摩根士丹利 (MS) 2012 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 and 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 Chairman and Chief Executive Officer James Gorman.

Thank you, Celeste.

Good morning, everyone.

I am pleased to be here with Ruth to discuss our first-quarter results today.

There were several significant highlights in the quarter but it is important to remind you of some of the steps we have taken to reach this point.

For the past two years our team has systematically executed in a number of areas, including selling certain assets and eliminating legacy positions to move beyond the crisis; rebuilding and investing in the clients footprint in institutional securities; implementing the MSSB integration, increasing fee-based assets and improving the profit margin in that business; deepening and strengthening our partnership with MUFG; building and maintaining a conservative capital liquidity and leverage profile; and finally, not unimportantly, maintaining strong expense discipline.

While this has been a long and at times arduous journey, our results this quarter are evidence we are on the right track.

Ruth will take you through the GAAP results in detail but let me underscore a few things.

Ex DVA, our revenue net earnings EPS and ROE for the quarter are among the highest since the financial crisis.

ROE was over 9%.

ISE revenues were particularly strong with significant progress in fixed income, driven by improved balance sheet velocity and by our efficiency.

This was coupled with continued strength in equities despite challenging markets.

We reached an important milestone in the quarter with the successful move of the first wave of legacy Smith Barney advisors to our new technology platform, with the rest to follow in early May and early July.

We are just 11 weeks away from completion of this integration.

Our strategic partnership with MUFG continues to grow as we deepen client relationships and leverage our combined balance sheets to deliver financial solutions.

Finally, we have delivered on the promise of expense control.

We were disciplined in the approach to compensation, and while overall compensation expense rose of course with higher revenues in the actions we have taken in the last few years, we meaningfully reduced the ratio, striking a balance between driving ROE and investing in the franchise.

Similarly our rigorous non-compensation expense program allowed us to keep a tight rein on spending and thus drove significant operating leverage.

Clearly, we still have work to do to reach our goals but I believe the progress we have made further underscores the strength of this franchise globally.

I will now turn it over to Ruth to take you through our earnings in detail.

Good morning.

To provide greater transparency into our results, I will provide both GAAP results and results, excluding the effect of DVA.

We will present our results this way whether the impact is positive or negative, and have provided reconciliations in the footnotes to the earnings release to reconcile these non-GAAP measures.

DVA in the quarter was negative $2 billion with $381 million in equity sales and trading and $1.6 billion in fixed-income sales and trading.

Excluding the impact of DVA, Firm-wide revenues were $8.9 billion, up 24% sequentially, excluding the impact of the MBIA settlement in the fourth quarter.

Noninterest expenses were $6.7 billion, up 10% versus the fourth quarter.

Compensation expenses of $4.4 billion this quarter included approximately $138 million related to severance.

Non-compensation expenses were $2.3 billion, down 2% from last quarter, reflecting Firm-wide cost containment efforts.

Income from continuing operations applicable to Morgan Stanley common shareholders was approximately $1.3 billion.

Net income from continuing operations per diluted share was $0.71 after preferred dividends.

On a reported or GAAP basis, Firm-wide revenues for the first quarter were $6.9 billion (technical difficulty) 22% sequentially.

Income from continuing operations applicable to Morgan Stanley common shareholders was a loss of approximately $103 million and the reported net loss from continuing operations per diluted share was $0.05 after preferred dividends.

Book value at the end of the quarter was $30.74 per share.

Tangible book value was $27.37 per share.

Subsequent to the end of the quarter we closed on the sale of Quilter and the first phase of the Saxon disposition.

Turning to the balance sheet, total assets were $781 billion at March 31, up from $750 billion last quarter reflecting increased client activity.

Our liquidity pool was $179 billion at the end of the quarter.

Although our calculations are not final we believe that our Tier 1 common ratio under Basel I will be approximately 13.2% and our Tier 1 capital ratio will be approximately 16.8%.

Risk weighted assets under Basel I are expected to be approximately $319 billion at March 31.

Subject to final rulemaking our Tier 1 common ratio under Basel III was between 8% and 9% pro forma as of the end of the first quarter, assuming full Basel III inflation of RWAs and zero benefit from mitigation, where in the range is a function of the ultimate resolution around Basel 2.5 NPR.

We expect that our Tier 1 common ratio under Basel III at the end of 2012 will approach 10%, reflecting passive mitigation driven by position roll off and consensus earnings.

Now turning to our businesses in detail.

Unless otherwise noted, all discussion of income statement metrics and segment results will exclude DVA for the remainder of my remarks in order to differentiate revenues associated with our business from those associated with our borrowings that results solely from our credits risk.

In institutional securities, revenues were $5 billion excluding the impact of the MBIA loss last quarter, revenues were up 39% sequentially.

Non-interest expenses were $3.3 billion, up 17% versus the fourth quarter.

The compensation ratio was 42% in the quarter.

Non-compensation expenses declined 5% from last quarter.

The business reported a pretax profit of $1.7 billion.

Our Investment Banking results reflected backdrop of continued low market activity, resulting in revenues of $851 million, down 4% versus last quarter.

According to Thomson Reuters, Morgan Stanley ranked number 1 in global IPOs and number 2 in global completed M&A and global announced M&A at the end of the first quarter.

Notable transactions included Glencore's $49 billion acquisition of Xstrata; AIG's $6 billion follow-on equity offering; a $7.2 billion investment grade bond offering for Petrobras; and a $2.8 billion non-investment grade bond offering for United Rentals.

Advisory revenues of $313 million were down 23% versus the fourth quarter as market volumes remained subdued, particularly in the Americas.

Equity underwriting revenues were $172 million, a 9% decline from the fourth quarter, reflecting an industrywide decline in IPO volume and an unfavorable shift in mix.

Fixed-income underwriting revenues of $366 million were up 27% versus last quarter with significantly higher bond issuance activity in both investment grade and high yield products.

This strength was partially offset by a decline in syndicated loan revenues which were negatively affected by lower levels of event financing.

Equity sales and trading revenues were $1.83 billion, an increase of 44% from last quarter.

Results reflected continued broad-based performance across geographies and products despite lower marketwide volumes.

Client revenues remained resilient, demonstrating ongoing realization of adjacencies across products and diversification of distribution across client segments.

Prime brokerage revenues were up on higher balances and a more favorable mix of activity.

We continued to gain market share with notable outperformance in electronic and retail.

Strong results also benefited from prudent risk management.

Fixed Income and Commodities sales and trading revenues were $2.6 billion, excluding the MBIA loss last quarter revenues were more than double and were up 30% versus a year ago.

Results this quarter reflected broad-based strength and were also balanced across products and geographies.

Stronger performance year over year and quarter over quarter underscores our continued emphasis on flow products, risk efficiency, and increased velocity with average balance sheet below 4Q 2011 and 1Q 2011 levels.

Each of our major product areas contributed meaningfully to results this quarter.

Rates revenues increased, driven by higher client volumes benefiting from prior investments in our footprint.

FX results were up with lower balance sheet and continued to benefit from our investment in technology.

Credit revenues were up, both quarter over quarter and year over year, reflecting improved credit market and balance sheet efficiency.

Commodities revenues rebounded from a slower fourth quarter as client activity including structured transactions increased.

Securitized product revenues were up sequentially but down versus a strong 1Q 2011 comparison area

The other sales and trading line reflects negative revenues of $286 million versus positive $83 million last quarter.

Turning to VaR, average total VaR declined from $123 million in the fourth quarter to $84 million this quarter using a four year data series.

The decline reflects the full-quarter impact of the MBIA settlement that occurred last December.

Period end VaR declined from $87 million at the end of the fourth quarter to $78 million at the end of the first quarter.

Our average aggregated VaR by primary risk category for the quarter was $72 million versus $66 million in the fourth quarter.

Global Wealth Management revenues of $3.4 billion were up 6% versus the prior quarter, driven by higher asset management fees and an increase in transaction-driven revenues.

Specifically, asset management revenues were up 7% due to the benefit of higher equity market levels at the start of the quarter.

GWM's Investment Banking-related fees increased 24% versus last quarter, primarily driven by fixed-income new issuance.

Trading revenues were up 19% versus the fourth quarter, reflecting increased activity and markups in deferred compensation plans.

Commissions were roughly flat to last quarter.

The other revenue line included lower gains on AFS sales versus the fourth quarter.

Non-interest expenses were $3 billion, up 2% from last quarter.

The compensation ratio was 62% versus 64% last quarter.

Non-compensation expenses were $922 million flat to the fourth quarter.

Integration costs were approximately $75 million.

As the integration is completed we expect these expenses to taper off during the year.

Profit before tax was $387 million while the PBT margin was 11%, up from 7% last quarter.

NCI for the quarter was [$74 million], up from $16 million in the fourth quarter.

Total client assets increased to $1.7 trillion, due to market appreciation and net asset inflows in the quarter.

Global fee-based asset flows were $8.7 billion, fee-based assets under management grew to $531 billion at quarter end, up 8% year over year.

Global representatives at quarter end were 17,193.

Bank deposits were $112 billion at the end of the quarter with approximately $57 billion held in Morgan Stanley banks.

Asset Management revenues of $533 million were up from $424 million in the fourth quarter due primarily to markups in merchant banking and real estate funds and higher asset management fees.

In traditional Asset Management, revenues of $342 million were up 18% compared to the fourth quarter due to higher market levels.

In real estate investing, revenues of $146 million were up 32% versus last quarter.

Due to the ownership structure of these funds the majority of these revenues are passed to third-party investors in the noncontrolling interest line.

In Merchant Banking, revenues of $45 million increased from $23 million in the fourth quarter, driven by higher markups on investments.

Compensation expense was $218 million in the quarter, up from $183 million in the fourth quarter reflecting higher revenue.

Profit before tax was $128 million, up 64% from last quarter.

NCI was $65 million versus $44 million last quarter, reflecting markups in consolidated real estate funds.

Total AUM increased to $304 billion, due to higher market levels.

In conclusion, the global markets continue to be affected by ongoing macro uncertainty, but we remain focused on that which we can control.

The strategic steps we have taken during the last nine quarters are reflected in our results with broad strength across our businesses globally on an improved revenue mix, tight expense controls and a stronger foundation of capital and liquidity.

Three observations.

First, with respect to revenue our results highlight that the Firm is far more balanced and diverse today than we have been in some time.

In institutional securities, we drove revenue gains across our sales and trading franchise the Morgan Stanley way based on insight, solutions, and technology.

Our Investment Banking team continues to be engaged in leading significant transactions throughout the world, our backlogs remain strong.

We benefited this quarter from the absence of the legacy items we have addressed in the last two years.

In GWM, after extensive investment and integration work we are pleased with the perfect -- the platform the team has [developed] (technical difficulty).

It enhances the FA and client experience and increases efficiency opportunities by consolidating our business on to one platform.

As evidenced by the consistency in revenues, retail wealth management continues to support the stability of the Firm's results.

It is a more annuity-like capital-light business that increases its contribution with ongoing growth in both our fee-based assets and our lending business.

Second, our approach to compensation and non-compensation expenses reflects our disciplined expense management.

We continue to have success with our Firm-wide cost-containment and reengineering efforts and expect further benefits over the next two years.

Third, our capital ratios remain industry-leading.

We have a balanced and stable funding mix that will further improve as we exercise our MSSB call options which will in turn add to our deposit base.

Our strategic priorities have also provided funding flexibility.

Specifically as a result of a more liquid flow focused business, we did not refinance the majority of the $16 billion of debt that matured or was retired in the first quarter.

Net debt outstanding declined $10 billion in the first quarter, continuing the trend we started last year.

Meanwhile our liquidity pool remained in line with 2011 with ending liquidity of $179 billion.

As I have noted previously a key input to the sizing of the liquidity reserve is our upcoming maturities.

The combined impact of strong liquidity and declining maturities going forward put us in an even stronger position with respect to funding flexibility.

Parent liquidity debt coverage is up significantly from two years ago, an indication of the strength of our balance sheet and our prudent liquidity risk management.

We believe these steps put us in an even better position to serve our clients and our stakeholders.

Thank you for listening and James and I will now take your questions.

(Operator Instructions).

Howard Chen with Credit Suisse.

Good morning, everyone.

Congrats on a strong start to the year.

Thank you.

Regarding the meaningful improvement across the sales of trading franchises I was just hoping you could share some thoughts on how you separate what is market-related versus what is related to pay off from all the investments you have made over the past few years.

Well, I think we have to start with the investments that we have made over the last couple of years.

What we saw this quarter was real strength across products and across geographies.

And no one particular driver of results, across the five businesses all growing kind of within a narrow zone rates, FX, corporate credit, commodities and investment-grade securitization.

And what we have been talking to you about over the last number of quarters -- quite long number of quarters is that we felt there was real upside as we moved back into flow, an area where we had obviously been strong for many years but had underinvested for a period of time and our view was that we were punching below our weight and had the opportunity for market share upside and invested in particular in rates and FX, and those were two of the important drivers.

I think the other big driver here was we talk internally about adjacencies when we talk about our equities business the benefit of adjacencies, which as we've talked about before looks at working with clients across the platform and that approach is very much reflected in the way we are running our fixed-income business as well.

It starts with the leadership team.

It starts and then goes to our senior relationship management program, our SRM program.

So that is yet another investment.

Then, the third is really the technology investments that we've continued to make.

That, in particular, is one I have highlighted over time and is true again this quarter for our foreign exchange business benefiting from our electronic trading platform.

So those all go to investments.

I think the fact that we started the quarter with lower balance sheet and lower inventories really underscores that this is less about marks and more about flow and engagement with clients.

And so I would say it is helpful to have a constructive environment, no question.

But it goes to what we have been discussing with you repeatedly quarter after quarter the investments in the business and the focus.

I think also, Howard, the -- I would just take into account the leadership team.

Colm Kelleher, we put in that job a couple of years ago and Kenny deRegt and Ted Pick in Fixed Income and Equities, respectively.

This is now a very seasoned team working extremely well together across the Firm and I do believe the leadership makes a difference.

Great.

Thanks for all that detail.

Switching gears, Ruth, on the new held for investment disclosure you had a near doubling of the HFI portfolio in the last quarter.

Is that a function of new clients or active refinancing?

As that portfolio grows how do you think about the impact to your stress capital ratios, earnings volatility and hedging costs?

Well, that is really the driver of the move where we are clearly a mark to market shop as we always talk about but we are a bank, the 15th largest depository ballpark today and pro forma for the incremental MSSB deposits will be, ballpark, the 12th largest depository.

As we talked about last quarter under the CCAR scenarios the impact of loans under HFI were less punitive than fair value; and as we are looking to continue to build out our bank consistent with other banks' practices and regulatory guidance, we have been focused on what is in the best interest of stakeholders and our view was that if HFI is viewed as a -- or results in being a more capital-efficient way to run the lending book that is the appropriate way to migrate our lending book.

So what you have seen here is that movement to HFI this quarter, and you will continue to see that.

Okay.

Thanks.

And then with respect to the Moody's review could you just comment on what a downgrade means to you and what you are all doing to prepare for and maybe prevent a potential downgrade?

Sure.

We have done a lot to narrow the impact of any potential ratings change and view that -- in our view is that the impact potential outcomes are manageable.

Obviously, ratings reviews started a few years ago first with S&P and then with Fitch and now with Moody's.

So we have had time to prepare and so trying to give some perspective on how we look at it or how we think about the impact, structured derivatives is obviously the most affected by ratings change.

But it is also an area of focus for regulatory reform and as we've reduced the scope of our structured derivatives business that is very consistent with our change in business mix toward cash and flow products, and that has been kind of an over time and I just commented on with respect to what we're doing broadly in fixed income.

But what that means is at this point only 8% of our ISDA contracts have triggers within the Moody's potential range, which helps reduce the size of -- it is kind of step one.

The other key point is that a large amount can be centrally cleared and we were early and aggressive to move to central clearing and become client central clearing brokers.

Two of the largest fixed income asset managers were also easy -- early in moving to clearing and we won mandates to become their clearing brokers.

The trend towards clearing is clearly ratings-agnostic.

So that further reduces the pool that subject to impact and then beyond that we have a higher rated derivative entity and we have slowly been moving derivatives into our bank.

So that kind of sizes and brings down the scope of it and hopefully underscores the couple of work streams which underscore why I started by saying we think the potential outcomes are manageable.

The other point I think is really key is that none of our funding has ratings triggers.

So that side of it is very easy to address as well.

I think across the platform we have done a lot to narrow the potential impact.

Great.

Thanks, very helpful, Ruth.

Maybe just a quick follow-up on the ongoing business.

That 8% figure you noted.

Is that just number of ISDA contracts or is that -- what does that mean as a percentage of maybe revenues earnings contribution today?

Yes.

That is 8% of ISDA contracts and that is why I kind of started there and, then, went down to what are the various incremental steps that we have taken.

I think the other thing I would point you to is that we are still A rated by S&P and Fitch and a lot of clients are doing their own credit assessment.

So hard to gauge how that translates into any other impact on the business.

Great.

Thanks for all of the color and for taking the questions.

Sure, thank you.

Guy Moszkowski with Bank of America Merrill Lynch.

Good morning.

I wanted to see if we could -- if I could just follow up on what you were talking about just now with respect to the Moody's.

I know that it -- that moving contract into better rated entities was pretty far down your list of actions that you've taken.

But I'm just interested in the idea of using the bank's unit and any other entity that you might have developed and sort of how sizable you think that could be in terms of helping you mitigate the impacts.

Well, with respect to the bank broadly, our strategy or our objective is to build a robust national bank that is consistent with our Wealth Management business and building a balanced portfolio of assets in the bank systematically.

I have talked at length on -- I think on two different topics that are relevant to that.

One is building our lending business both institutional and retail and, two, is moving derivatives into the bank.

When we've talked about the lending business, in particular on the retail side, I have talked about this being a slow systematic study build, building out the suite of products that we are offering to our retail clients, taking our time to build that out so we have got the right to quality control over the build.

That is one key portion of the asset side and the other is, as I've talked about before, slowly systematically working to move derivatives into the bank.

We started with FX and rates will follow.

Our view is the result of both of those steps will be a balanced asset portfolio against $60 billion of deposits with another $60 billion of deposits to come as we buy in the remaining Morgan Stanley Smith Barney stakes over time.

Our view is and has been that we have a higher rated derivatives entity to the extent it is needed and our -- you know, have stayed on this course of a longer-term approach to moving more derivatives into the bank.

Thanks for that.

The bank deposit build on the retail side is directly related to the percentage ownership of the joint venture.

Isn't that right?

As we exercise various traunches of the remaining buy in for MSSB, we -- with that comes the [Peralta] portion of deposits.

Correct.

Got it.

Was hoping that maybe you could talk about the restatement of your capital allocations on page 5 of your supplement.

That is always an incredibly helpful disclosure by the way as I think we have discussed before.

But you did restate it, and I am not sure I completely understand what the footnote is telling us.

So, there -- I think one of the key things -- I'm not quite sure what you are referring to, but one of the things as we have allocated parent capital back to MSSB, the reason we increased the allocation to MSSB was consistent with guidance that came out during the CCAR process which is that associated with NCI under Basel I, one now needs to allocate capital for that NCI.

We have been doing that under Basel III and we talked about it last quarter that we had moved from parent capital into MSSB the NCI portion of capital.

Okay, that helps.

And then just on the institutional side on the restated basis that you now showed us, I noticed that the capital allocation fell by almost $2 billion in the quarter.

Is that related to the reduction in VaR and the reduction in the legacy MBIA position or is it something else?

I'm not sure.

Why don't you follow-up with (technical difficulty) on that one?

Okay.

I will do.

I think actually that is it for me.

Thanks very much for taking the questions.

Okay.

Thank you.

Michael Carrier with Deutsche Bank.

First on the Wealth Management business.

You add the improvement in the margin this quarter.

Given the integration cost, I just want to make sure, is it that simple?

Meaning as the $75 million or so of integration expense comes out we should see that 11% -- I think if I just do the math it will move up to maybe 13%, 13.5%.

Then just in the near-term given that we have had the market tailwind you gave some stats in the past in terms of how sensitive that business is to an internment there and then as well as rates.

Any difference there?

Because it feels like we are getting the market at least for the time being, but just any changes in those sensitivities.

The focus on margin is still a midteens margin by mid-next year.

And although we are getting the benefit of reduced integration expense, as you pointed out, we are also having some of that offset by increased software capitalization expense as we've talked about on prior calls.

So the way we are driving to the midteens margin in part comes from integration expense although it is not quite as big as that [full 75] given software cap.

It is also additional cost -- cost discipline focused and expense discipline focused.

It is the continued buildout of our lending platform that I just mentioned and it is also the ongoing growth in managed money.

Those are really the key drivers of margin expansion and that is going to continue as we go through the next year.

We do get a bit of a benefit in particular next year, when we are all operating on one platform.

It makes some of that second category, the expense discipline cost savings program easier to implement, but it is really the combination of the same items we have been discussing over time.

Then, as it relates to the market benefit we did get a bit of a lift here given the S&P started the first quarter higher than it was at the beginning of the fourth quarter, and going into the second quarter we similarly have a bit of a benefit from that.

But the midteens guidance was -- midteens PBT margin guidance assumed no market benefit and if we continue to have market benefit that helps [assimilate], and if the Fed funds rise that helps.

Okay, and then just on the buy-in.

So we don't have all the details but when you think about, you know, obviously the valuation will play a part, your other options will play a part and then just what flexibility you have with the Fed -- but when we start thinking about timing of that and then other opportunities, what -- is the likelihood still of that occurring in the near term?

Well, Michael, let me address it.

We are -- we have said for a long time that we like this business.

It is strategically important to us, and while it has been difficult market conditions for a couple of years we do think we know how to manage it well and we are in the last 10 weeks of a pretty massive, in fact historically largest integration.

So we are on track and the first call option is available, I believe, at the end of May or the 1st of June and, obviously, at that time or sometime before that we would have a discussion with our friends at Citigroup on the first call option.

We have a pretty clear path over what is now only two years to buy the remaining pieces.

We feel no particular compulsion or anxiety to accelerate that.

We have great clarity around what we're trying to do with the business.

Obviously, we are always prepared to listen, but we are in a position where we have a clear path.

We have a clear plan.

We have had this plan now for over 3 years and we are frankly rapidly moving to the end of it.

So that is where we are right now.

Okay, thanks, and last one, just on the ROE for the overall business, obviously you have seen a pretty good improvement over versus the last call it two years.

But still at 9% in a seasonally strong quarter, so when you think about the legacy assets and the things that you have been doing on the -- even on the trading site, how far along are you in that process?

Because clearly a better macro environment can still get that up, but you also have the seasonality against you.

But just wondering how much of getting rid of some of the legacy issues or transitioning under the new regulatory environment is done versus the rest, you know, more of a macro environment improvement will drive stronger revenues?

We would be the first to agree that ROE we are still on a path of improving over time and it is benefiting from systematic execution in the businesses, but we are on a path.

If you just kind of go through the three big buckets, categories that should continue to drive ROE.

On the Institutional Securities side, we felt really good at exiting 2011, having addressed legacy issues that we had been speaking with you about for so long, and exiting those, having those dregs gone is helpful.

We have been reducing our presence in businesses which [underperformed] (technical difficulty) three or more capital consuming and moving to a more flow model which is more capital-efficient so you get some lift just from the mix of the business and that is continuing.

On the GWM side, moving in the direction of the midteens PBT margin after 3 plus years, as James said, will help as we benefit from integration and a higher PBT margin on that business.

Then, we are continuing our disciplined approach on comp and non-compensation.

So those are three of the bigger levers that will help continue to drive ROE.

We are doing a lot more but we are comfortable on this path.

I would just add, Michael, I think that there were areas of our business that clearly benefited from a reason -- I would call it a reasonable market environment, not exactly a bullish market environment.

But there were areas that did not.

I mean, in the first quarter of the Ute issue calendar in equities was not exactly robust.

M&A and advisory work, frankly, was very low across the industry.

Our Wealth Management businesses, Ruth said with rates at basically zero interest rates and no equity calendar, clearly that business wasn't exactly operating at a seasonal or market high.

So there were pluses and minuses as you put it all together with the cost backdrop that we are working on with the integration stuff we'd have talked about with the continued retooling we have been doing in Securities businesses.

You know, we are quite comfortable with the path we are on.

Okay.

Thanks a lot.

Glenn Schorr with Nomura.

So, look, the -- give you credit where credit is due -- the trading results are awesome and awesome on a relative basis as well and everything that you said about the investments made it all makes sense.

What I guess my question is, is what is different about this first quarter that produced such a payoff.

In other words, if you look at it, relative to the last eight, ten quarters average, your increase is literally 50% more than everybody else in both Equities and Fixed.

So don't want to complain, it is great numbers.

I'm just curious on what you think that made this first quarter the payoff.

Well, I think you know, Glenn, firstly quarters as I've said often come around with remarkable frequency every 13 weeks.

We are already three or 4 weeks into the next month, so we are talking about ancient history here.

But I think it is -- if you look at Equities in the last couple of years this is not a flash in the pan.

This is being a pretty considered and deliberate progress where our franchise I think had gained market share of over 350 basis points last year and continued to be strong this quarter.

Fixed income, obviously, there was better balance in the business.

A lot of the pieces came together nicely.

Cross rates, foreign exchange, credit rebounded.

A little bit of what was environmental as we said and a little bit of it was the leadership and a little bit of it was the investments we have made in the platform.

So I don't regard it as a bolt of lightning out of the sky here.

I think it is the aggregation of a series of things that have been steady investments.

Every quarter won't look exactly the same.

That is for sure.

I am sure we will see some ups and downs over the next several quarters, but it shows evidence that the investments we made are in the right direction.

Okay.

Question, Ruth, I heard all your comments regarding funding costs and debt issuance or debt decreasing in the quarter.

Actually I have the opposite question on debt issuance plans going forward, and I think your average maturities in that five-year range has come down over time where my intuition would tell me that you want to be extending the ration especially -- you know, some of the things that Moody's points out on the business, I mean it can stand on its own two feet.

Can we -- can you help us think through what your debt issuance payments are and how you think about today's funding costs where they should be over time?

Yes, the way I -- I think it is a great question, and the way I start on that is really looking at funding requirements as a function of our business mix and our balance sheet.

As I spoke about on the last quarter's call, there are really three strategic priorities that frame the way I think about funding.

First, our strategy for our business mix has moved toward flow from structured and we can fund that efficiently through the secured channel and we are.

Second, exiting legacy positions is really decreased the need for unsecured funding.

A lot of these positions were less liquid and they were cash funded and by exiting them not only do we free up some of the requirements there and that was a part of the story this quarter and, frankly, over the last couple of quarters.

Then, the growth of our deposit base consistent with what we're doing in MSSB is funding both our corporate and our retail loan book and enabling us to fund more with the deposit base that reduces our reliance on unsecured funding.

Overall, the strategic moves toward a leaner more velocity focused balance sheet, have allowed us to extract funding from the balance sheet which means we are not and we haven't refinanced all the maturities.

So specifically I made this point in the first quarter, we paid down $16 billion in debt.

We issued $5 billion.

In other words net debt down $10 billion in the first quarter alone, and we've reduced net debt by $16 billion over the past couple of quarters and we did this while improving revenue strength and capturing market share and maintaining high liquidity.

So this is where we really want to be which is delivering for clients and enhancing our funding.

As I talked about a lot on the last quarter, I felt like I was the beneficiary, when I am thinking about funding of all of the strategic things that have been done.

So very much to your point, our maturities, our rolling 12-month maturities peaked in September of last year and they have been on a downward trajectory, and that gives us some funding flexibility.

As we think about how to do benefits from that funding flexibility we are looking as we have consistently over the last several years at optimizing our unsecured issuance across channels, vanilla debt, structured notes and ongoing work with our partner MUFG in the Japanese market with the [Yurodashi] issuance, we are looking across currency and we are being mindful of what is the wham of the overall book?

But the other -- the way that we think about it is given high liquidity and declining maturities, I mentioned this liquidity maturities statistic.

What is notable is we are now at 38 months coverage.

In other words parent liquidity covers the next 38 months to maturities which is up from 23 months two years ago and it just goes to the prudent way we are running the balance sheet and the high degree of flexibility we have as a result of it.

Well, with all this going on I would think your credit spreads would be tightening more.

Maybe last one on that note, it --

We would agree.

(laughter).

On that note with it, again, price aside, I think there is something in it for both sides to do more of MSSB sooner.

So price aside, it is highly likely not a big capital call.

Is there a thought to just issue a bunch of debt as spreads come in and take the whole thing in?

Listen, obviously we are not going to talk about a particular transaction.

As we have said our focus is on number one getting the integration done.

We are 11 weeks away from that.

Number 2, we will proceed with the first call option.

That is five weeks away or something like that.

And number 3, eventually owning 100% of this business which we can do on a very clear program over the next 24 months.

So I am in the camp of we like certainty.

We have what we think is a well structured deal that was laid out three years ago.

We are right at approaching crunch time which is pretty exciting.

But it would take a lot to encourage us to get off of that path.

Understood.

Thanks for all the answers.

Chris Kotowski with Oppenheimer.

Yes.

I was just wondering, most of my questions have been asked, but was looking at the share count and it looked like about 50 million additional shares.

What drove that?

Was it the annual issuance to employees?

You know if you could follow up with IR and they will give you that.

Okay.

I am all set then.

Thank you.

Fiona Swaffield with RBC.

Just a couple of things on the compensation ratio in the Institutional Securities group.

Could you talk about whether that is a level that could hold for the year?

And then, secondly, just to doublecheck my understanding of the 8% to 9%, sorry, Basel III lookthrough ratio in Q1, so is all of that 100 basis points' difference a potential impact of the NPR on Basel 2.5?

Thanks.

Certainly.

So starting with the compensation ratio we are accruing what we think is reasonable looking at both absolute dollars and ratios.

It is obviously early in the year, and the same thing we talk about we've talked about on prior calls remains, which is, we are very focused on balancing, driving ROE on the one hand and compensating and retaining talent that is driving our -- that is driving that ROE and this is obviously an industry-wide white balance.

But we have got a -- we're routinely focused on it, and within Institutional Securities the compensation ratio reflects the severance that I commented on, and again it was several hundred million -- $107 million in ISG alone.

So that's part of the overall number.

But we are still maintaining that, very much that lens, which is we have got to get the balance right to drive ROE while paying the talent that is driving that ROE and it is early in the year.

On the Basel III question, you are absolutely correct that the range really reflects the ongoing uncertainty regarding Basel 2.5 NPR and until there's greater certainty, we think it is most prudent just to give you a range in where within that range we will tighten up as rules become more clear.

Thanks.

Roger Freeman with Barclays.

Good morning.

Just want to follow up on a couple of other questions that have been asked.

I guess just on the, again, the sort of strength of the first quarter, it feels like your strength, your revenue generation actually builds over the course of the quarter with March being stronger, or as I think others have -- kind of saw the opposite with January being stronger.

Was there something that -- were one of these areas particularly strong and -- in March -- and then obviously it is only a couple of weeks into April but is that momentum carried on?

Well, actually, I think we started January, coming into the year, I think the benefits of LTRO kind of as the tailwind.

We started January and things were pretty attractive.

I think we were mindful of the fact that we entered the quarter with low balance sheet and therefore weren't benefiting from much of a big inventory that would be written up.

But, [FOB] pretty good activity on the sales and trading side in January.

I think it got a little more muted in the middle of the quarter and then did end the quarter, to your point, stronger.

I think it is too early to call three weeks, two weeks into the second quarter.

I would be remiss to try and extrapolate from where we are here and so much of it continues to be what is going on in the macro environment; you tell me that and I will give you a bit of a cleaner forecast for the second quarter.

So, too early at this point.

I haven't figured that out either.

So it just reminds me of another point I want to ask on the balance sheet.

So you said the average balance sheet, your inventory levels were down.

Can you characterize how the ending balance sheet may have looked versus the average or versus end of 4Q?

The average and ending for the first quarter were pretty consistent.

It is in the supplement.

They were within -- there were close, and they have kind of stayed at those levels.

We are continuing to run $700 billion to $800 billion balance sheet.

Oh, I mean I am referring more to this risk capital within the trading business.

I assumed that was what you were referring to.

Oh, I'm sorry.

Yes, so that similarly really has not changed much, continuing to run at the same kind of modest levels.

I think when we look at the fixed-income results, it is a story about breadth across a number of all the areas, but in particular when you look at the fact that we ran at low VaR and the balance sheet where it was -- ROA was up nicely.

VaR efficiency was up as well.

It has continued to run at those kinds of levels and no change really there.

Then just back on the credit rating discussion, so your comments around using the higher rated bank entity, do you have sufficient capacity given the size of the bank deposit base [that are in data] to accommodate any existing business that may have technical requirements if the rating were to be downgraded to move away?

Because you hear Larry Fink's comments yesterday saying they will have to move some business away.

I mean, can we be assured that Morgan Stanley is not one of the ones on the list?

Well, that is why I went through the various steps and executions paths.

We have got multiple execution paths and that is what gives us the comfort to say that outcomes are manageable.

So apart from that, which is centrally clear, you are focusing really on and what about the rest of it.

As I indicated we have a higher rated derivatives entity and that is a valuable next part of the execution paths longer term.

It goes to the bank, but we have got a number of different execution paths, which is why their solutions here making it very manageable.

So no one would actually have to leave, right?

You can accommodate any requirements?

Look, I think I would point to one other thing which I commented on which is, first and foremost, I don't want to prejudge the Moody's outcome but a lot of clients are focused on what are the other ratings that we have for the Firm.

We are still A rated by S&P and Fitch and a lot of clients are doing their own credit assessment.

Some of the questions that are coming up are more structure-related than anything else and for that we focused and I have kind of gone through what are the execution options available.

Okay.

Great.

Thanks for the clarity.

And I think, Roger, just on the ratings it is important to note that when Moody's first came out to render an opinion on all of the banks around the world, it was before the stress test was -- the results of that were published, which is obviously important information, and it was before the first quarter results of the large institutions certainly in the US.

So they now have the benefit of two concrete pieces of information that they didn't have and I think it is important and constructive that they are delaying their readout on this until early June as they try and assimilate all of that positive feedback they have had from the industries.

Mike Mayo with CLSA.

What are the investment banking backlogs and how do they compare to a quarter ago?

The equity backlog remains strong and continues to build, and I feel like I have been saying that quarter after quarter and the appropriate question is -- and what takes it to move out of backlog and into execution?

We did see a bit more of that in March.

There was some kind of a bit of a pickup in equity new issue products and that gives us, I guess I would say, guarded optimism that we'll see more of it here in the second quarter, of course, the market backdrop always being one of the key determinants.

But that remains an attractive pipeline.

M&A is similarly a healthy backlog and we are having a lot of conversations with clients.

I think the view continues to be that there is still [CEO] concern about the durability of the recovery not just in the US but around the globe.

Therefore we would be more guarded on the speed of movement of M&A deals out of the pipeline.

We would love to see that accelerate clearly, but I think the view of our team has been for quite some time, if you look at historical patterns, it is more likely that it is a back half of the year rather than a front half including second quarter movement out of the pipeline and onto announced transactions.

Can you put any dollar amounts?

I mean is it flat, is it up, is it down versus just last quarter?

You know I -- we look at it kind of on a probability weighted basis and it looks healthy.

I think it is kind of generally around the same levels.

Is Facebook going to open up a lot more activity or is that a one off?

How do you think about that?

We never talk about any deals in registration.

We don't want -- can't comment.

Right.

I just meant generally do you think the technology IPOs are going to be picking up later this year?

Same answer.

Okay, that's fine.

And then just switching gears on the brokerage business what were the net new assets for the quarter?

On the brokerage business -- I am glad you asked that because we have included in here fee-based assets.

The net new assets for were a bit below that, consistent with the trend we saw last year.

We have shifted the disclosure as we talked about -- we have talked about previously to fee-based assets and the reason for that is, that is really strategically where we have been focused, and that is -- the stronger relationship between funds movement and our P&L is on the fee-based side.

So going forward, given that is the way the senior team is managing the business, we are going to be providing it with the fee-based assets.

All right.

Thank you.

All right.

Thank you so much for joining us today.

We look forward to speaking to you in July.

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

You may now disconnect.