Morgan Stanley (NYSE:MS) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.
Wealth Management Business
Michael Carrier – Bank of America Merrill Lynch: Maybe first question just on the Wealth Management business. So, you’re hitting the margins. You do the buy-in. Just the one area that it just seems like that business still looks a little bit on the low side would just be on the returns (in granted) this quarter. There’s a lot of charges and you don’t get the full benefit. But it just seems like even on an adjusted basis it might be in that 7%, 8%. Just going forward, like what’s the driven there of improving those returns. I mean, obviously, as the margins pick up that’s going to benefit it. But just what’s the long-term opportunity for the return in the Wealth Management business?
Ruth Porat – EVP and CFO: Well, a couple of points. Given there is an acquisition, there is goodwill associated with this. So, the return on tangible equity in the business is about 30% today. And we do see the profitability, the profit margin and the returns on that business increasing. So, up nicely year-over-year, increased versus the last quarter and that really reflects the ongoing strength on the revenue line, the benefit of the cost moves that we’ve made on the expense line. I did call out that there were some higher expenses this quarter; but fundamentally, the benefit on the expense line and we do see longer-term upside as we continue to execute on the lending products. So, again, upside from lending. We revised our target to 20% to 22% by the end of 2015. And again, to be clear, that was with no assumption about higher equity market levels or rate changes and we expect that we would be above 23% with the benefit of markets and rates. The other thing I’d note is that this quarter we did take the charge associated with buying in the balance of the Wealth Management business. That’s $152 million charge. So, the return on equity excluding that’s 10%. But again, I’d focus you to the return on tangible equity given the acquisitions.
Michael Carrier – Bank of America Merrill Lynch: Then maybe just a follow-up on the capital side. So, you gave color on the leverage ratio and the outlook in terms of 2015. In terms of – how do you get there? What are the different leverage points that you have and then any impact on the revenues of the business? And then probably more importantly, given that you got the buybacks this quarter and for the rest of the year, how do you think that plays in, because obviously the earnings power is improving, the leverage ratio is lower, but you are getting some buyback opportunities. And when we think about buybacks going into ’14 and ’15, just any view on that just given the different dynamics?
Ruth Porat – EVP and CFO: So, let me start with the leverage ratio. As I indicated, we estimate we’re spot at about 4.2% this quarter and as I said, we expect to be above 15% in 2015. We do see opportunities with both the numerator and the denominator, and most important, they are very consistent with the strategy against which we’ve been executing. So starting with the denominator where we see a big opportunity, there are a couple things to note. First, with our focus on reducing risk-weighted assets in fixed income, this is not model approval, but passive and active mitigation, and as a result, we’re taking balance sheet down because there’s a relationship between risk-weighted assets and gross balance sheet. So that’s the first point. As we repeatedly said, we’re taking risk-weighted assets down in areas that are not accretive to revenues. So we don’t see that is impacting the business. The second is our focus on central clearing. We’ve talked about that on many calls. We’ve invested meaningfully in central clearing. We’re well-positioned to increase the volume of our derivatives through central clearing and back-loading old trades leads to an elimination of the gross up in the denominator. We’re obviously accreting capital, which benefits the numerator. So when you incorporate both items, $500 million share repurchase we’ve talked about and an assumption that we do continue to return capital in the future, that takes us to this glide path to above 5% in 2015. Now, to be clear, on top of those items, we do believe there are additional opportunities to reduce the denominator, but it’s too early to quantify. So, a couple of examples. With banks on both sides of the Atlantic focused on reducing balance sheet, we believe there could be lower derivative notionals by compressing offsetting trades between clients and counterparties for non-clearable derivatives. A second opportunity is more upside in central clearing. In our calculation, we only incorporated our expectation for the amounts to be cleared in the next 12 months. We didn’t go beyond one year. This is an important area and so we do see again upside in the reduction in the denominator from the amount that’s centrally cleared. And then finally, consistent with all that we’ve been doing to optimize capital, business unit leaders have the analytics to optimize their returns. We’ve talked about this in the past. We look at – we charge them for the capital balance sheet and liquidity needed to support their business and when you look at the way we are organized with our bank resource management effort, we’ve talked about that in the past, BRM. It’s a centralized resource governance structure. We are well-positioned to make appropriate resource allocation adjustments. So, we do feel good about the strength of our capital base, which we baked in and returning more capital into that calculation and I would note that we’re already above 6% at the Bank.
Share Repurchase Details
Guy Moszkowski – Autonomous Research: It was very encouraging to see the buyback. Can we assume that that was something that was approved as part of your approvals process with the Fed just ahead of the joint venture buy-in?
Ruth Porat – EVP and CFO: So, just to break it down, in the 2013 CCAR, the only request we put in as we’ve talked about on prior calls was for the Wealth Management acquisition given how strategically important that is and there is a provision though within CCAR once you have capital approval, you can apply for an additional 1% of Tier 1capital for capital action. So, upon closing it, I think this is where you are going, but just to make sure I’m very clear on it. As we went to the final closing of the Wealth Management acquisition, we put in the request to use this incremental 1% of Tier 1 capital for capital actions. We thought it was the logical next step and are pleased to have the approval no objection and to be commencing the share repurchase – it hasn’t yet started. We just got approval for it, so it gives us the ability to use it as James said in his opening comments…
James P. Gorman – Chairman and CEO: Yeah. I think, Guy, that the key, as we’ve said consistently, is to focus on the strategic platform, get Morgan Stanley in the shape that it needs to be in for the next decade and more and then the financial management through buybacks and other capital actions, obviously follow from that. So we were very careful to make sure we got the deal done even though it was modest capital outlay of four hundred and some million before we started anything on the capital action and we’ve taken this first step and obviously we are pleased to do it.
Guy Moszkowski – Autonomous Research: But just to follow-up on it then, as we think about the platform and the capital that’s needed in it. I look at the capital allocations that you give for the different business units, which is as I told you before a very, very helpful disclosure, which a lot of people don’t do, so thanks for that. I noticed that you brought the capital in ISG down this quarter by a little over $1 billion and with the accumulation of retained earnings you brought the parent unallocated capital up by a little over $2 billion. Are we supposed to read or can we read anything into that into what you think you need for the different business platforms and how much you might be accumulating for ultimate return?
Ruth Porat – EVP and CFO: Well, let me first clarify what’s in the allocation of required capital. So, you are absolutely right. The parent capital number went up. The allocation is based on the final Basel I, Basel I plus 2.5 if you want to call it that. And with the reduction in risk-weighted assets in fixed income that we require less capital in fixed income which is why the ISG number went down and the parent number went up. (Indiscernible) earnings plus the reduction of capital required in the business. Now, the way we are managing the business is with the Basel III lens as we’ve talked about and we will shift to this table to Basel III as soon as we are – the industry is reporting on the Basel III basis completely. But fundamentally what you see here is that we are continuing to accrete capital. That’s why we said we believe we are increasing our degrees of flexibility that’s reflective in our Basel III Tier 1 common ratio and in particular, the clarity we think we have with the execution path on the leverage rations. So, directionally, yes, and then the numbers would change a little as it moves to Basel III.