摩根士丹利 (MS) 2020 Q4 法說會逐字稿

Good morning. On behalf of Morgan Stanley, I will begin the call with the following disclaimer. During today's presentation, we will refer to our earnings release and financial supplement, copies of which are available at 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 and strategic update.

Within the strategic update, certain reported information has been adjusted and is noted in the presentation. These adjustments were made to provide a transparent and comparative view of our operating performance against our strategic objectives. The reconciliations of these non-GAAP adjusted operating performance metrics are included in the notes to the presentation.

On October 2, Morgan Stanley closed its acquisition of E*TRADE, which impacts period-over-period comparisons for the firm and Wealth Management. 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, operator. Good morning, everyone. Thank you for joining us. And I fully appreciate we're competing with a historic day here so I particularly appreciate you listening in. We will be brisk as we always try to be.

Morgan Stanley delivered record results in 2020. We generated an ROTCE of 15.4% while meaningfully driving our strategic vision forward. We successfully closed our acquisition of E*TRADE, received an upgrade from Moody's to A2, were placed on review for upgrade a second time; and announced our intent to acquire Eaton Vance. Then last month, following the Federal Reserve's release of its second stress test result, we announced a $10 billion buyback program that we intend to execute in 2021. Our performance and competitive position serve as hard evidence that Morgan Stanley has reached an inflection point.

Jon will discuss the details of this year's performance in a moment, but first, let me walk you through our vision for the next decade and outlook focused on growth as outlined in our Annual Strategic Update. This is something we've now done since, I believe, 2012.

Let's turn to Slide 3. Our strategy revolves around demonstrating stability in times of serious stress and delivering strong results when markets are active. 2020 for sure tested this thesis. In a rapidly evolving operating environment, we responded to heightened volatility, and supported open and functioning markets and client needs.

We delivered record revenues of $48 billion while remaining disciplined in our risk management. Those revenues, by the way, are up from $34 billion in the time period 2010 through 2014.

Turn to Slide #4. We enhanced our positioning in areas of secular growth with several strategic acquisitions. In 2019, as you know, we advanced our workplace offering with the acquisition of Solium. And in 2020, we took a leap forward when we announced our acquisitions of E*TRADE and Eaton Vance.

Combining with E*TRADE positions us to reach clients in various stages of wealth accumulation in a scalable, economic way. E*TRADE's technology, products and innovation mindset enhance our growth model. Further, E*TRADE serves a younger demographic who are on average over 10 years younger than those we've historically served and who we can continue to service as their needs become increasingly complex.

With Eaton Vance, we will create a leading asset manager of scale. Eaton Vance brings new investment capabilities to our platform and leading positions in secular growth areas, particularly customization and sustainability. The deal will also expand our client reach, combining MSIM's robust international distribution with Eaton Vance's strong U.S. distribution.

Please turn to Slide #5. Having experienced periods of fragility, healing and stability, our firm is now at an inflection point. The next decade will be characterized by growth. Our growth drivers span across all 3 of our business segments. We'll focus on gaining market share, expanding and deepening our client relationships, realizing acquisition synergies and operating leverage and finally, returning capital to our shareholders.

Please turn to Slide 6. Scale in our interconnected businesses are the foundation for our first growth driver, gaining market share. Our integrated investment bank produced $26 billion in revenue on a pro forma basis. Our Wealth and Asset Management platform is among the largest globally with over $5 trillion in combined assets.

Our breadth and depth of product offerings and services have enabled us to gain an increased share of client wallet as you can see on Slide 7. Our segments are working together to deliver holistic client coverage and are capturing asset and revenue growth. In 2020, international securities (sic) [Institutional Securities] generated over $300 million of revenues from transactions through Wealth Management referrals. Wealth Management in turn gained $20 billion of client assets, and Investment Management saw $6 billion of net flows and commitments, all from Institutional Securities referrals.

Our second growth driver, expanding and deepening our client base, begins with Institutional Securities on Slide 8. Our integrated investment bank benefits from our coordinated and client-focused approach. We built revenues meaningfully to a record $26 billion in 2020. The result of this growth, coupled with risk and expense discipline, was an operating margin of 35%.

Turn to Slide 9, which talks about our Wealth Management business. With the acquisition of E*TRADE, we are now a Top 3 player in each of the key channels in which investors manage their finances, and each presents unique growth opportunities. With our increased capabilities, we can deepen client relationships and provide more services to millions of households.

If we look at E*TRADE on Slide 10, you'll see the business had a remarkable year in 2020, setting new records across all material metrics. The unique backdrop dramatically accelerated digital adoption and meaningfully increased levels of engagement. Versus prior records, trading activity more than tripled and Net New Assets more than doubled. Deposits reached record levels. Extraordinary growth versus prior records is hard additional evidence that our decision to buy E*TRADE was indeed the right one.

On Slide 11, we illustrate our extraordinary accumulation of Net New Assets, bringing over $200 billion of assets this year new to our firm. That's 6% of beginning-period assets on a pro forma basis. We've invested heavily over the years building our Modern Wealth Strategy, enhancing our technology and building new businesses, and the addition of E*TRADE will only help. This year's Net New Asset growth was remarkable. And while Net New Assets tend to fluctuate obviously in any year, this is -- and this was likely at the high end of what is the likely range, we still expect Net New Assets to remain well above historic levels.

On Slide 12, every year for the past decade, our revenues have increased. And with E*TRADE, our daily revenues will be significantly higher in the future. In 2020, 65% of trading days saw revenues in excess of $70 million. That was compared to just 2% only 4 years ago.

Let's talk about Investment Management on Slide 13. With our announcement to acquire Eaton Vance, we will create a premier global asset manager with $1.4 trillion in assets under management. Since 2017, Morgan Stanley Investment Management has grown assets under management by over $360 billion. And both MSIM and Eaton Vance have each individually attracted industry-leading long-term net flows over 20%.

We're really excited about this transaction, and the integration planning is going well. Eaton Vance's business remains strong. with increasing assets under management through the end of December. We expect to close the transaction no later than early in the second quarter.

Slide 14 shows the power of our Wealth and Investment Management platforms when taken together. On a pro forma basis, we will have over $5 trillion in client assets, creating further revenue opportunities. Our efforts to enhance and build out these businesses have led to strong growth. Pro forma client assets are more than double the amount we oversaw in 2014. Consistent with our predominantly advice-driven business model, revenue on these assets, expressed in basis points on the right-hand side of the page, is materially higher than our 3 larger competitors.

Now let's turn to Slide 15, which includes an update on the acquisition synergies we expect to realize. The cost synergies we previously outlined are definitely on track. And on the funding side, with the additional liquidity and deposits we've added since the announcement, we expect $100 million more in synergies than originally projected. We also expect to capture significant incremental revenue opportunities through these deals, and they are outlined in a little bit detail down the right-hand side of this slide.

So turning to 16. Expense discipline is a fundamental tenet of the way we manage Morgan Stanley and has enhanced record pretax profits. And you see our efficiency ratio has come down from 2014 at 79% to just 70% this past year. And obviously, that has driven the pretax profit expansion.

So our fifth growth driver is highlighted on Page 17. Over the past several years, we've consistently improved our returns, despite holding material excess capital. We're excited about the opportunity to return that excess to shareholders and announced a $10 billion buyback program for this year. We restarted our share repurchase program this month and plan to increase our dividend when restrictions are lifted by the Federal Reserve.

I'll now conclude with our updated strategic objectives, which are shown on Slide 18. While this year will be a transition year as we absorb 2 major acquisitions, our focus remains on positioning Morgan Stanley to achieve our long-term strategic targets. Our long-term aspiration, and frankly our belief, is that Wealth Management will generate a margin over 30% by 2022, and in that period, we expect to range from 26% to 30% as we continue to work through the E*TRADE integration.

We also plan to invest in many aspects of our business for growth, but we'll balance this with discipline. In so doing, we're keeping our long-term efficiency ratio below 70% and within the range 69% to 72% over the next 2 years.

Finally, our long-term aspiration for ROTCE is indeed to exceed 17%. How quickly that occurs depends not only on our business performance, but also, of course, on capital distribution. In the meantime, we raised our 2-year target to the range of 14% to 16%.

As always, these targets are subject to major moves in the economic outlook and any big changes in the political and regulatory environment. However, based on what we see now, we fully expect to achieve these as stated.

That concludes the strategic part of the conversation. I'll now turn the call over to Jon who's going to go through the fourth quarter and annual results. Then, together, we look forward to taking your questions. Thank you.

Thank you, and good morning. The firm produced revenues of $48 billion in 2020, records both with and without E*TRADE. We saw continued momentum into the fourth quarter with revenues of $13.6 billion. Dynamic markets, incredible volatility and consistent client engagement across all 3 businesses drove results. Excluding E*TRADE integration-related expenses, our ROTCE was 18.7% and 15.4% for the fourth quarter and full year, respectively, and EPS was $1.92 and $6.58, respectively.

We continued to deliver on operating leverage in 2020, led by Institutional Securities. Non-compensation expenses for the year increased 15%, driven by increased volume-related expenses and higher credit provisions. These increases were partially offset by a decrease in Marketing and Business Development. Compensation expenses increased 11% on a full year basis on higher revenues. Revenues for the full year were up 16%, resulting in an efficiency ratio of 70%, down from 73%.

Now to the businesses. In Institutional Securities, our business achieved various records throughout the full year. Our revenues were $26 billion, 25% higher than our previous best year. While all regions contributed to the results, growth in Asia was a standout. Revenues were $7 billion in the quarter, marking the strongest fourth quarter in more than 10 years. The traditional seasonal slowdown was not experienced, and clients remained active up until the week of Christmas.

Investment Banking revenues were $7.2 billion for the full year, 26% higher than 2019, driven by record Underwriting revenues, particularly in Equity. In response to the COVID environment, the year saw a rolling opening of markets, beginning with debt and rescue financings, next with equity and very recently, leveraged loans and corporate M&A financing. Quarterly results were the strongest in over a decade, generating revenues of $2.3 billion, 46% higher versus the prior year, driven by record Underwriting and Advisory results, with each region contributing revenues well above average run rates.

Overall, the Investment Banking pipeline continues to be healthy across products. The pace of M&A announcements has accelerated, and client and boardroom dialogue is active. Equity issuance remains robust with a strong backlog from IPOs driven by leadership in Healthcare and Technology and follow-on activity, notably in the Americas and Asia. After a record-breaking year in investment-grade and high-yield debt markets, strategic activity should support increased acquisition-related financing.

In Equity Sales and Trading, we remain #1 globally for the seventh consecutive year. Full year revenues of $9.8 billion increased 22% from the prior period. This represents the strongest annual result in over a decade. This year's market backdrop was unprecedented, and the strong performance across products reflected heightened client activity, elevated volatility and a double-digit increase in global market volumes. Fourth quarter revenues of $2.5 billion and full year results were robust across products and regions with the biggest growth drivers from Derivatives and Asia.

Fixed Income Sales and Trading revenues were the highest in over a decade, increasing 59% to $8.8 billion for the year. Clients were highly engaged in a year marked by higher volumes and volatility, active capital markets and wider bid-ask spreads.

Fourth quarter revenues of $1.7 billion increased 31% year-over-year. Results in the quarter and full year were led by Credit and Foreign Exchange. For the full year, Asia showed particular strength.

Across Other Sales and Trading and Other Revenues, results this quarter improved versus the prior year. The increase primarily reflected lower provisions for loan losses and movements related to deferredcash compensation plan.

Our ISG credit portfolio continues to perform well. Over 90% of our ISG loans and commitments are investment grade or secured. ISG loans and lending commitments are up $9 billion this quarter as we continue to support our clients while our funded ratio on our Corporate book has continued to decline and is now close to pre-pandemic levels.

After building our allowance for loan losses throughout the first 3 quarters, it was essentially flat in Q4. ISG provisions were $14 million while net charge-offs were approximately $40 million, primarily related to one commercial real estate loan secured by a hotel.

While risk remains concentrated in our vulnerable sector portfolio, the portfolio continues to decline. We de-risked this portfolio by close to $2 billion this quarter, and it now represents less than 10% of our portfolio. Over 90% of this portfolio, like our entire ISG portfolio, is either investment grade or secured. Our reserve coverage remains stable, and forbearance for the ISG portfolio continues to decline.

Turning to Wealth Management. On October 2, we closed our acquisition of E*TRADE. This quarter's results include the combined business financials with virtually all of the E*TRADE revenues in Transactional and NII. Making comparisons to prior periods are difficult so I will focus my comments on Q4 and how we are positioned for 2021. We have also included some new disclosure in the supplement on Page 7 regarding the combined business.

In the quarter, revenues were $5.7 billion. Excluding integration-related expenses of $231 million, the PBT margin was 22.9% and full year margin was 24.2%. The underlying drivers of this business remain extremely strong, reflecting comprehensive capabilities and strong client engagement and activity.

We saw record fee-based flows of $77 billion for the year, and fee-based assets are now $1.5 trillion. We added $18 billion of loans or 22% growth in 2020, and loans are nearly $100 billion. Asset quality continues to be excellent, and loans in forbearance are under $400 million, down from approximately $2 billion at the end of Q1.

Deposits continue to grow and were supplemented by $54 billion from E*TRADE and are at $306 billion. The network generated Net New Assets of $66 billion in the quarter, and on a pro forma basis, over $200 billion in the year. We remain a destination of choice for advisers and continue to add strong teams and retain our productive advisors. These underlying fundamentals and the realization of synergies position us well for the future.

In the quarter, Asset Management fees were $3 billion, benefiting from higher asset levels and $24 billion of fee-based flows. Transaction volumes remained elevated, and revenues were strong even after excluding approximately $350 million of DCP as clients were active across both advisor-led and self-directed channels.

Net Interest Income was $1.2 billion in the quarter and benefited from the incremental deposits and investment portfolio that came with E*TRADE. This is a reasonable exit rate to inform 2021 and includes the purchase accounting adjustments associated with premium amortization, which is approximately $50 million a quarter. This year, NII will grow due to the realization of our funding synergies and lending growth with limited impact from rates.

On funding synergies, we onboarded approximately $4 billion of the deposits that were previously swept off E*TRADE's balance sheet in the back half of Q4, and we expect to onboard approximately $20 billion in Q1. As we invest these deposits and shed higher-cost wholesale funding, we would expect to realize 80% of our revised higher funding benefits in NII in 2021 with the full impact of these actions reflected in Q2. On lending, we continue to see strong lending demand and expect approximately 10% loan growth to benefit NII.

Lastly, on rates, we do not anticipate any change to policy rates in the near term. However, we will benefit from the eventual normalization of rates. The acquisition of E*TRADE increases our U.S. Bank's sensitivity to rates, and a 100 basis point increase in rates would now contribute an estimated $1.5 billion of additional NII compared to the estimated $1 billion we disclosed in our Q prior to completing the acquisition.

We continue to expect $800 million of integration costs over 3 years with approximately 40% to be realized this year. Following the close of the transaction, we took actions to realize the $400 million of cost synergies we outlined. Our efforts have been aimed at limiting disruption to the customer experience during the integration and will be measured. 2021, we will be exiting the E*TRADE branches, consolidating our bank entities and integrating HR and finance systems and would expect to realize approximately 25% of the cost synergies during the year.

Investment Management reported revenues of $1.1 billion in the fourth quarter, representing the second-highest quarterly level in over a decade. For the full year, revenues were $3.7 billion, in line with the prior period but reflecting a greater contribution from more durable management fee revenues and less from carried interest.

Total AUM rose to a record high of $781 billion, of which long-term AUM was also a record at $493 billion. Long-term net flows were $8.5 billion in the quarter. Our global equity strategies continue to deliver strong performance and attract positive flows. Total net flows were $25 billion. The global nature of our platform remains an advantage as inflows across regions led to record long-term net flows of $41 billion for the year and an annual long-term growth rate of 12%.

We are excited about the transaction with Eaton Vance. Across businesses and strategies, Eaton Vance's assets under management increased by over $65 billion since October. The overall tone of the business is strong, and their momentum continues.

Turning to the balance sheet. Total spot assets were $1.1 trillion, and Standardized RWAs increased to $454 billion, reflecting high levels of client activity and the closing of E*TRADE. Our Standardized CET1 ratio was flat to the prior quarter at 17.4%.

Our tax rates were 23% and 22.5% for the quarter and full year, respectively. We expect our 2021 tax rate to be in and around 23%, which will exhibit some quarter-to-quarter volatility.

We are pleased with our strong performance this year. Our franchise is better positioned for growth than we have been in well over a decade. We enter 2021 with strong asset levels, healthy pipelines, engaged institutional and retail clients and an extremely strong brand. We are confident in our ability to deliver on our objectives.

With that, we will now open the line to questions.

(Operator Instructions) Our first question comes from Brennan Hawken with UBS.

Just wanted to start on the Net New Asset disclosure that you guys provided here this quarter for the first time. Thanks for that. That's very, very helpful.

It seems as though the net new asset growth, the organic growth profile in the wealth business accelerated here in 2020. What do you think is driving that? Is that capturing a greater wallet share of existing clients? Is that an expansion of the client base?

And it seems as though the metric excludes fees and commissions. Do you have an estimate of what that would mean for a headwind to that growth rate? Because I believe most of the other competitors disclose it net of those fees. So just want to try and make it like-for-like.

Well, let me start, and Jon will talk about some of the disclosure stuff. And as you pointed out, Brennan, it's the first time, I think, we've done it in many, many years. And we just thought it was time to reflect the fact that the business has unbelievable growth. I mean we hear about a lot of competitors and a lot of digital players with, frankly, in absolute dollars, modest assets, and we're able to bring in $200 billion in a year.

Now part of that is obviously the pro forma base. Part of that is if you look at what E*TRADE is doing, they're doing great. Part of it is if you're a net attrition of financial advisers, you will be a net attrition of assets on those advisers' books. For the first time in 20-plus years I've been doing this, we're not in net attrition, which is interesting given the IFA channels continue to grow, but they're not growing from us.

So we're keeping assets of our advisers. We're gaining assets from new advisers through the workplace initiatives, through Solium and E*TRADE. So we are gaining assets from the conversion and keeping of those assets at a higher rate than we were. So it's a whole variety of things that have been done within the Wealth Management business to look for ways to continue to accelerate our client asset growth at the firm, and it's no single thing.

I do think 6%, that's -- as I've used the expression before, it's a sporty number, but it's a long way from the 2% or the 3%, 4% we were operating at. And I think it will be elevated. I don't think we're going to go back to 2%, and -- but maybe 6%, that feels high. Certainly, it's best in class to what The Street offers. But maybe Jon has more on the disclosures.

Yes. So the 2 critical disclosures are Net New Assets and then the fee-based flows. And you can see from the footnotes on the Net New Assets, which is the concept of the assets that we bring into the organization net of the outflows, that does not exclude the fees. You can figure -- see the fees on the asset base line in the disclosure of about $10 billion or $11 billion. The fee-based flows do exclude that as a function about how much fee-based assets that we have that are generating a return on those asset bases.

Hopefully, that clarifies the question. And I think for us, the Net New Assets, given the different business models across -- the different business models, that reflects most people don't have the level of asset-based fees that we do and we thought it was appropriate to disclose that.

Yes. No, that's great. That's very helpful clarification. And agree the growth rate looks robust. I mean you regularly hear about how the traditional Wealth Management firms are just the providers of share, and certainly, a mid-single-digit growth rate does not suggest you're providing or ceding share to anybody. So agreed there.

And then for my follow-up, sort of a related question. One of the things that a lot of people and myself included think as one of the more exciting opportunities for growth in the wealth business is the stock plan business, where you really just have a strong position competitively. And you flagged a lot of that in the deck, which is really helpful. You talked about the retention opportunity of the 15-plus percent, which is what E*TRADE has pointed to historically.

Are you -- what's the plan to integrate the stock plan platforms? How long do you think that might take?

And is it right -- when we think about the opportunity set, you've got the $435 billion of unvested assets. My guess is that's the opportunity set. About how much of that tends to vest per year? Is it about 1/4 or 30%? And it's right to think about that as evergreen, right? Like they vest and then they're replaced with new awards in the subsequent year. Sorry about the multipart question, but I think it's important.

That's okay. So we have integrated the sales team. We're going to market to our corporate clients with a consolidated sales effort. As you would expect, we're going to be very mindful of the integration of these platforms. I would highlight that there were certainly a different emphasis in terms of big companies, small companies, private companies, and we will converge those platforms over time and upgrade them both to sort of bring the best of both of those platforms together.

You're right, the existing opportunity is the $435 billion of unvested assets and roughly 5 million participants. Our expectation is we will continue to grow the number of corporate relationships we have and therefore, the number of participants. And we've seen good closure rates since announcing both the Solium transaction and the E*TRADE transaction. So we feel very good about the momentum of the number of new corporate relationships we have in that channel.

And then lastly, on the $435 billion, give or take 25% or 30% of that vest each year. I think that's a pretax number. So clearly, there's tax impacting that. But as you say, our expectation is that number will continue to grow as we bring on more and more corporate relationships.

Our next question comes from Mike Mayo with Wells Fargo Securities.

Well, you clearly gained share this quarter or year in Capital Markets and Trading. Aside from your gaining share, what is your outlook for the industry wallet?

As you know, it shrunk in Trading for a decade, and now it may or may not have turned more permanently. So some banks say we're planning for 2019 levels for Trading. Some think it can maintain this pace. Some say it's in between. Kind of where do you fall out and why? What do you see as the structural changes?

Mike, it's very difficult to say. I mean just look at what we've been through in the last 12 months and look at activity in the first quarter versus the second quarter and then where the year finished.

So clearly, there is a lot of activity in the market. There is enormous fiscal stimulus. Rates remain very low. I think the global economies are recovering. And I think the vaccine, if we get in the U.S. to 1 million doses a day for the next 150 days, would be spectacular.

So there are a lot of industries that are continuing to look at share issuance, new IPOs coming, recapitalizations of different kinds, raising debt. So there's a lot of market activity, I think, in the reasonable near term. Whether it is at the level of 2020, I mean you'd have to bet against that just on pure odds, less than 50%. I think -- but who knows?

I mean the year has started off strong, and we count them one day at a time. And the year started off strong. The markets are active. The economies are recovering globally. New administration has come in. It looks like we had a peaceful transition hopefully today. So I'm quite optimistic about it.

I can't put a pin to say exactly where we're going to end up, but we're clearly gaining share. Our Fixed Income franchise has well recovered from the 2015 restructuring and 2012 lows. Equities bounced and retained their #1 spot again in what has been a growing equity fee pool. And clearly, with the banking revenues above $2 billion for the quarter, there's a lot of M&A activity and a lot of underwriting activity.

So I'm pretty optimistic. I mean I can't put an exact number on it, but I certainly don't feel like we're going to make a major back step at all here.

On that last comment, in terms of backlogs, are they up quarter-over-quarter, near record, down?

Yes. Generally, I think from my comments, Mike, we described them as healthy across all products in all regions with IPOs as a standout. As I said, M&A activity, dialogue is very active; pipeline, very healthy. So as James said, a very constructive start to the year with very healthy pipeline.

Our next question comes from Christian Bolu with Autonomous.

Maybe back on Wealth Management organic growth. And again, echo the earlier comments, really appreciate the new information. But James, you seem to be really playing down the 6% this year as not sustainable. So I guess can you just maybe help us understand what exactly was elevated in 2020?

Was this overall industry was elevated? Was this something more specific to Morgan Stanley, like higher recruiting? I'm just trying to understand why you think it was elevated. And then maybe more importantly, just looking forward, give us a sense of what you think the business can do sustainably, a sort of range for organic growth that you would expect for the business.

Christian, you probably know me well enough by now to know I'm not going to project a trend line based upon one point of data. Listen, we've had a decade of growing Net New Assets around 2%, 3% and then 3%, 4%. Clearly, E*TRADE has a fast-growing asset growth capability that adds enormously. I think net positive financial adviser. Our actual numbers of financial advisers went up this quarter, I think, for the first time for years. So I just trend to the conservative until I see more data.

And do I think it's going to fall back to 2%? Not at all. But if we could lock in 6% for the next 10 years and we'd be -- we're bringing $200 billion a year. I read about a lot of these online players have got $20 billion in total, and we're bringing $20 billion every 5 weeks. So we're effectively creating these companies every 5 weeks.

Now if it's going to be 4.5%, 5.5%, I don't know. I just -- my instinct is 6% on $4 trillion is a lot of assets to bring in, and I think it's doable. I'm not saying it's not doable, but I'm not projecting that, and I wouldn't want to guide you to that. On the other hand, I don't think we're going back to where -- I think we've got a different kind of company.

The reason this -- the title of this presentation is called "Morgan Stanley at an Inflection Point: The Next Decade of Growth" is if there's one message I would like people to take away from it is we are in the growth phase of this company for the next decade. We've been in, as we said, from the crisis forward, sort of fragility then healing and stability, and we are unambiguously in a growth phase.

We have the capital to invest in our businesses. We're gaining share across our businesses. We've got scale in the key businesses. We've invested in a lot of technology improvements to the businesses to increase their efficiency. And I believe we're in a growth phase in this company, and one of those indicators of growth will be very strong Net New Asset growth.

Fair enough. Maybe switching over to capital. With the stock now trading well above book value, how are you thinking about prioritizing buybacks versus dividends? I think in the past, you have spoken to an aspirational target of paying out all of Wealth and Asset Management earnings as a dividend. So maybe just some updated thoughts around how you're thinking about that prospect and again, buyback versus dividend conversation here.

Well, the third leg to that conversation, very important leg is investing in the business. If we're going to grow -- let's pretend we're growing, I don't know, net earnings of $10 billion and we're paying out dividends at the moment of about $2.5 billion. So if we're doing a buyback this year of $10 billion, we're only eating into our buffer at $2.5 billion a year. We're not going to chip away at it much. We're at 17.4%, and I think the threshold is 13.2%. I'm looking at Jon.

Yes.

13.2%. Let's assume we carry, what, a 50, 100 basis point buffer on our SCB. So let's assume we want to run at 14.2%. We're at 17.4%. We've clearly got some room to move. Obviously, we've got the Eaton Vance move coming in, which affects those numbers about 100 basis points.

So as I think about it, I've described this before, half our company has that sort of yield component to it, very stable revenues and earnings. And we could clearly move the dividend higher and will once the regulators permit that. We have -- clearly, we have the capacity.

On the book value, yes, I would actually have preferred to be buying stock last year when we were at $27. Unfortunately, we couldn't do that, but I'm not troubled by buying a little over book value. And I don't think we can be too cute.

We have 1.8 billion, 1.9 billion shares outstanding, obviously, through the issuance from the deal. So I'd like to get it back to 1.5 billion type range over the next few years. And we've got this capital. We don't -- there aren't enough things we can invest $10 billion, $15 billion a year in the business and generate the kinds of returns we expect to generate. So it's a mix of all 3.

But clearly, we'd like to see more action on the dividend. Clearly, we're going to be aggressively buying back and consistently. And clearly, we have capacity to increase our investment in the core business.

Great. A high-class problem.

Our next question comes from Steven Chubak with Wolfe Research.

Just wanted to start off with a question on funding and NII. Appreciate the disclosure on funding optimization and the drivers of some of the improved synergies from the initial guidance. Curious how much room there is to cut deposit costs further. It looks like your Wealth Management deposit costs of 24 bps is just running well above peers.

And just a clarifying question regarding the NII guidance, Jon. Is the growth you're contemplating in '21, is that versus the 4Q '20 base, which reflects the full impact of the deal? Or was that a guide versus full year 2020?

I'll do the first -- the last question first, which is that it was based on the fourth quarter. So sort of using a fourth quarter annualized is the right base to be thinking about because, again, we did have the full impact of both the transaction for the full quarter as well as the amortization of the premium from the investment portfolio.

You're right, our deposit costs were 24 basis points, which were down 14 basis points for the quarter. We also saw an improvement -- as you know, BDP or what we call our sweep deposits, obviously, at a lower rate, basically at 1 basis point, relative to our wholesale that cost about 100 basis points. So part of the funding synergies is really coming from replacing those wholesale funding CDs and other wholesale funding with the off-balance-sheet deposits that we're going to bring back on balance sheet.

So we started the quarter, I think, about 65% of our funding in the deposits were sweep. We're now at 75%. We would expect about $15 billion to $20 billion of CD roll-off. That's obviously based on the maturities. So we continue to think that we can drive our average deposit costs lower as we continue to replace the wholesale with the incremental deposits from E*TRADE.

No, that's great. And just for my follow-up, a big-picture question, James, if you'll indulge me. I was hoping you could help us reconcile versus your prior target of 15% to 17% ROTCE. What rate, market and capital assumptions are underpinning your 17%-plus ambition?

And I guess if we start to think about the inflection in growth that you cited and maybe even some tailwinds from normalization, just higher rates which should be more than 100 basis point benefit, greater realization of revenue synergy opportunities, further progress on the SCB, the direction of travel there has been quite favorable, now the 17%-plus longer term still feels somewhat conservative. I'm wondering from your perspective, do you see even in upper teens or 20% plus ROTCE as a reasonable long-term ambition just given the significant transformation that's underway?

You're beginning to replace Mike Mayo. He's usually asking that. What about the plus? What's wrong with plus? Plus means more.

You can drive a truck through that range.

Yes. Listen, I wouldn't put -- I wouldn't try and model too much science into this. This is an expression of our aspiration and as I said, also happens to be our belief. It's not just Disneyland. We're -- we believe we will deliver these numbers and for some of the reasons you listed, rates being one of them. Obviously, it has a huge impact on this firm.

But look at where we finished last year and what our numbers were. These obviously become very plausible. Whether it should be 17% plus, 18% plus, 19% plus -- listen, if we'd said to you 3 years ago, our aspiration was to have a 17%-plus ROTCE, you would have thought we're off the planet. So I'm very comfortable with these numbers. If we could achieve this, then, obviously, the stock would be trading much higher than it is today.

And embedded in it, we do, do some math. We start with our budget. We start with our operating performance in 2018, '19, '20. We look at our budget projections. We do sensitivities around revenues. We understand what our comp and non-comp look like over the next couple of years, whether we have major litigation exposures or not, the integration costs that we've got to work through and then the synergies of the various businesses. And then we, of course, look at the capital question, which I discussed earlier, I think, with Christian on buyback, dividend or reinvestment in the business and what our RWA growth is going to be in ISG and how that affects the CET1. And you put all of that in a big washing machine and now it's a number with a plus on it.

Our next question comes from Glenn Schorr with Evercore.

James, I wonder if we could look at Slide 14 and talk to something that comes up a bunch. You show your $5.4 trillion pro forma. If you look at that fee rate, there's only one other peer on that top 10 that has a fee rate equal or better than yours. And I think it's a good thing, but this comes up plenty so I'd love to hear you talk about it and the sustainability of that fee rate.

I don't see price pressure in the Wealth Management business, but people ask on it all the time. Just curious to get your thought process over the coming years. And what's kind of embedded in those -- your medium- and long-term targets, implicitly with that?

I don't think you're going to see price compression of any significance across the Wealth or Asset Management platform. It's really a function, Glenn, of asset type. So for example, the wealthier the client -- if you have clients with $100 million, they're not paying 58 basis points. They're probably paying, I don't know, closer to 10 basis points or something. A client with $1 million is paying closer to 100 basis points. So it depends a little bit on the business mix as to what revenue you generate on those assets.

Obviously, some of the E*TRADE active trading clients have got higher velocity on them. They're going to have higher basis point numbers than a very passive position in restricted stock. So a little bit of that is you've got to sort of peel away what's going on under the numbers.

But to your broader question, do I see price compression across Wealth Management? No, I don't. In fact, we will probably generate more revenue as we build up the banking and the banking, lending and deposit product.

On the Asset Management side, I mean, listen, if you're driving performance in the active side, you can generate -- you can hold your fees as they are. The underperformers lose their assets quick and they lose their fees. So I'm not terribly bothered about it.

And if you knew the names of the 3 above it, you probably guessed them, there's a reason. They're more index-oriented. It's a different business model. Now we generate a higher revenue per dollar of asset but we pay a higher revenue comp structure per dollar of asset. So it's not exactly a 30, 40, 50 basis point win, as you know, obviously.

Understood, understood. Wanted to hear in your words.

And then maybe if we could just bridge the gap. I think I know the answer to this, too, but this is a pretty strong environment, you consolidated E*TRADE, the adjusted margin in Wealth Management of 24%. Of the medium-term target of -- 2-year target of 26% to 30%, how do we get inside the range without the help of rates? Because the Fed theoretically is on hold for a few years.

Well, the business is growing. We had some additional expenses this year. For example, we made more contributions to our overall philanthropic and charitable efforts given what's going on with COVID. That cost is distributed across the businesses. We paid a one-time bonus to all employees earning less than, I think, $150,000 who don't receive bonuses. Given the head count in Wealth Management, that disproportionately affects that business.

So there's always a few things going on, but 1 point of margin is worth about $45 million a quarter, I think, if I'm doing my math right, $18 billion, $180 million, so something like that. So it's not -- small numbers can move it around 1 point or 2, but I think with increased growth, increased efficiency, better conversion of the assets, more asset flows and generating this average 58 basis points is how you bounce between the sort of 20 -- what did we say, 24% to 30% range.

26%.

26% to 30%, I'm sorry, 26% to 30%. And depending on the environment -- I mean we've started the year strong. That probably helps 1 point if that held up. There you go.

Our next question comes from Devin Ryan with JMP Securities.

First question, I just want to come back to some of the questions on organic growth. And I like the Slide 9 that shows the $8 trillion in assets held away, essentially making the point that you already have, the customer reach. And so just trying to think about whether you view kind of all of that as potential wallet that you can go after. Or said another way, are there any products that maybe you don't line up with in that $8 trillion?

And then as the firm becomes more connected through technology, which I think you guys have done a great job over the past couple of years, how do you think about your strategies to connect with a greater percentage of that, call it, $8 trillion? I know every business has a little bit of a different, call it, sales process. But are there new strategies or even financial incentives that you can think about to really accelerate the penetration into that?

Sure. I'll give that a crack. And we're not naive. We don't expect to have 100% of the wallet of all of our clients. So clearly, we don't expect to bring in all $8 trillion over time, but there's significant overlap, as you note, in these channels and in these wealth figures.

We continue -- as you saw through the Net New Assets, as James mentioned, a lot of that was from existing customers consolidating their assets. A lot of that is being driven by the technology that we've made and the investments that we've made in the platform that help our advisers advise their clients. And we've seen people bring in more assets. So I think if you think about the opportunity set, I think we tried to line it up pretty well through the different channels.

On the workplace, I think it's really around retaining cash and retaining vested assets and then over time, growing the relationships. Self-directed at a minimum, we've seen people leaving the E*TRADE platform as their needs got more sophisticated and they needed advice. We're clearly going to capture that top part of the funnel with our FAs, with the FA-led model that we have.

So again, a real opportunity. And I like the way you described it. Just look at the numbers, 2.5 million households -- almost 5 million participants, 6.7 million households. The breadth and reach of the platform is quite large. And there is some overlap there, but it's still over 10 million clients that we can provide incremental services or bring in more assets from.

In terms of trade activity, as you can imagine, we are collecting and analyzing data and working with our clients to try to figure out incremental needs and services and products that they need. With the E*TRADE acquisition, we bring on incremental digital capabilities. And as you can imagine, this year, we're spending the year trying to figure out and piloting ways that we can work better and more efficiently with our clients. We're going to pilot around lead generation.

We've defined the adviser group who's going to work with new clients, we've got scoring systems. We've got artificial intelligence trying to help predict what people are going to want and need and next best action. So it's really a culmination of all the investments that we made plus the digital from wealth. And we're going to use this year to try to get a very good understanding of our client base with these pilots and how we can provide incremental services going forward.

Okay. Terrific. Just a follow-up here just on the core expense structure and trying to think about some of the benefits of 2020 with the pandemic that were deflationary. It would seem that as some of those benefits roll off, there's some inflationary aspects into 2021 kind of on a core basis. But longer term, obviously, I think we've learned a lot about the businesses through the past 12 months and opportunities potentially to drive some longer-term savings or maybe core deflation in the expense structure. So just would love to get some thoughts around how you guys are thinking about areas of opportunities to maybe drive more expenses out of the system based on what you've learned over the last 12 months.

Yes. We -- I would say we're still learning. Crisis is not over. We clearly are hopeful around the rollout of the vaccine. I think there are going to be some takeaways around some of the digital client experiences that we've been able to do, the work from home that we've been able to do. But I think it's just -- it's a little early to start making those decisions. Let's get through the crisis first.

Our next question comes from Mike Carrier with Bank of America.

The Strategic Update and growth outlook are always helpful. Just on the efficiency ratio, given the 70% level in '20, and realized strong revenues in this environment, but with E*TRADE and Eaton Vance operating at a better ratio and I think, the longer-term Wealth Management margin improving maybe 600 basis points, just what drives the conservative outlook? Like are there areas that you want to invest significantly to continue to drive the growth? Or are there areas for potential improvement on that 70%?

Yes. Listen, I think we said under 70% after 2 years. So I don't think that's conservative. Like we were -- like we're at 79% just a few years ago, and when I started, we were much higher.

So the long-term position is we'll run this place with a 30% margin plus. What happens in the next 2 years with the bouncing around the market, it's -- I don't know. Maybe we're too conservative in the short run, but it doesn't change our behavior, I guess, is what I would tell you. We are very determined to drive this company for growth and for efficiency and for return. That's been unambiguous for a decade now.

So it doesn't change our behavior at all. It's just what do we think as reasonable people you should expect at a minimum to achieve in this time period. And that's what we try and put in the 2-year period. But longer term, we are much more aggressive, but deal with the reality of 2 years. This year -- as I said, if you annualize the way this year started off, we're doing better than the efficiency, right?

Yes. No, that makes sense. And Jon, just one clarification on the Wealth Management. You gave a lot of numbers on the outlook within the E*TRADE deal. I just wanted to clarify on the funding benefit, did you say 80% in '21 and most of that by 2Q?

And then same thing on the expense synergy. I heard a 25% and a 40%. So I just wanted to make sure I had the right number just in terms of what you're recognizing in '21.

I think all of those numbers that you gave are correct. The funding synergies are really from this transition from the off-balance to the on-balance sheet and the runoff of the wholesale deposits.

So again, that skews more towards the back half. And that -- the 80%, that's -- when you get into the second quarter, you'll be using a quarter number, not a full year benefit number. And then 25% on costs and approximately 40% on the integration costs. So yes, those are the right numbers.

Our next question comes from Jeremy Sigee with BNP Paribas.

(Operator Instructions)

I thought the comments on Net Interest Income outlook in Wealth Management were very helpful. And I just wondered if I could get you to talk in a similar way about the asset management fees and the transaction revenues in Wealth Management because I -- versus my estimates, I thought asset management was a bit below. Maybe that's a lag with the rising AUM, but obviously, transaction revenues were very strong. So could you talk about those 2 revenue drivers within Wealth Management, please?

Sure. On the asset management fee line, obviously, the exit rate, as you know, we get the benefit now for the full year of the $1.5 trillion in fee-based assets. You have averaging effect and exit effect in terms of 2021. So now with the $1.5 trillion assets, we'll also have the benefit of the Net New Assets that we bring in over 2021, though on an average basis. But we would expect continued growth obviously in that line. We had over 10% growth year-over-year in that asset management fees.

And then on transactional, it's really going to be around client engagement and client activity levels. Fourth quarter, we benefited from elevated transactional. I did say that, that was helped by the DCP number, which presumably may or may not repeat next year. But the margin on that revenue, as we've talked about in the past, is virtually 0.

And so transactional generally has been declining. We now have the E*TRADE platform inside of Morgan Stanley. So the commission's based on there. Options trading as well as some of the flow dynamics will aid that number so we'll be at a new level. But generally, that's going to be driven by volume-related activity. And we'll have to see how it plays out, recognizing the first 11 days have been pretty good.

And just a follow-up on the acquisition expenses. You sort of break out the amount of acquisition-related expenses in here. I just wondered if you could talk to us about the split between sort of restructuring and amortization of intangibles. You said you're going to be amortizing the intangibles. I just wondered about the amount of that and where we see it.

Sure. Why don't I just give you a few? So again, we issued $11 billion of equity or about 230 million shares. We generated $7.5 billion of goodwill and intangibles. You'll see that in the first couple of pages of the supplement.

Of that goodwill and intangibles, about $3 billion is going to be amortized at a rough rate of about 15 years, so about $200 million. And that would be allocated in the non-comp in the wealth segment.

Our next question comes from Jim Mitchell with Seaport Global Securities.

Maybe we could talk a little bit about the momentum at E*TRADE. I just want to confirm the numbers. If I looked at their second quarter, sort of retail client base is around 5.8 million self-directed clients. And then I think at December, the fourth quarter was up to 6.7 million.

Are those apples to apples? And if so, that implies quite a bit of new account -- net new account growth of close to 900,000. Is that -- that's pretty good momentum. And just maybe you could discuss what's driving that and how you feel about that going forward.

Yes. I mean, I think we tried to lay that out. As I said on Page 7, you can see what pre-closing -- so the September 30 number shows the self-directed assets within Morgan Stanley before the deal closed. So yes, the growth has really been in the E*TRADE channel. Your number of about 900,000 is accurate.

Again, I think from our disclosure going forward, we had to conform sort of definitions and whatnot. But they've had real strong growth with new clients given the activity levels this year. It's a number we -- you'll be able to track whether the self-directed channel is growing through that number going forward. I don't think we're going to be implicitly disclosing net new clients within the self-directed channel as we try to integrate and bring these 2 businesses together.

Right. I imagine that's better growth than you anticipated. Does that give you even more confidence in the revenue synergies from E*TRADE?

Yes.

Yes and yes.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.