The Transcripts

Morgan Stanley (MS) Q1 2023 Earnings Call Transcript

Operator Good morning. On behalf of Morgan Stanley, I will begin the call with the following disclaimer. This call is being recorded. During today’s presentation, we will refer to our earnings release and financial supplement copies of which are available at’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.James Gorman Good morning, everyone and thank you for joining us. The first quarter of 2023 was very eventful for our industry, but not so eventful for Morgan Stanley. Firm delivered strong results with revenues of over $14.5 billion, net income of $3 billion, ROTCE of 17% and net new asset flows of $110 billion. At the same time, we bought back $1.5 billion of stock while maintaining a CET ratio of 15.1%. In many ways, it was an excellent test to Morgan Stanley and the opportunity to show the strength and stability of our business model.Let me just touch briefly on the turmoil and the banking sector. In my view, we are not in a banking crisis, but we have had and may still have a crisis among some banks. I believe strong regulatory intervention on both sides of the Atlantic led to the cauterization of the damage. I consider the current issues is not remotely comparable to 2008. I was pleased that Morgan Stanley, along with the other large U.S. banks, became part of the solution by providing an uninsured deposit line of $30 billion to First Republic Bank. Someone who lived through the darkest days of 2008 where Morgan Stanley was seen as part of the problem, it’s indeed rewarding to be here 14 years later as part of the solution.Turning back to our own company, while the performance of the overall business was strong, the results reflected the impact of the environment. In Wealth Management, positive flows of $110 billion were a very strong result, reflect continued growth in the model together with the flight to quality. This obviously gives us a good start to our 1 trillion every 3 years target. Investment management also benefited from diversification as long-term outflows moderated and we saw strength in Parametric and also in the liquidity product. Overall margin in the Wealth Management business was 26%, impacted by modest increases in credit reserves, slightly lower growth of NII versus forecast and ongoing integration expenses. We continue to focus on the levers within our control with an eye towards expense management. In ISG, underwriting and M&A remain very subdued. As I have said previously, these are revenues delayed, not dead. Already, we are seeing a growing M&A pipeline and some spring-like signs of new issuance emerging. That said, it largely remains a back half 2023 and full year 2024 story.On the positive side, our fixed income and equity trading teams performed very well in managing through some historic rate moves. Total trading revenues were solid. I expect the markets to remain choppy through this earnings season and for the next several months. However, absent any geopolitical surprise or limited progress on bringing down inflation, I think 2023 is likely to end on a constructive note in most areas. Morgan Stanley is very well positioned not just for 2023, but for several years ahead as we see significant growth opportunities across all three of our client platforms.I will now pass it over to Sharon for more details on the first quarter.Sharon Yeshaya Thank you, and good morning. The firm produced revenues of $14.5 billion in the first quarter, our EPS was $1.70, and our ROTCE was 16.9%. The firm’s results demonstrated the durability of our business model, evidenced by the resilient ROTCE, robust asset consolidation and wealth and our stable capital and liquidity levels. In institutional securities, fixed income and equity supported our clients while navigating volatile markets.Wealth Management showcased $110 billion of net new assets and investment management continued to benefit from the investments we have made to diversify our offerings. The firm’s first quarter efficiency ratio was 72%. Deferred cash-based compensation plans negatively impacted our firm’s efficiency ratio by approximately 60 basis points. Ongoing technology and marketing and business development investments as well as higher litigation costs increased operational expenses versus the prior year. Given the broader market uncertainty and the inflationary environment, expense management remains a priority, although we continue to prioritize investments in our long-term goals.Now to the businesses. Institutional Securities revenues were $6.8 billion, an 11% decline from the very strong prior year. Fixed income and equity results partially offset weakness in banking as we helped our clients intermediate markets through this period of heightened uncertainty. From a regional perspective, Asia delivered its third highest quarter ever with strength in areas of both fixed income and equity aided by the policy dynamics in Japan and the China reopening.Investment Banking revenues decreased year-over-year to $1.2 billion, solid revenue in advisory supported results while ongoing market volatility continued to pressure equity and non-investment grade underwriting. Advisory revenues were $638 million, benefiting from the completion of previously announced transactions. Revenues were down versus the strong prior year on the back of lower announced volumes in 2022.Equity underwriting revenues were $202 million, down 22%, largely as a result of depressed IPO activity. While IPO and follow-on activity remained muted, issuers selectively access market windows. Fixed income underwriting revenues were $407 million. Results were supported by an open investment grade market and opportunistic loan activity. Clients are engaged as we help them navigate an uncertain backdrop and our investment banking backlog is building. Financial sponsors continue to look for opportunities to invest.Within underwriting, we are encouraged by the issuance activity during constructive windows. Of course, further conversion from pipeline to realized is predicated on clarity around macroeconomic conditions, stable financing markets and increased corporate confidence. Equity revenues were $2.7 billion, a solid quarter against an uncertain and volatile backdrop. We continue to be a leader in this business and the results reflect our global and diversified footprint. Cash revenues decreased versus the prior first quarter on lower global volumes. Derivatives results were solid compared to a strong quarter last year as we help navigate – as we help clients navigate challenging markets.Prime brokerage revenues were down as equity market levels declined. Clients remained engaged and balances increased steadily throughout the quarter. Fixed income revenues of $2.6 billion were strong, though lower versus the prior year’s elevated result, which was impacted by the beginning of the Fed rate hiking cycle and a start of the war in Ukraine. This quarter’s performance was driven by rates and credit. Macro revenues were down modestly year-over-year with relative strength in rates versus foreign exchange in the comparison period. The volatility created by varying expectations around global central bank policy aided results across regions. Micro results were up versus the prior year, supported by client engagement.Commodity revenues moderated meaningfully compared to the robust results in the previous first quarter largely due to reduced volatility in European markets and the mild weather in the U.S. Other revenues of $245 million improved versus the prior year, largely driven by higher revenues on corporate lending activity and gains related to DCP.Turning to ISG lending and provisions, our allowance for credit losses on ISG loans and lending commitments increased to $1.3 billion. In the quarter, ISG provisions were $189 million and net charge-offs were $70 million. The increase in provisions was driven by the higher recessionary probability and worsening outlook for commercial real estate. The charge-offs were substantially all from a handful of specific loans.Turning to Wealth Management, revenues were $6.6 billion. Movements in DCP positively impacted revenues by approximately $100 million compared to a negative impact of nearly $300 million in last year’s first quarter. Net new asset growth of $110 billion was a standout as we continue to execute on our long-term strategy. Pre-tax profit was $1.7 billion and the PBT margin was 26.1%. The margin reflects a more favorable revenue mix offset by higher credit provisions and an increase in expenses as we continue to invest in our business, inclusive of integration-related expenses. Credit provisions were $78 million, including those that impacted revenue and the integration-related expenses for the quarter were $53 million, in line with our expectations.Forward growth drivers remain robust. Net new assets were very strong at $110 billion for the quarter, representing a 10% annualized growth rate of beginning period assets. While NNA will be lumpy and should be looked at on a full year basis, the results illustrate our ability to attract assets and the payoff of our investments to support growth. We saw contribution from all channels with notable strength in the adviser led channel, particularly amongst existing clients. The events in March and the rising interest rate environment over the past year impacted client behavior. Clients increased their allocation to cash equivalents such as money market funds and U.S. treasuries by over 60% versus last year. At the same time, deposits declined in the quarter by 3% to $341 billion. We believe investable assets stayed within Morgan Stanley as our clients worked with advisers to help navigate the volatile markets.Today, adviser-led assets invested in cash and cash equivalents stand at a peak of 23% compared to historical average of approximately 18%. Over time, we believe clients will reinvest these balances across more assets when the market outlook improves. In the interim, given our broad product offerings, clients are choosing to invest in cash with Morgan Stanley through the cycle, positioning us to provide them with more reinvestment choices down the road.Net interest income was $2.2 billion, up 40% year-over-year. Results reflect the impact of higher interest rates and lower sweep balances. Fee-based flows of $22 billion were strong. Asset management revenues were $3.4 billion, down 7% versus last year, reflecting lower market levels. Transactional revenues were $921 million. Excluding the impact of DCP, revenues were down 12% versus last year due to fewer new issuance opportunities and reduced activity levels compared to the beginning of 2022.Lending balances declined this quarter to $144 billion, led by pay-downs in securities-based lending, reflecting the higher interest rate environment. Importantly, our strategy is working and we are seeing channel migration from workplace to adviser-led. Adviser-led flows, originating from workplace relationships reached $28 billion in this quarter alone, double versus this time last year and this compares to the approximate $50 billion we saw annually over the past 3 years. Furthermore, almost 90% of these flows were from assets held away, also consistent with what we have seen historically. Our strategy remains in place to best serve our clients and support the firm’s path to reach $10 trillion in client assets.Moving to Investment Management, revenues of $1.3 billion declined 3% year-over-year, primarily on lower AUM due to the decline of asset values and the cumulative effect of outflows over the prior year. Total AUM ended at $1.4 trillion. Long-term net outflows were $2.4 billion as equity outflows moderated in the quarter. In fixed income, outflows in floating rate loans were partially offset by high yield and emerging markets. Finally, alternatives and solutions delivered strength, driven mostly by demand for Parametric’s fixed income customized portfolios as well as inflows into private credit.Liquidity and overlay services had inflows of $13.9 billion. Positive liquidity inflows of $37 billion were partially offset by outflows related to a single client relationship. Asset management and related fees decreased versus the prior year to $1.2 billion due to lower average AUM, partially offset by higher liquidity fee revenue. Performance-based income and other revenues were $41 million. Results were supported by gains in our private alternatives portfolio, reflecting the diversity of the platform.Integration-related expenses were $24 million in the quarter in line with expectations. A key focus area remains maximizing our global distribution capabilities and we continue to see momentum internationally, particularly from the Eaton Vance fixed income team. Our investments across a broad array of strategies and capabilities, including active ETFs, Parametric customization and alternatives position us well to benefit from the diversification as well as to serve our global client base.Turning to the balance sheet, spot assets were $1.2 trillion, largely in line with the prior quarter. Our standardized CET1 ratio stands at 15.1% and SLR at 5.5%. Standardized RWAs increased quarter-over-quarter, primarily on client activity, consistent with seasonal patterns. We continue to deliver on our commitment to return capital to our shareholders, including buying back $1.5 billion of common stock. Our tax rate was 19.3% for the quarter. The vast majority of share-based award conversion takes place in the first quarter, creating a tax benefit. We continue to expect our full year tax rate to be approximately 23%, which will exhibit some quarter-to-quarter volatility.As James discussed, the fallout resulting from the events in March is not indicative of the systemic stress that the industry faced during the global financial crisis. Our clear and consistent strategy allowed us to enter this environment well positioned. The outlook for the remainder of this year is difficult to predict. We are keenly aware that opening and functioning markets and economic stability are integral in aiding confidence moving forward. In the interim, we remain focused on supporting our clients and attracting assets to our platform.With that, we will now open up the line to questions.Question-and-Answer Session Operator Thank you. [Operator Instructions] We’ll take your first question from Daniel Fannon from Jefferies.Daniel Fannon Thanks. Good morning. Just thinking about the environment and the opportunity, can you talk about adviser recruitment, I assume retention is high, but as you think about the opportunity, given some of the fallout with some of the regional banks, in the current environment. Maybe talk about how you are positioned and maybe how that differentiates versus say a year ago?Sharon Yeshaya Certainly. The adviser recruiting pipeline remains healthy. We continue to see assets aggregated from all channels, as I mentioned, both recruiting, adviser-led and workplace and when we compare it to a year ago, I think that what we continue to see is that we remain a destination of choice, not only for new advisers, but also obviously, as we stated, from the assets held away that we continue to aggregate in both the net new assets from existing and from new clients.Daniel Fannon And then just as a follow-up, with NII, generally probably a little more challenged versus where we were last year, how do you think about wealth management margin expansion in this environment? And maybe specifically, can you talk to you the NII trends as you think about this year and how we should think about that given some of the deposit dynamics you mentioned as well as the current rate environment?Sharon Yeshaya So first, let’s take NII. As we said, what we have been looking at is we thinking about it in terms of modeled client behavior. Obviously, March itself had a different modeled client behavior than we probably would have expected for other months within the quarter. But when we look ahead, we are currently not expecting expansion of the quarterly NII as we go forward. Now as that relates to the margin, a 26% margin, obviously, is still impacted by certain things, such as integration-related expenses. We mentioned also litigation and we continue to really invest in the model as we go – as we have and also as we go forward. All of that being said our eyes are still on the 30% goal that we have set forth and we will continue to achieve as we move through time to progress to those goals.Operator We will hear next from Glenn Schorr from Evercore.Glenn Schorr Hello. Thanks. Maybe we could follow-up on that conversation. I’m just curious, you mentioned that interesting stat of 23% sitting in cash and cash equivalents, up from 18% historically. If we weave that into normalizing over time, but also deposits were down 3% and cost of funds is up a bunch. As we go through the year, do you anticipate the normalization of the cash component at the same time, deposits continue to come down and migration continues to be yield seeking, like can – I guess, my question with all that ramble is, can the margin get back into that range while we have these cash leaking and yield-seeking behavior is happening?Sharon Yeshaya So I think that for us to predict exactly what the behavior will be. Obviously, if we think about what happened in March, that’s a very difficult thing to predict. But I think what you’re highlighting in your question, Glenn, as I parse out the very beginning of it, is right now, cash and cash equivalents are at a higher level, a higher level than we have ever seen historically. As we begin to see those assets be deployed into different types of products that ability and that advice will obviously be accretive. It will also help us as you see asset levels rise. So there is a pull/push factor as you think about those things. In addition to that, as we continue to aggregate assets, we will gain from scale, the more assets that we see, the more we will see in balances, the more that will probably help as you think about just what the cash balances are more broadly because assets are being attracted platform. And in addition to that, we will gain for the longer objectives of what that might mean for the margin and for the wealth management business more broadly.James Gorman If I could just add and excuse my voice, I have a chest cold. Glenn, on the simple math to take the margin of that business from 26% to 28% is about $120 million. Obviously, we’re still absorbing some integration stuff relating to the platform that will be done this year. We had slightly higher reserves. We’ve been investing pretty aggressively in the business and, frankly, I think, prudent – appropriately, the payoff is the $110 billion, which is a net new asset organic growth of 10%. So I’ll take that any day long, the assets to sustain the building. So yes, we have a lot of levers to push that margin around a couple of percent points. That’s not, frankly, a source of great anxiety to me at this point. And I think you’ll see us probably push a few of those levers as we get through this year and certainly next year. So the trade-off is, I think we all want to keep investing for growth. We see a real window here. This $10 trillion target is for real. The tree in every 3 years is 300 – whatever it is, $330 million a year, $333 million, I guess. And starting off with $110 million, I think we have pretty good visibility to net new money. So it’s a balance. But as we get through this integration as it’s finally completed, some of those costs roll off. We will get a little tighter in the expense management in the wealth business. I know Andy and his team are already focused on that. So – and then the deposit stuff will – it’s kind of going to be what it’s going to be depending on where rates go and what the Fed does.Glenn Schorr Appreciate that. And thank you for fixing my question. The follow-up I have a simpler on commercial real estate. Can you just help us just dimensionalize the portfolio? What exposure do you have? And how do we get comfortable that this is going to get that keeps on giving, like I’m sure there is details within the provision that you took that could help us? Thanks.Sharon Yeshaya Absolutely. I think what’s important about that portfolio is that it is diversified, in addition to that, we have been reducing the exposure in the ISG direct CRE portfolio over the course of the last year or so. So obviously, we keep our eyes on it. As you know, CECL is a life-of-loan concept. And so as you see economic deterioration, you do need to account for that. And the same goes for what we’re seeing in the commercial real estate market. So I think that those are the two main points I would point you to is that it is diversified, and we have been continuing to reduce that direct exposure.Operator We will hear next from Ebrahim Poonawala from Bank of America.Ebrahim Poonawala Good morning. I guess just first question, I wanted to follow-up, James, a comment you made about being expecting 2023 to end on a constructive note. I was wondering if you can elaborate on that just in terms of a lot of this is tied to macro. How do you think the economy paying off in terms of the Fed’s fight against inflation damage it does to the economy in the markets? And as you think about ending 2023, where do we think – where do you think we will be on all these fronts by the time the year ends?James Gorman Well, our house call out for the markets went about flat from where they started at the beginning of the year, and they certainly support that. I think the two wildcards out there are geopolitical risk, which we can’t really handicap my gut is that the U.S.-China relations while having the moments tension remain overall stable through this year and global trade remains stable. The second risk, of course, is that the Fed’s actions doesn’t bring down inflation. Well, the evidence so far is it is bringing down inflation, but they are probably not done. I think it’s likely we will see at least one more and possibly two more rate increases. That gets you to sort of high 5%, 6% type interest rates, which is not shocking. And if we get through that, again, many people are calling for a modest recession, it might be, I don’t know, obviously, but got is, whether it’s a modest recession or we dodged that bullet. Sort of doesn’t matter that much. What really would matter is if inflation is not tamed, it has to go much higher than people are expecting. You go into a much deeper recession it’s certainly not a likely outcome at this point. So that’s why I said I think I used the words constructive.For Morgan Stanley, if the sort of green shoots we’re starting to see. Again, I don’t think they are a Q2-type event but back half of the year and next year in banking and underwriting, we just had a Global Risk Committee yesterday discussed some of the stuff and certainly the underwriting calendar, it looks like it’s picking up a little bit through the back half of the year. I think the wealth management, what Sharon pointed to, the 23% in cash like security is moving into active investments, that will happen. I mean through the long history of this business people don’t hold a quarter of their money in cash. They just think it is not real. So – and I suspect once we pass this sort of inflation Fed action, there will be a long pause would be my gut followed by some rate cuts starting in 2024. I do not expect that this year. So when I put it all together, relative to sort of other periods that I’ve been through my career, I think it feels given the landlord, given the geopolitical stuff, given the inflation surge given COVID, it actually feels surprisingly benign from what it could have been.Now that’s not denying there are clear stresses, the commercial real estate that I think Glenn just asked about across the banking sector, what’s going on in some of those banks with very idiosyncratic portfolios that frankly didn’t match duration interest rate risk, well, is were issues. There are parts of the world that are still having slow growth. So it’s not a perfect kind of remains the rolling on song, you can’t always get what you want but you get what you need. And I think about Morgan Stanley coming out of this, and we’re kind of getting what we need. We’re getting a 15% CET1. We’re getting a 17% ROTCE decent revenue, decent earnings, obviously, opportunity to take some costs out and I think very well positioned on a go-forward basis. So that’s where the word constructive came from. Sorry, it’s a long answer for one word.Ebrahim Poonawala No. I appreciate the color. And just as a follow-up, when we think about capital return in terms of one, the pace of buybacks, given the macro uncertainty, any perspective there? And just opportunistically, do you see this as creating opportunities inorganically M&A-wise for Morgan Stanley as we look forward?James Gorman We’ve maintained – it’s a very good question. I’ll deal with sort of what the capital position is now and what the opportunities are for excess capital. On the capital position now, CET1 is running at 15.1%. We obviously have control over that dial to a large extent. So – and we have tilted conservative. I think it’s fair to say. I haven’t seen all the numbers, but I’m pretty sure we’re at the top or above all of our competitors set again, and we’ve been that way for quite a while. So on current capital requirements with the last stress test, we’re at 13.2%, I think or 33%, somewhere around there. So 15% is a very healthy buffer. But we’ve got a new stress test coming out. So many people feel that’s going to be a little tougher than what it was last year. It might be, and we’ve obviously got plenty of capital for it. So I don’t expect any issues whatsoever. And then we have Basel III coming out in, I think, sort of late May, June time period where – and again, that will be implemented probably 2025 that looks like earliest. So again, there is time for the banks to adjust their capital position. So we will have much better visibility as to what we’re dealing with by, say, July 1. And I – again, I don’t – I suspect it might drive some changes in how we run our balance sheet, but I don’t think it’s going to involve anything particularly draconian.Now given that, we like to maintain a healthy buffer. We have done, obviously, the deals we did in the last couple of years, E-Trade and Eaton Vance, which I just said I couldn’t be more happy with both the timing of those deals, the pricing of those deals and the performance of the businesses. And when we see a really robust market environment, you’ll see that even more so in spades. We’ve had a very healthy dividend yield. I think it’s over 3.5% churn, something like that now. We believe in the dividend. I’ve said for years, and I think of the wealth management business is a dividend stock, and we’re clearly making more money in that business than we’re paying out a dividend. And we’re buying back. I mean we dove the buyback down a little bit. I think to $1.5 billion, we’re probably running at $2.5 billion at our peak last year on a quarterly basis. And we did that just – it was an interesting environment. I mean, let’s just say you had two of the biggest banks fail in the last 15 years. So being a little prudent a little conservative, watching that going on, you don’t want to be too grabby is my attitude. So I think we have lots of flexibility. There is no doubt we can and over the years, we will do more acquisitions in my mind. There is no doubt about that whatsoever. And it will be in the wealth and asset management space and we constantly keep a list of who’s attractive and who would be a good fit.But obviously, I couldn’t say if there was something imminent, but there is nothing imminent, but it’s something we focus on. So again, I’m sorry, I’m giving long answers this morning. It must be this cold that I’ve got.Operator We will move next to Steven Chubak from Wolfe Research.Steven Chubak Hi, good morning. So I wanted to start off just unpacking the NNA lows that you saw in the quarter. I mean 10% is really an impressive result. The fee-based flows continue to lag brokerage. And just wanted to better understand what you see as a sustainable fee-based flow rate. And just as we try to evaluate the durability of 10%, how much of the quarterly inflows were from FRC where you’re clearly a destination of choice for some of those attriting advisers?Sharon Yeshaya I’m going to try and remember all of your questions, Steve, in order. So if I forget one, just remind me. The first point on FRC, I’ll take first. In terms of the regionals, more broadly, as I mentioned in the prepared remarks, I believe we had about $90 billion that came in without any relationship to those regionals. And so that shows cases to you that’s well above the average that we’ve seen. So I think it just continues to show that the investments that we have made are really working as we move forward. So that’s sort of point number one. The second point that I mentioned, and I think you asked where are those assets coming from? It’s really – in this particular quarter was in that adviser-led space both from existing accounts and new clients. To me, what was most remarkable when I was going through the diligence materials really was what we’re seeing from clients. So the idea that we continue to be a destination of choice for our existing clients and attracting assets held away, again, speak to all the conversations that we’ve all had over the course of the last 7 years or so talking about investments to give our advisers more time to service their clients as we move forward.Then the final question that you asked around the fee-based flows actually a very strong fee-based flow number, to be honest, from our perspective in an environment where individuals – we think about it, cash and cash equivalents are high. You’re thinking about putting your money into managed kind of accounts associated with it from that fee-based concept, you’re unlikely to do that in a period of time where you think the cash and cash equivalents and safety might be what you’re looking for right now. And so that is, in fact, the dry powder that we have that over time could move into the fee-based assets. So I think it’s actually a strong number given the environment that we have on the backdrop.Steven Chubak Really helpful color, Sharon. And just for my follow-up, with – on sweep deposits, those are now running below 4% of AUM. That’s historically been a strong support level for transactional cash within the advisory space broadly. I was hoping you can give some perspective on how we could think about where sweep CAT could potentially bottom and have you seen any continued mix shift into sweep or deposit pressures in April so far?Sharon Yeshaya As it relates to April, I talked a little bit in one of the earlier questions about modeled client behavior. And that what we did see is that in March, we really deviated from some of that modeled client behavior. Now in April, we have been more in line with modeled client behavior. So that does speak to your point of maybe we are in a position where from a transactional patch level, we are there. But again, as James said, it is an uncertain environment. And so from that perspective, we will have to wait and see how we move through time from here.Operator Moving next to Brennan Hawken from UBS.Brennan Hawken Good morning. Thanks for taking my questions. I’d actually have to follow-up on that last question from Steven. So April is more modeled April is typically a tax payment month, which is a headwind. So are you seeing – where is that cash getting funded from? Are you seeing some of the taxes – tax payments coming out of both sweep and the other higher cost deposit sources? Is it more biased to the higher cost? Could that provide some relief? And when we put all that into the mix and think about NII going forward, should we be thinking about stable NII we know it’s not growing, but funding this funding cost elevation maybe could lead to some downside. So curious how we should be thinking about that.Sharon Yeshaya I think that your question in terms of April in terms of where it’s coming from the exact breakdown is challenging to see in terms of exactly where it’s coming from, from all of the deposits perspective because there is could, as you know, cash is fungible, so you could take something and then move it into a different security or a different asset. To parse that out, is challenging. I do think that what’s more important, as you highlight, is that it is tax season. And so to not see an acceleration is obviously one of the more optimistic signs that you are moving through more model client behavior. Now what it means from funding, we obviously have many funding different places. I don’t think that funding is concern, as you mentioned, it does matter from an NII perspective, but it will be a function of two things, Brennan. As you know, rate expectations have also changed since January. And so our NII forecast and predictions are based on models client behavior in terms of cash, sweep etcetera, and also where interest rates are and where the forward curve is for Fed bonds. And so as you begin to see if that changes, that could change your NII forecast. We are still, if you look at models client behavior, asset sensitive. And so from that perspective, I think that gives you a few different pieces to put together in terms of how to think about the forward look based on deferred assumptions.Brennan Hawken Okay. Thanks very much. Obviously, a lot of uncertainty, so I appreciate that color. And then one more on the net new asset component. Sharon, you guys have an offer for – promotional offer and it’s tied to higher yielding cash alternatives. What percentage of the net new assets came into – from that promotion this quarter? In the past, you’ve spoken about how when you bring that cash in a majority of it stays in the system. Do you have any more granular statistics on what portion of that stays in the system? It’s obviously good that it comes into the system, but kind of curious when we think about stickiness and how much is hot money and how much is actually durable? Thanks.Sharon Yeshaya So the best way to think about the stickiness within the system is actually NNA right, because you’re going to see the outflows would be a net negative to the NNA more broadly. And so the consistent growth over time, if you look at it all the way back even to when we saw promotional levels back, I remember we spoke about this in ‘18 and I think it was ‘17 and ‘18. In those early years, that was still seeing net new asset inflows over time. So, for me, the most important thing is, well, what’s the net, the net continues to be positive and continues to ramp higher. In terms of the CD exact offerings and what that would mean from NNA, it’s considered NNA if it’s brought out from outside of the firm. And again, what’s important here is that we continue to see more in the advisor-led space. And that over time, again, think about the channel migration from workplace into the advisor-led space. What’s important here is that when people begin to seed money into advisor-led, we actually see more money from assets held away. So, I know that doesn’t answer your question directly, but I think it’s important to highlight, as people begin to work with an advisor, what we said to you is 90% of the assets that then come are from assets held away outside the building. So, just again, another proof point that once they understand what the advisor has to offer, it helps aggregate new assets into our system.Operator We will hear next from Gerard Cassidy with RBC Capital Markets.Gerard Cassidy Thank you. Good morning. Sharon, can you share with us, when you guys talked about, I think James said around 25% of your Wealth Management customers’ assets are in cash or cash equivalents, which is high, of course. What interest rate do you guys sense, meaning do rates at the fall 100 basis points or 200 basis points for that money to move back into more traditional assets?Sharon Yeshaya So, I don’t actually know that it’s the absolute value – the rate level. And I will answer it in two different ways. First, you have to remember that the events in March didn’t make people – I mean, we all read the popular press and most individuals begin to think about what is the most risk-free asset, that being a U.S. treasuries. So, one should not be surprised if they begin to move assets into U.S. treasuries. So, I do think that it’s a function also of uncertainty and not just the absolute level of where interest rates are or aren’t. Now, as I have said, we have these moments that are opportunistic, both when you think about the corporate activity and then when you think about the individual activities, so both for ISG and in Wealth Management. And that was evidenced last August, last October and then earlier in January and February that when markets become calm that you begin to see movements into asset classes and further activity as evidenced by our self-directed channel as well. So, I don’t know that there is an absolute level of rates, but I would say it’s related to confidence in the system more broadly and a belief in asset levels being in a place that will bottom and then potentially will rise as we go forward.James Gorman I totally agree with that. I think Gerard, if people can get a 4%-ish return in a very uncertain environment, that’s not a bad thing to have in your portfolio, at least for 25% of their portfolio. As they get better visibility, as we all get better visibility of when the Fed stops moving and did we go into this recession that some appearing or not or if it’s modest, then I think you will start seeing more engagement. I mean it’s just, we have all been through this. It’s human behavior. We have had a pretty significant shock to the system in the last few months, which thankfully the world kind of – the financial world got through, but could have turned sideways. And higher rates came at a time of increased uncertainty. So, it’s entirely rational that people would take advantage of higher rates and increased uncertainty by parking in cash, but they are not going to stay in cash at 4% forever. That’s not going to help.Gerard Cassidy Thank you. I appreciate that. And then just as a follow-up question, Sharon, you talked about the credit, the provision and linking into commercial real estate. Of the total loan portfolio, what percentage of that is in commercial real estate mortgages? And are there any construction loans in that portfolio?Sharon Yeshaya As it relates specifically to the construction loans, I don’t know about the exact construction loans that you might have. I am certain that somewhere there could be a construction loan. But more broadly, I think the absolute level, we do disclose from the ISG side around that $10 billion, and that was in our filings from last quarter.Operator Devin Ryan from JMP Securities.Devin Ryan Thank you. Good morning. I just want to start just on market share opportunities that maybe are accelerating here. You touched on some on the call, but one of your peers highlighted your private banking in Europe, just on the heels of some of the banking stress or potentially even just opportunities where you are going to get paid more for committing capital when your capital is becoming more scarce in the system. So, just love to maybe think about some of the things that you are seeing just over the last month or so that might be sustained going forward.Sharon Yeshaya On capital opportunities, in Europe. Sorry, could you repeat what’s the question?Devin Ryan Yes. The question is just where there is opportunities to take market share kind of in the wake of the banking turmoil. So, one peer had highlighted private banking in Europe as one example. But just whether there is others as well here, just on the heels of the recent stress?James Gorman Yes. Devin, let me have a go at that because that probably builds off the capital discussion and where we would invest. We do not have an appetite for private banking in Europe. In fact, we sold our Private Bank in Europe to Credit Suisse several years ago. It’s one of the first things I did, because we would had an unhappy experience. We had owned the business for 21 years, and we lost money for 20 years of them. And I kind of took a fairly simple view that if you lose 20 years out of 21 years, you have probably got to lose it. So, we got out, you need scale. And frankly, it’s not a good fit I believe, with the current regulatory structure that we operate under, so much more interested in the U.S. and Asia and some in Lat-Am. The U.S. business, it’s just going to be an asset gathering monster. To bring in $110 billion in one quarter and $1 trillion over the last 3 years, there aren’t many companies in the world that have a trillion assets under management. So, I think we have got to keep our eye on the prize here and not get distracted by going down some rabbit hole because somebody else is in stress, maybe somebody else is in stress because it’s not a very attractive rabbit hole when you get down inside it. We know what we have got here, and it’s a killer machine. Asia is growing nicely. Again, Lat-Am some, but the workplace conversion is a massive opportunity now that we are focused on. Obviously, we are tracking financial advisors from seeing somewhat of a safe harbor, I guess across the industry. In our organic flows, if you compare them to our traditional competitors, the warehouses or the online brokers, our organic flows, I think are on an annualized basis, significantly higher than the traditional players, and higher than anybody in the industry. So, that’s how we think about it, again, Asia more interesting, Europe not interesting, Lat-Am a little bit interesting and U.S. definitely interesting.Devin Ryan Got it. Okay. Thank you. Helpful. Just a follow-up, it sounds like you are starting to see maybe a little bit better momentum with financial sponsor clients. I would love to maybe just touch on those specifically and kind of what the appetite is to do deals or to sell assets and kind of what the – you think the trigger point is to kind of engage them further?Sharon Yeshaya Certainly, I mentioned is actually when I spoke at a February conference this year, which is that when you think about financial sponsors, they may be in a different position than what we would consider traditional M&A, i.e., they are faster to market. They are in a position where you might not have the same level of activity from a Board. And because of the size, you might have different regulatory restrictions. And so from that perspective, we would expect that they might be first before we see really traditional activity open up. And that is – that remains kind of the view that we have and also as the pipeline begins to build, that’s also what we are seeing. In order for that to move forward and become realized, it’s really about the opening of the markets in terms of the financing activity. As we have seen some of the backlogs clear, that’s clearly very helpful. But again, it’s about stabilization and it’s about confidence.Operator We will move next to Mike Mayo from Wells Fargo.Mike Mayo Hi. What is going so right – what is going so right in Asia that it’s your third best quarter in an environment like this? And then what is going so wrong in investment management since you closed Eaton Vance, the first full quarter, it was second quarter ‘21, if I have that correctly. Investment management revenues are down almost one-fourth. So, shout out to certainly E*TRADE and wealth doing well. But in terms of investment management, like it just looks from the outside like Eaton Vance panning out the way you expected. But first, the positive on the Asia was going right and then the negative one, what’s not going right in the investment management?Sharon Yeshaya Certainly. So, let’s take Asia first. What we saw over the course of the quarter was China reopening, obviously, supporting us from the equities side and perspective in terms of client engagement. And what’s going right also from Asia has been the – what we have a franchise that we have really built in Japan. And in an environment where interest rate dynamics change, such as what’s going on within Japan, that certainly helped us from the macro perspective and the macro business within fixed income. So, I think that we are – that’s very important and critical is that it speaks to the global perspective, and it speaks to our global franchise. Why that is important when you think about investment management, and I will tie the two together is that you have to invest more broadly to be able to create an environment of diversification. And so Asia might be asleep. Japan, for example, could be asleep for many years, and all of a sudden, Central Bank activity picks up, and you are there to support your clients with that global franchise. Think about investment management quite similarly. What we are doing is we continue to build a franchise where we are able to have diversified products that are there to capture our client assets. You highlighted what’s going on within the investment management. Well, asset levels are down tremendously. However, since we have purchased and we announced the deal associated with Eaton Vance. Look at Parametric, we have raised over $45 billion in that product alone, again, diversification of the portfolio, diversification of product to be there in a period of time where you see activity. That’s what we are trying to do and build.James Gorman Yes. I mean I will just add, I wouldn’t frankly, render a judgment yet on the Eaton Vance deal. I think it’s a little soon through a challenging market environment. I would tell you, I am personally thrilled with it. And I am highly confident that 5 years from now, we are going to look back and be thrilled with a lot of people said that Smith Barney deal was a dumb idea. And a lot of people said, E*TRADE is a dumb idea. And a lot of people said we overpaid for Solium and these things have moments of sort of settling, if you will. It’s like good house its foundations have to settle. And in a very challenging environment, I think the business is holding up, right. So, I am very happy with that transaction, great people, great company, some fabulous brands. And I think Mike, if you come back and ask that questions in 3 years’ time, hopefully, you won’t reverse the questions. But maybe you will say what’s going right with Eaton Vance and asset management, and what’s going wrong in some other places. Because I am sure, as I have said in the rolling sense, you can’t always get what you want, given the environment, something might be working. But yes, I am pretty relaxed about that one.Mike Mayo I appreciate the answer. Just a short follow-up, it looks like you are not getting any NII guide, or if you did, I have missed it, and we just want some help with our models here. If you want to kind of guide us in a certain direction, I mean clearly, funding costs have gone up in the industry.James Gorman I mean super hard. I will be blunt. We sort of guided a little higher on growth in the first quarter and came in plus 1%, which I guess was better than most, but just super hard. So, let’s get through – I think let’s get through this quarter. We will learn a lot of taxes. And as Sharon said, it’s kind of the numbers have reverted back to what we are modeling, which is good. We will see that. We will see how much of this cash that’s moving. We will see whether there is further deposit outflows or not. I mean it’s just super hard to guide right now. So, I don’t think I know it’s sort of – I don’t know if it’s fair or not, but it makes your modeling harder, which I appreciate. But also I don’t want to give guidance that we don’t really have an intellectual basis or fact basis for doing it. It’s just too hard. We are not stressed about it, but that much guidance I will give you, but I just don’t want to put numbers on the sheet of paper at this point.Operator We will move next to Matt O’Connor from Deutsche Bank.Matt O’Connor Good morning. Can you talk about the sustainability of the strong fixed income trading revenues. Obviously, on an absolute basis, very good, down from a really strong year ago level and benefited from rate volatility, but at the same time, advisory and DCM was sluggish. So, how do you think about this kind of not just 2Q, but the next several quarters in the kind of environment that we are in and maybe some improvement in IB? Thanks.Sharon Yeshaya So, the – our business has done. I think management has done a phenomenal job in really transforming this business to be a client-centric model focused on velocity of assets, focused on supporting our clients. So, the deeper we have gotten into that, the more we have been able to grow our wallet share more broadly and we have been able to be in and around this 10% number. So, that’s clearly based on the activity that we have seen. Now to your point, should we see an opening up of markets could there be greater activity, that would also obviously support the wallet more broadly, but we would expect to be there to continue to gain our appropriate share of that client activity.Matt O’Connor Okay. And then maybe just broadly speaking, like as you think about client brokerage in both fix and equity, like what’s your thought there in terms of committing capital kind of on an incremental basis, like providing more or less from here or not really any change?Sharon Yeshaya We continued to invest in that business more broadly. You can see that even on the technology side. We are really proud of the equity franchise and business and the transformation that’s had for well over a decade being a market leader. Clearly, as we think about committing capital, it’s also, again, about our clients being active in that market as we see. And I highlighted this in my prepared remarks, we do see client balances increase. We have obviously been there to support our clients. And we are looking for the appropriate risk-adjusted return as we continue to invest in that business.James Gorman Yes. I would just add, if you step back from this sort of over a 5-year view, firstly, just take hats off to the team led by Ted and Sam, Kelley Smith and then Jay Hallik and Jack [ph] in fixed income. It’s come a long way from, I think a 6% share. I think we troughed that. I don’t even know below after crisis might have been much lower, but sort of 6%-ish share per half of the last decade, and then steadily moved up to 10% and pretty stable. It’s kind of what we wanted. I mean – and on the equity side, you can buy share, for sure, more, but you want to be in the part of the prime brokerage business that we want to be in. We don’t want to be in the sort of the broker last resort. So – but if you step back from it and what you have really got is kind of an oligopoly type structure emerged out of the financial crisis where a smaller number of institutions have the global capability for global sales and trading, and we are now one of them. And that was probably not a given 10 years ago. It certainly wasn’t a given. And you have just seen, obviously, Credit Suisse has been merged and that business, lots of parts of that business. I suspect this appear relating to the trading side of the prime brokerage. So, our position gets stronger, not weaker. All that said, we are pretty careful about how much balance sheet we want to use to grow aggressively on the margin because we simply have good options in terms of wealth and asset management businesses. So, it’s a balancing act, but I think the team has done a great job, and I feel really good about where they landed the plane this quarter. tricky quarter, by the way, particularly in rates.Operator We will hear next from Jeremy Sigee from BNP.Jeremy Sigee Thank you. Just quite a specific one actually. I thought comp costs were a bit heavy in wealth and in investment management. And you mentioned the deferred comp plans linked to investment performance. Is that heavier deferred comp cost? Is that something that stays with us throughout the year, or is it – does it move around? Is that a 1Q specific, or is that stuck with us for the rest of the year as well?Sharon Yeshaya Jeremy, as you remember, that moves around with the investments. You will see both on the revenue line and the expense line. And so you should look at them together, and that’s why we have enhanced the disclosure so that you can think about them from both sides, understand both the margin and the comp ratio, both historically and as we move forward.Jeremy Sigee That’s perfect. Thank you.Operator There are no further questions at this time. Ladies and gentlemen, this concludes today’s conference. Thank you everyone for participating. You may now disconnect.