摩根士丹利 (MS) 2016 Q3 法說會逐字稿

Good morning. This is Sharon Yeshaya, Head of Investor Relations. During today's presentation, we will refer to our earnings release and financial supplement, copies of which are available at www.MorganStanley.com. Today's presentation may include forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release.

This presentation may not be duplicated or reproduced without our consent. I will now turn the call over to Chairman and Chief Executive Officer, James Gorman.

Thank you, Sharon. Good morning, everyone. Thank you for joining us. After a challenging end to 2015 and, frankly, difficult start to this year, Morgan Stanley is back on track and delivered solid results in the third quarter.

The major strategic goals we outlined are trending in the right direction. Wealth Management's pretax margin hit the lower end of our 23% to 25% range for next year. Fixed income is on course for an annualized quarterly revenue run rate of $1 billion per quarter, and Project Steamline's progress is evidenced in our 73.3% efficiency ratio this quarter. The 9% to 11% ROE target for next year remains our focus.

Traditional businesses of strength, namely equities and investment banking, remain solid. Additionally, Investment Management rebounded from its underperformance a year ago, though more progress needs to be made.

We are comfortable with our strategy and competitive positioning, but by no means are we complacent. We have much more work to do. On the business side, the expense management program has to run its full course. Fixed income needs to evidence continued consistency. And our Wealth Management business needs to adapt to ongoing changes, such as DOL and digital innovation.

On the regulatory front, we need to successfully meet our obligations that include resubmitting our capital plan and addressing shortcomings in our recovery and resolution plans. Furthermore, we have to insure we are prosecuting our business optimally, given the proposed inclusion of the GSIB buffer into CCAR, and any other regulatory changes. The Firm is well-positioned to move past these challenges and then focus on growth opportunities.

Finally, we must remain extremely vigilant about our collective actions, and constantly reaffirm Morgan Stanley's core values. Putting our clients first and doing the right thing is central to our culture. If we embrace these simple objectives every day at work and every time we face a decision, I am confident that the inevitable outcome of these efforts will be achieving our financial goals.

Needless to say, we can never control for all the vagaries of market and geopolitical uncertainty, but our job is to remain nimble as circumstances warrant, and mitigate risk when called upon. Our senior team is battle-hardened, loyal and highly motivated to succeed. I'm proud of the way they are leading our employees through these ever-changing times, and I have every confidence they will continue to do so. I'll now ask Jon to discuss this specific quarter in much more detail.

Thank you, James. Good morning. The third quarter results demonstrated progress against the strategic objectives we outlined earlier this year. While slower summer markets generally impacted client activity and volumes, our business mix generated solid results. For the quarter, we reported Firm revenues of $8.9 billion, unchanged versus the second quarter. PBT was $2.4 billion and EPS was $0.81, a sequential increase of 8%. The results yielded an 8.7% ROE.

Before discussing the businesses performance, I want to touch briefly on the progress we have made on Project Streamline. We remain on track to achieve our objective of reducing expenses by $1 billion by year-end 2017 on flat revenues. Year to date, non-compensation expenses have decreased by approximately $800 million or 10% versus the same period last year. While some of that benefit is related to lower revenues, the vast majority of the 200 expense initiatives identified internally are yielding results and will continue to be carried out through year-end 2017.

We continue to leverage our global centers of excellence, and have hired more than 650 employees in lower-cost locations. The vast majority of these hires have been offset by a corresponding reduction in the headcount in our core locations. We are progressing towards our target of hiring 1,250 employees in our centers of excellence through 2017.

We have begun to recognize savings from shutting down the two North American data centers, and are on target to close the remaining two next year. Further, last year's restructuring of fixed income sales and trading continues to be a tailwind for the overall non-compensation expense base.

In addition to the meaningful divisional headcount reduction, we have also realized savings in operations and other support services. In addition to support service efficiencies, our streamline targets were predicated on compensation savings and lower litigation spend.

Year to date, our ISG compensation to net revenue ratio was 36% compared to 38% over the same period last year, excluding DVA. Litigation expenses have also decreased year over year. Our targets continue to assume that we will not see any new outsized litigation expenses or penalties.

Our CCAR resubmission, as well as potential future costs associated with Brexit, will serve as headwinds to Streamline. The CCAR resubmission has demanded resources, both people and money, and will remain a medium-term expense. Despite these cross currents, we are on track to deliver the $1 billion reduction in expenses by year-end 2017.

Now to the businesses. Our Institutional Securities franchise performed well in the third quarter. We showed leadership in our businesses of traditional strength, equity sales and trading, advisory and IPOs, while continuing to make progress in fixed income sales and trading.

ISG net revenues were $4.6 billion, essentially unchanged on a sequential basis. Non-compensation expenses were $1.5 billion for the quarter, up slightly on a quarter-over-quarter basis, but down versus the prior year. Compensation expenses were $1.7 billion. And year to date, our ISG comp ratio is 36%. We remain disciplined on compensation and are committed to our target ratio of less than or equal to 37%.

In Investment Banking, we generated $1.1 billion in revenues, in line with our Q2 results. Year to date, we were number one globally in IPOs and number two in announced M&A, completed M&A and equity and equity-linked offerings. Pipelines are stable and markets are generally constructive, but as one would expect, the timing and pace of future deals will be a function of the market backdrop, issuer confidence and investor appetite.

Advisory revenues for the quarter were $504 million, up 1% versus Q2 2016. M&A-announced volumes are running approximately 35% below last year's heightened levels, as lingering uncertainty and increased regulatory scrutiny have weighed on activity. However, the pipelines remain healthy, and clients are engaged and interested in discussing strategic transactions.

Equity underwriting revenues were $236 million, down 11% versus Q2. Debt underwriting revenues were $364 million, up 6% sequentially. Equity underwriting activity remains well-below historical levels. We saw a slight pick-up in IPO activity toward the end of the quarter, and we will have to see if that trend continues.

In equities, we expect to be number one globally. Revenues were $1.9 billion, representing our best third quarter in recent history, with solid results across regions. Revenues were down 12% versus a strong second quarter, impacted by a lack of specific macro events, a muted underwriting calendar and light volumes that are traditionally seen over the summer months.

Third-quarter results were driven by continued strength in derivatives, as performance was aided by a number of meaningful corporate transactions, underscoring the collaboration and cooperation across our investment bank. Results were offset by a sequential decrease in cash revenues on lower volumes and lower prime brokerage revenues, driven by seasonality.

Fixed income sales and trading had a solid quarter, with revenues of $1.5 billion, up 14% versus the second quarter. A more constructive backdrop in the last two quarters resulted in an improved trading environment. The benign credit environment, with tightening spreads broadly, and in Europe in particular following the Brexit vote, yielded stronger sequential performance in corporate credit. SPG also benefited from a favorable credit environment. And increased volumes in agency trading further benefited our micro businesses.

In macro, we witnessed an increased level of client engagement in rates, largely attributable to divergent expectations around central bank policy. Fixed income RWAs were $124 billion, and SLR exposure was $344 billion at September 30. Fixed income revenues year to date are $3.6 billion.

We remain comfortable with our objective of maintaining the revenue footprint we had over the last few years. This restructuring is a multi-year process, and we remain focused on supporting our clients and delivering results.

Other revenues were up versus the second quarter, primarily driven by gains on our relationship and event-held-for-sale loans as a result of an improved credit environment. Lastly, average trading VaR for the third quarter was $42 million, down versus $46 million last quarter and $53 million last year. The derisking of our balance sheet as we continued to adjust the composition of our inventory, contributed to the reduction in VaR.

Wealth Management performed very well and continued to provide stability in the third quarter. Net revenues were up 2% to $3.9 billion, which is a record for the business. The PBT margin was 23%. Despite retail investors remaining cautious, we have good momentum in this business.

Total client assets increased 3% sequentially to a new high of $2.1 trillion. Fee-based assets increased 4% to $855 billion, which is a new high both in absolute terms and as a percent of total client assets. The increase included $13.5 billion in asset flows. These trends position us well for 2017.

Asset management revenues increased 2% quarter over quarter, reflecting positive flows and generally higher indices. Net interest income was up 7% sequentially and 18% year over year. The sequential increase was attributable to both loan growth and lower amortization, driven by a slowdown in mortgage prepayment fees. Bank lending balances were up approximately $3.5 billion quarter over quarter, and $11 billion year over year, on track to meet our lending goals.

Transactional revenues of $791 million this quarter were largely unchanged from Q2, but down sequentially when excluding the impact of mark-to-market gains on our deferred compensation plans, as client engagement remains subdued. Total expenses were essentially flat on the quarter. Non-comp expense were down 3%, reflecting continued execution of our expense initiatives, notwithstanding continued investment in our digital platforms and enhancements to our infrastructure to insure compliance with DOL.

Investment Management saw stable asset management fees and less volatility in the investments line. Total net revenues were $552 million, down 5% quarter over quarter. AUM grew to $417 billion due to market appreciation and positive flows, primarily in our liquidity products as a result of money-market reform. Asset management fees for the quarter were $508 million, essentially unchanged versus Q2 2015. Investment revenues in the quarter were $51 million, essentially unchanged versus last quarter, reflecting a more stable investing environment.

Overall expenses were down slightly, 2% quarter over quarter, driven by lower non-compensation expenses. We currently have approximately $2.3 billion of investments in, and relationships with, legacy-covered funds subject to the Volcker Rule across the Firm. While we expect to request additional extensions for the overwhelming majority of these investments, we continue to consider various alternatives to be in compliance with the rule, including sales, redemptions and liquidations where the amounts we ultimately realize in these investments may be less than their current carrying values.

Turning to the balance sheet, total assets were $814 billion on September 30, down from $829 billion on June 30. The spot decrease was primarily due to a redesign of our Wealth Management client suite -- excuse me, client cash suite program, in light of money-market reform, and a decrease in Firm liquidity following Brexit.

Pro forma fully phased-in Basel III advanced RWAs are expected to be approximately $368 billion, essentially flat to the second quarter. Our pro forma fully phased-in Basel III advanced Common Equity Tier 1 ratio increased approximately 20 basis points to 15.9%. Our pro forma supplementary leverage ratio for the quarter was up approximately 10 basis points to 6.2%.

During the third quarter, we repurchased $1.25 billion of common stock or approximately 41 million shares, and our Board declared a $0.20 dividend per share. Our tax rate in the third quarter was 31.5%, and going forward, we continue to estimate a tax rate of 32%.

We have good momentum in our business, and have made demonstrable progress towards our 2017 9% to 11% ROE target. That said, we have more work to do. We must continue to execute on the plan we laid out at the beginning of the year, including the implementation of our Bank strategy and focus on expense management. We also continue to invest in our businesses through digital offerings, electronic trading capabilities, preparation for DOL and additional regulatory conformance.

We will continue to focus on the levers within our control, and we feel confident that our ROE target is achievable. Currently, markets are constructive, but both markets and investor sentiment will be impacted by some major events on the near-term horizon, including the upcoming US election, the outcome of fed policy action, and the Italian referendum, to name a few. Closure around some of these risk events will be an important factor for investor conviction and corporate confidence. With that, we will open up the line to questions.

(Operator Instructions)

Our first question comes from Brennan Hawken with UBS.

Good morning. Thanks for taking the question. One, I guess starting out on FIC, really encouraging to see the solid back-to-back results here this quarter and last. Can you help us understand whether or not there may be -- might have been some changes to risk management that has gone along with the new leadership team? And maybe could you have any stats you could share behind it? Maybe inventory loss stats or something along those lines to support maybe a higher baseline result, or at least less volatility?

Sure, I'll take a try. I think when we set out on this restructuring, what we said is, we wanted to have a credible and critically sized business that was relevant to our clients and supported adjacencies that exist within our ISG franchise. For example, leverage finance with our M&A business. We also said we wanted to maintain the revenue footprint while reducing the balance sheet to capital the expenses and the headcount in this business.

We're three quarters into it, Brennan. We've generated $3.6 billion of revenue year to date, so that puts us on track to maintain our revenue footprint that we saw over the last couple of years. I think the success that we've had has boosted confidence, and the team continues to gel. But it is early. This is good results for the quarter, but we need to do this over multiple years, not multiple quarters.

I think the leadership has started to gel and bring the sales and trading businesses together, consolidating as you said, the risk management and some of the infrastructure support behind that. And we've seen some real learnings from that experience, and I think that's been a positive from a results perspective. But this quarter also benefited from just a good backdrop, particularly for our businesses around the credit and SPG line items. We saw tightening spreads, better environment in Europe on ECB buying, better distressed trading volumes, better volumes in SPG. So a good backdrop and good performance against that.

That's helpful. Thanks, Jon. Can you give us a sense -- is it possible to give a sense about how much you guys might guess the positive environment helped results this quarter? Or is that just too difficult to try to tease out?

Any question where you ask if you want me to guess, I'm going to have to say, no thank you.

All right. And then shifting gears onto the Wealth Management business, can you share any plans that you might have around fiduciary rule compliance? A very large competitor of yours has confirmed their direction, which is to not use the BIC. And so curious about what insights you can give into your approach there and whether or not you see potentially divergent policies as a business opportunity here as we move forward?

Why don't I touch on that? Firstly, the team is going to be coming out making some announcements over the next couple of weeks. So Brennan, I won't get ahead of them.

But you know what? I think it's fair to say our Firm view is that optimizing choice for our clients, giving them a choice of how they deal with the Firm, services they access, how they pay for those services, is critical to how we operate as a Firm. At the same token, obviously we're operating under whatever the regulatory constraints are. But choice has been a fundamental guiding light for the Firm, and that is unlikely to change.

Okay, that's very clear. Thanks, James. And then I guess one more question I would have is also on Wealth Management. We saw the deposits drop quarter over quarter. And isn't it that Q2 is sort of a soft base to build off of, given the taxes? So can you help us understand what drove the change in deposits this quarter versus last, within Wealth Management? Is there any shift happening there?

From a fundamental perspective, there is no real shift in sort of client behavior. As I mentioned, Brennan, in my prepared remarks, that we did change our client cash management suite program. Because of money-market reform, we had clients that were in prime funds that were going to go to a floating NAV; and with the gates and so forth, we did make a change in sort of how we sweep deposits, based on thresholds and client preference, first into BDP and then into government funds.

So that had a slight decrease overall, but it did actually improve the liquidity of those deposits, as uninsured went down and insured went up. But you know, the BDP number is relatively flat quarter over quarter. So we haven't seen any major change in behavior. And as I said before, it's still pretty subdued in terms of the investor sentiment.

Okay, terrific. Thanks for clarifying that. Much appreciated.

(Operator Instructions)

Our next question comes from Glenn Schorr with Evercore ISI.

Thank you. Jon, two quick follow-ups from some of the comments you made earlier. One, I appreciate all of the color you had on Project Streamline. I just want to make sure -- can you give us a number of what of the $1 billion is in the current run rate, or what's left?

And then your comments around, as we approach the July 2017 deadline on Volcker compliance, I appreciate the potential filing extension. But what is the size and type of funds that we're talking about? I'm assuming it's some of the real estate funds that we built with Asia. But size and type of funds? And are they above or below cost base right now? Thanks.

So I'm going to go back to the first question first, which I've now actually forgotten.

Project Streamline. What's in the --

Streamline, thank you. Again, there are a couple of different components to it. I think what I would say is that we feel very confident about the $1 billion. We've shown good progress on the controllable expenses around, as I said, if you look not quarter over quarter, but year over year around occupancy, around T&E, around some of the professional services.

That $800 million, I'm not going to go line by line. There is some benefit from the fact that revenues are down a bit. But we feel confident that we're going to hit both -- or, the $1 billion target, which obviously includes compensation savings.

On Volcker, it's $2.3 billion, which is why we highlighted that number. There's been some confusion around it, and our intent is to file for extensions for the overwhelming majority of that. We have options for the other funds, as it relates to the July deadline.

And then to your question, obviously currently the funds are at NAV now. They are basically, historically, whether it be real estate or private equity but it's the mix of the businesses and asset classes that we've been in historically.

All right, cool, I appreciate that. Last follow-up, or just question for maybe James. RWA is down a lot; it's like down 16%. You've got a 15.9% CET1. You had a great result in capital return, but capital is building, so it's this high-class problem you have. I think you'd be at the high end of your ROE target range now if you had a similar capital ratio to the peers, and you're above 10 on a tangible. So can you talk about how you address that in terms of just keep doing what you do and try to get more out? It's a give and take, but it's a ton of capital.

Yes, it is, Glenn. This is not a sprint, it's obviously a marathon. We're trying to build a Firm that's resilient for all times. We're trying to be ahead of whatever the regulatory requirements are. That has been, as you and everybody else know is a moving piece.

We have the GSIB buffer coming into play. Obviously there's going to be some netting against that, if I read the speeches right, around the shape of the balance sheet growth and around whether one is held to buyback commitments for the nine quarters. So we need to see the GSIB buffers.

We took our buyback from zero to $500 million, to $1 billion, to $2.5 billion to $3.5 billion in the last several years. We took our dividend from $0.05 to $0.10, to $0.15, to $0.20 a quarter. So pretty significant progress. But you're right. We have a high-class problem.

I was amused watching some of the pundits on TV the other day talking about ROE, and how different it is from pre-crisis. And you know, I wanted to yell at the screen: yes, well, that might have a little bit to do with the capital being a little different pre-crisis. We had $30 billion of capital pre-crisis. Our ROEs would be comfortably above 20% now if we were operating the business like that. But clearly that would not be a good or appropriate operating model.

So we're approaching -- I think we were at or near the top of the large banks in terms of payout ratio. I can't remember exactly, but I think it was in the high-80%s or even 90% ratio. This year, we are continuing to accrete at pretty sporty numbers, as you point out.

But we've got some wood to chop in between times. We've got a resubmission on CCAR. A successful resubmission would dictate whether our current capital program remains intact, so that has all of our attention. And then the 2017 CCAR program is just around the corner in April, I think, the submission is.

So if you got to have a problem in terms of returns in this business, I'd much rather it be because you've got too much capital. That, I would argue, is our problem. Achieving 100% payout ratio is obviously a terrific position for us to target, and that's what we are targeting. And then we will sort of take it from there.

But this has been a multi-year restructuring. I don't think any bank has wanted to try and get ahead of the capital regimes, given that all of the rules have not been fully baked in. As Jon just said, we're dealing with the Volcker disposition. It will happen, and whatever extensions we get from June 17. But obviously we've got some dispositions going, we've got the GSIB buffer in action, the resolution plans are still working their way through, all of the banks are resubmitting those. So there's still a lot of moving parts.

Fair enough. Thanks, James.

As a shareholder, you know, frankly, I as a shareholder take comfort from the fact that we have the capital that we have.

(Operator Instructions)

Our next question comes from Mike Mayo with CLSA.

Hi. Another question on fixed income. And I hope you can appreciate some concern about fixed income, given the record over the last 10 to15 years. But it was certainly much better than expected. To what degree are the FIC results the result of taking more risk? Page 6 of the supplement shows VaR is down for rates and FX and commodities, but up in the credit portfolio. And to what degree are the better results in FIC the result of taking share, say, from European banks? And if you could address prime brokerage too?

I'm going to just start on that, Mike, and I'll let John get into it. But listen, we are not and did not in the second quarter run any victory lap around fixed income. We said we're targeting $1 billion a quarter on an annualized basis. We said there would be volatility around that by the very aspect of the markets. We obviously did much better than probably anybody thought this quarter, and part of that is a function of the mix of our fixed income business, because they are a more credit-dependent business.

But that said, we have made real changes to this business. We did bring down the RWAs from $390 billion to about $125 billion now. We did take out 25% of the total headcount cost and people in December of last year. And we are currently on track for the $1 billion run rate, in fact, a little above it.

But again, we're not too focused on the quarter-to-quarter moves. And I think if the question underlying it is did the team do something on the risk front, which was sort of further standard to deviations out from what we've typically been doing the last couple of years? I think the answer is clearly, no.

And we can -- John will take you through more details if there's more to add to it. But this is a business which, as you know -- and if you look at the street's numbers, I think all of the banks are priced on the upside. There was a better macro environment, there was more volatility post-Brexit, there was more volatility around rates because of the Fed, multiple talking voices of the Fed, and the credit markets firmed up.

So if you are in the fixed income business, you're going to have a better quarter. We had a better quarter. What I'm pleased about is, we did it with 25% less people. Jon, do you want to add anything?

No. Mike, were there other parts of the -- I'm sorry -- were there other parts of the question that James didn't address that you'd like me to tackle?

Well, at least, I guess the flip side is the market share gains, to the extent that you have the potential to use your balance sheet more than some global banks that are restructuring. How much of that is a factor in FIC or trading or capital markets generally?

Listen, I think what we've generally said is that we feel very comfortable with our competitive position. You can see our rankings. Quarter-to-quarter share is sort of hard to look at because, as James mentioned, these businesses move around. But certainly over the medium to long term, we have a very strong position, we've got a nice global footprint, we've got a defined strategy. Not all of our peers could probably say that. So I think over the medium to long term, we think our competitive position will bode well for us.

All right, thank you.

Thank you. Our next question comes from Christian Bolu with Credit Suisse.

Good morning.

Good morning.

Maybe just a clarification on Project Streamline. Just so I'm clear, you've done $800 million in expenses so far versus the $1 billion target. Does that imply $200 million to go by 2017? Or am I looking at it --?

There's a couple things. One is that Project Streamline is a total expense number. So that would include comp and non-comp. The $800 million is a non-comp number. That's number one.

Number two, the premise around Steamline was $1 billion expenses assuming a flat revenue environment. So if you look at year to date, although we've shown nice progress in the second and third quarter, if you'll recall, the January and February market environment, but also the first quarter, was quite soft. So we're actually running, year to date, below our revenue from 2015. And so therefore, the apples-to-apples comparison is a little more challenging, so I don't think you can do the math that you just did.

The one thing I will say is that we are confident, even with the incremental CCAR and Brexit planning expenses that are probably in the budget at this point, we are confident that we'll be able to get $1 billion of expenses out of that total $27 billion expense line from last year, in 2017.

Okay, thanks for the clarification. And then on just some sales practices, wondering if you can comment on the Massachusetts Securities officers' enforcement action around your sales practices? Do you have to change anything? Does that impact your kind of efforts to increase lending penetration?

No, it doesn't. We are not changing things. We put out a public statement relaying messages; we're not going to comment on that. We run our business consistent with the values of doing everything we can to support our clients, and we'll continue to do that.

Okay, that's very clear. Thank you very much.

Thank you.

Thank you. Our next question comes from Guy Moszkowski with Autonomous Research.

Thank you, good morning. I just wanted to have a couple follow-up questions on equities and FIC. In equities, you had mid single-digits revenue growth year over year. And of the five global dealers reporting so far, there's once again a big separation between the three firms that have sizeable prime brokerage activities, yourselves and the other two, and the other players who have really fallen behind. Can you talk about that? Is this sort of a coincidence, or can you see real evidence that because of the strength of that business, maybe an ability to re-price or concentrate share of flows, that you are really able to break out?

I'll try, Guy. Listen, we are number one in the world in this business, and I think we're seeing the benefit of being able to provide clients with value across the globe. As I mentioned, the third quarter was our strongest in equity since the crisis. So we are seeing the benefit of being the number one in the world. And I think you're going to see, just like in many other financial services products, the concentration of market share among the top players. And that's what you're seeing in equities.

And in FIC, can you give us a sense for the degree to which, maybe alongside strong flow activity that you commented on, that, that revenue might have been supplemented by positive marks on legacy, long-dated derivatives or other positions?

Listen, Guy. Certainly some of our fixed income businesses, we carry inventories in those businesses, particularly in our credit and SPG areas, and tightening spreads around the world. We benefit from that. But I won't comment on the, I think, your derivative. But it was a good constructive backdrop for this business.

And just as a follow-up to the follow-up on that one, those types of positions, are they still absorbing meaningful amounts of capital driving the significant part of the RWA that persists? And when we get back to the whole idea of long-term capital return potential, should we be looking over the next three to five years for a significant free-up of capital from positions of that type, that don't generally generate very much revenue?

The way I would think about it is, we have $125 billion of FIC RWAs today. We aren't meaningfully above our both 2017 target, which was $120 billion, and our longer-term target. So we continue to move towards those goals, where positions are running off over time, as we've talked about.

Given the liquidity we saw, I made a comment that we have been working on our composition of our inventory. We saw opportunities to come out of some of the illiquid positions. We've seen a trend towards our clients wanting to trade in more liquid products, given their view of the world. So we're going to continue to manage that business. We're going to continue to run those down over time. And I think we're pretty close to the ultimate targets on a balance sheet perspective, as it is today.

Okay, that's great. Thank you very much.

Yes.

Thank you. Our next question comes from Devin Ryan with JMP Securities.

Thanks, good morning. On GWM, maybe bigger picture. It still seems disconnected from history here that retail engagement is so subdued against a backdrop where risk assets have performed well and [vessel] assets are growing. So I'm just wondering, is there any data or anecdotes that you would point to that would suggest that this isn't a secular change around products or demographics?

No, I think -- listen, there's just been a lot more headlines, there's been a lot more volatility. Yes, markets have been trading up over the course certainly of this quarter, and we're seeing indices at reasonably high levels. But on the flip side, transaction revenues have historically been driven by underwriting calendar, where we've seen a very slow 2016. I think the geopolitical risk and some of this political risk and some of these risks that are much harder for retail, or actually any investor, they will probably wait and get their hands around and probably push people to the sidelines. I don't know if it's secular or cyclical at this point, but certainly it's at very low levels.

I think that it's -- having watched this business over two or three decades, I didn't think I had seen transaction levels lower than this. And juxtaposed against that, that the business had record revenues, is a testament to the managed money side of it, the banking side of it, the deposit side of it. Things that, frankly, 15 years ago really didn't exist. You were highly dependent upon transaction activity.

And the world has changed. Investors have changed. But we're sitting on $2.1 trillion of assets. And their behavior has changed. Whether the transaction stuff picks up post the election, post the Fed moving, it remains to be seen. My guess is, over time, it does. I feel, just intuitively, it feels like a low. But can it go lower? I guess it could go lower. But probably there's a bias to moving up rather than moving down, over the next couple of years. That said, more and more money is going to fee-based accounts.

Got it, great, that's very helpful. And then you guys have $27 billion of debt maturing over the next 12 months. How should we think about the delta between those rates relative to the current market rates, to try to get a sense of orders of magnitude of impact, assuming you replace that?

Well, I think a little ways back, we said that we had a good funding tailwind, as the maturing debt was much more expensive than what we were putting on. I think at this point, that has run its course, in terms of our new issuance is generally in line with what's been rolling off. So I think there is still some benefit of annualization and things of that nature. But we've come to probably the end of, material end to sort of the funding arbitrage that was going on.

Got it. Okay, that's helpful. Okay, thanks, guys.

Yes.

Thank you. Our next question comes from Fiona Swaffield with RBC Capital Markets.

Good morning. My question was about net interest income in Wealth Management. Could you talk more about margins? They do seem to be pretty strong in the third quarter. But if you adjust for the prepayment, which I think we [already] knew how much that impacted Q2. But you can help us on the trends in margins in Wealth Management. Thank you.

Yes, at 23.2, it's obviously at the low end of our range. What we saw in the second quarter, if you'll recall, in June, rates were coming down, so then prepayment speeds were accelerating. So we had a negative impact from that. We had obviously the opposite this quarter, as generally, rates have been rising throughout the quarter it was not a significant contributor to the margin. We feel good about the progress that we've made.

And at the low end of the range of 23.1, excuse me 23.2, you should also recognize some seasonality in this business, in terms of the expenses in the fourth quarter. But again, as James said, and I said in my prepared remarks, given the flows in managed money, given the lending progress that we've made, we feel good about the margins and sort of the progress that we've made here.

And can I just check on the net interest income margin specifically? There's no funny that, that's a good base from which to forecast going forward, it's just so much higher as a percentage of assets than its been for awhile?

Yes, that's a good base. There's going to be nominal volatility because of prepayment speeds, as our mortgage book grows. But that's a good base.

Thanks.

Thank you. Our next question comes from Michael Carrier with Bank of America.

All right, thanks, guys. I guess either for Jon or James, just on the DOL. James, you mentioned providing customers with options. Just wanted get your sense on how to manage that versus, say, like the legal side or the legal risk? And then I think in the past, you guys mentioned that you didn't expect any significant new impact on revenue or expense, meaning like the margin. So I just wanted to confirm that, as we get more information in, you guys continue to work on the strategy.

You know, Mike, as I said, I think the team is going to be saying something over the next couple weeks. So really, to be fair to them, I don't want to get ahead of it. They will give you a lot of details. I don't think that giving clients choice heightens one's legal exposure. In fact, that just seems a little counterintuitive. We run a large, complicated business, and we do it in full compliance with the regulatory rules. And we try and optimize what's always in the best interest of our clients. That's the basic principles.

And Mike, on the second half of your question, obviously there were drafts of the DOL rule out last year, so we were informed when we gave you the 23% to 25% margin target. What we said about this is that we think this is going to be manageable, both from our clients' perspective and from a results perspective. And we're going to work with our clients to make sure that we're providing compliance solutions.

Okay, got it. And then just as a follow-up, Jon, on the buyback, it looks like the pace is just ahead of what you did in the last CCAR, versus what you can do in this cycle. And so just wanted to get a sense on, do you have more flexibility in terms of front-loading it?

And then when I think about -- I think Glenn had the question on just where the capital ratios in the ROE. [You, James] having too much capital definitely in this environment is a good spot to be, when you look at the global firms. But on the other hand, it does weigh on the ROE and on the multiple. So when you look at what you guys are doing strategically and in terms of focusing on Wealth Management you're taking down some of the risk on the balance sheet, is that starting to resonate with the regulators? And so do you have the potential to get that CET1 ratio back around the industry average, versus at these elevated levels?

You know, I think -- is it resonating with the regulators? You've got to look at the track record. We've increased the dividend four years in a row, and we've increased the buyback four or five years in a row. We operate in a world which has been an evolving world from a regulatory front, and we've tried to stay ahead of it. And I think we, frankly, have done that in terms of where our capital is.

But I'm not going to repeat what I said, I think it was earlier to Glenn or somebody, on what our plans are. But we try and optimize within the rules, but at the same time, be appropriately conservative until we see where all the rules flesh out. We'll get a much better sense when the GSIB stuff is finally written down, and then we'll know pretty much where we stand.

And then on the first part of your question, as you highlighted, we did buy back $1 billion in the quarter this -- in the third quarter. We have a $3.5 billion authorization; so we do have $2.25 billion left to do over the next three quarters.

Okay, thanks a lot.

Thank you. Our next question comes from Andrew Limb with Societe Generale.

Hi, good morning. Just got a follow-up question on capital, and following Dan Tarullo's remarks on the stress capital buffer. Possibly you've got a very strong CET1 ratio, but presumably, you've also got a very high stress capital buffer, so your minimum requirement will be quite high. And I'm just making that implication there from the impact on your CET1 ratio on the 2016 CCAR process. So I'm just wondering what your thoughts are there, as to what you think your SCB should be, what your minimum capital requirements could be. I know the rules aren't ratified yet; and how you would stack up versus your peers?

Let me try to take a crack at this. So I would say a couple things. One, I think that it's a little too early to start estimating SCBs and sort of impact. This is obviously going into effect in the 2018 CCAR. So for 2017, what James had said and what we said at the beginning of the year, is that we were capital sufficient, and we would like to try to return capital above the current levels that we have. And we're going to continue to follow that strategy in 2017.

And then in 2018, as the NPR becomes rule and we have a better sense of what the ins and outs and the takes are, we'll be in a better position to tell you what we think the capital outlook looks like then. The one point which is reasonably clear from Governor Tarullo's speech is the integration of stress testing into the baseline capital ratios, and business as usual, and that's a trend that we've seen for a while. So I think broadly speaking, although there were some lack of some of the details, the speech was broadly in line with our expectations.

Right, thanks for that. And then just a follow-up question, just looking at the 2016 CCAR and the comments people have been making about the FIC business. Obviously you've got quite a big impact there on the 2016 CCAR, versus the severely adverse scenario. And I was just wondering how you tied it up with the bank of your business? Why would that be the case, especially given that you're relatively light on FIC, versus some other peers? Is it the case that maybe that's a reflection of higher risk that you might be having in FIC, and the way you run that?

I'm not sure that I fully understand the question. I would say that, I think of the large banks, we were the only bank that had their stress losses go down year over year. I think that is a reflection of the actions that we've been taking around the risk of the -- the overall risk in our balance sheet. We continue to look at inventories and manage those businesses, and try to shrink where we can. I mentioned that in my comments.

So again, I'm not sure that I understand what you're driving at. But I think we are -- and I think our absolute stress losses relative to the other big banks are also below those levels. So I think that we are starting to see the benefit of the risk reduction that we've taken, and I think that will continue to persist.

Right. But the absolute delta in your starting CET1 ratio, and then where it moves to under the severely adverse scenario, that's relatively quite large versus all of the US banks. And I was just wondering why you think that would be the case?

Again, I think the way I would look at it is, we've been able to increase our capital return quite dramatically over the last several years, and our ratios in CCAR last year ended up higher than the year before. So I think there is recognition of the risk reduction and the transformation we've taken, both on the revenue and the risk side.

Okay, thanks a lot.

Yes.

Thank you. Our next question comes from Eric Wasserstrom with Guggenheim.

Thanks very much. Jon, I'm sorry if I missed this, but in the Institutional Securities, what drove the non-comp component up sequentially? It was up about 5%, quarter on quarter.

Yes, I mean, listen, on a quarter-over-quarter basis, it's going to bump around. As I highlighted, year to date for the Firm, non-comps are down dramatically. So to be honest, these things are not straight lines. But we feel confident that we've got good expense management in place.

Got it. I guess I was wondering if it's just a function of the business mix, given that some of the markets revenues have more volume-related components?

No, I think that was not really a driving force. You do know we have CCAR resubmission in December of this year. So there was some incremental expenses that we didn't expect to have, from that perspective. But again, these things bounce around quarter over quarter, and we feel very good about the $1 billion target we set for next year.

Great. And if I can just maybe follow up on the capital questions. As we think about the longer-term target, can you just help us frame whether that target contemplates -- or what it contemplates, is really the question, in terms of capital levels? In other words, does getting to the high end assume stable or lower levels, or does it continue to reflect an expected amount of capital accretion?

I'm sorry, the high end -- ?

So if you look at the 9% to 11% target, like what is the equity assumption underlying that, relative to where we are today? Is it continued capital accretion, and net income is just expanding ahead of that accretion? Or is it some expectation of reduction?

Well, again, I think when we laid out the 9% to 11% for 2017 in the beginning of the year, we said we had sufficient capital, and therefore we wanted to try to maintain that capital level. You've seen that we've accreted a bit. Because obviously the payout ratio is based off of net income, and we do issue equity to our employees as part of compensation. So we are accruing a little bit of equity. It was predicated on that sort of general math that it would creep up, but nothing dramatic.

And what we said in January, which I think is actually even more consistent now with some of the comments around Governor Tarullo's speech about actually implementing those changes in 2018, is that, that's our current thinking for 2016 and 2017. And then we'll obviously analyze the new rules as part of 2018 CCAR, see where the progress that we've made on the balance sheet and fixed income restructuring, and then make another assessment at that point.

Okay, thanks very much.

Yes.

Thank you. And our last question comes from the line of Jim Mitchell with Buckingham Research.

Hey, good morning. Maybe a quick follow-up on the ROE targets, the 9% to 11% next year. You're sticking with it. But if we look at the presentation from January, it was sort of under the expectation that revenue growth would be 3% to 5% annually. Obviously year to date, we haven't hit those numbers.

So what gives you the confidence, or what's changed in terms of your ability to still hit the 9% to 11%? Is it just greater expense confidence? How do we think about that in the context of clearly a consensus with implying an ROE below 8% doesn't clearly believe you can get there?

Listen, I think we've shown some really good progress against the goals. As you do mention, the revenues are down 2016 versus 2015, year to date. But the target was for 2017. We think we can continue to make more progress on the margin in Wealth.

And as I mentioned, some of the flows and where we are in terms of our assets under management and our lending progress, helps position that business for 2017. Continued leadership in equities and IBD, where we like our positions and our global footprint. So we like to continue to press our advantage there and we have more Streamline to go.

So first quarter, very challenging, but we put up 8.3% in the second, 8.7% in the third, and we're a lot closer to that 9% to 11%. We clearly need constructive markets, but I think that's what our confidence is being driven by. We're closer to the number, and we still have some of the initiatives in flight, and we expect to realize them in 2017.

Okay, that's fair. And then maybe on the capital side, I think CET1 clearly very strong, but the SLR, I guess, is where if we look at your progress to date, its been not as rapid as on the RWA side in fixed income. Is that what's driving the slower progress on the SLR? And do you still feel confident you can get to the targets?

Yes, to the last question. Obviously the SLR is just a bigger denominator, and therefore, the changes that we've been making accrue more slowly to that number. But at 6.2%, relative to what the minimums are and what our expectation is on CCAR, is a strong number as well.

Okay, thanks.

Yes.

Thank you. That concludes the question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. That does conclude the program, and you may all disconnect. Everyone, have a great day.