摩根士丹利 (MS) 2014 Q1 法說會逐字稿

Good morning.

This is Celeste Brown, Head of Investor Relations, and 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 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 instruments.

I will now turn the call over to Chairman and Chief Executive Officer, James Gorman.

Thank you, Celeste.

Good morning, everybody, and thanks for joining us.

Before I comment on our performance this quarter, I will discuss our thought on capital returns, both for this year and for the medium to long term.

We recently completed CCAR, which was a significant inflection point for us.

As you know, we secured a non-objection to increase our capital returns.

We respect the CCAR process and made significant investments in that process over the past several years, and we have a program specifically focused on continuing to raise the bar each cycle.

In 2013, we asked for and received a non-objection to maintain our dividend and the ability to purchase the balance of the Wealth Management business.

In mid-2013, we applied for our first buyback since 2007 of $500 million.

In this latest CCAR, we applied to double the dividend, our first increase since 2007 and a $1 billion buyback.

We intend to and meaningfully track capital requests in future years.

Going forward, we will look to drive our dividend yield to at least levels commensurate with the broader S&P, which has historically been around 2%, sustained by growing earnings from Wealth and Investment Management.

In fact, an 80% to 100% payout on just the earnings from Wealth and Investment Management suggest an annual dividend at two or three times our recently increased level just based on 2013 earnings and share count.

In addition to growing our dividend [substantial], we expect to continue to increase our buyback with a focus on both mitigating employee issuance and reducing our share count.

Share buybacks will make up the difference between dividends and the total payouts, which we intend to drive toward 100% of firm earnings over the next several years.

Now clearly, when we can do this is, is obviously a function of regulatory approval.

Turning now to the businesses in the first quarter.

In challenging markets for institution retail investors, we drove our revenues and PBT higher across our three business segments versus a year ago as we continue to execute against our strategic plan.

Ex-DVA, our revenues were up 4% posted for first quarter of 2013 while our expenses were up 1%.

Our expense ratios improved across the segments and our overall earnings per share grew 13%.

In fact, ex-DVA, our earnings grew despite a significantly higher tax rate than a year ago.

ROTE from continuing operations, excluding DVA, improved as well, to 9.8% while ROE improved to 8.3%, up 130 basis points and 80 basis points year over year, respectively.

We continue to work towards sustainably higher ROEs across all of our businesses through the execution of our strategy, with a particular focus on growth in the bank, which we believe is substantial as well as on a Fixed Income ROE and our broader firmwide expenses.

I look forward to your questions at the end of the call.

I'll now turn it over to Ruth to discuss the results in detail.

Good morning.

I will provide both GAAP results and results excluding the effect of DVA.

We have provided reconciliations in the footnotes to the earnings release to reconcile these non-GAAP measures.

The impact of DVA in the quarter was positive $126 million, with $76 million in Fixed Income sales and trading and $50 million in Equity sales and trading.

Excluding the impact of DVA, firmwide revenues were $8.8 billion, up 7% versus the fourth quarter.

The effective tax rate from continuing operations was 33%.

Earnings from continuing operations applicable to Morgan Stanley common shareholders, excluding DVA, were approximately $1.3 billion.

Earnings from continuing operations per diluted share, excluding DVA, were $0.68 after preferred dividends.

On a GAAP basis, including the impact of DVA, firmwide revenues for the quarter were $8.9 billion; earnings from continuing operations applicable to Morgan Stanley common shareholders were $1.4 billion; reported earnings for continuing operations per diluted share were $0.72 after preferred dividends.

Book value at the end of the quarter was $32.38 per share and tangible book value was $27.41 per share.

Turning to the balance sheet, our total assets were $835 billion at March 31.

Deposits at the quarter end were $117 billion, up $4 billion versus 4Q.

Our liquidity reserve at the end of the quarter was $203 billion compared with $202 billion at the end of the fourth quarter.

Turning to capital, although our calculations are not final, we believe that our Common Equity Tier 1 transitional ratio will be approximately 14.1% and our Tier 1 capital ratio under this regime will be approximately 15.6%.

Risk-weighted assets are expected to be approximately $398 billion at March 31.

Reflecting our best estimate of the final Federal Reserve rules, our Common Equity Tier 1 ratio using the pro forma Basel III fully phased-in Advanced Approach was 11.6% at March 31.

Our pro forma standardized ratio was 10.2%.

We estimate our pro forma supplementary leverage ratio under the recent US regulatory proposal to be approximately 4.2%.

For reference under that prior methodology, our supplementary leverage ratio is 4.5%, up from 4.2%.

These estimates are preliminary and are subject to revision.

We continue to expect to see the required 5% level in 2015, including an assumption for increasing returns of capital to shareholders despite the Fed's recently announced more demand or requirements.

In addition to the mitigation items we highlighted on the fourth quarter call, we see opportunities to mitigate the recent conclusion of the CDS long add-on through steps such as compression, rehedging and roll-down.

Turning to expenses, our total expenses this quarter were $6.6 billion, down 18% versus the fourth quarter due to significantly lower legal expense, seasonality, and our focus on cost reductions.

Compensation expense was up 8% versus the prior quarter on higher revenue.

Non-compensation expense was $2.3 billion, primarily reflecting lower legal expenses, seasonality and cost of management.

Let me now discuss our businesses in detail.

In Institutional Securities, revenues excluding DVA were $4.5 billion, up 21% sequentially.

Non-interest expense was $3.3 billion, down 29% versus the fourth quarter.

Compensation was $1.9 billion for the first quarter, up versus the fourth quarter on higher revenue, reflecting a 41% ratio excluding DVA.

The decline in non-compensation expense to $1.4 billion primarily reflected significantly lower legal expenses.

The business reported a pre-tax profit of $1.2 billion, excluding the impact of DVA.

Including the impact of DVA, revenues were $4.6 billion and pre-tax profit was $1.4 billion.

In Investment Banking, revenues of $1.1 billion were down 17% versus last quarter, reflecting seasonality.

Results represent strong performance for our first quarter across all products.

According to Thomson Reuters, Morgan Stanley ranked number one in Global Announced M&A and number two in Global IPOs and Global Equity and Equity Linked at the end of the first quarter.

Notable transactions included: in Advisory, Morgan Stanley acted as advisor on the five largest transactions, including as exclusive financial advisor to WhatsApp on its $16 billion sale to Facebook.

This transaction reflects Morgan Stanley's continued leadership in the largest and most complex transactions in the technology sector; and as exclusive financial advisor to Suntory Holdings in its acquisition of Beam Inc.

for $16 billion.

This continues our leadership in cross-border activity as well as in Japan.

In Equity Underwriting, Morgan Stanley acted as joint global coordinator for the $2 billion IPO of Altice Group.

This is the largest ever IPO of a cable operator in AMEA.

Morgan Stanley also recently acted as lead financial advisor to Altice, [Numericable] on its acquisition of Vivendi's [fibre] unit SFR, including acting as joint bookrunner on its EUR16 billion of non-investment grade acquisition financing.

In Debt Underwriting, Morgan Stanley also acted as active bookrunner for Exxon Mobil Corporation's $5.5 billion offering of senior unsecured notes.

This transaction is Exxon's first US-dollared senior unsecured debt offering.

Advisory Revenues of $336 million declined 25% versus our fourth quarter results, due primarily to seasonality.

Announced advisory transactions were up significantly versus a year ago.

Equity Underwriting revenues of $315 million were down 24% versus the fourth quarter, driven by lower global market volumes and typical seasonality.

Fixed Income Underwriting revenues were $485 million, essentially flat to the fourth quarter as market activity remained at very high levels.

Equity Sales and Trading revenues, excluding DVA, were $1.7 billion, an increase of 13% from last quarter.

Revenues were strong across regions and products driven by higher client activity.

Cash revenues were up, driven by increased volumes in all regions.

Prime brokerage revenues were up significantly, driven by higher balances and robust client portfolio management activities.

Derivatives revenues grew as volatility trended higher.

Fixed Income & Commodities sales and trading revenues, excluding DVA, were $1.7 billion, up significantly from the fourth quarter.

Revenues increased significantly in all major products.

Commodities had broad-based strength across the energy complex, driven by extreme weather in North America and increased client demands.

Revenues outside of commodities were driven higher by seasonality and strength in credit products.

Average trading mark for the first quarter was $50 million, essentially flat to the fourth quarter.

Turning to Wealth Management, revenues were $3.6 billion in the first quarter.

Asset Management revenues of $2 billion were up versus last quarter, reflecting the benefit of higher market levels at the beginning of the period and positive flows.

Transaction revenues decreased 10% from last quarter, consisting primarily of commissions of $540 million, down 6% versus the prior quarter, due to fewer training days.

Investment Banking-related fees of $181 million, down 12% versus last quarter, reflecting the lower US Equity underwriting calendar, most notably with fewer closed-end funds.

And Trading revenues of $275 million, down 15% versus the fourth quarter, reflecting lower gains and deferred compensation plans.

Net interest revenue increased 2% to $539 million, driven primarily by higher revenues from our bank deposit program and continued growth in our lending product.

Other revenue decreased to $62 million from $110 million.

Net interest expense was $2.9 billion, down 3% versus last quarter.

The compensation ratio was 60% up versus the fourth quarter due to seasonality.

Non-compensation expense was $762 million, down 13% versus last quarter due to the absence of an impairment charge as well as continued expense discipline.

The PBT margin was 19%.

Profit before tax was $691 million.

Total client assets surpassed $1.9 trillion.

Global fee-based asset flows were $19 billion, a record level.

Fee-based assets under management increased to a record $724 billion at quarter end, representing 37% of client assets.

Global representatives were 16,426, essentially flat to the fourth quarter.

Bank deposits were $132 billion, down $1.6 billion versus the fourth quarter.

Approximately $108 billion were held in Morgan Stanley banks.

We continued to grow our Wealth Management lending balances and increase our penetration rates with our retail client base.

Our mortgage balances increased 10% and our PLA balances increased 9% and our committed undrawn PLA facilities grew at an even more rapid pace.

Investment Management revenues of $740 million were down 12% from the fourth quarter.

In Traditional Asset Management, revenues of $437 million were up 2% from the fourth quarter, driven by higher market levels and client flows.

In Real Estate Investing, revenues of $131 million were down 18%, driven by lower investment gains.

Merchant Banking revenues were $172 million, down 32% driven by a tough comparison to very strong investment gains in the fourth quarter.

Expenses were $477 million, down 6% from the fourth quarter due to declines in compensation and non-compensation expenses.

Profit before tax was $263 million, down 22% sequentially.

NCI was $54 million versus $46 million last quarter.

Total assets under management increased to $382 billion, driven by market appreciation and increased flow.

Turning to our outlook.

As we begin the second quarter, our investment banking pipeline is strong across all products.

M&A is particularly robust.

The pipeline is growing, with an increase in activity from AMEA and Asia.

On the financing side, the flow is healthy for both Equity and Fixed Income Underwriting.

With respect to sales and trading, overall economic and market conditions continue to be favorable for equities.

However, the challenges that weighed on certain parts of Fixed Income markets for much of the quarter persists.

On the retail side, trading activity is consistent with levels we saw in the first quarter, but we entered the quarter with a tailwind from higher equity markets.

In addition, we continue to have momentum with FA adoption and client penetration is increasing, an important driver of growth, profitability and increased earnings consistency.

Over the last several years, we've [judiciously] worked to reposition our businesses in a way that aligned with regulatory change.

We've made the tough decision, provided metrics to demonstrate our progress and have a suite of businesses that are complementary.

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

(Operator Instructions)

Your first question comes from Glenn Schorr with ISI.

Hello.

So I have a couple [parter] on commodities first.

Just if you could frame how much of a contributor was to FICC this quarter, whether it be relative to last year or prior peaks?

Obviously, something went very well there.

Well, there were a number of important factors in the overall FICC performance.

Strength in commodities, clearly being a big driver, given volatility in the market due to weather and robust client activity.

But as I noted, both had strength in credit corporates and mortgages.

And those continue to be strong areas for us.

So overall, it was up meaningfully.

It was the biggest driver in year-over-year performance.

Okay and I don't know if there's anything you can update us on -- there's -- one of the competitors sold a piece of their physical business.

You guys have been contemplating that.

A, if there's an update that and, B, in the quarter, how much of a contributor was that just for the thought process on a go forward?

Sure, to try and help you size it, it's -- you exclude the two physical oil businesses that we're selling.

Overall, Fixed Income was up slightly year-over-year on a percentage basis, so it's still up excluding those two physical oil businesses.

And then in terms of where we stand on those, we're continuing to work on the sale of [TransMontaigne] and we'll give you an update when we have something more to say on it.

Okay, That's cool.

You also mentioned and we could see it in the numbers, prime brokerage is doing awesome.

Curious on how you weigh that business doing as good as it's doing with the fact that you still have the lowest leverage ratio in the group and have some work to do?

So I heard your comments on what you can do into [risk land], but is there any pricing benefit that you can pass through on Prime Brokerage?

Just curious to how you balance that.

Well, I think they're really two different points within your question.

Prime brokerage is a gem franchise for us.

We spend a lot of time talking about how we manage our business across nine boxes, product on one hand, cash derivatives, and PB, and geography on the other hand, America, Europe, and Asia.

And we manage really intently within each box that over many quarters, I've talked about the importance of adjacencies, in particular with our PB clients.

The deeper we go with them, the deeper they go across our franchise.

So we think we've -- have a very positive, strong, mutually productive relationship with our PB clients and that's an important franchise for us.

If I switch to the leverage part of your question, in our view, we have a very strong clear path to improve our leverage ratio and it's consistent with the business strategy we've talked about.

The real levers are things that go to things like compression trades or [on the way to] rundown and spec so that's a very different answer.

It doesn't affect what we're talking about here on the PB franchise side.

Okay, cool.

I appreciate that.

Last one.

Without opening too many cans of worms here, I wanted to get your thoughts on all the focus on high-frequency and what it means for your Equity business.

How can you help us frame that?

That would be super helpful.

Sure.

Since 2009, Morgan Stanley has been very vocal with regulators and has been on the record about the necessity for changes to market structure to protect clients.

We've advocated for increased transparency and trading protocol.

You can see that in docs we filed with regulators as far back as 2009.

They're all in the public domain.

So we welcome ongoing enhancement to equity market structure.

We've been a very leading voice in this area for a long time.

And in fact, we've implemented protocol and governance consistent with this in our business.

And then maybe just to be annoying, the book mentions like a really big number for Speedway and I think it is -- controls a lot of volume.

I don't know if you want -- help us with what's the real numbers in terms of contribution or size that?

Well, just to clarify, what it is, it's an execution tool in our electronic trading toolkit.

It's consistent with offerings across the Street.

We make it available to all our clients, many of whom you're familiar with.

And the key to us and all we do is risk management.

Risk management checks that latency and latency is inconsistent with extreme speed strategies.

And also to clear up any source of confusion, it facilitates connectivity only to [mitigate] savings around the world.

It doesn't connect to any dark pool anywhere and overall, HFTs are not a meaningful driver of our business.

Okay.

That's good for me.

Thank you.

Your next question comes from Guy Moszkowski with Autonomous Research.

Thanks.

Good morning.

I would -- I noticed that the capital allocated to the institutional business came down by about $1.5 billion linked quarter.

Is that directly related to RWA reductions that you would have had in the Fixed Income business or is it more complicated than that?

And if it is, maybe you can explain to us what's driving it?

Sure.

It is more complicated than that but we did have a further reduction in risk-weighted assets in Fixed Income.

In fact, down to $199 billion as of the first quarter, down from $210 billion in the fourth quarter.

So, continuing to make progress there.

The way we calculate required capital is based on whatever the capital regime is in place at a point in time.

In this quarter, as a result of the regime change in particular, with the Basel I numerator moving to the transitional Basel III note numerator, that drove the capital reallocation.

The Basel III transitional numerator, by definition, has deductions that phase in over time.

So in managing the business, we look towards the Basel III fully phased-in lens.

So this is -- it's a lot of -- there are a couple of moving pieces.

Yes, we reduced the risk-weighted assets but this -- the biggest driver here at the table is the regime change.

Got it.

And if I can just relate the comment that you made about the increase in the old-style SLR in the quarter, which I think you alluded to about 30 basis points.

How does that relate to the target that you laid out back in January for a 30 or 40 basis point increase just from exposure, compression and the like?

Is that being driven by that or were there other puts and takes?

So there were a number of drivers.

We're -- as I said, we're still very comfortable greater than 5% in 2015 and with increasing returns of capital.

This quarter, in the numerator, we benefited from higher earnings and as we talked about in prior calls, that has, what I keep calling, a multiplier effect, because it reduces the deductions on DTAs and importantly, it also increases the investment capacity for those items that get into that 10% bucket, thereby reducing the numerator deduction.

In addition to that, we have been quite focused on mitigating some of the numerator deductions so you're seeing the benefit of that beginning to flow through and then in the denominator, of course, we're continuing with compression trades in RWA reductions, as I indicated.

Got it.

And then just to beat a little bit on the SLR horse, there has been a proposal made just in the month of March by Basel -- people assign different acronyms to it, but I've heard SACCR, which would be a standardized approach to counterparty credit, which I'm -- I've heard broadly, could be a plus as well.

And I was wondering if you had done any numbers on that preliminarily?

Yes, that -- as SACCR adopted, that would be about a 50 basis point benefit to the SLR and a 30 basis point benefit to the standardized ratio.

Wow, so it's quite meaningful.

It is.

And you're calling it SACCR.

Is that like a patented Morgan Stanley term?

You can use it if you want.

Okay, thanks.

(laughter) I guess the only other question that I would really have would be if you could -- we talked a little bit about commodities and the fact that Fixed Income would still have been up, or FICC would still have been up year over year even with the planned sales having taken place.

Can you give us a little bit more color on what you saw in the rates business in the quarter because obviously for banks that have a heavier contribution from rates and from the effects, so it's called the macro businesses, we saw much, much weaker results so far.

Well, look, I think that we -- and I said this -- and we saw the same headwinds you've heard from others with lower client activity.

That was a tougher market just given all that was going on in the environment.

For our rates business, it was down year over year, reflecting lower volumes but nice -- up nicely versus last quarter.

We are really focused on this centralized or federalized resource management across all of the macro product but it's been -- it was a tougher part of the market.

Got it.

So mix was just one of the more important differentiators for you guys, I guess.

It was.

As I said, it was commodities, it was credit, it was mortgage.

(multiple speakers)

Just one final question on Wealth Management.

A 10% increase in the loan balances late quarter is obviously strategically what we want to see but it is a very large percentage increase of what's starting to be a fairly sizable business.

How comfortable are you that your risk controls are where they need to be in what's technically been a tough mortgage market?

So the -- in close, again, we got a couple things going for us.

One is very low penetration with a very large client base.

We're meaningfully underpenetrated versus our peers and we've been slow to build this product precisely for the reason you flag, which is top of our list, which is ensuring tight proper credit risk management and all of the processes around it as well as ensuring that it's a good experience for our clients and our financial advisors.

So it's up a nice percentage.

I would say the other thing that's benefiting that is it's nice up -- it's up a nice percentage off of a small number.

We are continuing to see good growth in the mortgage side given this low penetration.

We're finding that as they see the product, are using it longer and increasing their penetration.

The credit standards are very tight.

FICO less than 50% LTV, 60%.

Again, it's with our client base, so we know the clients.

We have their assets here and the other gross area on PLA is a very -- is a highly overcollateralized, significantly overcollateralized product that I think you know.

It's security-based lending and again, it's all with our existing client base.

There's virtually no credit losses to date and risk management has been the driver across all of these businesses.

Great.

Thanks so much for taking the questions.

Thank you.

Your next question comes from Brennan Hawken with UBS.

Good morning, guys.

Good morning.

So one, just real quick one to clarify, I believe, Ruth, you said that your IB backlog is up.

Just want to make sure, is that based on year end because Goldman highlighted that their IB backlog actually shrunk since year end.

So our backlog is up across all products from yearend.

M&A, as I noted in particular, is strong and the pipeline continues to build.

I think you can see that just from the flurry of announcements that have occurred since quarter end.

No, it's great.

It's just good to see continued momentum there.

And then another one, the CCAR was sort of a surprise here and to some firms this year.

And I guess the Fed highlighted some process improvements in their comments.

Did -- have -- do you guys have any outstanding process improvements with the Fed?

And was there anything in that CCAR process that jumped out that investors should be aware of?

So I think the whole industry is waiting for a formal -- that feedback process, but I think we generally received other feedback about our processes.

As James said in his opening comments, we've invested meaningfully in the process.

And for the last several years, we had something we call our CIP Program, Continuous Improvement Program.

So regardless of what we even hear back, we look to up the approach and the analytics each year and that process hasn't stopped.

We continue to raise the bar for ourselves on the overall process.

We for good about processes around CCAR.

Terrific.

And the -- is it your view that the Fed feels good about your processes as well?

I understand you can't -- based on the information you received from the Fed, is that your perception?

Brennan, I don't think we want to get into the business of trying to explain what the Fed feels.

All that matters to us is we put in probably our buyback and dividend and they're approved and we're continuing down the path that we laid out.

Appreciate it.

Just trying to maybe get some insights into what is proving to be a very murky process for all of us on this end.

Understood.

And then is it right that you guys have slimmed down your management structure in Wealth Management?

I think we saw a reduction in the number of divisions and regions.

And maybe could you help us think about whether that's driven by potential expense [basis] or whether that's done to slim down decision-making and the like or maybe help us understand that move a little bit?

I think it's probably what I would describe as the last gas past the integration.

This is been a four-year integration and now that the business is very stable, I think the FA headcount was flat to maybe modestly up.

The new leadership under Shelley O'Connor determined that the -- she could make some changes there to just make the organization fast to moving a little more nimble, a little more efficient than -- and put the team in place to make that happen.

Great.

Thanks a lot for taking the questions.

No problem.

Your next question comes from Mike Mayo with CLSA.

Hi.

So to the extent that prime brokerage has performed better, can you give us any numbers around that?

What are the prime brokerage revenues this quarter versus a year or two ago or can you give us some market share figures around your prime brokerage business?

Well, as you know, we don't break out components within businesses, but clients balances and revenues are all up quarter over quarter and year over year.

Okay.

And how does it compare to the time of the crisis?

I remember a lot of clients were leaving Morgan Stanley and then they'd come back.

Have you gotten back to pre-crisis levels?

Do you expect to get back there?

These are the highest balances that we've had since the crisis.

We continue to nicely steadily build.

Okay.

And shifting over to Wealth Management you're redeploying the deposits.

What are the yields and margin that you're getting as you deploy those deposits?

So last quarter in the deck we laid out a couple of things that we thought it was important as everyone is doing their analysis, so we'd show you what the asset growth would be and the changing mix over time as we move from cash into AFS and one of the deployment, it included yields there, current yields and then if you just follow the forward yield curve.

Those really haven't -- we're getting the benefit of the improving mix but yield by product hasn't really changed much, as you can see with the rate environment but really the upside to us is the ongoing deployment across the portfolio.

Separately, I'm looking at your deck from January where you said you wanted to drive ROE above 10% in Fixed Income & Commodities.

Did you exceed that in the first quarter and how is that progressing?

Well, we've certainly had progress because you can see the revenues that I just provided, the RWAs -- so we have higher revenues, reduced RWAs now down to $199 billion.

It's relative to the $210 billion last quarter and to about $250 billion-ish last year.

So we're certainly getting better returns in that business and our view is that we have more to do there.

As we said, when we look at ROE and we 're managing to ROE in that business, it's about revenues, expenses and capital optimization and the team is continuing to focus on all of those.

Can you give us any update on the run-off of legacy assets in Fixed?

I think you sort of get that, Mike, in the RWA rundown.

So the -- that's a combination of passive and active and part of the active is how trades are structured and part of it is actually running down as much as we can as rapidly as we can.

So if you go back to third quarter of 2011, we had $390 billion of risk-weighted assets in our Fixed Income business and as you know, we keep bringing forward our target in time.

We brought forth that $180 billion from 2016 to 2015 and what that really, is it captures is your question we're running down those legacy assets as rapidly as we can.

We are pleased to have that deadweight capital pushed out of the business.

And then my last question, your ROE target is for a 9% ROE; in this quarter, you're still below that.

Can you either reaffirm or give us a timeframe when you think you'll achieve your ROE target.

I'm not saying a return on tangible common equity, if you give that to us, too.

Right.

So on the -- I would say ROE, we're looking at a ROE in excess of cost to capital, we're talking about a 10% ROE.

I appreciate your looking at the building blocks we provided last quarter.

We did see progress across our businesses and our view is that the upside continues to come from the bank.

It's in its early days and given the opportunity with the bank and moving again from overweighted in cash to deployment into loans as well as AFS, there's a real benefit there, the continued focus on expense management.

And then the ongoing higher returns to capital, that 9% number is obviously without higher capital returns.

We're pleased to have doubled our dividend, doubled our share repurchase program and as James said, our intent is to continue increasing return to capital over time.

I'd say just to be clear, so now your target -- since you're being -- since you're able to return capital now, your target is now 10% return on common equity?

Our target is -- consistently been 10%.

What we tried to break out last quarter was what it would be without higher return to capital and then the return to capital takes it above and beyond that.

But we've been continuing to be focused on 10% return on capital as the next stop along the way.

Okay.

In this quarter, return on tangible common equity was what?

9.3% -- 9.8%.

I apologize, Mike.

9.8%.

Okay.

9.8%.

Okay, thanks a lot.

Thank you.

Your next question comes from Steve Chubak with Nomura.

Good morning.

I wanted to discuss your 10% FICC ROE target for a moment.

Clearly, the progress you've made mitigating RWA has been nothing short of extraordinary, which has driven required capital levels down pretty meaningfully.

What I'm wondering is given the tough treatment for derivatives under the modified SLR approach, even when we contemplate some of the future benefits from various forms of mitigation, whether it's CBS maturity matching SACCR model approval, et cetera, it appears that required capital for FICC, under the modified SLR calculation could still be pretty materially above that under the risk-based framework.

So essentially, I just wanted to clarify that the 10% FICC ROE target, which you've highlighted in the past, is still achievable, whether one evaluates under a leverage or risk-based lens.

Yes, and we look at our businesses under a risk-based and leverage-based capital lens now.

It's the current leverage base capital world.

But again, we have the added lens of what's at the SLR and business unit leaders have the balance sheet under that SLR lens and that's helping really put a spotlight on the opportunities for mitigation and the areas where mitigation is absolutely key.

So as you pointed out in your question, there are additional work streams that can be added to that which we discussed last quarter, with the inclusion now of net long CDS so that opens up an added work stream.

So we do see a good path forward to greater than 5% under the SLR, including higher returns of capital.

And yes, we hold ourselves accountable for that greater of risk-based capital, leverage-based capital.

Okay, thanks.

That's really helpful.

And one of the things I wanted to inquire about was the Fed clearly stated its plan to consider applying additional capital surcharges on wholesale borrowings.

The details have been disclosed as far regarding the methodology or the potential approach remains somewhat murky.

I wanted to see if you had any additional thoughts or insights regarding how that rulemaking could potentially shape -- shake out.

So you're right the rule is -- the discussion at this point is unclear.

I think the terms that have been used, such as short-term wholesale funding is one phrase.

We talk a lot about the difference between short-term wholesale funding and durable funding.

And we've invested quite meaningfully, as we've talked about on many calls, to term out our secure book and that's built-in durability to -- it's been evident in all sorts of periods of market stress, market stress in Europe and we think that liquidity durability is important.

Our LCR, we're well north of 100% requirement, in large part, because of all that we've done, although we've invested, it doesn't come for free.

It's expensive to term it out and get that durability but we have a LCR that's probably been at 100% for that reason.

And we're very supportive of the Federal Reserves focus on CLAR, the mirror-tested CCAR focused on liquidity given all we've done to build in what is a very durable approach to liquidity and funding.

So don't know which way it goes because these terms, some terms are being used in a sort of broad way, but again, given what we've done with our capital stack, we feel that we've built in a lot of the durability that is what regulators looking for.

Okay.

And I guess one more question on the SLR proposal of -- parsing up the language in the Fed's document, it highlighted two key-sized criteria for identifying systemically important banks, one being GAAP assets in excess of $700 billion and AUC in excess of $10 trillion.

And based on your interpretation of that proposal, do you believe that the [GSID] classification can potentially be avoided for those banks which operate below those designated thresholds?

And specifically would you consider optimizing your balance sheet size if it enabled you to potentially bypass a tougher 5% leverage role or is that simply not a viable strategic option given growth initiatives at the bank and other potential opportunities that could -- that will drive future balance sheet growth?

Well, given the -- our suite of businesses and the strength of these businesses, we don't see going below $700 billion as practical.

In particular, we see the opportunity to mitigate a number of the items as I've already discussed, both the growth of the denominator and reduce some of the deductions in the numerator which are accretive to the SLR.

If you look at some of the relationship across our various businesses, so for example, as I talked about on prior calls, within our investment banking franchise, a quarter after quarter after quarter, we've had about $500 million of Fixed Income Underwriting.

And that's some -- a service that our clients want.

It's accretive to the overall relationship.

It's accretive to the bottom line for the firm.

And it does require that we have a corporate credit capability origination and distribution.

So there are a lot of linkages between the businesses increasingly so with the Wealth Management business.

And our view is that when we look to the single most important thing which is how to we drive ROE for this firm, given there's a path to increase the SLR, it enables us to keep the suite of products as we define them and as we've reshaped what we're doing in Fixed Income, our judgment is that the best way to drive ROE is with the suite of products and we don't see how that would take us lower than $700 billion of assets.

Okay, understood.

And just one final one on the numerator upside you had discussed regarding the SLR.

We really appreciate the helpful detail in terms of the individual components that you disaggregated, driving the 80 basis point build in the SLR over towards that 5% goal.

I was hoping you could at least clarify the level of incremental preferred issuance that's assumed to help close that gap, just to get some clarity on those which will impact future earnings versus those which will have essentially be earnings neutral.

Sure.

So the -- as you saw, we did about $2 billion of preferred last year; that was in two transactions.

We will continue to optimize our capital stack and do think that preferred plays a valuable role in that.

So we're going to continue to leg into more over time.

I think when you -- the two that we did last year, you can see that we tried to size them, modestly sized them, properly sized them, whatever word you want to use for it and we'll continue to leg into more over time.

So that is another addition to the numerator.

I would say that what we're quite pleased about is the pace with which we've been able to mitigate a number of those numerator deductions and that investment basket has within it a couple of opportunities to continue to mitigate some of the numerator drags.

That's great.

Thank you for taking my questions and congrats on a strong quarter.

Thank you.

Thanks.

Your next question comes from Matt O'Connor with Deutsche Bank.

Good morning.

Good morning.

Can you update us on the expense efforts?

Obviously, good revenue this quarter so expenses were higher but it sounded like in the past, that there's still some opportunities for them to FICC to manage the expense base.

I was hoping for an update either on FICC expenses or just overall expenses.

So we're very much on track for the expense target ratio that we laid out at the end of 2012 going into 2013.

And just as a reminder, at the time we had an 84% expense ratio and with the $1.6 billion reduction, assuming revenue is constant so you don't have to adjust for the noise around activity base revenues, we said we get to a 79% expense ratio excluding elevated legal expenses and if there were any write-offs and that would be by the end of 2014.

This quarter we're at a 75% expense ratio excluding DVA.

So I think that underscores is expenses -- very much part of the DNA of all of our business leaders.

We have the balance of the year to continued focusing on expense reduction but it's built into programs across all of the various businesses and we're constantly looking for ways to add to the program.

It doesn't end this year; it keeps going.

It's just business as usual at this point but we're pleased that we're in a 75% expense ratio relative to that 79%, with still more time to get to the end of the year when we said we would hit that number.

Okay and as the revenue environment improves, a little bit tougher from here and say the markets businesses, do you feel like you can still maintain the expense ratio around here or still it back towards the 79% goal?

Well, so what we indicated was that we would be at a 79 -- back at the end of 2012, when we laid out the $1.6 billion, we set a 79% expense ratio assuming revenues were flat to 2012.

And again, depending on where the world goes, I think what we've evidenced over the last many years here is that we don't stand still.

But we are pleased with the way we're starting off the year.

Okay, and then outside of the core expenses, it didn't seem like there was any unusual litigation this quarter.

I know it's really hard to tell looking forward but any thoughts on how we should be modeling out litigation expense from here?

Well, you sort of answered the question.

It is lumpy to see the -- our view is that litigation, that's really a headwind for the industry.

We're pleased to have FHFA behind us, but legal can be lumpy as you've seen.

Okay and just switching to the Wealth Management, the 19% PBT was in line with what we had, had for this quarter.

Just any updates on you feel about the 22% to 25% target by end of next year?

We still feel very good about that and I'll hold that as something that we will -- we are looking to deliver.

As you know, that doesn't assume any benefit from rates in the environment.

We've got a number of factors that are taking that higher.

I think one of the important ones, really, it's what we're continuing to do with lending product and the benefits from the growth in lending and you can see the ongoing momentum there.

And what we're pleased about is that we've always said we would have a bit of a tailwind given we're underpenetrated with our clients and what we're seeing is as FAs start working with our clients with lending products, they continue to further penetrate their client base and we see much more of a take up.

So that is an important element of it along with back to your prior question, the continued focus on expense management.

Okay, all right.

Thank you very much.

Thank you.

Your next question comes from Michael Carrier with Bank of America Merrill Lynch.

Thanks for taking the questions.

Maybe just follow-up on the Wealth Management business.

You mentioned some seasonality in the first quarter versus the fourth quarter.

I think fewer days.

Maybe just a little color on the comp.

Matt just asked about the margin but how that impacts it and just the outlook as we kind of go throughout the year just assuming less seasonality.

So as you said, seasonality comes from a couple of things.

One is that several fewer trading days relative to the fourth quarter.

There's also seasonality on the comp line because FICA is a first quarter event.

So when we compare our 19% quarter this year to a 17% quarter last year, that's really isolating the difference in quarterly seasonality.

And a nice pickup from the 17% last year to the 19% this year.

What we also saw in the first quarter of this year was some lower issuance activity, in particular in closed-end funds.

And what's most -- of greatest interest within the Wealth Management system is a US new issue product and in particular, closed-end fund.

That was just a bit lower.

We had a nice underwriting calendar but it was more skewed outside of the US and very little closed-end fund activity.

So when we -- as we're looking forward to the second quarter, we have a couple tailwinds going into the second quarter.

Asset management fees will be modestly higher given the starting S&P level and we're clearly focused on the transaction volume, which is a function of the environment and the new issue calendar.

But the pipeline is stronger in the US.

It's clearly too early to tell but it's stronger in the US.

And then in aggregate, expenses should be a bit lower given the comp point I made, FICA being a first quarter event.

And non-comps do tend to be a little bit higher in the second quarter but overall, should result in an improved margin here.

Okay, thanks, and then just as a follow-up, just on the trading side, whether it's on Equities or Fixed Income, anything like lumpy this quarter?

And then any color, I know it's still early but on the Fixed Income side, in terms of the OTC markets transitioning onto SEFs, like any color there?

Thanks.

So as it relates to -- nothing really lumpy to know.

We had -- there was a good volume of activity, prime brokerage activity with portfolio rebalancing, just given volatility and equity markets.

And then in terms of the impact of SEFs on the market, we really think the lower volumes last quarter were related to broader market events and in particular, lower volumes in macro, as I've already commented on, given all that's -- that was going on globally.

And markets lacked condition; they traded in a tight range.

[Spring] product is better but macro was weaker and we think it's very tough to disaggregate the extent to which, if at all, that was really SEF-related, and we think that it was swamped by what was going on in macro.

Your next question comes from Jim Mitchell with Buckingham Research.

Good morning.

Just a quick follow-up on the expense question.

I just want to check, as you think about your closest competitor on an apples-to-apples basis, they're around a 70% expense ratio.

You guys are 75% in the strongest quarter, target is 79%.

Do you think this is an interim target and you can get more as you move forward as revenues get better and/or you still have more expense leverage elsewhere?

Can you kind of walk through that?

Mike, obviously, we can't comment on any other peers and we each have different business mixes.

I'm often asked the question about our comp ratio, as an example, and the comp ratio within Wealth Management is off of a formulated grid, so it starts higher than their institutional securities business.

And is it trending lower?

Yes, it absolutely is trending lower.

We've talked about that quite a bit.

It will continue to benefit from the growth in lending product but you've got some real apples to oranges comparisons if you just start with that line.

As it relates to our non-comp expenses, we're continuing to see benefit across the franchise, the ability to use technology more broadly across the franchise, as an example.

And so we are focused on the items that we identified internally as part of the 2014 plan.

As I said, we're continuing to add to it because it's part of the DNA within all of the business unit leaders to look for opportunities to be efficient, whether it's working across divisions or in any other approach to the business.

But I would just go back to my comp differentials so it's part of it is also business mix.

Okay --

And to be clear, those business mixes have different capital requirements.

There's a whole host of different elements that go along with it so when we talk about ROE, it's revenue expenses and capital.

Fair enough.

I was just talking about the institutional business but I hear your point.

Maybe just quickly another question on the dividend.

I think James had mentioned looking at a payout that would approximate or get close to the net income of the Wealth Management business.

But as the business grows, it seems like you would start to -- if you were to approach that level of dividend payout, you would exceed this 30% soft cap at the Fed.

Do you think that is doable?

I think -- I don't want to get into sort of hard projections but what we're indicating is that with our business mix now with half the firm's businesses essentially coming from a relatively stable annuitized set of businesses in Wealth and Asset Management.

One thinks about your dividend payout a little bit differently as it relates to your ability to afford it coming from things that you know are fairly predictable.

Obviously, at that -- when you aggregate it all, you come up against what an appropriate payout levels are at a regulator level and that's a different question, very simply, indicating we believe we have capacity given our business mix.

Okay.

That's helpful.

And then one last quickie on the physical oil sale, you mentioned sort of a -- gave a guide on the revenue impact.

What would be the net income mix impact?

I'm assuming it's a lot smaller.

The -- in terms of the businesses that are -- that we are looking to sell, as I indicated last quarter, that one of the things that was quite intriguing was precisely that is the -- more modest PBT and we're reducing risk-weighted assets pretty meaningfully.

So it's ROE accretive?

Yes, and when that's obviously over time.

You have to transition these things.

Sure, great.

Okay, great.

Thanks.

Your next question comes from Devin Ryan with JMP Securities.

Good morning.

How are you?

Good.

I just have a couple follow-ups on investment banking.

So I guess first, with respect to M&A, the announced activity in North America has actually recovered to the strongest levels since 2007.

But you guys have been noting on the last couple calls here that AMEA more recently has been feeling better.

So I just want to get some thoughts here.

Does it feel like we're still in a distressed asset sales cycle in Europe or are you starting to see more traditional strategic M&A accelerating there, which I think would be necessary to see a real recovery in activity in that region?

Well we've seen some broadening across industries of activity and what we still haven't seen is a real growth in the number of deals.

But if you look at the dollar volume in AMEA, it's up and the acquired activity out of AMEA, across-border activity is up.

Again, it's early days, but what's very positive is whenever a negative trend reverses itself.

And if comparable to the GDP growth in AMEA is still modest but it comes negative to positive, then we're starting to see the knock on benefits to some of the activity levels.

I would just add the largest economy and the economy that's doing best over there is Germany.

Having made a couple of trips recently, I think the corporate CEOs are still quite conservative in their views.

So there will be a tipping point here, obviously, with what's coming on with Russia and Ukraine, that's putting a damp, particularly on the German CEO view -- until we get better clarity there but I think there will be a tipping point.

We're not there yet.

There have been isolated transactions across the UK, Spain, and other places.

Great.

Appreciate that color.

And then Fixed Income Underwriting results have obviously also remained really resilient.

And I know it's still an attractive rate environment but are you starting to see a mix shift there in terms of what products are really driving the strength.

Has there been any change in mix?

There has in a sense that it has been much more of a refinancing story and now we're starting to see the benefit of the higher levels of M&A.

In the first quarter, I think what was notable is there were a lot of deals across investment grade high yield leverage loans.

It wasn't as though they were some really big chunky items that drove the quarter.

It was a balance across the various products.

But what you are starting to see is much more of this is event related and we think given the pipeline in M&A, that bodes well for continuation of strong debt underwriting notwithstanding the fact that we've had a long string year of strong quarters of debt underwriting.

Okay.

And I guess just with respect to how that ties in with FICC results, there's a flurry activity corporate issuance in March.

I'm try to get a better understanding around the results, the strong results within credit?

And maybe how much of that was a function of issuance started to pick up towards the tail end of the quarter.

Just any color around maybe how credit specifically progressed throughout the first quarter.

Credit, on the Fixed Income side, was pretty consistent throughout the quarter.

I think if you go back a couple of quarters ago when there was more volatility in credit markets that you saw was notwithstanding a strong new issued calendar.

It was pretty much buy-and-hold and you didn't see the follow through to secondary trading.

You're seeing more of that follow through to secondary trading now.

And hopefully that continues in particular given the volume of what we would expect would continue to be new issued product on the Fixed Income side.

Assuming the M&A pipeline continues to hold up and we see the execution continuing as it has these first couple of weeks in the quarter.

Great.

Thank you.

Thank you so much for joining us today and we look forward to speaking to you at the end of the second quarter.