative products and transactional revenues, a trend not seen since the first quarter of 2022 before the rate hikes began. I believe our strategy is performing well, as we have successfully aggregated assets, transitioned them into fee-based flows, observed growth in transaction volumes and new products, and managed this while clients have funds available to invest as market conditions shift.

Okay, thanks, Sharon. Maybe my follow-up is just thinking about your ROTCE targets over time of 20%. You know, the quarter is fine, 14% is nothing to sniff at, but it is some ways off that 20%. How should we think about the bridge from here? I know you've mentioned investment banking, but it seems like a fairly small part of your business. So what's the bridge to 20%? How much of it is macro? How much of it is self-help? And for what is macro, what sort of operating backdrop are you looking for? Thank you.

Well, Christian, I appreciate the chance to give you a bit of a respite after Sharon's comments. To expand on what Sharon mentioned, when people can earn a 4% or 5% return effortlessly, they are less likely to engage in trading. I've noticed that the secondary revenue lines are among the lowest I've seen in recent years, and while interest rates will eventually decrease, I don't anticipate that happening next year. Once rates do decline, we can expect increased market activity and more funds to flow into the sweep. There seems to be an ideal rate range that is appealing to investors without deterring them from the market, which differs from the checking account trend at some commercial banks. Regarding the 20% target, I should emphasize that we have indeed reached that mark before. Therefore, achieving it again is not a significant milestone. It reminds me of when I joined Morgan Stanley and people questioned whether the wealth management division could sustain 15% margins, despite two others already doing so. We've maintained that level, and the fundamentals have remained strong. The firm continues to grow due to our investments, such as the E-Trade integration, which required substantial effort. We chose to keep investing in wealth management during this cycle, anticipating significant returns in the next decade. The integration of the Eaton Vance platforms has been another priority, as those units were never fully combined. Dan has done an excellent job making that happen. On another note, banking performance has been poor, with revenue under a billion dollars indicating a tough environment and sluggish M&A activity. However, the pipeline this quarter looks promising, so while I don't expect immediate revenue impacts in Q4, I do see them materializing in Q1 and Q2 next year. Calculating based on current figures, we need to generate an additional $700 million net each quarter from our current $2.2 billion. We can manage expenses effectively to contribute a couple of hundred million more. As the banking sector recovers and we see some transactions shift into products, plus a potential Federal Reserve rate increase, reaching the 20% target seems achievable. I appreciate your question, and I have confidence in the long-term outlook. This situation has occurred before and will happen again, and I believe it won’t take long to see progress.

Hi, thank you. Sharon, first one on wealth management and NII. I mean, the trends I think are in the range of what's been happening across the industry. So not overly surprising. But I'm curious if you could break down even qualitatively how much of that sweep movement is coming in historical mortgage family versus E-Trade? I'm just trying to see what type of client is moving? And then to go back, you piqued my interest, James, in the comment you just made about not next year, but maybe after that. What conditions do you think we need to see for wealth management NII to stabilize and grow?

Let's start with the first question regarding the two types of deposit mixes. You’re right that when considering self-directed clients versus advisory-based clients in our historical wealth management franchise, one tends to exhibit a more stable deposit base than the wealth management side has shown. This distinction helps illustrate which client base is exhibiting that behavior. Regarding the potential growth of net interest income going forward, that aligns with our asset gathering strategy. A portion of these assets, whether they transition to self-directed or advisory relationships, will likely be held as transactional cash, which will support net interest income over time from a deposit standpoint. Additionally, this also enhances our lending capabilities and opportunities. We have observed significant household penetration in offering new lending products, especially with our SBL product. We are also witnessing growth in mortgages, even in the current environment for new home purchases. As we gain a better understanding of our client base, we can improve our offerings. Moreover, consolidating the E-Trade acquisition and integrating everything into the same portfolio and technology framework is crucial for merging various bank relationships. This integration should help bolster net interest income as we look ahead.

I think there's an optimal point to consider. We've seen interest rates rise from zero to 5% in the quickest time since the 60s and early 70s, which is remarkable given we haven't experienced a recession; in fact, I believe we won't. If you're an advisor with a client holding a lot of cash earning nothing, you should suggest they invest in treasuries or similar options. This shift has already occurred. When rates are around 2% to 3%, the conversation changes. There is a trigger point that is evident across the industry, which explains the different behaviors observed with checking accounts. Many individuals remain unaware that their cash is sitting in checking accounts earning minimal interest, perhaps around 20 basis points. As interest rates decrease, the total cash held on our books, which is currently 23%, will naturally reduce since it’s an unusual situation due to current rates. As rates drop over the coming years, people will become less sensitive to cash returns and will instead utilize these funds as a liquidity account for managing investments. I've noticed that we've exceeded expectations relative to our business mix, which makes me optimistic about the future. Some banks have also mentioned achieving similar success, noting that although they are currently profiting from the funds in checking accounts, this is not sustainable. We've seen a situation where high rates prompted everyone to keep cash rather than letting it sit idle. I hope that makes sense to you, Glenn. Additionally, I appreciated your comment about the "green shoots" and how someone forgot to water them; that was a good point.

That's better than a pummel. Thank you. Onde quick one, maybe I'll get the pummel on this one. I know it's the board decision, but the longer the CEO transition announcement takes place, is there any timeframe where it starts to put more strain on the organization or become a distraction as every reporter in the world is writing on it every day?

Yes, in about three years. I want to clarify that I have made it clear I will not be CEO much longer. I stated this at the annual meeting because there was skepticism about my departure as bank CEOs typically remain. I intend to leave as soon as the board feels ready to make that decision, and I have communicated this to them. They have been doing an excellent job with this process, led by Dennis Nally and the succession committee, along with Tom Glocer as lead director. While I don't want to specify a time frame, I can say that we are progressing well. I believe there will come a time when continued leadership from me may yield diminishing returns, although we're not there yet. The team is performing admirably, and I am eager to hand over the reins to someone new so they can capitalize on the significant growth opportunities we’ve established. For example, our partnership with MUFG in Japan has been transformative, and I believe there's much potential ahead, especially with Japan’s economic turnaround. So, yes, we are getting closer to this transition, and I see myself more as a facilitator during the handover period, ensuring the organization continues to thrive.

Hey, good morning. I guess, I just wanted to follow-up on something you said, James, around the optimal level of rates, and you talked about NII. But if the Fed were to hike a few more times, or if rates stay at these levels for longer, is there an argument to be made that just structurally the business will be challenged until we get to the other side of the rate cycle, given just client assets probably remain in lower spread products? Just talk to us in terms of how you think about if rates don't get cut, is that a headwind to the business until we get to the other side?

No, I definitely don't think there's a structural issue. The business is generating impressive margins, and I believe the margins are even higher without certain costs. A few years ago, I anticipated reaching this level, though not many others did. So, I don't see any structural challenges here. I suspect the Fed might increase rates one more time before the end of the year, probably in November, but I don't expect them to cut rates in 2024, although I do think they may do so after that. In the next 12 months, we've already seen cash move significantly, which will have a slight impact on net interest income, but that’s not the main concern. The key point is looking ahead. Once the Fed signals that they’ve stopped raising rates, the mergers and acquisitions and underwriting sectors will see a surge in activity due to a backlog of opportunities. Boards are currently cautious because they want to understand financing costs before making major capital decisions. I believe we’re approaching a promising period, although I might not be around to witness it. I can't predict if this shift will happen in three, six, or nine months, but change is coming, and a drop in rates will trigger further investments. As a result, people will shift their focus from cash management to investment opportunities, leading to substantial growth.

Got it. I guess a good time for you to hand off. Your successor will be thanking you for that. But a quick question…

Investing more broadly internationally, James mentioned the deals or what we've been working on, I should say, MUFG 2.0 between research and also our sales and trading side. We continue to look for opportunities. We have Arun Kohli, who's been working on our India franchise. I think that there are clearly opportunities there. Within India, we see a lot of opportunities throughout Asia. We've discussed different opportunities also all across the international franchise in Europe. So when you look at, think about investment management. That was one of the key points that we had talked about potential distribution of investment management Eaton Vance products all over Europe. We've seen that. We continue to see products with Calvert, with various active ETFs that we're seeing all across Europe again. And we've been raising new AUM there. So there are ways to distribute product across different geographies. There's a way to work with our strategic partners in places like Japan. There are ways to organically take advantage and move forward in places of growth that have more secular growth trends such as India. So there are tremendous opportunities where we see that we can take, like I said, product-client relationship and also work across institutional securities and various places in investment management. Dan Simkowitz has talked a lot about that of raising funds through those partnerships and being able to look for ways to work together to also source talent internationally as we work across the organization.

And I just said, I mean, I was in the Middle East a few months ago, we're opening an office in Abu Dhabi. If you think of the combination Middle East, India, Japan, kind of, offsetting what's going on in China. And then strategically, I would be very surprised if this firm doesn't do some transactions in both wealth and asset management over the next three years outside the U.S. I think we have a game plan for it. Strategically, the team has worked on a lot of ideas. And obviously, we want to make sure when we do it, we're, you know, we're fully ready and we understand all of the, you know, the diligence issues around some of these relationships and careful about that, but I think the opportunities are clearly there.

Thanks, good morning. I wanted to follow-up on flows. Obviously, fee-based flows strong in the quarter, but the total flow number came in understanding the environment was a bit softer here in the third quarter? Could you maybe talk about the channels where the pullback was seen the most? You didn't mention workplace, so I'm not sure you would love some color there as well?

Yes, we've discussed this before, and I appreciate the question. In the workplace channel, particularly during the first and second quarters, there's been some utilization of available cash. However, we're not directly witnessing this as an increase in people’s accounts; rather, it appears they are selling stock instead of reinvesting, likely influenced by the current economic conditions and inflation concerns. This could be a noticeable trend, but it largely depends on the market. What excites me more is the increase in new client accounts and recruitment, which were the strongest factors. The ability to attract new clients has improved significantly; just five years ago, in the early stages of our modern wealth platform, there were doubts about our growth due to a lack of new clients. The investments we've made in wealth management technology have played a crucial role in attracting new recruits. When you talk to those recruits, they highlight the appealing projects we offer, our technology, and the client interaction opportunities as reasons for joining Morgan Stanley. This trend is ongoing, and we are also seeing positive numbers in new client acquisitions. These are encouraging indicators, also reflected in the rising number of stock plan participants.

Great, thank you. And then just a follow-up on investment banking and understanding the environment isn't ideal, but you did talk about increase in announcements. So I was hoping you could provide some context maybe on the sponsor community and maybe how those conversations are happening? And just overall backlog levels versus kind of last quarter.

Yes, we've continued to build our backlog, reaching some of the highest levels seen in both underwriting and advisory throughout the year. This is encouraging. We observe financial sponsors with significant resources, although there are some valuation gaps. As James mentioned, clarity around the stabilization of rates will facilitate deployment. In terms of transactions, we are noticing key themes emerging, such as consolidation within the financial sector, which is evident in our discussions. Additionally, the shift towards energy transitions is significant for some of our recent transactions. We're also observing a growing focus on technology and AI, as companies consider how to integrate these into their strategic objectives. All these factors contribute to a diversified backlog. We're committed to strengthening our firm by making strategic hires to navigate this complex landscape and identify execution opportunities moving forward.

Hi, good morning, James. Good morning, Sharon.

Good morning.

Good morning.

So I wanted to start with a question on just the expense and margin outlook. Expenses were actually well managed in the quarter. But one of your peers did talk about competition intensifying in terms of the war for talent within investment banking and trading. It feels like that's been the case for the better part of a number of years in wealth management. And I was hoping you could just speak to your expense growth outlook and your confidence in terms of your ability to achieve the firm-wide margin target of 30%?

When we evaluate expenses, we've been considering them throughout the entire cycle. Unfortunately, we've had to take some actions, both at the end of last year and again in the spring. We've been open about the severance costs incurred this year. We're managing our expense base to better understand the current environment. There's always a competitive landscape for talent, and we invest in talent competitively, but we need to align this with potential growth opportunities. We also need to consider the investments we're making in processes and technology. The technology we're investing in should lead to operational efficiencies and leverage going forward. This includes modernizing our operations, optimizing processes, and ensuring we have the proper risk and control framework to facilitate growth. Ultimately, it's about balancing future investments with maintaining a suitable expense structure to capitalize on efficiency gains and operating leverage as we progress through the cycle.

I'll just say one thing on the war for talent. Yes, I mean, obviously, really high performers are in demand across the street. But we've actually had the opposite issue. We've had very low attrition, which is why we did some of the expense initiatives that Sharon talked about. And I guess we should feel flattered. It's a reflection of the culture and the stability of the firm. But also, that's why we took the initiatives because you've got to bring in talented people and new generations to keep growing this place. So one's these and two's these, yes, you can lose somebody, a senior person here or there and we've hired a bunch in banking insurance, but the broader across the 80,000 people we've got is the broader messages attrition has been remarkably low and that's something that, you know, we just got to work through.

That’s great and for my follow-up just a question on capital, James you noted that pro forma Basel III endgame, your capital requirements approximate your current capital base. How much capital cushion do you plan on running with? Also, how it informs your buyback? And you addressed a question on ROTCE targets, curious about 20% target contemplates higher capital under Basel III. So I know there's a lot in there, capital cushion, buyback level 20% ROTCE target?

I'm going to take some notes. There’s a lot to remember, and it won't impact our ROTCE. We’re not planning to increase capital, so you can put that aside. The cushion depends on how the rules are finalized. From the beginning, I've been clear that I don’t think the proposal will remain unchanged after the comment period. I don't have any special insight, but I have spent a lot of time with the regulatory community over the past 14 years. For instance, everyone knows that the way operating risk RWAs have been calculated based on fees isn't aligned with what Basel originally intended. They intended to revise that rule years ago, but it never happened, and now we’re adhering to something they don't even use in Europe. It just won't happen as it is. This isn't being overly optimistic; it's simply my judgment. That said, in the unlikely event that the proposal takes effect as is, we’ll be fine. We’re definitely not raising capital and will continue our buyback during this time. The final implementation of this will be in 2028, and a lot can happen before then. It’s worth noting that this is the first time members of the Fed Board and the FDIC have expressed discomfort with a rule before it’s proposed. There’s clearly ongoing debate within regulatory bodies. Moving beyond the question of needing more capital, which I don’t believe is necessary, we need to focus on what the capital structure should be. It should not penalize businesses that charge fees, like credit cards or wealth management services, as that's not the regulatory intent, and I believe that will be addressed. Regarding the cushion, it will depend on where the rule lands. We will maintain a prudent cushion as needed. As for creating more capital, we won't unless our business grows to warrant it. And yes, we will continue with buybacks, and I’m sure Sharon can provide more details on our buyback and dividend strategies.

Yes, on the capital return strategy, we've been really clear that we expect to continue to return capital to our shareholders. Dan said that at the September conference, even when you think about all Basel, we first and foremost, we've talked about the dividend strategy. We doubled our dividend a few years ago and we've continually increased the dividend. That increase has been reflective of the growth and stable revenues that we've had more broadly as an institution. Then, of course, buyback, we're committed to a buyback, but the size of a buyback is always going to be opportunistic when you think about what the alternatives are for capital usage, right? So what are the opportunities that we see going forward and will make the right decision for what we think the right decision is for the company and for our shareholders around the uses of the capital. But we increased the buyback this quarter. So that shows you sort of how we feel about being able to return capital to our shareholders when you compare this quarter over the course of last quarter, moving from $1 billion to $1.5 billion.

Thanks. Good morning. My first question is about the E-Trade conversion. It's great to have that behind us. You mentioned some benefits, particularly related to flow and revenue. I'm interested to know if there are any significant cost-saving opportunities, especially considering potential redundancies that could be eliminated, as well as any other efficiencies that may be available.

We haven't approached this deal with a focus on cost synergies. The main emphasis has been on revenue synergies. While there may be some potential savings on the margin, that isn't the primary goal of the transaction. What's particularly interesting is the smooth integration with E-Trade, especially regarding our clients. It sets a solid groundwork for migrating clients between channels. For instance, we can move someone from an E-Trade channel or a self-directed channel and introduce them to a financial advisor, facilitating that potential transition. Being on the same platform makes this process much easier and more seamless. This also applies to our workplace offerings, as everything integrates well. Additionally, this integration is beneficial from a banking perspective since E-Trade had banking functionalities on their platform. We can leverage that as we look to expand our banking services, such as lending and deposits. Overall, I view this more as a chance for revenue synergies rather than cost synergies.

Okay, terrific. Thanks, Sharon. Quick follow-up here just on an interest income trajectory in GWM. So, we can make some assumptions around the trajectory of deposits, but how should we be thinking about the asset yield trajectory from here if we use the forward curve? I guess what are some of the puts and takes to be thinking about there?

When examining the relationship between sweeps and net interest income over the past two quarters, it's important to consider that asset yields depend on market yields. In the last quarter, I noted that net interest income was bolstered by increased asset yields. At the end of the first quarter, we were still facing a regional banking crisis, which led to some higher yields, particularly in funding, due to the prevailing market conditions. As those yields stabilized, we saw a decline in asset yield, and deposits reacted more significantly to sequential changes in net interest income. Therefore, it's essential to consider both quarters when analyzing the connection between sweeps and net interest income, while also recognizing that asset yields will be influenced by broader market factors.

Good morning, James and Sharon. Thanks for taking my questions. Would like to start, you know, similar to that last question. So there's clearly uncertainty, but also it seems equally clear that NII is no longer a tailwind for wealth. So when you're thinking about the 30% pre-tax margin target that you've provided for that business? How do you think, what are your plans given that tailwind may be turning into a headwind or at least moderating? And how are you calibrating any planned investment and balance that out with the potential for growth on the back of that?

Thanks for the question, Brennan. As you would expect, it's a balance, right? We've made changes to our expense base over the course of this year, but we want to make sure that we're investing for long-term growth by being able to offer both technology, platforms, solutions, et cetera, so that our advisors. The most important thing about the investment is to create opportunities where the advisors have more time. More time that the advisors have, the more they're able to prospect new business and bring new assets to the top of the funnel. So that's how we're prioritizing the investments in order to get the operating leverage as the market begins to turn.

We can make that happen. What we want to make sure is we make happen the growth over the next several years. So it is not a heavy lift. I'm not worried about that at all.

Hey good morning. Maybe just pivoting to the trading business, fixed trading, up sequentially a bit unusual in a seasonally slow third quarter. So maybe just talk a little bit about the drivers, how sustainable you think they are, at least in the near-term and maybe overall thoughts on industry wallet into next year?

Yes, it's a great question. When you look at what's gone on in terms of the industry wallet, we talked a lot about 2019 and 2020 being bookends. Obviously, you are above the 2019 wallet more broadly, and you see this playing out, because things like fixed income, you do have more central bank action, and you do have more broadly associated vol when you think about pre-COVID levels. So all that is fundamentally positive. In terms of specifically the trading businesses, you had movements like I said in commodities, oil, that ability to capture vol, it's really around being there for our clients, but having greater velocity of sheet. And the more that we're able to do that as we move forward, we restructured this business tremendously over the course of the last eight, nine years. And it's being there to be able to serve our clients and using our resources to some degree more effectively and efficiently.

Okay, great. That's it for me. Thanks.

Thanks, Jim.