Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: I'm Shanali Basik, and you're watching Bloomberg Open Interest, and
Speaker 2: I'm standing by here at Morgan Stanley's headquarters in Times
Speaker 2: Square alongside Morgan Stanley's CEO, Ted Pick. Of course, you
Speaker 2: had your third Corner earnings report today, you're watching your
Speaker 2: stock sore. You're having one of your best days ever. Really,
Speaker 2: if you hold, it'll be at least your best intra
Speaker 2: day in four years, and certainly your best day since
Speaker 2: you became CEO. What do you think is the biggest
Speaker 2: contributor to Morgan Stanley's performance at this point in time.
Speaker 3: Well, first of all, Shanali, welcome to Morgan Stanley. Thank
Speaker 3: you for wearing Morgan Stanley blue. For thrilled to have
Speaker 3: you here. I think the story of our earnings is
Speaker 3: one of consistency. Consistency on the top line this quarter
Speaker 3: fifteen billion plus and now all three quarters fifteen billion plus.
Speaker 3: And we've seen balance in the two major segments of
Speaker 3: wealth managed and institutional securities, where the profitability is roughly equal.
Speaker 1: We've got great.
Speaker 3: Performance in the third segment, investment management two. And then importantly,
Speaker 3: if you think about our sequential EPs two oh two
Speaker 3: in the first quarter, one eighty two in the second quarter,
Speaker 3: one eighty eight in the third quarter. So it's I
Speaker 3: think it's a consistency story more than anything.
Speaker 1: I say. The second thing is operating leverage.
Speaker 3: We as you know, we reduced our operating leverage needs
Speaker 3: by about three hundred basis points, improvements such that when
Speaker 3: you see our returns on tangible they were seventeen and
Speaker 3: a half percent for the quarter, eighteen percent for the
Speaker 3: year to date.
Speaker 1: So it's an operating leverage story too. And then of
Speaker 1: course we're talking about growth.
Speaker 3: We're talking about growth in wealth and investment management and
Speaker 3: in the investment bank, not just off this quarter, but
Speaker 3: in the years to come.
Speaker 2: You know, it's interesting because of course in wealth you're
Speaker 2: already really the largest, of course, but when it comes
Speaker 2: to investment banking, I remember a year ago what you
Speaker 2: told me was that equities, fixed income, and across investment
Speaker 2: bank thanking, you're focus on being number one. Now, notwithstanding
Speaker 2: today's report, you still have a ways to go with
Speaker 2: the other two investment banks when it comes to revenue.
Speaker 2: How are you closing that gap?
Speaker 3: I think that's a great question in the sense that
Speaker 3: we want to generate real returns and being in front
Speaker 3: of clients in the investment bank, and you see the
Speaker 3: share gains. You see that we've done three billion in
Speaker 3: equities for the last couple quarters. By the way, we
Speaker 3: did that three billion with lower var so the three
Speaker 3: billion versus last year's number in the mid twos and
Speaker 3: equities was done with roughly the same var So there's
Speaker 3: an element of the composition of that revenue base is about.
Speaker 1: Getting closer to clients. You could feel those.
Speaker 3: Metrics, and I think the fact that we were able
Speaker 3: to navigate what happened in Tokyo, what happened more recently
Speaker 3: in China without a ton of volatility in the books,
Speaker 3: able to monetize that with clients in prime brokerage and cash,
Speaker 3: equities and derivatives is important. And then if you look
Speaker 3: at our fixed income business, it's been stable, really a
Speaker 3: stable business which has underlying volatility just it's part of
Speaker 3: what farm exchange and rates and credit are.
Speaker 1: But they've been stable.
Speaker 3: And I feel like in both those businesses there's an
Speaker 3: element of the leaders pulling away from the pack, just
Speaker 3: because it costs a lot to run those businesses every year.
Speaker 3: If you're going to be connected with the clients. You
Speaker 3: need to be connected across the entire product suite. But
Speaker 3: also shealities, you know, you have to be connected around
Speaker 3: the world. And so we've been spending time in Tokyo,
Speaker 3: We've been spending time on the content. We've been spending
Speaker 3: time in India making sure that we are connected with clients,
Speaker 3: and of course in Hong Kong we had an important quarter.
Speaker 3: So I feel good about the global business. I feel
Speaker 3: that we now can really lay claim to being one
Speaker 3: of several global investment banks.
Speaker 1: You tell me how many you think, but that.
Speaker 3: That business can generate real operating leverage and when the
Speaker 3: cycle demands it, like it is now where things are
Speaker 3: beginning to happen.
Speaker 1: That we can lean it.
Speaker 2: You know, it's interesting value at risk for those of
Speaker 2: you at home.
Speaker 1: That is what bar is and it's interesting.
Speaker 2: You were watching markets near record highs forty six record
Speaker 2: highs this year already you're watching hedge funds with record
Speaker 2: amounts of leverage. Do you worry at all about where
Speaker 2: we stand today given what it's taken to get here.
Speaker 3: Well, we certainly are always paying attention to where there's
Speaker 3: leverage in the system because we lend and we are
Speaker 3: a market participants, so we're keeping an eye on all
Speaker 3: of our counterparties, our clients constantly looking at terms.
Speaker 1: Of trade where we are in the capital structure.
Speaker 3: I do think leverage, though, has some distinction within the
Speaker 3: asset classes. So for example, our prime brokerage business is
Speaker 3: at highs and some of the traditional long short investors,
Speaker 3: as you say, are operating at fully on a fully
Speaker 3: invested basis in many cases.
Speaker 1: But if you look at other segments.
Speaker 3: Like the multistrats or the quants, they're actually operating it.
Speaker 3: Leverage is roughly close to the long term average, So
Speaker 3: there is leverage capacity. But I do take your point
Speaker 3: that it is very important for us to continue to
Speaker 3: pay attention to where.
Speaker 1: There may be leveraging the system.
Speaker 3: Now, leverage is more expensive given we have higher rates,
Speaker 3: and the reality is we're all looking to do the
Speaker 3: right combination of high margin business with clients, which means
Speaker 3: that you have to be thinking about clients durably over decades,
Speaker 3: which clients are going to be in the businesses you care.
Speaker 3: Where might we be working with a client across our
Speaker 3: firm to manage those assets, source assets, structure finance. So
Speaker 3: it's not just the classic investment banking play. It's also
Speaker 3: their interaction with us in the wealth management context, their
Speaker 3: interaction with us in the investment management context. And you've
Speaker 3: heard s youonality ME talk about the integrative firm. That's
Speaker 3: where we think it's powerful, not just because there's interconnectivity,
Speaker 3: but there's also sort of ongoing diligence around who we're
Speaker 3: interacting with at what level, how do they think about
Speaker 3: their strategy and culture.
Speaker 2: Now, I also want to move away from trading it
Speaker 2: over to M and A and IPOs because this morning
Speaker 2: you told analysts that you are bullish. When do M
Speaker 2: and A big deals and IPOs in large form come
Speaker 2: back and how large will they be.
Speaker 1: When they do.
Speaker 3: I think you hit on it. They're going to be larger.
Speaker 3: They're going to be larger because it is a process
Speaker 3: to go public under Starbucks and for smaller companies that
Speaker 3: may be orphaned without the proper research. If they have
Speaker 3: a great growth story, why can't they go public? We're
Speaker 3: going to continue to be the underwriter to exciting young
Speaker 3: companies that only have a small number of years operating experience.
Speaker 1: You can get through the entire thirty three and thirty four.
Speaker 3: Act process of going public and grow and then eventually
Speaker 3: either become acquiring vehicles or they themselves get bought out.
Speaker 1: That will continue. But what is more likely is you know, and.
Speaker 3: You spend a lot of time talking about there is
Speaker 3: a trillion three of dry powder held by financial sponsors.
Speaker 1: There is at least three trillion in the ground.
Speaker 3: Ten thousand portfolio companies, and for the first time in
Speaker 3: almost fifteen years, the rate of deployment is outpacing the
Speaker 3: rate of raising.
Speaker 1: So why is that important, as we both.
Speaker 3: Know, because that equation means they need those private equity
Speaker 3: sponsors need to monetize.
Speaker 1: How are they going to monetize?
Speaker 3: They could sell, they could sell to other sponsors, they
Speaker 3: could try to find a deal with a strategic or
Speaker 3: they could go public. So I think the beauty of
Speaker 3: going public as larger companies is coming back.
Speaker 1: But I also think it's going to be a global phenomenon.
Speaker 3: I think you see equitization rates really starting to increase
Speaker 3: in places like Japan they've been so quiet for the
Speaker 3: better part of thirty five years, where we have a
Speaker 3: leading business on the continent, in places like Italy.
Speaker 1: You'll see it in the Middle East.
Speaker 3: So it's a global business, probably smaller unit size the
Speaker 3: larger companies that need the full suite of our products.
Speaker 2: You know, we hear over and over at Bloomberg that
Speaker 2: people are waiting till the election. They're waiting till the election,
Speaker 2: and a lot of investors are guiding to volatility headed
Speaker 2: around the elections. How are you preparing for that and
Speaker 2: how are you here from clients on how chopping things
Speaker 2: can get.
Speaker 3: We stay close to clients as you would expect, because
Speaker 3: it's a coin flipped on any of the red blue, blue,
Speaker 3: red combinations. They're nimble and staying pretty liquid around what
Speaker 3: might happen. The reality though, is not only do we
Speaker 3: not know what the combination is going to be, we
Speaker 3: don't know what the policy reaction function is actually going
Speaker 3: to be off of what has been said. And for
Speaker 3: that reason, I think you have a number of investors
Speaker 3: that are actually just sort of continuing to plow forward
Speaker 3: on the view that the economy is in pretty pretty
Speaker 3: good shape and the consumers and corporates are in great shape,
Speaker 3: so that when there is an election outcome, once there's
Speaker 3: a sense for whether new policy will actually get.
Speaker 1: Affected, then they.
Speaker 3: Can have a reaction and obviously that also then brings
Speaker 3: into question what monetary.
Speaker 1: Policy will look like. I think that our job is.
Speaker 3: Just to stay close to clients and to make sure
Speaker 3: our infrastructure is fit for purpose. So we do run
Speaker 3: tabletops to make sure that not just that we can
Speaker 3: help offer solutions to clients finale, but also that we
Speaker 3: you know, we have our act together internally.
Speaker 2: Even after the election. Is there a sense of which
Speaker 2: party at this juncture is better for the stock market?
Speaker 1: Do you have a view? No? I don't.
Speaker 3: I really don't, because I don't know that we can
Speaker 3: imagine what the combinations will be, what the mandate will be,
Speaker 3: and what the policy actual will actually be coming off
Speaker 3: of what's been said during the campaigns. What I do
Speaker 3: know is that the economy continues to be in pretty
Speaker 3: good shape and that gives any new administration some tailwinds.
Speaker 3: But of course they need to also continue to imagine
Speaker 3: where we are in the election cycle, and they also
Speaker 3: have to pay attention to deficits and national debt and
Speaker 3: all the things you've been talking about.
Speaker 2: You know, there's the election itself, the vote, and then
Speaker 2: there's the moment.
Speaker 1: Till the vote is certified.
Speaker 2: Do you expect uncertainty to clear up quickly or do
Speaker 2: you think it will last for a while.
Speaker 3: I know what I'm hoping for is what we will
Speaker 3: hope for, which is that the election is a certain outcome,
Speaker 3: and then we just go about getting a sense of
Speaker 3: what policy is. If there's uncertainty, that could go on
Speaker 3: for a bit of time, but markets tend to be
Speaker 3: reasonably sanguine about that kind of uncertainty.
Speaker 1: For a number of days. There could be some jittery behavior,
Speaker 1: but assuming we know where we're going, the markets should
Speaker 1: align in due course. You know.
Speaker 2: Another uncertainty is capital rules around the big banks. The
Speaker 2: US is mulling revised capital rules with lower capital requirements
Speaker 2: that initially put forward. How do you feel about the
Speaker 2: direction of travel.
Speaker 3: I feel like the direction of travel has been constructive.
Speaker 3: We are carrying a capital buffer, as you know, about
Speaker 3: one hundred and sixty basse points. We continue to carry
Speaker 3: that kind of buffer because it's an uncertainty.
Speaker 1: It affects Morgan Stanley.
Speaker 3: And you know, if I think about the three pillars
Speaker 3: of things that I care abouttionality at this place, I
Speaker 3: care about a strategy which is to raise managink capital
Speaker 3: for individuals and institutions. I care about our culture, which
Speaker 3: is one of rigor and humility and partnership, and I
Speaker 3: care about financial strength, capital liquidity. So whatever the we'll
Speaker 3: call it, visisitudes of the discussion going into the election.
Speaker 3: I think it's it's probably the case that we're not
Speaker 3: going to have resolution on.
Speaker 1: This until after the election.
Speaker 3: But I think the industry has made its case on
Speaker 3: where some real modifications should be made, and I think
Speaker 3: the regulator is largely listening and we'll have to see
Speaker 3: how that plays out coming out of the election.
Speaker 2: Ted, do you think if Trump were to win the election,
Speaker 2: that these capital rules are revised almost entirely.
Speaker 3: No way of knowing, No way of knowing, because I
Speaker 3: think in fairness, there is a desire to put the
Speaker 3: puck on the ice, and it may be in everyone's interest,
Speaker 3: whatever the administrative combination, to get something done.
Speaker 1: And if the industry feels.
Speaker 3: It's reasonable, and it's reasonable for mainstream and for our
Speaker 3: client base, there.
Speaker 1: Will be an effort to go forth.
Speaker 3: On the other hand, if it continues to be a
Speaker 3: tough one, we're going to have to continue to talk.
Speaker 2: You know, one more question for you before I let
Speaker 2: you go today. I was joking it's like the comeback
Speaker 2: of the Morgans. Your stock commands a higher price to
Speaker 2: book ratio than even JP Morgans does today. Why do
Speaker 2: you think that is?
Speaker 3: Well, I think it's because we've got we've got a
Speaker 3: durable business model and we know we do you know,
Speaker 3: we raise, manage, an allocate capital for clients, individuals and institutions.
Speaker 3: And that puts us in two spaces that are secular
Speaker 3: growers and they're global growers. The classic wealth management business
Speaker 3: with fifteen thousand financial advisors, our fantastic e trade platform,
Speaker 3: our growing workspace, our investment management solution with its parametric
Speaker 3: attacks customization product part of a growing investment management space,
Speaker 3: as you know, that is a secular grower for alts.
Speaker 1: And then the investment bank, where there's a.
Speaker 2: Ton of gross we have to leave it there at
Speaker 2: Congress on the report today of Corset is Ted Pick.
Speaker 2: He is the CEO of Morgan Stanley.
Speaker 1: Thanks you know, ling