Q4 2024 Earnings Call Transcript

Good morning. Welcome to Morgan Stanley's Fourth Quarter and Full Year 2024 Earnings Call. On behalf of Morgan Stanley, I will begin the call with the following disclaimer. This call is being recorded.

During today's presentation, we will refer to our earnings release, financial supplement, and strategic update, copies of which are available at morganstanley.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release and strategic update. Within the strategic update, certain reported information has been adjusted as noted.

These adjustments were made to provide a transparent and comparative view of our operating performance. The reconciliations of these non-GAAP adjusted operating performance metrics are included in the notes to the presentation or the earnings release. This presentation may not be duplicated or reproduced without our consent. I will now turn the call over to Chairman and Chief Executive Officer, Ted Pick.

Good morning, and thank you for joining us. First, we would like to acknowledge our colleagues, clients, shareholders, friends, and family in Los Angeles. Our hearts go out to all those impacted and dealing with the horrific devastation from the wildfires. We're grateful to all the firefighters and first responders, we are thinking of you.

Over the last several years, we've been faced with two central themes. One, the end of financial repression, namely the passing of the era of ultra-low interest rates and the reemergence of inflation. And two, the end of the end of history with the resumption of geopolitical uncertainty. These paradigm shifts juxtaposed against renewed investor and corporate confidence, present opportunities to support clients with exceptional advice and market access.

Morgan Stanley is well positioned to execute against these opportunities. The firm's consistent execution is demonstrated by the cadence of top-line and bottom-line in 2024. Revenues across the four quarters of $15.1 billion, $15.0 billion, $15.4 billion, and $16.2 billion, and earnings per share of $2.02, $1.82, $1.88 and $2.22. The fourth quarter was a top-line record with the highest earnings per share in over 15 years, capping-off one of Morgan Stanley's strongest years. For the full year, the firm delivered a return on tangible of 19% and earnings per share of $7.95, making significant progress toward our long-term goals.

The results reflect consistent durable earnings across the firm, evidencing that Morgan Stanley can deliver during this period of continued macroeconomic and geopolitical uncertainty. As we do every January, let's begin with our 2025 strategic update entitled Four Pillars of Morgan Stanley: The Integrated Firm. The slides can be found on our website. On Slide 3, we introduce the four pillars of Morgan Stanley to support our integrated firm, strategy, culture, financial strength, and growth.

Strategy is about consistently serving our clients and raising, managing, and allocating capital. Culture is about rigor, humility, and partnership. Financial strength is about strong capital and liquidity alongside durable earnings and growth is about smart strategic investments across the firm, which generate new opportunities to capture client share. The investment thesis for Morgan Stanley rests on our ability to deliver the integrated firm supported by these four pillars.

Slide 4. First, to reiterate, Morgan Stanley's clear strategy to raise, manage, and allocate capital for corporations, individuals, asset managers, and asset owners around the world. In the past year, our engagement advice across the full range of institutional and individual clients drove results. Slide 5. Morgan Stanley culture is defined by rigor, humility, and partnership. The leadership group on the operating and management committees have an average tenure at the firm of more than 20 years, many of them across business segments and regions.

More broadly, our leadership body of 2,312 Managing Directors, 173 of whom we recently promoted to the partnership have been with Morgan Stanley for an average of 15 years. 30% of our Managing Directors have been at the firm for two decades. Our partnership is defined by Morgan Stanley leaders who embody this homegrown culture, joined by acquisition and lateral talent who bring an incremental skill set to the platform. Morgan Stanley's culture of first-class business in a first-class way forged over many years of trial and success is a competitive advantage and will contribute to the success of the integrated firm.

Slide 6 highlights our position of financial strength, the third pillar of the integrated firm, and is the output of a clearly defined strategy and a tightly knit culture. Our consistently strong capital position over recent years is a standout. In 2024, we accreted over $5.5 billion of CET1, while continuing to return capital to our shareholders. We will continue to prudently grow the dividend, continue to invest in each of our three businesses and across our infrastructure, and continue to opportunistically repurchase the stock.

In 2024, we effectively deployed capital to support clients and translated that into earnings growth. High capital levels protect us in challenging climates and sustain us for long-term growth. Slide 7 brings us to the fourth pillar of the strategy, revenue and earnings growth. Earnings expansion in 2024 reflects a return on multiyear investment to support clients.

We will continue to invest heavily across the firm, in our talent, our clients, in e-trade and in parametric, in our bank, across resiliency in technology and infrastructure, and in the development of the integrated firm. In the past year, expense growth was tempered by our focus on rolling off initial integration spend and taking opportunities to consolidate our real estate footprint. Investments for growth will continue to be supported by ongoing disciplined prioritization of our expense base. Slide 8. The last six years shows step function change in the firm's growth across our businesses.

In the Wealth and Investment Management segments, combined revenues have grown from $20 billion to $34 billion and total client assets have nearly tripled to $7.9 trillion. This growth has been achieved both by way of acquisition and through organic execution. You will also note that institutional securities wallet share has grown by nearly a 100 basis points. These results reflect not only constructive markets, but also a sharpened focus on key client relationships and an expanded coverage of corporates and asset managers.

Morgan Stanley scale positions us over the long-term to deliver growth in each of our three business segments. We win both through an expanding denominator of global securities, banking, wealth, and investment management activity and by increasing our numerator as in our wallet share in each segment. In short, we seek to gain durable share in the secular growth businesses in which we participate. Slide 9, goes a level deeper into institutional securities.

First, the growth in institutional securities has been both broad based and crucially is global. It is important that we are relevant in all the major regions around the world. Amidst geopolitical and interest rate uncertainty, each region grew revenues by roughly 20% in 2024. These results follow multiple years of investment in talent and leadership, as well as efficient and disciplined RWA growth. In 2024, we saw institutional securities deliver an operating margin of 31% and revenue growth that was significantly higher than our RWA growth.

We are in a leadership position and can offer trusted advice and market access into the investment banking new issue and M&A cycle, which just lies ahead. Slide 10. In Wealth Management, investments in our self-directed and workplace channels drive our differentiated client acquisition funnel. Today, with our expanded offering, we reach over 19 million relationships and have added net new assets of over $250 billion in each of the past two years on track to delivering $10 trillion plus of total client assets. An important indicator of Wealth Management momentum is fee-based flows, which reached an exceptional $123 billion in 2024. Delivering on new relationships and net new asset growth creates opportunities for our team of world class financial advisors to tap into the integrated firm for their clients.

Slide 11 highlights the breadth and tenure of wealth management's client relationships as 60% of advisor-led assets are associated with clients who have an average duration of 20 years. We retain 99% of our clients reflecting their enduring trust in Morgan Stanley. The slide illustrates our multichannel model, which continues to drive new assets to the platform. 30% of our advisor-led assets are associated with clients who have a Morgan Stanley relationship of less than 10 years and 10% of advisor-led assets are with clients of less than two years. The client acquisition funnel supports durable growth, namely as clients mature with our financial advisors, they become the foundation for the continued growth of recurring fee-based revenues.

Slide 12. In Investment Management, we continue to focus on the secular growth areas of customization and alternatives. Our industry leading parametric platform, inclusive of overlay has grown to $575 billion. In alternatives, our investable assets have more than doubled in size to $240 billion. Investments in these secular growth areas have brought more balance to our investment management business and supported fee-based revenues.

Additionally, the integrated firm, particularly the relationship with wealth management continues to benefit the investment management platform with the enhancement of retail oriented distribution offerings and additional product capabilities. Slide 13. An area of investment is in the incremental growth of our U.S. banks. Since 2018, the firm has significantly grown deposit balances and continues to source deposits from wealth management clients with an expanded product offering. On the asset side, we will continue to grow our wealth management lending capability by covering clients holistically as their financial needs evolve.

In addition, we will continue to utilize the bank platform to support growth in eligible institutional businesses. As we continue to grow our capabilities across the integrated firm, we are well-positioned to provide a full suite of solutions to our clients. Slide 14. A dividend that is aligned to the growth of fee-based earnings has been a leading priority. Our durable results demonstrate consistent execution of our strategy, and we have raised our quarterly dividend by $0.075 for three years in a row to $0.925 per share.

Slide 15. As you've heard us discuss during the past year, the integrated firm brings together our world class wealth and investment management franchises with our world class institutional securities franchise. We are consistently strengthening the pillars underlying the integrated firm to deliver on our strategic goals. Across the integrated firm, Morgan Stanley is relevant to our clients, spanning from the advice dispensed and corporate boardrooms to our financial wellness programs for that company's employees. We are also the premier holistic partner to asset managers partnering with them to grow their businesses and to generate alpha.

We can deliver institutional capabilities to our clients alongside sophisticated wealth management advice and distribution in an integrated service model. And in so doing, be mindful of potential conflicts. To open 2025, we have formalized the integrated firm by positioning leadership talent at the center of client coverage, integrated data, risk management, and infrastructure to drive growth as we serve more clients across their full suite of needs. This effort will be led by Mandell Crawley, a three decade Morgan Stanley executive and a member of our operating committee.

Together with Co-Presidents Dan Simkowitz and Andy Saperstein, the integrated firm organization is aligned to scale client opportunities across Morgan Stanley. Slide 16. The Morgan Stanley investment thesis is robust. In 2024, we deliver top-line and bottom-line strength and consistency. The full year results are strong relative to our long-term firmwide goals.

We ended 2024 with total client assets at $7.9 trillion, wealth management pre-tax margins of 27%, a firm efficiency ratio of 71%, and a return on tangible of 19%. Of note, we added a new goal to achieve durable wallet share gains in institutional securities. The additional metric for institutional securities is an appropriate reflection of the expected contribution of this business segment to the firm's growth narrative. The key word is durable.

There will always be market and business cycles in each of these businesses. Morgan Stanley's trusted relationships over the very long-term lead to superior results. Against the four pillars of strategy, culture, financial strength, and growth, delivering the integrated firm is foundational to durable earnings growth and 20% returns through the cycle. Thank you.

Now Sharon, will review our fourth quarter and annual results, then together we will take your questions.

Thank you, and good morning. The firm produced revenues of $61.8 billion in 2024 and ended the year with fourth quarter revenues of $16.2 billion. For the full year, ROTCE was 18.8%, and EPS was $7.95. For the fourth quarter, ROTCE was 20.2%, and EPS was $2.22. The full year efficiency ratio was 71.1%. Improved efficiency not only demonstrates our ability to grow revenues, but also to prioritize our controllable spend.

Occupancy and equipment costs held flat, benefiting from the prior year's consolidation of our real estate footprint. During 2024, we took real estate charges of $62 million, which impacted full year EPS by $0.03. Professional services declined year-over-year, aided by the roll off of integration related expenses and discipline across project spend. These savings helped self-fund investments across infrastructure to support growth such as expanding data center capacity, renovations, and technology modernization efforts. Self-funding investments remains a priority.

In the short run, similarly sized additional modernization efforts focused on decommissioning legacy technologies may result in higher amortization costs. This alongside business enabled innovation and process optimization with AI should support the firm's future efficiency path. Now to the businesses. Institutional securities delivered very strong annual results across business and regions, demonstrating the high quality breadth and depth of our world class global franchise.

Full year revenues of $28.1 billion included our highest reported equity revenues and the highest results across combined equity and fixed income markets. The strong annual performance showcases our global footprint and our ability to capture client share amidst an increasingly constructive backdrop. Fourth quarter revenues were $7.3 billion as markets remained active, bucking the typical seasonal slowdown. We supported clients throughout the quarter and ended the year with momentum.

Investment banking revenues were $6.2 billion for the full year, reflecting growth across regions and products. 2024 commenced with strong debt underwriting activity, followed by M&A announcements that picked up in the second half, and ended with increased equity underwriting activity as the IPO market posted its highest volumes since 2021. Fourth quarter investment banking revenues were $1.6 billion. Results were largely driven by accelerating strength in equity underwriting as follow-on and IPO issuance saw meaningful improvements across -- over the comparison period. We also saw corporates and sponsors take advantage of constructive markets in the quarter.

Advisory revenues improved year-over-year on higher completed M&A transactions. Looking ahead to 2025, our M&A pipelines are healthy and diversified, outpacing recent years. Financial sponsors are joining corporates to drive activity, evaluating exit opportunities for long held assets. CEO and boardroom confidence continues to improve as valuations stabilize and financing markets remain strong.

Our business is well positioned for a strong continued rebound in deal making activity. Turning to equity. We continue to be a global leader in this business, evidenced by record full year revenues of $12.2 billion. These results reflect year-over-year growth across regions with record performance out of Asia, demonstrating the importance of having a global footprint.

Full year results were supported by increased prime brokerage balances and our agility as we navigated the market well. Revenues were $3.3 billion in the fourth quarter. Following the U.S. elections, clients re-risk quickly, given shifting market dynamics. Additionally, third quarter strength in Asia carried into the fourth quarter with renewed investor interest across the region.

Prime brokerage revenues were a record for the business as clients remained engaged and balances rose to peak levels. Cash results increased year-over-year, consistent with higher levels of client engagement and volumes. Derivative results increased versus last year's fourth quarter on the back of higher activity across a variety of products, in line with improved risk appetite from clients. Fixed income revenues were $8.4 billion for the full year, driven by consistent quarterly performance across the businesses.

The full year results demonstrate our multiyear efforts to recenter our fixed income business around the integrated firm, improved trading performance, growth in durable lending revenues, and servicing corporate and sponsor relationships all contributed to results. Quarterly revenues were $1.9 billion, driven by credit products and commodities. Micro revenues were above historical quarterly averages. Results were driven by securitized products, which benefited from higher loan balances and an increase in securitization activity.

Macro performance was relatively flat versus the prior fourth quarter. Commodity revenues improved year-over-year. Results were led by our North America power and gas business, where structured opportunities for corporate clients leveraged the integrated firm. Turning to ISG lending and provisions.

For the full year, ISG provisions were $202 million and $78 million for the quarter. The quarterly provision was driven by portfolio growth and a build in a handful of individual assessments. For the full year, ISG net charge-offs were $210 million. For the quarter, net charge-offs were $62 million, primarily related to several commercial real estate loans, which were largely provisioned for in prior quarters.

Turning to Wealth Management. 2024 was a strong year for wealth management. Full year highlights include records, revenues of $28.4 billion, pre-tax profit of $7.7 billion, and a reported margin of 27.2%. The strength of our scaled and differentiated client acquisition funnel continues to set us apart. Fee-based flows were $123 billion, exceeding $100 billion for the fourth consecutive year.

Clients continue to seek Morgan Stanley's advice, supporting our thesis that as assets move through the funnel, incremental revenue growth and margin expansion will follow. For the fourth quarter, revenues were $7.5 billion and the reported PBT margin was 27.5%. DCP and real estate related charges negatively impacted the quarterly margin by approximately 140 basis points. Asset management revenues in the quarter set a new record of $4.4 billion, showcasing the progress we have made to durable fee-based revenues.

With each quarter this year, asset management revenues saw sequential improvement, powered by constructive markets and consistently strong fee-based flows. Fourth quarter fee-based flows were $35 billion. Importantly, over the last two years, we have seen an increase in the number and the pace of assets migrating from advisor-led brokerage accounts to fee-based accounts. We remain an industry leader in organic growth.

Net new assets for the quarter were $57 billion. Full year NNA of $252 billion represents approximately 5% annual growth of beginning period assets. This year, our advisor-led channel drove the results, benefiting from both existing clients and new clients coming to the firm. Transactional revenues for the quarter were $1 billion.

Excluding the impact of DCP, transactional revenues represent the highest level of activity we have seen since the peak in 2021. Higher retail engagement in equity-related products and demand for alternative products supported results. These revenues will continue to benefit from the breadth and the depth of our growing alternatives platform. Bank lending balances were $160 billion. Loan growth of $4 billion was driven by securities based lending, where we saw demand for new lines and a decline in the pace of paydowns.

Total deposits increased 3% sequentially to $370 billion, driven by higher sweep balances. End-of-period sweep deposits have increased for two consecutive quarters, supporting the view that as rate dynamics change and markets turn to be more constructive, sweep balances will be increasingly transactional in nature. While clients deployed more sweep cash in the rising markets, particularly in December, balances held strong as clients showed less rate sensitivity with their transactional cash. Net interest income was $1.9 billion in the quarter.

The sequential increase was primarily driven by higher sweeps. Looking ahead into 2025, the combination of a more stable deposit mix, higher lending balances, and the rate outlook suggests that first quarter NII should not fluctuate materially from our fourth quarter results. We are intently focused on driving additional growth across channels. In our advisor-led channel, our effectiveness in deepening relationships is evidenced by our consistently strong fee-based flows.

In Workplace, our recently announced partnership with Carta, puts us at the center of new client stock plan opportunities as private companies consider going public. And in self-directed, the number of active traders on the E*TRADE platform grew, ending the year at levels higher than 2022. Moving to Investment Management. The business reported annual revenues of $5.9 billion and quarterly revenues of $1.6 billion. Our AUM reached a new peak at year-end of $1.7 trillion, supported by market gains and net inflows.

Long-term net inflows were $4.3 billion in the quarter, driven by continued demand for our fixed income strategies and parametric customized portfolios. This brings 2024 long-term net inflows to $18 billion. Within Alternatives and Solutions, Parametric remains a key differentiator for MSIM. Growth of the brand will be supported by investments in technology, ongoing education for retail clients on the benefits of customization, and tailored solutions for asset managers.

Liquidity and overlay services had inflows of $67 billion on the back of strong fund performance and seasonality, some of which may reverse in the first quarter. Fourth quarter asset management and related fees of $1.6 billion increased 11% versus the prior year, driven by higher average AUM. As a reminder, performance fees are recognized on an annual basis, largely in the fourth quarter, which drove the increase sequentially. Quarterly performance based income and other revenues were $88 million.

Gains were concentrated in infrastructure, U.S. private equity, and private credit. In parallel with Wealth Management MSIM is helping to deliver our asset-led strategy. Our efforts to build a business that is well diversified and focused on secular growth areas, as well as global opportunities gives us confidence to drive incremental growth. Turning to the balance sheet.

Total spot assets were $1.2 trillion. Over the course of 2024, we demonstrated velocity of resources. Standardized RWAs declined sequentially to $473 billion, driven by year-end seasonality and market dynamics. Lower RWAs at period end have already begun to reverse as we enter a new calendar year.

During the year, we accreted over $5.5 billion of common equity Tier 1 capital and our standardized CET1 ratio ended the year at 15.9%. For the full year, we bought back $3.3 billion of common stock. Our tax rate was 23.1% for the full year. The quarterly tax rate was 24.1%, reflecting the level and the mix of earnings.

We expect our 2025 tax rate to be approximately 24%, and consistent with prior years we expect some quarterly volatility. As we look ahead into 2025, our franchise is well positioned for growth, exiting the year with momentum across all of our businesses with a strong capital position to invest in our clients and our businesses. We enter the year with record asset levels, healthy and diversified pipelines, an engaged and institutional retail client base, and a strong global brand. We are focused on disciplined execution as we progress towards our goals.

With that, we will now open the line up to questions.

We are now ready to take in questions. [Operator Instructions] We'll take our first question from Glenn Schorr with Evercore.

Hey, thanks very much.

Good morning, Glenn. How are you doing? Glenn, how are you?

All right. Appreciate it. Where to begin -- I guess, let's talk about trade. There is a lot of upside in trading.

We've all seen great trading environments and this certainly was a good one. But I wonder if you could just try to parse out, how you think about great trading environment versus what your words are, just more durable the higher client balances, the record PB, the share gains, and how are you going to measure the success of those durable gains? I'm just trying to separate your actions versus the environment. You've certainly been performing really well.

Thanks.

I appreciate that. The focus on institutional securities over the last number of years is of course to deliver to key clients, the whole product set across what -- as you know, we called at one point about five, six years ago, I think it was in 2018, the integrated investment bank. And that was the bringing together of folks in equities, fixed-income, capital markets, and investment banking, minding obviously all the walls between them, but having folks mobilize across those divisions, across the regions and really understand what life is like to sit in the shoes of folks in different divisions.

And as you know in this business, you don't actually know what that feels like unless you're in that business, so we had leaders moving around. And six years later now with ISG under Dan Simkowitz’s leadership, we're able to -- in an environment that is friendly to a lot of the businesses because now we have a real corporate finance activity. We have real interest rates and you have effectively two way markets in lots of places around the world with respect to central bank activity, with respect to buyers and sellers of assets. And of course, if you're well organized, you can prosecute that in an orthodoxical way.

We have during this period under leadership of Sharon in the office of CFO been quite prudent on the deployment of those risk weighted assets through our Chief Risk Officer, Charles Smith, how do those risk weighted assets and GAAP balance sheet get deployed to clients? One mistake, Glenn, is you can lose the forest of the trees and not think about all the client touchpoints across the integrated firm, we're calling it or you can actually lose sight of the real drivers of what makes that client valuable to the institution. And now we've had six, seven years of really focusing on that and preparing ourselves for the ability to expand our wallet at a time where we believe the denominator is growing as well.

It's a little trickier to try to expand the numerator, your wallet when the denominator is not moving as was the case with zero interest rates because you are effectively not a price maker and you are potentially going to be taking some concentrated risk. But here now with the cycle having transitioned, we were able to lean in first across our sweet spot, which is equities to have not just prime brokerage, but the cash equities and derivatives businesses really start to generate above cost of capital ROEs. So the entire basket of equities offering to our clients, but then in fixed income, which has been extraordinarily stable in what is intrinsically an unstable business given the very different businesses of commodities, interest rates, foreign exchange, and credit.

On the leadership there Hallik and Horder have done a brilliant job, really running a durable business with a lot of annuitized revenue around well considered financing, structuring, lending businesses that look quite like the businesses we have in classic underwriting such that when we now go into this investment banking cycle where we do think there is going to be an acceleration of classic primary and secondary offerings we're already doing business that looks like that inside of sales and trading, our lending businesses, client advice, and of course, there is real collegiality across the investment bank.

The last piece of this is what we've been waiting for, which are M&A tickets, which as you know are the top of the waterfall, the highest margin product that then have multiplier effect through the whole organization and that has begun. The pipeline is very strong, depending on how you measure it, the strongest it's been in five years to 10 years, maybe even longer, and we are excited about pushing that through to the rest of the investment bank. What I've said and I would repeat here too, just to give a lengthy answer, Glenn, is that on ISG wallet share, we are clear that we want those share gains to be durable, which is why we didn't go with quantification.

We want those gains to be ones that are not gains by reaching concentration risk, counterparty risk, but the clients know we are serious about bringing ISG to the fore and that the integrated firm now is bringing together these world class wealth and investment management businesses with our investment bank. And the proof is in the pudding, this past year 100 basis point gain, plus or minus in the investment bank to roughly a 15% wallet in a growing denominator. And as you can tell, given we've been quite disciplined on RWA growth against that and you see the operating leverage in the income statement, it's fair to say the institution at large is very exciting.

That was a very full answer. I really appreciate it. I'll cede my follow-up to the group. Thanks.

Thanks, Glenn.

We'll take our next question from Ebrahim Poonawala with Bank of America.

Good morning, Ebrahim.

Hey, good morning. I guess, maybe just -- I know this is -- you've addressed this in prior calls, but as we think about just investments in systems as it pertains to AML, BSA on the wealth management side. If you don't mind addressing where the firm stands there today in terms of sort of meeting all the highest standards from a regulatory compliance standpoint. And I think the essence of my question is, as we think about the growth opportunity in terms of international wealth, do you need to sort of get your ducks lined up on the AML, BSA front in order to pursue those more aggressively or actively?

Thanks.

Thank you for the question. I think that the, the way I would answer your question is more fulsome than just specifically looking at one particular sector. The point that I would underscore is the results themselves in this business speak for themselves. In terms of the investment, the ability to attract clients, both existing assets as well as new clients across the wealth management platform.

So that's the first point that I would make. Second point that I would make is that over the course of the -- not just the last year, but really multiple years, we've been investing in all of our processes and our systems in order to engage and make sure that we have a robust infrastructure in order to be allowed to grow broadly and meet all of our growth objectives. And that has to do with everything that I mentioned across the technology side, across better understanding our data, better servicing our clients in terms of investment dollars and in terms of the underlying infrastructure. So what we're trying to do and what we've been actively pursuing is making sure that across the firm, not just specific to wealth, we can service and look and impact all of our clients.

And moreover, you can see that very well in terms of our ability to actually continue to attract assets, we'll be making all of the necessarily investments to continue to be world class, both across people and our technology.

Got it. Thank you. And I guess, a separate question, Slide 13 with regards to the investment into the bank. Just remind us in terms of the -- where we stand in terms of the integration of the bank.

And as we think about -- with some of your peers where the bank and the wealth businesses probably are fully integrated, are we there yet? And then, what's the opportunity when you think about just deposit growth from your wealth management clients that you can bring onboard?

We're definitely not there yet. We still have a lot of -- to do when we think about the bank. I've always, both internally and for those -- for many externally have felt that the bank itself is an incredible growth engine across the institution. If you look at our bank, we obviously started our bank much later than many of the peers that we now compete with from a commercial bank perspective.

We have a very different deposit mix than others. And what's so interesting our deposit mix is that over 70% of our deposits come from our wealth management clients. Now there is -- that's currently, as you know, is largely coming from sweeps and for savings accounts. There is much more that we can do when we think about the deposit franchise itself, and then we can talk a little bit also about the other side of the balance sheet.

But we're investing in those deposit opportunities. Remember, we didn't really have bank rails until we bought E*TRADE. That was part of the value proposition of acquiring E*TRADE and working with those bank rails to offer real checking accounts and continue to have a savings account offering. Moreover, as you think about the work we're doing to invest the banking products within Workplace, you now have different ways to manage cash and cash alternatives for the actual underlying employees, as Ted talked about from an integrated firm perspective.

So there is much more that we can do with servicing and growing that deposit base over time. As you think about the lending side and you think about where we are, we continue to see opportunities to help our wealth clients as they expand their lending needs and we better understand their portfolios. Moreover, just holistically, as Ted mentioned in the slide, there are places where we are still working to move eligible ISG assets onto the bank. That should help institutional securities as you think about the actual funding profile associated with those assets.

So there are many places that when you look overall at the integrated firm, the bank plays an important role in making sure we have the ability to see that grow.

Yeah, Ebrahim. I'll tag on to that. Deposit side, we're going to service clients across all three channels in wealth, the FA channel, the everyday transaction offering of cash plus type of offering in E*TRADE. We're going to continue to focus on checking accounts with competitive rates, integrating products into the client journey as they move along with E*TRADE to potentially a classic FA.

And then as you know, we've been really banging the drum on workplace where we can partner with companies to reach employees. And on the loan side, as Sharon said, we've been growing loans steadily. The loans number in wealth, as you know, was about $80 million in the fourth quarter of '18, that's doubled to $160 million. We grew that every quarter in '24. We're a bank.

We lend and we have to do that in the context of deepening relationships. We lend to about 16% of our households and the best-in-class peers are higher. They're 50% higher, mid-20s. So there's -- as Sharon has said, there is real opportunity.

And then in ISG, where we've been growing the lending capability there too, up about 15% year-over-year. So there is real focus on this and upside. But there is also been, I think back to the concept of owning Morgan Stanley as a durable instrument that we are growing both deposits and loans in a smart way over the next five years, 10 years, you can expect these numbers to continue to move higher.

We'll move to our next question from Brennan Hawken with UBS.

Good morning, Brennan.

Hey, Ted. Good morning. How are you?

Good.

Would love to follow up on that -- some of that last discussion and talk about the loan growth because it seems like loan growth was -- the trends were better than certainly many were expecting last year. And it feels like given the expectation for capital markets reopening, improving risk appetites, we should continue to see that building momentum. Could you talk a little bit below the surface around what you're seeing on the loan side? You spoke to it at a really high level before, but I'd just love to drill down and hear what you're seeing more recently.

And then where do you stand from a capability perspective, do you guys need to continue to build that out or do you feel like you're fully ramped from a competitive perspective?

Thanks, Brennan. I'll take that. As I mentioned in my prepared remarks, as you alluded to, what we saw, if you remember over the last -- since really interest rates when they began to rise, we saw a decline in the use of the SBL product. And we often actually saw an increase in paydowns.

What's changed over the last – particularly, we noted it this quarter is, we've seen that pace of paydowns decline and then, we've actually seen an increased use of the lines. The important part there is, as you know probably better than anyone else is that, that product is one that is often generally used in periods of time by our clients when you actually see markets rise. And I wouldn't be surprised if we also begin to see it from a tax perspective as we enter the second part of the quarter. In terms of capabilities, excuse me, -- in terms of capabilities, I think we have the capabilities, there is clearly places you can still look from a tailored perspective.

There is still capabilities when you think about the assets that we can move from an eligible perspective from the ISG side onto the bank. So it's a different portion of the question in terms of what we're doing from a legal entity perspective. But overall, I think we're very happy with what we have from the wealth management perspective and it's really about seeing the change in environment that should help the dynamics as we move forward to see that increase in loan growth.

And I think integrated firm matters here because there is the ability for us now in our risk committee sessions to look at tailored lending as a form of sophisticated structured product that has some institutional qualities to it. So it's not so much the classic bifurcation of division-by-division, but more of a firm lens across what the commitments are at a time when we should see acceleration in both of the major sides of the house.

That's interesting when thinking about utilizing the balance sheet. Thanks for that. I'm really sort of happy to ask this next question because of the focus on cash in the past year or so, and now I don't have to worry about drawing Sharon's ire when I ask about that. It seems like we're likely to have a pivot like, around cash trends.

Like, we've got stability and even a little growth in the sweep. And when you think about prior easing cycles, what has -- how long has it taken before we see some of the recycling out of those yield oriented cash equivalents like CDs and money funds, which tend to be thinner margin into more market-oriented products that are higher margin? How should we be thinking about that timeline? Thanks.

Brennan, it might be the first time in two years that I'm excited to answer a sweeps question. I am really encouraged by the signs that we see on the underlying sweep dynamic. It often actually plays to the fact that there is a lot that our clients can do and a lot that our clients are interested in right now. You see that in the transactional level of activity and all of the underlying trends as it relates to sweeps are actually playing out in that increase in transactional.

So if I can just break it down, what we see, right, we look at sweeps and we look at the underlying sweeps in multiple different layers. So how do you think about where the sweeps are going to products that are under one year? How do you look at sweeps in terms of products over one year in terms of fixed income and how do you look at sweeps going in and out of market? What you saw this particular quarter, which I found to be quite encouraging and fascinating in terms of the sentiment of the retail investor actually changing is that we saw a really strong increase of the flows moving from sweeps into market.

So it's not as though they aren't using that cash to invest. They're just using that cash to look at it more transactionally to go into market and asset level products. That's point number one. Point number two is, you begin to see the fixed income products that were over one year mature and just sit there.

So it's as though when you think about what is the retail client doing, they're waiting, they're getting those assets, they're letting it mature and it's just sitting in some sort of sweep product until they want to deploy those assets into the market. The final point is, you're just seeing less activity go into various types of cash alternatives. And in my mind, that just means that this cash, now that rates has come down, markets are going up, it feels to be somewhat more normalized. It's acting transactional, which is what we had always assumed there would be some level of transactional cash.

And to your point, as that rate differential goes down and it's no longer -- you can earn 5% from a cash product. There are places and decisions of what individuals want to do with that cash, they're letting it sit and they're using it to eventually invest in markets. And what you're seeing is that, that is actually taking place in the transactional line item.

We'll take our next question from Mike Mayo with Wells Fargo.

Good morning, Mike.

Hi. Well, Ted, last quarter you were pretty built-up on the markets and some of that's playing out. But to how much are your backlogs up? Is our backlog a record? I'm not hearing record backlogs anymore here, up, but not record. I'm just wondering, how much you can monetize the backlogs that were in place in some cases, I guess, one, two, or three years ago?

Yeah. Depending on how you measure it, whether volume or unit, number of units or sort of add value, you see pipelines in the M&A product that are the highest in seven years. So that is really encouraging. Now, some of this will be dependent on how things roll out in the first couple of months of the incoming administration and how things feel on a cross-border basis.

But the pent-up activity that we're seeing is starting to release. You had saw some announcements going into the end of the year. You saw some very large capital raises that took place where enormous capacity was filled for great names over a weekend or over a 24 hour period. And that -- we haven't seen that since really 2020 and that was a totally different interest rate and backdrop context.

So there is clearly demand even discussions for IPO potential, not just as an option versus selling to another sponsor or selling to a corporate, but in fact, a real option. So I am -- you're right, I've been bullish on this. It has taken some time and I think we will have some unpredictability around regulation in one jurisdiction versus another. But I think the demand to -- for some corporates to get bigger, to purify their businesses, given the deglobalization effect, given climate, given interest rate transition, they have things to do.

And then again, the sponsors, they are looking to harvest some of these assets given where prices are and that sort of mismatch of expectations versus the reality of what the market is willing to pay for good companies, I think that's really starting to come together. And I would also say that the -- within the investment banking cylinder, i.e., M&A versus ECM versus DCM, that sub -- those sublines, as you know, have rotated over the last four, six quarters. A couple of quarters ago, it was a great ECM quarter. This past quarter was a DCM quarter, that also is healthy.

It suggests the people in the treasury or CFO's office of large corporate clients are looking at all the toggles. So it is an activity-based business and I think '25 as we move through the year, if we continue to have reasonably constructive markets and reasonably predictable interest rates and reasonable sort of geopolitical backdrop, I think we are going to see increasing activity as the year goes on.

So you said the best backlog in seven years was that for mergers or all investment bank?

Largely the M&A number, Mike. Globally.

Okay. So yeah, that's a -- I guess, that would be a lagging driver to the whole capital markets theme. And for you guys, when you think of a multiplier...

Yes. By the way, yes. Yes, on that, Mike. Exactly as you've been saying all along, that is the last piece.

And there have been periods where it's sort of frustrating, stuff gets discussed at a sort of free Board approval level and then there's some unpredictability and it gets tabled. But the sort of the inventory around stuff that is idea flow that is a near announcement, that piece of it is increasing and it may not result ultimately in a merger ticket. It may actually turn into the company being carved out and taken public. But I think what we are increasingly confident about, again if the market and the economy holds up and those are -- those are ifs, but if they do, then you're going to see the entire corporate finance cylinder really kick into something that maybe looks like mid-90s activity classic corporate finance.

Operator, can you hear us? We can move on to the next question.

Steven, your line is now open. We'll take our next question from Steven Chubak with Wolfe Research.

Good morning, Steven. Thanks, and good morning.

Good morning, Ted. Good morning, Sharon.

Good morning.

So, one is that -- wanted to ask on the 30% wealth management margin target. Just taking a step back, you're already running at 29% on a core basis. Sharon, you cited a number of headwinds in the coming year, whether it's just NII inflecting AUM growth, capital markets fee tailwinds. I'm just trying to understand what would preclude you from getting to that goal this year.

And why isn't the longer-term aspiration something north of 30 just given significant operating leverage in this model at scale?

So I'll take that, Steve. I just juxtaposed this call to where we were a year ago and a lot of the conversations, obviously, as you think about the change in the rate environment, but then also very importantly, the change in the asset management fee revenues. That has been a very large contributor to the point that you're making where we've seen the fee-based increase, we've seen the AUM and then we've seen the revenues. But I don't want to lose sight of the fact that we're investing in this business and that investment is very important.

We've always said over the course of the last five years, we can get to 30%, but we don't want to starve the business. We want to do it in a durable manner. And we want to make sure that we are able to invest specifically in the places that might be margin dilutive. Those are workplace.

There are different parts of marketing and investment in the sales cycle as you think about self-directed. Putting money towards the top of the funnel, putting money towards technology that actually helps match places where you have the top of the funnel into the advisor-led channel. All of that's working. So the last thing one would want to do is, put a target out there, see a change in dynamics associated with all of a sudden markets go down or there is some shock that we're unaware of, you're unable to meet those targets and you pull back investments, that's not how we want to run this.

As Ted said in his prepared remarks, the word across this entire -- these scripts is durable. We're looking for durable margins. We're looking for durable growth. We're looking for durable returns.

All of that comes into play as we think about the actual investment in the business over time.

Yeah. And what I would add to that is, the extraordinary performance of -- well, you just look at the fact that revenues grew by 8% year-over-year, but PBT grew by 19%. So that is -- that's the kind of progress against larger numbers that we are excited to see and a full contribution to the firm outcome.

No. That's great to hear. Just one quick follow-up, Sharon. You referenced the recently announced partnership with Carta.

And I was hoping to double-click into some of the tangible financial benefits from leveraging that partnership. Just given the number of planned participants, it's been pretty stagnant over the last few quarters, but certainly feels as though this could be a potential accelerant, maybe help reinvigorate growth within that channel.

Yeah. So let me just first -- I'll take the second part of your question first because there is some stuff to unpack when you actually look at the underlying participants. We have talked about and we've seen -- we will see a transition from some of the stock sale plants that we have sold and announced both in Europe and in Asia, that are associated with the actual participants. So I just want to be clear that -- there are other underlying factors in there.

The other point that I would mention is, we have not been in a cycle in which -- especially over the last two years that you've seen a lot of monetization events. And so you have changes really in the workforce dynamics for many of these companies where you might have seen headcount reductions, you might have seen acquisitions in which some of those stock plan participants decline. I don't want you to read into that as though there is not investment or it's not growing because we continue to meet win mandates and we continue to have expanded corporate relationships. So that's important as we talk about where are we investing.

We are investing and we're seeing progress as we continue to have greater breadth of corporates that we service within the United States in particular. Now as it relates to Carta and I'm glad you mentioned and asked the question is that's a really exciting partnership, especially, as the capital market cycle turns. So as you're likely aware, Carta does service the private companies in particular. And what we have now done and the relationship that we announced at the end of last year was that we have an exclusive partnership with Carta, which means that they will refer those private -- different stock plans or different corporate companies to Morgan Stanley as they move into going public.

It's really exciting for many reasons, not just the opportunities on the wealth side, but also as Ted talked a lot about is the integrated firm. So there is a lot of places to build out those relationships as those companies are going through that transition. Moreover, what we are committed to doing as we go through that transition is to make sure that it's a seamless experience for those clients. As you know, we already do service individually some of those private companies.

As they move public, they'll have that seamless experience both from a Carta referral perspective and even what we see that's currently on the books.

We'll move to our next question from Christian Bolu with Autonomous.

Good morning, Christian.

Good morning, Ted and Sharon. Maybe on Wealth Management organic growth, first of all. So if I look at flows over the last three years, total flows have been somewhat short of that sort of $1 trillion target and have been at the lower end of your 5% to 7% organic growth target. So maybe just talk through how you think about the ability to accelerate organic growth going forward and then maybe confidence level in that $1 trillion target?

So what I would like to note here is, this is a really I think in the environment that we've been in the last two years, I think, this is a remarkable outcome. Especially, if you look and you compare it to our peer set and anyone who's been able to actually aggregate assets were best-in-class. And a lot of that best-in-class has to do with the fact that -- and I mentioned this in my prepared remarks, the vast majority of the assets, the new assets that we're seeing over the course of this last year has been on the advisor-led channel. And we've talked about some of the headwinds that are going from a cyclical perspective that I think are beginning to abate.

And those have been spending of money, you're necessarily -- not necessarily seeing as much money in motion and you aren't seeing monetization events from workplace corporates. So you add the self-directed channel, you're not necessarily seeing as much money coming in. From the workplace side, you're not necessarily seeing monetization events. So people aren't getting that cash, you're not seeing companies going public.

Those things are beginning to turn. And so this -- these results were really led from the advisor-led channel from new clients and existing clients, new clients being really important. And so, I think that there is a lot of opportunity there in terms of the 5% to 7%.

Yeah. What I'd add to that, Christian, is sort of a big picture answer and a little picture answer. My little picture answer would be just taking a look again at Slide 9, fee-based flows. That is the -- that's sort of the core of the funnel.

And we've been talking about that every quarter, and Jed Finn running well very much has been focused on that too. And you see that the number just continues to move. $109 billion last year or two years ago, $123 billion in 2024. So fee-based flows, that's kind of the ultimate outcome. And you see that we are seeing this incremental activity now in the self-directed product from clients who they kind of -- have the kind of experience that we talk about when they make their way to a financial advisor, it could prove very sticky. My big picture observation though would be, one, and I know you know this, but by way of sort of a reminder, just given what's happened in the market over the last year of when we did this call a year ago, the combined assets for wealth and investment management stood at $6.6 trillion.

And as you know, we said we're going to get to $10 trillion and we're going to keep going. And in a year, we've gone from $6.6 trillion to $7.9 trillion. So that is a $1.3 trillion in a year. Now, of course, we've had the kind of markets that are -- take asset prices higher, but that I think speaks for itself in terms of our ability to continue to stay on what really is what I would have folks paying attention to, which is just this commitment to get to $10 trillion.

And whether that takes X years or X plus one year or X plus two years, we want to get the kind of assets that ultimately work their way through the funnel and you say, well, what's the KPI there? And I'd say, the KPI there is going back to Slide 9, which is are we increasing the TAM of relationships and are we doing that across the financial advisory of lever through workplace and through self-directed? Are we doing it all three? The answer is, yes.

Are we seeing enough net new assets that it's actually material and clearly at $250 per annum, that is a material number? And then how are we doing on that which you can model on a multiple -- a nice multiple on, which is fee-based flows, and there it is on the right. So I'm less wrapped around the axle on whether we are at 700 or 800 versus $1.23 trillion in a given three year period and more focused on sort of the composition of the funnel and that the assets are growing materially, but that ultimately we are translating that across a broader number of clients, again, $19 million plus and that ultimately, at least for some of them translates into financial advisory fee-based flows and that's the right side.

So that's kind of the way we're thinking about it, Christian, in the context now of the integrated firm.

Okay. Very fair. Thanks for the full answer. Maybe another quick one here on just comp leverage, very strong expense, especially in ISG comp. And I'm sorry if I missed this in the prepared remarks, but is the 2024 full year ISG comp ratio of 31% kind of a good place to run going forward, obviously, as you mean, revenue continues to grow?

Yeah. Obviously, Christian, as you can tell, we look at comp on a full year basis and you did have the outperformance as it relates to the revenue in the fourth quarter on a relative basis. And so you do see changes within that comp. We don't give full year guidance specifically on one expense line.

We manage the company holistically. When we think about our expenses, we're looking at our overall efficiency of the firm. And what I would pay attention to is on the last page of the targets, the 70% efficiency ratio goal that we've stated over the long-term.

And what I'd add to that is, listen, we're running a talent business. And so we pay for performance and performance comes in sort of the upside for our partners comes in two forms. One is through compensation over many years, which is why tenure matters. And of course, total return in stock ownership, which is, as you know, a critical part of our partner compensation, so that is the thinking.

Of course, when you have good years, you experience some operating leverage in comp of which then flows to the bottom line. In tougher years, as you know, the comp ratio moves higher. What we did do in 2023 in the second half was some of the tough work around calling and doing some lateral work and that obviously has the -- if it's done right, both enhances the efficiency of the income statement, but also allows for some incremental productivity on the top line of those bankers and traders and salespeople and structures and risk management folks as they begin to kind of gestate over the two, three years after that.

So we feel like we came out at a good place there.

Thank you. [Operator Instructions] We'll move to Devin Ryan with Citizens JMP.

Hey, Devin.

Thanks so much. Hey, Ted. Hey, Sharon. I just have one on Investment Management.

Slide 12, you lay out, your parametric has been a great success story in the alternatives bucket. In investment management, overall, it's still less than 10% of firmwide revenue. And I know the Alts (ph) bucket specifically is an area of focus, but I'm curious areas like private equity, private credit, there is a lot of secular growth there. I know you have ambitions to grow private credit, but how do you think about that becoming a larger strategic piece of Morgan Stanley?

And what's the appetite there to maybe do acquisitions to step function or accelerate that?

So when we look at -- what I would focus you on as we think about investment management more broadly is the fact that, as you know, we are looking to create a diversified platform and we obviously were able to do that, as you mentioned, through acquisitions. And specifically through the acquisition of Eaton Vance when we think about both Parametric and a lot of the fixed income products. We're beginning to see a lot of reaping of those synergies across the more -- the wealth management business, across MSIM, and across all of the initiatives that we laid out at the beginning. So remember, what we said is, we thought we -- there was more to do on Parametric, specifically on the retail side, that's working.

We're seeing increased participation from our FAs, retail clients, and even asset managers to leverage that parametric product. We have also noted that we plan to think about things like fixed-income and use fixed-income and see international distribution, that was evidenced this quarter. A lot of the flows that we saw there have to do with international distribution. So the synergies themselves are working already.

I think there is much more to do just on bringing the two franchises together. And as we see continued investment with different parts of private credit, different parts of private equity, different parts of infrastructure, we will take part in those secular growth trends as they move forward.

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

Good morning, Dan.

Thanks. Good morning. One more question just on wealth. Can you talk about advisor retention, kind of recruitment, and backlogs here? And then you used to talk about the companion accounts within wealth and workplace. So curious if there is any update on where that sits and some of the progress you're seeing within that initiative.

Yeah, I'll take that. So in terms of the workplace in general and how we're beginning to see the transitions in the companion accounts. What I would focus you on is companion accounts were something that we were looking at the beginning of time when we had put together the E*TRADE and the Morgan Stanley platforms, that integration is largely complete. What we're more focused now is actually better understanding the channel migration.

And those are the numbers and statistics that we've been giving over the last couple of calls more specifically. So what I mean by channel migration is, we have workplace assets that began at some point in workplace and we're seeing them move into the advisor-led concept. Over the last five years or so, since 2020, we've seen $300 billion coming and initiating at some point from workplace and moving into that advisor-led channel, that has been a big part of the move towards first transactional and then that movement from transactional flows into fee-based. So those are more of the metrics that I'd point you to on the forward when we think about being able to mark ourselves to market from a funnel perspective.

We'll take our last question from Gerard Cassidy with RBC.

Good morning, Gerard.

Thank you. Hi, Ted. Thank you. Can you guys share with us -- we share -- many investors -- many of us share your optimism on the outlook for Morgan Stanley in the business?

Can you share with us the risk aside from the obvious geopolitical risks globally, what risks or curveballs are you guys trying to keep your eyes on for this year? Because again things do look very good for yourselves and others. But what are some of the risks you guys talk about on a regular basis?

So needless to say, we're constantly running a number of stress tests as you think about the risks, geopolitical macro in nature, counterparty risks and that's been a lot of the focus when you think about the velocity of the balance sheet and all of the capital metrics that we have is making sure that we're in a position to constantly refresh. And look, when we think about -- if you look back at any of the episodes that we've talked about and then a lot of the risks that we've learned, we are constantly thinking about where are there tall trees. How do you see the velocity of different positions that you have?

So it's very hard to pin down and say, well, what match risk have you not necessarily solved for because generally speaking, there is something brand new that one -- I don't know that anyone knew that there would be a global pandemic, right? But the underlying risk of what does the global pandemic mean, you think about even the risk that you might have seen over the course of this quarter. You have an election, we don't know what's going to happen with the election. None of us knew what would necessarily happen with the election.

You look at the risks, you look at tall trees, you think about being able to bring down, what can you bring down quickly and how do you think about velocity? And then how do you run scenarios? What does it mean for higher rates? What does it mean for lower rates?

And we look at different geographical exposures as well to try and better understand how we can manage all of that dynamism as you move forward.

I guess, what I'd add to that, Gerard, is most of the risks that we have been looking at in this period are -- and Sharon kind of went through a whole panoply of them, they are largely in the buckets of either the implications or the reality of regime change around interest rates that the period of zero interest rates and zero inflation is now passed and that this hot coal that we feel are now tilted more towards inflation. And if there was a downside risk, it would be something that felt more stagflationary that we are running risk scenarios around that, then there might be periods when it feels a little colder again.

And that is all sort of imputed in the language of interest rate policy around the world. So that's sort of bucket one, the end of financial repression. And then bucket two is the geopolitical uncertainty and tension that we're seeing that has built over the last number of years and will continue. And that's important to us because, of course, we're running a global business.

So there may be places where there are re-equitization opportunities. There may be places where there is outsized risk in behalf of clients and we have to navigate that as well. So those are the two major buckets, I think, of our time. And that is why it's so important that we were able to put up a quarter that concluded a year where we had the kind of consistency we had on the top line, on the bottom line.

We can't undertake that, that will be the case in every market context. But if you think about the year we just had, there were multiple years within that year. And the fact that the enterprise through the businesses we're in was able to generate that kind of consistency on the top and bottom line, I think augurs well for a period where we think all things being equal, the denominator of opportunities should improve.

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you everyone for participating. You may now disconnect and have a great day.