MS
#Good morning.
Let me try to take a swing at this one.
So as we laid out on the page, first of all the compensation, the $1 billion-plus of compensation and non-comp savings are assuming a flat revenue environment.
So if we get out two years and we're flat to today our ratio will be 74%.
As <UNK> mentioned, we do expect revenue growth throughout this period.
And therefore the efficiency ratio should be lower than the 74% because we do have operating leverage in the business, first and foremost.
So I think that is probably the biggest disconnect in your math.
You can see in the revenue bucket, or the modest revenue growth bucket, we do have improvements in different business segments.
And then in terms of the capital base, ideally we believe we have sufficient capital, we had been accreting capital over the course of the last several years.
We would expect to probably accrete a little bit more capital over the coming period, but we would like to try to clearly slow down the accretion of capital since we believe we have the appropriate amount of capital for our current plan.
I don't want to get ahead of predicting how regulators are going to think about this.
We did what we think is right for our business.
Our job is to generate returns for our business.
However, arithmetically if you have met all of the capital targets, by definition if you change the structure of your business and throw off additional capital that you now by definition don't need, that ought to be available for returns.
Do I think that there's going to be one-time major dividend in the next 12, 18 months.
No, I don't think that's possible.
But do I believe that we're going to be in a position where we increase our returns.
Absolutely.
And you've seen banks that have generated payouts above 100% for this reason.
They are accreting more capital than they need for their business.
That's before you get to banks that have actually restructured their business in the face of the new business reality.
So again, I don't want to get ahead of them.
That would not be a smart thing to do.
But I do think our strategy is pretty clear, and it's certainly consistent with where the regulatory push has been.
<UNK>, we've got about a little over $9.5 billion of goodwill and intangibles.
So on our capital base somewhere around 125 basis points above those numbers, just math.
We have an ROE target of 9% to 11% for all of our common equity.
Not totally sure I understand your question.
All of our employees who are bonus-eligible are paid in stock.
The stock has generally performed somewhere in line with ROE and priced to book.
So everybody's affected by that.
The most senior management team receive as part of their compensation performance units, which are directly affected to ---+ by ROE and total shareholder return.
So that's very specific for the senior team.
But we're not doing this to, frankly, drive up our personal comp.
We're doing it because we think these businesses should be run with returns at or above 10%.
And nobody in this world predicted the last four or five years of what's gone on in the markets and the amount of capital that will be required to support these businesses.
When I took this job our capital base was $40 billion.
Today it's $69 billion.
We're in a tremendous E position, and the challenge has been to get the R moving consistent with that rate of growth of the E.
And what we've done here is to frame it for investors, because understandably they want to know what is a realistic time frame.
Just to <UNK>'s question before what is a realistic time frame.
How do the pieces add up mathematically to get you there.
Are they believable, are they plausible.
And we thought, <UNK>, it would be smart to lay out what we think is a realistic time frame, that kind of range, 9% 11% 2017.
The pieces are we are definitely taking out expenses.
Some of them are in the bag, if you will, and some of them are going to be driven by management processes that we put in place.
We believe there is revenue growth across many parts of our business over a two-year period.
And we believe we are sufficiently capitalized, given the world that we operate in.
So if you add all those pieces together, putting it in terms of a target to help investors have a framework rather than open-ended seemed to be the right transition point for Morgan Stanley.
In the last several years we couldn't have done that because we couldn't address some of the issues on the right-hand side of that slide.
I'm sorry, say that again.
We addressed the compensation, we didn't give meat on what.
Well, I think what we wanted to frame was the total comp ratio ---+ I'm sorry, the total efficiency ratio of 74%.
And embedded in that was $1 billion of expense savings which will be a function of comp and non-comp.
We're not going to break those out in detail on this call.
We are very confident about that, as we were referencing with <UNK>.
There are a number of these things which obviously just go away through reality, like the severance costs.
There is the elevated legal expenses we've carried in the last several years, which we think is unlikely to be carried forward.
There is the restructuring we did, which frankly changes the run rate of your salaries, benefits, medical and the bonus pool for those individuals.
And we've already initiated a major effort under this Project Streamline, and some of those pieces began this week.
We started with changing our so-called contingent employees who are consultants in far away markets where we've achieved the objective of what they were being put to work.
We've now reduced some of those numbers.
And all of those efforts are coming together.
So you'll see a mix of ---+ and over the next several quarters we'll give you much more details on the non-comp.
So we're not going to break it out now.
No.
Certainly not that's visible at this point and not that's planned.
Sure.
No, I'd think about it in terms of the full year.
Obviously the second half revenue run rates of $500 million were incredibly low.
But we look at what the total market size is, what our share is, and what our expected share is and expected market size in the next couple of years.
And that's where we say we believe we're right-sized for revenue rate equivalent to 2015.
We obviously will be trying to do a lot better than that, but we think that's a plausible outlook.
Sure.
A couple of questions.
I think on the Investment Management question the way I would try to think about it is there are basically two major components of how we make business in that ---+ how we make money in that business.
One is just our fee revenues for managing money.
And obviously that's going to be a rate times volume equation.
So if the amount of money we're managing goes down, that'll be impacted by the markets that we're seeing.
But that line is pretty stable.
The second line, as you said, is the investment line.
And when I referred to the investment line I'm talking about the segment reporting we do in our supplement.
That number was negative $235 million last quarter.
We said that was predominantly driven by a reversal of carry in our Asia PE fund or funds.
This quarter it was $100 million.
That return to a positive number was driven by all of our ---+ or most of our investing businesses, both private equity, infrastructure and real estate.
So it was more balanced.
We said in the third quarter when we took the reversal of carry that that eliminated the vast ---+ or, excuse me, of the majority of the carry that we have accrued in our Asia PE businesses.
We obviously have a carry accrued in other businesses.
And that's disclosed in the Q.
But the exposure certainly in Asia has been reduced.
And the fund that was under stress in the third quarter had no material changes this quarter.
That was the first part of your question.
I think the second on transactional revenues, those numbers have been subdued.
Clients are cautious.
Whether that's a floor or not is hard to tell, given the volatility.
But we think that those numbers hopefully have stabilized.
I'm sorry, I'm just turning to page 3.
Before getting that page in front of me, I think the results this quarter, we did see Asia was down but continues to be a strong and important part of our business.
We did see weakness in the fourth quarter relative to the third quarter in Europe, given the concerns and uncertainty around Brexit and some of the immigration issues.
We still think that Europe, although showing some signs of growth in certain areas, is going to be a fragile economy and the drivers of our business will be the US and Asia.
In terms of the third ---+ page 3, again don't have in front of me just this minute, but that you should also know is a managed ---+ the way we look at the businesses is on a managed basis.
And so those revenues don't necessarily tie back to the tax rate that I talked about earlier regarding the geographic mix of earnings.
So <UNK>, I'm not sure ---+ I wouldn't agree with that statement.
I think historically over the last couple years we've seen good growth in both the ISG lending product as well as the Wealth Management lending product.
And those have been the key drivers along with deploying our deposits away from securities into these loans.
Those have been the key drivers of the NII growth historically.
I think going forward, I would tell you that the primary driver of the lending growth is going to be Wealth Management.
The growth assumptions in the ISG part of the business are much lower than they had been over the last couple of years that we built those portfolios up.
So the key driver's going to be the Wealth Management area.
I don't have a target here.
We could break out mathematically how it separates and get back to you.
But I don't have a target off the top of my head.
Obviously it's very low single digits.
It's not in the above 10%.
You can see the numbers on the chart which just show mathematically what the total residential lending is, $21 billion up from $16 billion.
So I guess that would imply we [bid] about 2.4%.
Sure.
I think first I'd highlight it's a 2017 ultimate target.
I think, as you say, the Wealth Management is being really driven by the lending growth and some of the other initiatives we have there.
In terms of both equities and Investment Banking, listen, we think that we can continue to gain some share there.
We have good shares in those businesses but the backdrop is a constructive one where the revenue pools are up modestly.
If we're in a situation where revenue pools for these products decline precipitously, these are ---+ that's not the backdrop that we set these assumptions.
So a little bit of share gain and a little bit of revenue or pie growth.
I think it's a mix.
Clearly more non-compensable revenues is helpful for that target.
But as we've said for the totality of the firm, we are very focused on expenses and comp.
And there are some other levers that we can use here, other than just the growing non-compensable line item.
Well, I can take at it.
<UNK> may want to add something.
CCAR is a function ---+ there are of five different ratios under the normal scenario, and then the severely adverse scenario.
Where we had an issue, to the extent we did, was on the total leverage ratio which we addressed with our [TruP] preferred securities.
So I think ---+ listen, CCAR was submitted last November/December, I think.
January.
The cycle got moved out this year an extra three months to April.
So the world we're in, 15 months ago our RWAs were significantly higher.
They weren't where we finished the year at.
So it's sort of an apples and oranges back then.
We presented the firm as it was then.
This April we will be presenting a different firm, although there are various cutoff dates when balance sheets are set and so on.
So I don't really want to get into ---+ and I know you didn't ask for specific prediction on CCAR.
But all we can do is put ourselves in a position where it's clear we have sufficient capital and any incremental changes we make to the business or any incremental earnings that we accrete by definition become excess capital.
Whether that flows on a dollar-for-dollar basis obviously is something to be considered when we submit our thing and hear from our regulators.
Okay.
So <UNK>, the two parts of the question.
I think on the funding question there's obviously a lot of components that go into those lines, including the size of our balance sheet, secured versus unsecured.
What we said, just to give you some ---+ to try to cuff it.
We did about $21 billion of new unsecured last year.
And those came in at rates that were significantly below where the historical debt had been issued.
Our average maturity, or WAM, on our unsecured stack now is about six years.
So we were sort of retiring five-year debt and putting on slightly longer.
But we saw our credit spreads were easily 100 tighter than where they were before.
That process went on throughout the year.
We obviously didn't refinance all of the debt on day one.
So we'll continue to get the benefit from those funding savings as we annualize.
And so that, I think, addresses question number one.
And question number two on the deposits, we will continue to grow our deposit base.
I think what we would like to try to do this year in 2016 is try to optimize the deposits.
We have different deposits that have different liquidity values.
We think we can support the lending growth that we've highlighted in the strategy deck without growing our deposit base, but clearly that is a goal.
And in 2017 that will be a requirement to support our future lending growth.
We've talked about some of the digital strategy and cash management products that we're rolling out, and that will support ---+ that will hopefully drive the deposit growth in 2017 and beyond.
I'm sorry, IS.
Again, I'll come back to you on that one, <UNK>.
No.
I think we've ---+ this is probably our longest call.
I'm glad we got everybody's questions in.
And we look forward to talking to you again at the end of the first quarter.
Thank you.
