Morgan Stanley Earnings Call Nuggets: Cost Management and RWA Reduction
Guy Moszkowski – Autonomous Research: Handful of questions for you the first one is I think we can see plenty of evidence of the cost management moving towards capturing your $1.6 billion expense targets, but what’s the best way for us to track as we go through the year, your specific progress against the $1.6 billion?
Ruth Porat – EVP and CFO: So, on the $1.6 billion that was based on the calendar year ’12 actual compensation and non-compensation expense as I think you know through 2014 and predicated on a flat revenue scenario. So, we do remain very comfortable with that target. There is some quarterly seasonality, so I think as we go through the year you’ll continue to see progress against the $1.6 billion.
Guy Moszkowski – Autonomous Research: Is there some way that may be starting with next quarter you could actually track against those baselines, what you’ve actually captured?
Ruth Porat – EVP and CFO: We’ll try and highlight, so you can see the progress as we have in other areas where we’ve laid layout the marker and it continue to hit and exceed the goals.
Guy Moszkowski – Autonomous Research: Moving on to just the whole question of the risk-weighted assets and what we saw happening in the fixed income business more broadly in the quarter. You called out recent commodities as contributing to the year-over-year decline in fixed income revenues, but while we did see the commodities VaR come down quite a bit if we measure year-over-year, the rates VaR was actually up pretty materially. Can you help us square that with both the revenue momentum and with the decline that you called out in terms of the FICC RWAs that got you ahead of your year-end targets by the end of the first quarter?
Ruth Porat – EVP and CFO: Sure. Obviously, couple of questions in that. So within VaR the interest rate line is obviously both interest rate and credit line, and as you noted, was up year-over-year, flat to the last quarter and it’s affected by a couple of things. First and foremost, it’s measure of risk and not necessarily correlated with revenues. It does take up the activity in credit, as you know that I call that out as an area that was quite strong for us both corporate credit and securitized product or mortgage business generally. So it’s a function of the shape of the book and volatility in the market generally. But I think what we’re looking at when you look at the total line is pretty consistent with prior period, prior year. I think you then had another question regarding risk-weighted assets…
Guy Moszkowski – Autonomous Research: Yeah, I mean to the extent that risk-weighted assets are going to be driven in some measure by your stressed VaRs, I was just wondering if you could try and reconcile for us the movement in VaR versus the decline in RWAs. I guess the follow-up question on the RWAs is if you already exceeded your year-end target, why stick with that as a target basically for the end of the year or a couple of billion more?
Ruth Porat – EVP and CFO: So, the reduction; when we look at this reduction over the next period of time to 2016, its ballpark 60% passive and 40% active. This quarter it was mostly passive, it benefitted from the structured credit contract maturities as James noted. But it also reflected a change in the shape of the book and some other changes such as active mitigation. And our view is that we’re very confident that we’ll be at that year-end target of $255 billion, if not lower, but given part of the reduction was the change in the shape of the book we just built in some degrees of flexibility over the year. And as I said we’re confident we’re going to at least meet that year-end target. It may not be a straight-line down quarter-over-quarter, just depending on the shape of the book to be higher in the second or third quarter. Again, we remain very committed to the reduction this year and I’m taking it down to that sub-200 level by 2016.
Guy Moszkowski – Autonomous Research: Then just to sort of continue, I guess, along the same lines. You allocated a large part of the parent company capital down to ISG, 11 billion in the quarter after holding a lot of that really at the parent for a pretty long time. Can you talk about what prompted the decision and is there anything about that move that that kind of traps capital in the business in anyway if in fact your RWA declines continue and you might otherwise free up capital?
Ruth Porat – EVP and CFO: So, the way we run the business as a way we look at capital is we really run it with a Basel 3 lens and as I think you know we actually charge capital and liquidity down to the business unit levels or the product levels so we can look fully loaded at risk-adjusted returns. The question then we came over the last year or so is what do we do with parent capital given the rules for Basel 2.5 and Basel 3 were still in flight and they hadn’t been implemented. And our view was that once the Basel 2.5 rules were implemented at the end of last year and so there was complete clarity on it, no guess work in what was being charged to the various segments it was the appropriate time to take that parent capital number and allocate it up to the businesses. So, consistent with moving our Tier 1 common ratio, Tier 1 to the Basel 2.5 metrics we allocated the parent capital. And just to make sure it is clear because I find it can be confusing given the nomenclature it is still Basel 1, even though it is using the market risk rules under Basel 2.5 our fourth quarter ’12 Basel 1 number was 14.6. The Basel 2.5 for the fourth quarter was 10.6. So, if you are looking at where our Basel 1 ratios were last quarter under an apples-to-apples basis Basel 2.5 10.6 last quarter, going to 11.5 this quarter consistent with reporting ratios that way parent capital was allocated into the businesses and then to your very good question of does that mean that there is trapped capital as we think about the businesses, we look at again, a Basel 3 lens with that 50 buffer and then above that we believe we have degrees of flexibility with respect to capital return and we are continuing to build that Basel III ratio based on the capital accretion from earnings, as well as the capital optimizations through things like the risk-weighted asset reduction, and so that does give us greater degrees of flexibility.
Guy Moszkowski – Autonomous Research: That’s a very helpful description, thanks. I’ll just ask one more, which is the Moody’s announcement in conference call a couple weeks back, kind of puts into focus that Morgan Stanley still has a lot of its derivatives booked held outside of the bank unit. I was wondering if given they are talking about doing that pushes you to try to move more into the bank to the extent that you can?
Ruth Porat – EVP and CFO: Well, we’ve been focused on moving more into the bank. We continue to write foreign exchange derivatives in the bank as we’ve talked about on prior calls and move old foreign exchange derivatives into the bank. We do plan to write new interest rates, derivatives into the bank this year and timing and speed is really a function of some of the regulatory processes. But I think more broadly on your question about Moody’s, we feel good about the steps we’ve taken to position Morgan Stanley for greater quality and consistency of results and it sets us up well. We’ve talked a lot about the changes to the business mix and funding on calls like this, with plans and counterparties, which really all go to the strength of our standalone credit profile and what we’ve done. I think also when you look at the change in the business mix for example with fixed income, it’s really moved more towards cash than derivatives, so that puts us in a good spot. Now, that the industry has changed as well in the past year with adjustments to IMAs post the ratings action, so would meet the impact of anything that maybe done on the ratings front. But I think the main thing is our – we think that all that we are doing continues to build our standalone credit profile.
Glenn Schorr – Nomura: Just one quick follow-up on the RWA reduction FICC. It doesn’t sound like it had much of an impact on revenues. I just want to make sure, clarify that point.
Ruth Porat – EVP and CFO: Correct. The majority of it was passive; the active was P&L neutral. On the structured credit position there wasn’t a P&L impact because we really hedged up revenue and risk.
Glenn Schorr – Nomura: Then on commodities. It’s been a tough revenue backdrop for everybody, given the lower trending prices. I just want to make sure that you still feel this is mostly cyclical trending lower or things like that and make sure that there aren’t any structural changes needed to the business?
Ruth Porat – EVP and CFO: Our view is that it is a cyclical headwind, as you said its continued degradation and it won’t turn on a $0.10. Cyclical changes can take time to turn, but it is cyclical. It affects opportunities for us. It affects opportunities for clients related to particular structured solutions, which benefitted us last year, but we do view it as cyclical.
Glenn Schorr – Nomura: Then in terms of the physical (indiscernible), you’ve tend to hedge that at all times correct?
Ruth Porat – EVP and CFO: Yeah, we don’t take on right positions. We hedge our physical inventory.
Glenn Schorr – Nomura: Super. Last one is, there were some, not that big, but modest shifts of revenues and expenses in the reporting from last quarter from Wealth Management to the Institutional Securities group. I mean had a drop of an effect on — positive effect on the margin, but the real impact on the margin besides the good markets was a core drop in non-comp side Wealth Management and I just want to see is that a function of the systems integration of course running-off and this is good run rate to run with.
Ruth Porat – EVP and CFO: So, couple of things; in terms of the International Wealth Management markets and you nailed it is a small move. If you look at the supplement from the fourth quarter to now it is about 10 basis points difference, so small difference. In terms of the overall margin, I think, I’d highlight two points; one, was the strength of the new issue underwriting activity, in particular, closed-ended fund activity was very favorable last quarter and that helped on the top line. So, that you can assume we are going to have the same volume in the next quarter that was a positive. Expenses clearly we have remained focused on and the integration being done and rolling-off was very much as planned and we are continuing to stay focused on the expense line, but I think if you are looking forward to the second quarter assumed expenses pretty much hold at that level, notwithstanding the fact that we remain tight on expense discipline. You’ve got the closed-end fund new issue activity hard to forecast. We do see new issue activity, generally a lot of that is outside the U.S. and the real catalyst comes from the U.S. At the same time the S&P is about 10% higher than at the end of the first quarter which should benefit our fee-based revenues. I think those two revenue items sort of offset one another and so at this point we are holding kind of our margin expectation pretty much in the area where it is, although you can see we’ve got a number of levers that we are continuing to push.
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