摩根士丹利 (MS) 2011 Q1 法說會逐字稿

Good morning.

This is Celeste Brown, Head of Investor Relations at Morgan Stanley.

Welcome to our first-quarter earnings call.

Today's presentation may include forward-looking statements which reflect management's current estimates or beliefs, and are subject to risks and uncertainties that may cause actual results to differ materially.

The presentation may also include certain non-GAAP financial measures.

Please see our SEC filings at www.MorganStanley.com for a reconciliation of such non-GAAP measures to the comparable GAAP figures and for a discussion of additional risks and uncertainties that may affect the future results of Morgan Stanley.

This presentation, which is copyrighted by Morgan Stanley, may not be duplicated or reproduced without our consent, is not an offer to buy or sell any security or instrument.

I will now turn the call over to President and Chief Executive Officer James Gorman for today's call.

Thank you, Celeste, and good morning, everybody, and thank you for joining us.

I am going to take you through the major components of the quarter and our announcements this morning before turning the call over to Ruth to review the results in detail.

First, we made clear progress increasing client share and this translated to financial performance.

We have seen the benefits of our investments in hiring and the leadership as we execute across our businesses.

In Institutional Securities, our trading results demonstrated considerable improvement and reflect continued focus and discipline, while we maintained at or near the top-of-the-league tables in global M&A and equity underwriting.

Equity sales and trading had an outstanding quarter, its best since the financial crisis, as we continue to gain market share across our three major businesses.

In fixed income and commodity sales and trading we made important progress versus a year ago in interest rates and all products were up sequentially.

In Global Wealth Management we are pleased with our progress and the MSSB integration remains on track.

We delivered higher revenues; however, margins were lower, as we indicated they would be on the last quarter's earnings call.

In Asset Management revenues were solid and asset flows gained some momentum.

Now secondly, in addition to improvements to our operating results, we had a significant benefit arising from the completed sale of Revel which was a positive development.

Finally, as you are aware, we have a comprehensive strategic partnership with MUFG.

In that partnership we have set up two businesses in Japan that operate on a joint venture basis.

One business is operated and risk managed by Morgan Stanley, the other is operated and risk managed by MUFG.

MUFG has a 60% economic interest in each joint venture, while ours is 40%.

We were disappointed to announce that there was a significant trading loss in the business operated and risk managed by MUFG.

Because of the economic structure, we will bear 40% of that loss which drove a $0.26 per share impact this quarter.

Over the past weeks the following things have occurred.

MUFG will be injecting capital into the business that will partially offset the losses consistent with the shareholder agreement.

MUFG, with the active input of Morgan Stanley, has taken a number of steps to address the issues that gave rise to the loss and to materially derisk the business.

Ruth is going to discuss each of these steps in the business in more detail.

Notwithstanding the loss, we remain fully committed to our partnership with MUFG, which we regard as powerful and strategic, and we are constantly looking for ways to extend our relationship around the world.

On that note, we are particularly pleased to jointly announced today that MUFG will make a full conversion to our common shares of their $7.8 billion face value convertible preferred shares.

This is a signature event for Morgan Stanley and reflects the strength of our ongoing partnership.

The conversion will reduce annual preferred dividends by nearly $800 million, increase our earnings power, and further enhance our capital ratios.

Subsequent to the conversion, our capital position is unquestionably strong.

It will increase our March 31 Tier 1 common ratio by 270 basis points on a pro forma basis.

We have made significant progress strategically repositioning the firm and moving towards a strong and durable institution while diligently focused on cleaning up some legacy issues.

Although we have taken major steps to be in a position of operating strength, we understand that significantly more progress is expected and it remains the focus of this management team.

This is an institution that is extremely well positioned for the future, no matter the environment.

So now let me turn it over to Ruth to review our financial results in more detail and then we will be available for questions and answers.

Thank you and good morning.

Overall, for the quarter ended March 31, income from continuing operations applicable to Morgan Stanley was $966 million with diluted earnings per share of $0.50 after preferred dividends.

I will focus my discussion on two primary areas.

First, the MUFG-related items including the JV loss, the portfolio being managed by Morgan Stanley, and the impact of the pending conversion.

Second, the operating improvements across our businesses globally.

With respect to the MUFG-related items, on the JV loss our 40% economic ownership in MUMSS, the joint venture that MUFG operates, resulted in a negative equity pick up of $665 million or $425 million after tax which equates to $0.26 per share.

The loss was associated with trading results and write-downs in its fixed income business, operating expenses, and other costs.

This loss is reflected within Institutional Securities in the other revenue line item.

As James indicated, MUFG is solely responsible for maintaining an appropriate level of regulatory capital at the MUMSS joint venture as part of the shareholder agreement.

Morgan Stanley is not required to add capital nor is our ownership in the joint venture diluted when MUFG injects capital.

There was no capital injection in the first quarter because MUFG had not completed its capital assessment by March 31.

They have since concluded that they will contribute approximately $370 million of capital in April.

This will partially mitigate the reduction in our book value by approximately $145 million and will be reflected in the second quarter.

To the extent that there are additional losses in the MUMSS joint venture that affect regulatory capital, MUFG will be required to inject additional capital, thus, the impact to Morgan Stanley could be partially mitigated from a book value perspective.

Following the loss, MUFG has embarked on a thorough and strategic risk management review and remediation program and is changing the leadership and process controls at MUMSS.

MUFG is holding people accountable and moving forward to make necessary changes.

Given the restructuring and management changes underway at MUMSS it was viewed as beneficial to transfer a portion of the portfolio that drove the losses to the Morgan Stanley controlled joint venture in Japan, MSMS.

We executed the transaction on an arms-length basis taking into consideration the size, liquidity, and risk of the portfolio as well as the associated capital requirements.

We will consolidate the full P&L associated with these positions in our fixed income results as we do all of MSMS.

MUFG's 60% economic interest will continue to flow out of the non-controlling interest line.

Finally, with respect to the equity conversion we announced today, as James mentioned, MUFG will convert its $7.8 billion face value convertible preferred into our common stock subject to regulatory approval and a shareholder vote.

This will eliminate $784 million in annual preferred dividends.

This security was not callable by its term other than when our stock hit a certain threshold.

To affect an early conversion we agreed on what we believe is fair consideration for foregone dividends and we will be paying the premium via the issuance of an incremental 75 million shares of common stock.

As a result, we will be incurring a charge in the third quarter for this dividend based on our stock price at the time of conversion.

Pro forma, based on yesterday's closing price, this would equate to approximately $2 billion.

Total common shares outstanding will increase by approximately 385 million reflecting the conversion and the dividend payment.

After the conversion, MUFG will own approximately 22.4% of Morgan Stanley.

Pro forma, assuming the conversion occurred at March 31, our Tier 1 common ratio is estimated to increase by 270 basis points.

Now turning to our firm-wide results.

We continue to make progress across our global platform.

Our first-quarter revenues were $7.6 billion, down 2% sequentially but up 5% when excluding DVA in each period, the MUFG-related loss this quarter, and the CICC gained last quarter.

Our non-interest expenses were $6.8 billion, up 2% from last quarter on higher compensation expenses partially offset by a decline in non-compensation expenses.

The firm-wide compensation ratio was 57%, though excluding the impact of the MUFG-related losses and DVA the ratio was 51%.

Non-compensation expenses were $2.4 billion, down 5% from last quarter, primarily due to lower professional services expenses partially offset by higher brokerage and clearing.

We are focused on driving down our cost structure further through business reengineering.

In February we announce the creation of an office of reengineering and expense management under our COO and have commenced a three-year program targeting $1 billion in annual run rate savings.

Results for the quarter also included a tax benefit of $447 million or $0.30 per share related to the completed sale of Revel.

The benefit arose from the re-measurement of a deferred tax asset and the resulting release of a related valuation allowance.

Excluding this discreet tax gain and the affect of the MUMSS loss, the quarterly effective tax rate from continuing operations would have been 28%.

Book value at the end of the quarter was $31.45 per share while tangible book value was $26.97 per share.

Turning to the balance sheet.

Total assets were $836 billion at March 31, up $28 billion sequentially driven by higher client demand.

Although our calculations are not final, we believe our Tier 1 capital ratio under Basel I will be approximately 16.7% and our Tier 1 common ratio will be approximately 11.8%.

Pro forma at March 31 for the pending conversion of MUFG's convertible preferred equity or Tier 1 common ratio would be approximately 14.5%.

Our Tier 1 capital ratio was affected by the change in the treatment of trust preferred securities, or TRuPS, effective March 31.

This capital is now limited to 15% of core capital and therefore approximately $4 billion of TRuPS are now classified as Tier 2.

This change does not impact our Tier 1 common ratio.

Risk-weighted assets under Basel I are expected to be approximately $300 billion at March 31.

We remained focused on RWA mitigation and optimization and the decrease in RWAs versus December 31 came from a combination of business mix, analytics, and collateral changes.

Now turning to our businesses.

Institutional Securities revenues of $3.6 billion included the impact of the MUFG-related losses mentioned earlier and the negative impact from the tightening of credit spreads on firm issued structured notes, commonly referred to as DVA, of approximately $189 million or $0.08 per share.

Sequentially, stronger trading results were driven by increased client flow but were partially offset by lower volumes in investment banking reflecting typical seasonal patterns.

Non-interest expenses were $3.2 billion in the quarter, flat from the fourth quarter.

The compensation ratio was 54% in the quarter.

Excluding the impact of the MUFG-related losses and DVA, the ratio was 44%.

The business reported a pretax profit of $397 million.

Investment Banking revenues were $1 billion, down from the fourth quarter on lower industry volumes but up nearly 15% from a year ago.

This was our strongest first quarter in Investment Banking since 2007.

For the quarter, Morgan Stanley ranked first again and global announced and completed M&A and we were third in global equity.

We lead significant deals, including three of the top five transactions, in global announced M&A.

In the quarter we advised on a number of significant transactions including Deutsche Telekom's $39 billion sale of T-Mobile to AT&T, the $15.2 billion merger of ProLogis and AMB Property, and HCA Holdings $4.4 billion IPO.

Advisory revenues of $385 million were down 20% sequentially driven by lower activity in the Americas.

Equity underwriting revenues were $285 million, significantly lower than the fourth quarter and reflected industry volume that declined by nearly half following the record issuance levels last quarter, particularly in Asia.

Fixed income underwriting revenues of $338 million declined 9% from last quarter as higher investment-grade issuance was more than offset by lower loan syndication and municipal finance fees.

Equity sales and trading revenues of $1.7 billion included negative DVA of $30 million and represent our highest reported quarter since the financial crisis.

Results were strong across our businesses and in each major geography driven by broad-based increases in client flows as we continue to make targeted investments.

Of note, our European and Asian businesses were up significantly versus the fourth quarter.

In addition, the US Equity Research Department improved its [rankings to number] three in the 2011 Greenwich Analyst and PM surveys, up from seventh and eighth, respectively, in 2010.

Cash equity revenues were up over 10% from the fourth quarter as a result of sustained market share gains alongside clients and geographic diversification, outperforming against a market backdrop of muted volumes in the US, volatility in Asia, and growth in Europe.

Derivatives outperformed in the quarter on expanded client footprint with sequentially higher client flows against a backdrop of elevated volatility arising from global macro events.

Growth in our electronic businesses in cash equities and derivatives continued to outpace market volume.

And prime brokerage recorded the highest level of client balances since the financial crisis as we continue to focus on innovation and client service.

Fixed income and commodity sales and trading revenues of $1.8 billion included negative DVA of $159 million.

Results benefited from an increased client activity and better facilitation with particular strength in Europe while all product lines showed improvement from the fourth quarter.

We continued to invest in the electronic trading platform for this business.

Interest rates revenues more than doubled from the previous quarter on strong client flows across all regions, particularly Asia, and included increased electronic share in Europe and more sustained activity in the US.

We continued to make progress growing this business where revenues were up 10% on a year-over-year basis.

In particular, liquids flow rates were up over 50%.

Credit revenues increased meaningfully versus the fourth quarter with particular strength in securitized products that were down from the prior year, reflecting a quieter market in corporate credit.

FX revenues were also up on higher trading revenue versus the fourth quarter despite muted FX volatility during most of the quarter.

We reported our single largest electronic trading day in FX this quarter.

Commodities revenues were up significantly from the fourth quarter due to increased market volatility.

Fixed income results continued to reflect a drag from the tightening of monoline credit spreads and CMBX indices with net losses of $318 million.

Other sales and trading negative revenues of $458 million primarily reflected losses on economic hedges related to the firm's long-term debt and funding costs related to the higher amount of liquidity held by the firm's US subsidiary banks.

Turning to VaR, average trading VaR declined to $121 million from $132 million last quarter primarily driven by reductions in credit and foreign exchange.

Global Wealth Management revenues of $3.4 billion increased 3% sequentially as higher asset management fees and commissions were partially offset by lower Investment Banking revenues due to a quieter new issue calendar.

Non-interest expenses were $3.1 billion, up 4% from last quarter on higher compensation expenses.

The compensation ratio of 62% in the quarter continues to be driven primarily by the formulaic grid payout.

Integration costs were approximately $80 million.

Profit before tax was $348 million and the PBT margin was 10%.

Total client assets increased sequentially to $1.7 trillion on market appreciation and net asset inflows of $11.4 billion in the quarter.

Net fee-based asset flows were $17.8 billion.

As you consider the second quarter, note that client flows tend to be seasonally weak due to tax filings.

The number of FAs was 17,800, within our expected range, while turnover within our top two quintiles remained near historic lows.

The decline in headcount was due to our focus on reducing low performing FAs, which could result in further reductions next quarter.

Deposits in our bank deposit program were $112 billion, of which $54 billion is held by Morgan Stanley banks.

With respect to the second quarter, implementation of the new FDIC assessment rules may result in significantly higher FDIC charges related to the city depositories, which are part of the MSSB bank deposit suite program, partially offset by lower FDIC charges related to the Morgan Stanley depositories in the same program.

It is expected that Citi will take actions to mitigate most of the impact sometime during the third quarter.

In addition, Fed funds is half of what it was in the fourth quarter and well below where it was during the first three months this year.

As you know, we have some sensitivity to rates and the movement could pressure net interest margins.

Let me turn to Asset Management where, starting this year, we have organized this segment around three businesses.

We have aligned our AUM and asset flow disclosure and provided the revenue breakout for these businesses in the supplement.

The first is traditional Asset Management, which includes our long-only, liquidity, and AIP fund-of-funds businesses, and where revenues declined 6% from the fourth quarter to $325 million.

The second is Real Estate Investing, where revenues of $118 million declined on lower investment gains.

Approximately $42 million was related to investment gains from consolidated [MSREF] funds.

Given the ownership structure of these funds, the majority of the gains are passed to third-party investors in the non-controlling interest line.

The third is Merchant Banking, which includes our private equity and infrastructure businesses and our hedge fund investments, where revenues of $183 million included lower investment gains in private equity and lower management fees, as well as the absence of a full quarter of revenues related to FrontPoint.

PBT was $127 million for a margin of 20%.

The traditional Asset Management business reported strong margins in the quarter.

Total AUM increased to $284 billion as market appreciation and net asset inflows of $1.4 billion were partly offset by the reduction in FrontPoint AUM.

Inflows were driven by equity and liquidity assets.

As of February 2011, over 74% of our long-term strategies continued to outperform their respective benchmarks on a 3-, 5-, and 10-year basis.

Now turning to our outlook.

We are cautiously optimistic about the operating environment with healthy liquidity and increased confidence providing tailwinds for our capital markets and advisory businesses.

Risk assets have been resilient with markets absorbing and recovering from macro and geopolitical news more quickly than in prior periods.

However, concerns remain regarding the potential slowing pace of US growth, particularly as the impact of monetary and fiscal stimulus wane as well as ongoing stresses in Europe.

These contradictory factors were evident in what we would characterize as moderate risk taking in the first quarter, but an improvement from the risk on/risk off environment of much of last year.

Beyond the operating environment we are benefiting from the strategic moves and investments that we have made.

First, we are pleased with the pending equity conversion that puts us in an even stronger capital position.

And most notably, within our business segments we saw ongoing progress in many areas in sales and trading.

In fixed income, we continued to see the benefits of our investments to broaden our footprint and in equities our team globally was able to capture additional market share.

We remain very focused on the disciplined execution of our strategy, to continue enhancing our global footprint, and growing our share of the market to deliver for clients and shareholders.

Thank you and now we will take your questions.

(Operator Instructions) Howard Chen, Credit Suisse.

Good morning.

Congratulations on the announcement of the MUFG conversion.

I think one of the overhangs I have certainly heard is you have got a lot of capital but the quality of the capital was a bit challenged, so this certainly alleviates that.

I think, assuming you receive approval, Ruth, how does that change your capital management priorities in the context of both Basel I and Basel III?

It's a very good and fair question, but a bit premature.

We are delighted to be announcing this morning.

As you said, it does meaningfully improve our Tier 1 common; delighted to be up at 14.5% pro forma.

But we still need to go through final regulatory approval and shareholder vote.

I think overall it puts us in a very strong position with added flexibility.

And we will be back to you more on that in the future.

Okay, thanks.

Then switching over to the results, you noted the monoline related losses again this quarter.

Could you just update us on where exposures stand at the end of the quarter and what we should be looking at in terms of thinking about future losses and/or gains?

Certainly.

So as we said before, this is a legacy exposure that will take time to work out.

It's, unfortunately, not as straightforward as it may appear because there are a number of factors in play and correlations are breaking down.

So in addition to normal credit considerations there is regulatory and litigation overlay.

We are continuing to evaluate the market and all positions, so you are going to see more disclosure in our Q as you would expect.

We have adjusted some of our hedges and that will be detailed in the Q.

Okay, thanks.

Finally, you noted the RWAs were down during the quarter.

Is that more environmental driven or is that a function of getting ready for Basel III?

It's really our approach and focus on RWA mitigation and optimization.

We put more resources, people, and analytics behind RWA management, and as a result it enabled us to identify opportunities to really optimize RWA.

It's a combination of business mix change, analytics, and changes in collateral.

We are focusing on Basel I now but intend to use that same discipline focusing forward on [II.5] and III.

Okay, thanks.

Just a follow up to that, Ruth.

I guess as you look to that RWA optimization, how do you think about the P&L ROA type of impact from mitigating those RWAs?

So what we talked about here, the reduction from 330 down to 300 did not have a P&L impact.

Great.

Thanks so much.

Glenn Schorr, Nomura.

Ruth, if we could just do quickly the pro forma tangible book and fully diluted share count post the conversion.

I am in the $25.63 range and $1.85 billion, is that about right?

So the tangible book is around $25.78, book value $29.36.

And fully diluted I just add the shares, nothing special there in the math?

Right, right.

Okay.

So what is interesting is your leverage was running 17.2 times on common.

This immediately takes it under 15.

Just curious if you think about that as the right range , you knew this was coming versus is there an ability or any thought process on letting the balance sheet drift up a little now that you have a lot more common

So this quarter our balance sheet obviously did drift up, moved up from fourth quarter.

It was lower at the end of the fourth quarter on basically client activity, and we took it up as we saw client activity.

I think the real point here is that we are very pleased with the ongoing success we have in equities and fixed income, and that has really driven the demand for incremental balance sheet which we have used.

Clearly, this provides a very strong Tier 1 common base, but what was driving the balance sheet moves fourth quarter over first quarter was client activity and executing on our strategy.

Okay.

So let's talk about that, I think you do deserve the credit for the progress there.

Could we, inside of [FICC], talk about -- I know commodities is operating towards peak levels right now; I think that continues.

But do you mind making a comment specifically on rates and FX, where a lot of the build has been and what kind of contributor that was to the good results this quarter?

Certainly.

So rates had very strong performance.

It was up year over year and quarter over quarter in a choppy market.

I think what you are really seeing is the results from the build that we have done, the strong leadership we have there, the additional talent added to our team globally really makes a difference.

I think our point that we talked about in the past is the need to build out the team to have greater presence with clients, which in turn would drive greater opportunity for client facilitation.

And that was very much borne out this quarter.

What you will see in the 10-Q when you look at our trading histogram is it has moved over to the right.

And again, another way of underscoring that with the addition of the team greater presence with clients, greater client facilitation opportunities that we are productive.

I would just add, Glenn, this is the first time that I have felt comfortable with the leadership across all of our fixed income businesses.

Moving Kenny Durrett, who ran fixed income 10-plus years ago, left the firm, came back to run risk, and is now back running the business; is a unique talent.

A mature, very capable trading executive.

And under Kenny the four or five players that he now has are really a world-class team.

So leadership starts at the top.

You have got to have that ability at the top.

The investment we made in hiring people, combined with the leadership at top I think is what is starting to move the needle.

Excellent.

All right, thanks both of you.

Thank you.

Guy Moszkowski, Bank of America.

Good morning.

I think it would be really helpful if maybe you could take us through a little bit more detail on how you achieved the reduction in the RWAs as the assets went up, because this mitigation thing is so important, I think, for us to understand.

It's really -- as I described, we have been -- we have built up the team that is focusing on RWA optimization.

And so the combination of business mix as well as analytics, as well as looking at changes in collateral just yielded benefits which one could candidly say would have been nice to have had sooner.

But we are pleased to have put the resources behind it to identify it.

These are Basel I improvements.

I don't want to leave you with the notion that it necessarily rolls forward to Basel III.

Some of them we give up again in Basel II and that is why I made the point that we are using this same approach to make sure that we are capturing all opportunities now in Basel I, but we are going to move this to II.5 and III.

So when I look to our Basel III guidance it stays very much the same.

I wouldn't want to leave you with the suggestion you can build off this.

Got it.

But it sounds like you are trying to identify opportunities to further this even on the Basel I basis and achieve more on a Basel III basis than maybe what you would have thought a few months ago you could do.

Or is that not fair?

Well, no, that is very fair.

The Basel III numbers that we talked about previously had an inflation path of mitigation net up $140 billion.

We still think is an appropriate way to look at it and don't have any changes to our earlier guidance of $480 billion of risk-weighted assets under Basel III.

However, very much to your point, we intend to take this same focus, apply it to II.5 and III.

In addition, there are opportunities on active mitigation.

But at this point there are two steps which is let's take this forward to II.5 and III, see what else it yields, and then see what we want to do beyond that.

Okay, that is very helpful.

Thank you.

I was also hoping that maybe you could give us a little bit more color on the other sales and trading loss which you refer to as being related to some of the economic hedges I guess on the corporation's balance sheet.

I am not sure that I understand it, and obviously the losses are significant enough that it would be helpful to understand if those could -- if those are going to be mitigated ahead or whether -- how we should model that.

Sure.

So as we have discussed previously, this line item is volatile and it, unfortunately, is difficult to model because it includes a number of different items in it.

So, for example, we have amortizing hedges from debt we bought back in 2008 and 2009 in there, a current long-term debt hedging program, our US Bank liquidity portfolio, leveraged loans, and relationship lending.

And so, while we have negatives in this line item, there are often also positive offsets.

That is what we had last quarter, we had some positive offsets.

Unfortunately, this quarter the items all went the wrong way and thus the negative.

That is the drag.

Okay, thanks for that.

Then the final question that I have is on equities.

Obviously you have had a very, very successful result in the quarter.

And I guess the question that we have to ask ourselves is how much of this is really sort of permanent -- no, permanent is never the right word -- but sustainable improvement from some of the footprint improvements that you have had and the like.

And to what extent might you just have had a very favorable outcome from volatility-related equity derivatives trading.

Can you help us with that at all just so that we don't overestimate what you might be able to achieve in the quarters ahead?

Yes, absolutely.

We are very pleased with the performance and I think you have hit the two issues.

First and foremost, we have a terrific team around the globe.

This is really -- this strength is broad-based, it's across products, it's across geographies, and it is about a very strong team.

Cash equities was very strong; derivatives as well.

Prime brokerage, as I noted.

So I think it starts with the team and the stronger presence in front of clients that they are executing extremely well.

We certainly also benefited, as you noted, from a constructive market.

So, for example, in derivatives we have certainly benefited from the market, but it was the team -- with the backdrop of a constructive market they executed well against it.

Okay.

Thanks for that then and thanks for taking my questions.

Thank you.

Mike Mayo, CLSA.

Good morning.

All my questions are on the MUFG conversion.

I just wanted to clarify maybe some simple things.

So you eliminate the $784 million in dividends, so that is a $0.53 pickup once you do that.

Is that correct?

So that is kind of in the bag?

I am going to count on you doing the math right, so $784 million in dividends.

Okay.

And then --.

Preferred dividends, to clarify.

Right.

So I am just trying to understand how I would adjust my normalized estimates.

So if my normalized number is $4 or $5 or $6 -- let's just use $4 for the moment -- so the increase in shares outstanding would be diluted by one-fourth which would take the $4 number down to $3.

Then you would add back that $0.53 and the normalized earnings power would be $3.53 not the $4.

So it seems like normalized earnings would go down and I want you to correct my logic.

On the other hand, you have a mid-teens ROE target, and if you maintain that ROE target on the higher capital base that would imply a higher normalized number.

So if you could help me see my way through that.

You have got a number of components to it.

I am going to address some of them and then we will just follow up on some of the math after the call, because this conversion -- we have been focused on getting the conversion done and you are going into some of the numbers that I don't have in front of me.

So you are right on the $784 million of preferred dividends.

As I indicated, we are paying a premium with the incremental 75 million shares, so the total common shares up 385 million.

As we look at it with respect to -- and so I will come back to you -- we will come back to you on the earnings.

With your asking about ROE and really driving ROE on this strong capital base, we remain very comfortable with our mid-teens target over the cycle and come at it a number of different ways.

It starts with our revenue mix and the right revenue mix globally.

We think we are very well positioned for a changing regulatory environment and we are executing across the businesses and geographies.

You see that I think quite clearly in the results here this quarter.

So revenue upside in Institutional Securities driving equities further, based on the strength that we have just talked about.

And on fixed income, as we have talked about in the past, we are very focused on the initial closing the gap of 2% market share points and the benefit that that actually drives to the bottom line.

Investment Banking is at a cyclical low.

Given the strength of our Investment Banking franchise, we view that as a real positive.

Obviously, there is a flow-through to other businesses from the new issue business that comes out of the Investment Banking franchise.

There is the upside from GWM as we drive our PBT margin to the 20% target we have talked about in the past.

The expense management program that we have talked about is incremental operating leverage.

And then finally at some point, back to one of the prior questions, capital management is an added lift.

So that is how we look to the ROE and we will come back to you on some of the build.

Okay.

And then maybe you get to $7.8 billion of additional common equity, if that is correct, and so your tangible common would go up 19%, but your shares outstanding would go up by 25%.

And I am just -- am I doing the math correct?

And if I am, why so much more in the shares than the increase in the common?

We also have the incremental premium that we are paying, which is a deduct.

So that, as I noted, will be a charge of about $2 billion based on yesterday's closing price.

And when you gave the pro forma tangible book value of $25.78, does that include that $2 billion charge?

Yes, that is fully loaded.

All right, thank you.

Roger Freeman, Barclays Capital.

Good morning.

Just a couple more on MUFG.

One, can you help us think about -- James, you talked about the largest strategic benefit of the relationship.

Maybe just put into context some of the benefits that you have gotten out of that partnership so far.

I am just thinking can we look at this in some sort of a cumulative context?

Has there been any meaningful profits?

Firstly, on a pure financial basis, the investment that MUFG made during the financial crisis was obviously critical to repositioning us.

Their contribution to the various equity raises has also been critical.

Then we have put in place a number of different business initiatives around the world.

One of them was the formation of these double joint ventures in Japan.

And while we have clearly had a stumble in the trading book on the fixed income side of the business that they have been running, the long-term opportunity and strategic opportunity in Japan, giving us access to the retail market which is a very large portion of the market there for distribution of our institutional product, and putting Morgan Stanley in a position to take Japanese corporates outside of Japan for their M&A and capital raising needs is a very compelling sort of strategic objective.

Secondly, we have worked with MUFG and Bank of Tokyo subsidiary to bring them into a number of client relationships where we are leveraging the combined balance sheet of both institutions.

And I think the number -- I forget the exact number, but we are up over 50 to 60 instances where we have done that.

They did their first sub-investment-grade deal with us, so there are a number of opportunities for them to do that.

Thirdly, as we look at various smaller emerging markets around the world where they have a presence and capability, we might want to build the infrastructure.

We are looking at ways where we can leverage their infrastructure.

Then, finally, in the United States they have operations here in both retail and commercial banking.

So it's a very broad-based partnership.

Again, obviously a stumble but the evidence of the strength of the partnership, this truly moving investment here that they have made repositions us in lots of ways.

Okay, that is helpful.

Then just thinking about the premium you are paying to convert to preferred early, kind of paying the next couple years of the preferred dividend.

Is it just the certainty of having the common equity contribution today as opposed to not sure whether the stock price is at the conversion point two years from now and there might still be a cost then?

Have you had to negotiate something?

I am going to let Ruth -- she can take you through the mechanics of it.

But the bottom line here is what we have spent the last couple of years doing is clearing up a number of uncertainties that impact our future.

And this was, frankly, number one on my list for this year.

We had a window of opportunity here to get this off the list.

Obviously, we had to pay a premium.

We think it's a fair and balanced -- Ruth will take you through them.

So to that point, the security is not callable by its terms which is customary for this type of security.

And so we and they value the security with all the relevant factors -- share price, discount rate, volatility -- led to what we think is a fair outcome.

It really goes to James's point, which is this creates certainty which we believe really drives additional benefits for clients and all of our stakeholders.

I would just like to say, not to overstate this, but getting this done in this time frame with all that our Japanese partners are dealing with in Tokyo now is a measure of the strength of the partnership.

That they were willing to focus on this at the CEO and Board level and our Board level to get this done.

I appreciate that.

Last question just in terms of your positioning sort of post Dodd-Frank, Basel III, final clarity, and how you might be thinking about any response to that from a resizing perspective -- I think a lot of dealers are going to have to go through this process.

My question for you is, because you have been in a rebuilding process, is it fair to assume that you kind of had some aspect of this outcome in mind and that you are restaffing has been focused in businesses that likely have brighter futures than others?

And then ultimately there may be less of a headcount challenge for you than maybe some of your competitors?

I think you have framed it well.

The focus is very much for us a client-centric flow business and that plays into much of the direction of much of the regulation.

I think when you talk about some of the areas like derivatives -- clearly there is a lot still to be done with respect to derivatives legislation and we do want to -- we are focused on the need to ensure that US institutions broadly aren't disadvantaged relative to global -- other firms or European firms.

But when you think about Morgan Stanley, I think there are ways that we are relatively advantaged versus peers, and we have talked about that in the past.

The ability for us to move derivatives into the bank; the fact that the focus really is on client service and research support for our clients.

It's giving us an opportunity here with our technology and connectivity leveraging off what we are doing in, for example, foreign exchange and PV to set ourselves up for well for this new world.

So we do feel that in many ways the market is going the direction that we are going.

We still are somewhat smaller in fixed income on headcount, and so that very much, to your point, is beneficial given where the market is going.

Okay, thanks for the color.

Michael Carrier, Deutsche Bank.

Good morning, thanks.

Ruth, last quarter I think you gave some details on the wealth management business just in terms of some of the factors that can push the margin up over time, more environmental.

Then there was also a portion that is more what Morgan Stanley can do in terms of consolidating platforms, realizing some of the additional synergies.

So just wanted to focus on that portion.

From a timing standpoint are we still looking at -- I think you guys were saying like the beginning of 2012.

But I just wanted to make sure any update on those synergies and consolidation on what you guys can control versus the environment?

So the three pillars, as I call it, that drive margin expansion.

First, as you just referenced, completion of the integration and the synergies that come from having integrated the various platforms.

We are moving the Morgan Stanley FAs on to this platform by the end of the third quarter.

We will then be training up the Smith Barney FAs; they move on in the first half of 2012.

So that is a very important part of this integration timeline.

The second part and very important is building up the private banking business, because that, as we have talked about in the past, is where we build our non-compensable revenues.

And that we are systematically building.

We had 160 bankers at the end of the year.

We have 178 at the end of the first quarter, which is ahead of our -- what was our midyear target of 180, and we are looking to add about 30 a year.

So this is a slow, steady build to make sure we are providing the right client experience, the right risk management, the right full infrastructure around it.

But that is an important part and that will take time to build to the point where it really moves the needle.

And then to your point, the third part, which we don't control but I did reference in the opening comments, is the backdrop, the 100 basis point move in equities.

That is a point on our PBT margin and Fed funds we are focused on because they are down from 19 basis points in the fourth quarter to 10 basis points here as we are going in the second quarter, second quarter to date.

And every 50 basis points in Fed funds is about a point on PBT margin, and we look forward to that turning around.

Okay.

Then just the follow-up.

On the ROE you gave a few points I think on one of the last questions just in terms of getting the ROE up over time.

So I think -- you mentioned like five areas.

So overall activity levels, which we will see; anyone can predict.

You guys have the target in the Global Wealth Management business in terms of the improvement in the margin, so we can gauge that and size that opportunity.

So I guess in terms of the two others or maybe three others, like the size of the trading opportunity in terms of punching at your weight or getting into a level that is a better run rate.

Then just on the cost side.

I guess on those two areas when you look at the ROE and the impact that those businesses or those initiatives have is there any way to size that up?

Not like next quarter or the quarter after, but over the next year or two in terms of how much that can contribute?

Well, I will give you a couple of data points to use to size it up and then look forward to reading how you write it up.

But within the fixed income side we are targeting an initial 2% wallet share growth and that is steady, consistent.

I think what you are seeing in the results this quarter give us confidence that you are seeing that borne out through the P&L.

But that is the 2% upside -- 2% market share upside is an important first metric that we are looking at and managing to.

Then with respect to the cost program, I mentioned the office of reengineering under our COO that was announced early this year.

He is targeting and identified $1 billion of run rate expenses to come out of the business.

That is a three-year reengineering effort.

He has identified a number of different areas, but it does take time when you are doing substantive reengineering in that regard.

Okay, thanks a lot.

Jim Mitchell, Buckingham Research.

Good morning.

Just a follow-up on the JV.

I understand that this was an unusual quarter but you were losing money in the JV over the prior nine months, and understandably it has got some strategic value.

But how do we think about it -- how do you guys evaluate that longer term?

Is there really value to be had there, particularly when you are giving up risk management?

Is it sort of worth the effort?

Firstly, there are two businesses there.

So the JV has two businesses and one of them certainly has been making money.

But secondly, it's in its early stage.

It was only formed in May.

We have a lot of things that are going on in discussions about restructuring that particular business, which MUFG is going through and Ruth talked about.

We believe there are other potential synergies across most of those businesses for reducing the cost base and the infrastructure.

So, yes, from a cost perspective we think it can be more efficient.

From a risk management perspective, they have put in place a number of changes at the leadership and the process level.

And from a core strategic perspective to have access to the Japan retail market and have access to taking Japanese corporates globally is a major strategic move for us that we are -- frankly, continue to be as excited as we were when we started.

This is a stumble.

We are disappointed with it; they are disappointed with it.

They are putting in place the appropriate changes, but it's not something that is going to knock us off our sort of 10-year vision for our business in Japan.

So you see a pretty reasonable path to profitability there is basically what you are saying?

Yes, in time.

But it's -- obviously the Japanese markets have been under pressure and it's going to take some time to align the cost basis of these businesses where we have combined in that market.

Okay, great.

Ruth, on the risk-weighted assets you still targeting $480 billion under Basel III.

That is inclusive of the mitigation, right, of about $100 billion and -- I think is the numbers.

Then how do we think about -- you had mitigation on Basel I was -- I guess I will ask it again.

Was there any kind of mitigation related to Basel III yet or is that still to come, and do you still expect that to come?

So on Basel III we are still guiding each -- still for now look at $480 billion net of passive mitigation.

So as I said, we are not giving ourselves credit at this point for the Basel I RWA mitigation rolling through to Basel II.5 and III but we do intend to use that same focus as we look at II.5 and III.

So if you just hold to where we were previously, we will continue to give you updates.

That includes only passive mitigation.

There are obviously other things that are quite logical, like tariffs and potentially benefits from central clearing.

But I think the other point is that in our prior guidance on Basel III we were talking about 8% to 10% Tier 1 common by the end of 2012 with consensus earnings and the various other things we have talked about.

The 10% number was contingent on the conversion of the MUFG convertible preferred, which we have obviously now addressed today.

So that is the only real update on that topic.

Right.

But none of the passive mitigation has come through yet?

No.

On II.5 and III, no.

Okay, thanks.

One last itty bitty question.

Did you mention the dollar amount of the hedging loss for MBIA exposure or no?

The overall P&L impact was $318 million this quarter.

Okay, great.

Thank you very much.

Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference.

You may now disconnect.