Morgan Stanley Q1 2024 Earnings Call Transcript

Participants

Corporate Executives

• Ted Pick, Chief Executive Officer
• Sharon Yeshaya, Chief Financial Officer

Analysts

• Glenn Schorr, Evercore ISI
• Ebrahim Poonawala, Bank of America Co.
• Steven Chubak, Wolfe Research
• Brennan Hawken, UBS Group AG
• Mike Mayo, Wells Fargo Securities
• Dan Fannon, Jefferies Financial Group Inc.
• Devin Ryan, JMP Securities
• Gerard Cassidy, RBC

Presentation

[Operator]

Good morning. Welcome to Morgan Stanley's First Quarter 2024 Earnings Call. On behalf of Morgan Stanley, I will begin the call with the following information and disclaimers. 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 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. Morgan Stanley does not undertake to update the forward-looking statements in this discussion. 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 Chief Executive Officer Ted Pick.

[Ted Pick, Chief Executive Officer at Morgan Stanley]

Good morning, and Happy Spring in New York. Thank you for joining us. We entered 2024 with optimism, encouraged by improving boardroom confidence and an increasingly positive tone from our institutional and wealth management clients. The quarter was strong. We generated $15 billion of revenue, a 71% efficiency ratio, $2.02 in earnings per share, and a 20% return on tangible equity. In a relatively constructive environment, these results highlight the power of our clear and consistent strategy, serving as trusted adviser to our clients, helping them raise, allocate and manage capital.

During the quarter, higher asset prices and an improved economic backdrop supported confidence with our wealth management client base. We saw greater activity both in the advisor based and self-directed channels, resulting in higher adjusted margins of 27%. Net new assets grew by $95 billion. Investment management also generated positive long-term flows in the quarter. Across both wealth and investment management, total client assets grew to $7 trillion, advancing toward our $10 trillion goal.

As the new issue calendar returned for the first time in a number of quarters, it was great to see us regain our leadership position in equity capital markets. More broadly, we saw building momentum in investment banking both in our M&A and underwriting pipelines across corporate and financial sponsor clients. [Technical Issues] both generated very solid results to round out a strong quarter in institutional securities. As ever, we remain focused on managing our resources, sweating the income statement and being judicious with our capital.

Our CET1 ratio was 15.1%. Our excess capital position allows us to support our clients, invest in our businesses and return capital to our shareholders, particularly as regulators continue to evaluate Basel III endgame. Additional regulatory clarity and a sustained capital markets recovery should have a multiplier effect across our global franchise, further unlocking the unique power of our integrated firm.

I wanted to touch on the topic of client onboarding and monitoring in the wealth business with three short observations. First, this quarter's wealth management results speak for themselves, with record revenues and strong metrics across the board, including strong margins and very strong net new assets. We are really pleased with this terrific performance, and we are going to keep on going. Second, this is not a new matter. We've been focused on our client onboarding and monitoring processes for a good while. We have ongoing communications with our regulators, as all the large banks do. As James said in January, we want to ensure we continue to be world class in every aspect of this growing business. And third, to be clear, this is about processes. We have been spending time, effort and money for multiple years and it is ongoing. We've been on it and the costs associated with this are largely in the expense run rate.

To conclude, the first quarter of 2024 aligns with the goals outlined in the January strategy deck, $15 billion of revenue, a 71% efficiency ratio, $2 of earnings, $7 trillion of client assets and a 20% return on tangible. We have strong backlogs and momentum in every part of the firm. While the pipelines are healthy, there remains a backdrop of economic and geopolitical uncertainty. Our job is to generate these kinds of durable results on a consistent basis. I am very optimistic what lies ahead for Morgan Stanley, and on behalf of our 2,300 Managing Directors and 80,000 employees, say to those listening to the call, we will deliver an integrated firm to clients and shareholders that is unmatched in both its integrity and in its intensity.

Now I'll turn it over to our excellent CFO Sharon Yeshaya to discuss the quarter in more detail.

[Sharon Yeshaya, Chief Financial Officer at Morgan Stanley]

Thank you and good morning. In the first quarter, the firm produced revenues of $15.1 billion. Our EPS was $2.02 and our ROTCE was 19.7%. Our model is working as intended. The first quarter results demonstrate the strength of our scaled business and an improving backdrop. Benefits of durable revenues, particularly asset management fees in the wealth management business, stronger capital markets and a continued focus on managing the full income statement all contributed to results.

The firm's first quarter efficiency ratio was 71%, illustrating the inherent operating leverage in the model, and our ongoing efforts to consolidate our expense base following multiple years of integration. Efforts are evidenced by the year-over-year reduction in professional services and marketing and business development spend. Lower legal expenses further supported the improvement in efficiency ratio.

Now to the businesses. Institutional securities revenues of $7 billion were up 3% versus the prior year, reflecting strong performance across businesses. First quarter revenues underscore the power of the integrated firm as our cross divisional collaboration positioned us to capitalize on market opportunities. The geographical breadth continues to distinguish our franchise, and puts us at the center of client activity as the backdrop improves across regions.

Investment banking revenues were $1.4 billion for the first quarter, up 16% from the prior year, pickup in both equity and fixed income underwriting supported results, offsetting the year-over-year decline in advisory. Leading indicators continued to progress positively, including the preliminary reemergence of sponsor activity. Advisory revenues of $461 million reflected a decline in completed M&A transactions. Equity underwriting revenues of $430 million more than doubled versus the prior year as IPO markets reopened for most of the quarter alongside conducive markets for follow-ons. Our global reach supported our ability to lead cross border transactions, and we regained our premier leadership position in equity underwriting league tables, as global market volumes ticked up.

Fixed income underwriting increased year-over-year to $556 million. Results were driven by strength in investment grade and non-investment grade bond issuance, as clients took advantage of tighter credit spreads. Looking ahead, we expect the steady build of this business to continue. We are encouraged by the health of the advisory and underwriting pipelines. While the uncertainty of the rate path and geopolitical developments may impact the near-term conversion of pipeline to realize, conditions should improve over time and the underlying trends suggest that confidence is increasing. We remain focused on expanding our reach through opportunistic hires, particularly as we continue to see diverse pipeline and increased sponsor activity.

Turning to equity. We continue to be a global leader in this business. Revenues were strong, increasing 4% from the prior year to $2.8 billion. Results were supported by performance in derivatives and cash, and the franchise benefited from the scale of our prime brokerage business.

Cash revenues increased year over year, reflecting broad based strength in equity markets across the region. Performance in Japan was particularly strong, supported by higher volumes. Our increased coverage, augmented by our longstanding and unique partnership with MUFG should be supportive over time. Derivative revenues were robust as the business navigated the market environment well, and client activity was strong. Prime brokerage revenues were solid as client balances increased back towards all-time highs on higher market levels. Results reflect the mix of client balances and narrower spreads.

Fixed income revenues were $2.5 billion, results declined slightly compared to the strong result last year. Recall last year's results benefited from increased client engagement on the back of idiosyncratic events, including those related to the U.S. regional banks. Client demand for corporate solutions acted as a partial offset, reflecting the strength of our integrated franchise. Macro and micro revenues declined modestly year-over-year, on lower volatility and client activity which resulted in less transactional flow. Results in commodities increased year-over-year, supported by higher revenues in the North America power and gas business.

Turning to wealth management, the business delivered strong results across all key metrics, demonstrating the continued power and differentiation of the engine we have built. Record revenues increased from the prior year to $6.9 billion, driven by record asset management fees from both a rising market and ongoing success in migrating clients to advisory relationships to better serve their needs. Transactional revenues excluding DCP were also strong as retail sentiment improved alongside institutional investors. Importantly, net interest income remained in line sequentially.

Pretax profit was $1.8 billion and the PBT margin was 26.3%. Together, DCP and the FDIC special assessment impacted the margin by approximately 115 basis points. The results highlight the inherent operating leverage embedded in the business, particularly as revenues rise on the back of cumulative strong fee-based flows as clients invest more in higher beta assets and transactional activity rebounds.

Net new assets for the quarter were strong at $95 billion with contributions from multiple channels including our family office offering. Over time, our ability to deliver unique solutions to clients should continue to attract assets and lead to share capture. Fee based flows of $26 billion were strong. Within fee-based flows this quarter, we saw particular strength from the migration of assets from the advisor led brokerage accounts to fee-based accounts. This demonstrates that over time, assets migrate through the funnel into recurring revenue generating accounts. Fee based assets now stand at over $2 trillion.

Asset management revenues were $3.8 billion, up 13% year-over-year, primarily reflecting higher market levels and the cumulative impact of strong fee-based flows. Transactional revenues were $1 billion and excluding the impact of DCP were up 9% versus prior year. The first quarter's results were driven by client engagement across products, including record activity in structured products. Investments in our platform allow us to support increased client demand.

Bank lending balances were $147 billion, up slightly quarter over quarter, reflecting modest growth in mortgages. Total deposits of $347 billion were roughly flat quarter over quarter as the decline in sweep balances was offset by continued demand for our savings offering. While sweep balances were down on a spot-to-spot basis, average sweeps were roughly in line with last quarter, broadly consistent with our modeled expectations. Net interest income was $1.9 billion, flat to the fourth quarter's results, consistent with our guidance. The moderate increase in average deposit costs was offset by several factors, including the reinvestments of assets at higher market rates.

Looking ahead to the second quarter, the deposit mix will continue to be the primary driver of NII. Assuming the current forward curve and that our assumptions around client behavior materialize, we would expect NII in the second quarter to again be roughly in line with the first quarter.

Our strategy is working. We have a clear path to $10 trillion in client assets across wealth management and investment management. We remain focused on supporting clients on their path to advice, deepening existing client relationships, and using our scaled platform to achieve sustainable 30% pretax profits over time. Investment management reported revenues of $1.4 billion, increasing 7% versus the prior year. Results reflect higher asset management revenues, which increased 8% year-over-year, driven by growth in average AUM on higher market levels. Total AUM increased to $1.5 trillion. Long-term net flows were strong at $7.6 billion. Inflows were driven by strengths in alternatives and solutions and reflect the benefits of our diversified product offering.

Within alternatives and solutions, demand for parametric customized portfolios was robust as retail clients, including our own wealth management clients, allocated investments to parametric's equity-based products, underscoring the value of the integrated model. Flows were further supported by global interest in our active fixed income strategies.

Liquidity and overlay services had outflows of $12.9 billion. Performance based income and other revenues were $31 million. Gains in U.S. private equity and private credit offset lowered accrued carried interest in Asia private equity and real estate, demonstrating the benefits of a global diversified platform. We are seeing the benefits of ongoing investments in this business. We remain focused on customization, private credit and our global distribution. Parametric in particular has allowed us to deliver the integrated firm evidenced by the ongoing demand from our wealth management client base.

Turning to the balance sheet, total spot assets were $1.2 trillion. Our standardized CET1 ratio was 15.1%, down 14 basis points from the prior quarter. Standardized RWAs increased quarter over quarter as we actively supported our clients in more constructive markets. We continue to deliver our commitment to return capital to our shareholders, buying back $1 billion of common stock during the quarter. Our tax rate was 21% for the quarter. The vast majority of share-based award conversion takes place in the first quarter, resulting in a lower tax rate. We continue to expect our 2024 tax rate to be approximately 23%, which similar to prior years will exhibit some quarter-to-quarter volatility.

The first quarter is clear evidence that as the backdrop improves, our franchise is strategically positioned to capture upside, as it was designed to do. With client assets at a record of $7 trillion across wealth and investment management, we are on strong footing. Our wealth management business continues to focus on growth as well as supporting our clients with advice in delivering our differentiated offering and our institutional franchise is supported by our scale and our global footprint. This combined with the build of the investment banking pipelines and market confidence provides us with momentum to deliver on our objectives over time. With that, we will now open the line up to questions.

Questions and Answers

[Operator]

We are now ready to take in questions. [Operator Instructions] We'll move to our first question from Glenn Schorr with Evercore. Your line is now open. Please go ahead.

[Glenn Schorr, Analyst at Evercore ISI]

Hi, thank you, and I appreciate you not running away from a sensitive subject. I'm going to push the envelope and just ask one follow up if possible on the wealth matter. I wonder if you could size the non-U.S. wealth piece, whether it will be inclined assets or revenue for us. And correct me if I'm wrong, if that's the focus. And then more importantly, do you think, obviously you had a pretty darn good quarter. So, do you think this impacts any day to day or your ability to grow and onboard clients in the future? That's my real main question. Thank you.

[Sharon Yeshaya, Chief Financial Officer at Morgan Stanley]

I think that it's a great question, Glenn. Happy to take that, and just follow up on exactly what Ted said, which is, as you said, the results really speak for themselves. This is a phenomenal business. We had record revenues and we're in a great position. We have strong margins, strong net new assets. And no, there are no strategic changes to our business. There are no changes in our ability to do business, and we're extremely confident in our ability to grow and to deepen the relationship with the breadth of firm offerings that we have to serve our clients. Specific to your question on the international business, it is small.

[Operator]

All right, we'll move to our next question from Ebrahim Poonawala with Bank of America. Your line is now open. Please go ahead.

[Ted Pick, Chief Executive Officer at Morgan Stanley]

Good morning, Ebrahim.

[Ebrahim Poonawala, Analyst at Bank of America]

Good morning. Maybe, Ted for you, as we think about, it was a strong quarter for investment banking underwriting. There seems to be a fragility to the macro outlook based on how rates have behaved on the back of inflation. Geopolitics, just give us a sentiment check of when you're talking to your corporate clients, like how resilient do you see the investment banking sort of trends in the sort of desire and appetite for corporates to engage in either DCM, ECM or M&A, large M&A activity, as we look into sort of later in the year, into the U.S. elections. Thank you.

[Ted Pick, Chief Executive Officer at Morgan Stanley]

Thanks for your question. The pipeline is clearly growing. It's growing across sectors. It's growing on a cross border basis. There are some who will be willing to take the regulatory risk at this point in the cycle. And there is activity that we will see both from the financial sponsor community and the corporate community, will effectively be bidding with and against each other for assets. This is a moment when most want to purify their business model or grow, and that scaling needs to take place, now that the effects of COVID and supply chain are in front of us, and geopolitics continue to be on our minds, it is not surprising that the C suite wants to act. So, I think we are in the early innings of a multi-year M&A cycle. On the back of that, we should continue to see all kinds of underwriting. What was interesting about this ECM quarter where we had real success was that it was a combination of IPOs from the valley, capital raises from industrial companies, regional trades across border unlocks. It was the whole potpourri of offerings. And we've also begun to see the beginning of event financing in the high yield and leverage loan markets. So, I'm feeling good about this being early to mid-cycle for the classic investment banking and capital markets business around the world. And as you know, we are very active in Japan where we think activity will be heightened for years to come.

[Ebrahim Poonawala, Analyst at Bank of America]

That's good color, and just one quick follow up, Sharon. On the wealth management NII and sweep deposits, I think the sense is that we're getting to a bit of a bottom on NII. Is that an accurate characterization? And should we stop worrying about a big cliff event where NII declines meaningfully from where we trended?

[Sharon Yeshaya, Chief Financial Officer at Morgan Stanley]

I welcome the day where I stopped getting questions on NII. So, thank you. I would characterize this, it's now the third quarter in a row that I've said that our sweep models and the client behavior is following client expectations. It does feel as though we are reaching that frictional level of cash. Of course, you know, we'll have to wait and see how things play out. But broadly speaking, it feels as though, like I said, we are at a place where you have what we would say is intra-quarter volatility associated with things that might be, you know, T-bills maturing, people putting things in markets, but that again is frictional levels of cash rather than large changes or movements in real client behavior, which is what you saw two years ago in the summer when we saw the large move in rates, which was a one-off event. And then you had, again, a very large event with the regional bank movements in the first quarter of last year. So those are very specific events that we can look at. And since then, like I said, we have been working with our modeled expectations.

[Operator]

We'll move to our next question from Steven Chubak - Wolfe Research. Your line is now open. Please go ahead.

[Ted Pick, Chief Executive Officer at Morgan Stanley]

Good morning, Steve.

[Steven Chubak, Analyst at Wolfe Research]

Good morning, Ted. Good morning, Sharon. So maybe just starting off on the expense outlook, we saw some good progress on the expense front, and the KPI's are encouraging. Headcount was down year-on-year, comp and non-comp surprised positively in ISG and wealth. And I was hoping you to speak to your efforts to rationalize or optimize the expense base. And with IB and wealth fees expected to ramp, consistent with the M&A commentary, Ted, that you cited, how should we be thinking about incremental margins as these businesses, and particularly fees start to grow?

[Ted Pick, Chief Executive Officer at Morgan Stanley]

Certainly, let's take just the expense big picture, and we obviously disclose the SEC drivers of expenses. I called them out. We've had multiple years now where we've been looking to integrate, you know, multiple acquisitions. And as we've come out of that, we've been able to reevaluate our expense base. And I've talked about it in different pieces of our earnings call. Many times, I've mentioned space. You can see even in the lines around occupancy, in the actual disclosures. You can see bumps that bump ups in space is where you're taking write offs down in space, and then it begins to trend down again. So, we're making big picture decisions around what do we actually need and where do we want to invest those growth drivers as we move forward. So, consolidating the marketing dollars and figuring out what is the best use of those marketing dollars, consolidating professional services, how do we actually want to deploy full time hires in those growth objectives? So, in my prepared remarks, we talked about two things. We talked about taking expenses down in certain line items, but we also discussed investments, right. I talked about the fact that we're looking at opportunistic hires in M&A. We've discussed a lot about investing in parametric and technology. We've been giving technological tools to our advisors and investing in the business.

So, it's a push pull and it's making sure, as Ted says, that we're sweating the income statement, and we're thinking about our resources efficiently and durably as we move forward through the cycle. What I'd add to that is if you just sort of had an intangible sense of what we talk about at our leadership meetings, our operating committee of a dozen people and the next group, the management committee of about three dozen, and then their leadership teams. I think it's fair to say, Steve, over the last five years, a large chunk of time was spent talking about capital efficiency, how we can optimize those toggles. And of course, with Basel III endgame pending and the annual CCAR process ongoing, we of course continue dedicate time to that. But the sea change over the last number of quarters, and it has accelerated now into '24, is we're actively talking about the income statement, about delivering earnings growth, earnings momentum that obviously then ties into the returns on capital that we were able to generate this quarter. But we're looking to make investments, strategic investments in top human capital now and then when it comes about, but we're being pretty judicious about that. This is a great platform and we have a great team, but we need to be running this thing super efficiently. And that is why reiterating the efficiency ratio of 70% in January was so important. And that we put up 71% this quarter where it was a -- it was a generally constructive environment, I think I called it a relatively constructive environment. But, there's clearly more operating leverage to be had when you get to the higher brackets of ISG and then as you move to the funnel and wealth. So, the focus on generating that operating leverage and keeping the income statement really tight is very much on the minds of the leadership team.

[Steven Chubak, Analyst at Wolfe Research]

That's great color. And just for my follow up relating to the wealth management margins, unpacking some of the different component pieces, given continued strong fee momentum. Nice to see the inflection in NNA too. It sounds like NII is close to stabilizing, just given some of the key drivers and inputs and the focus on efficiency, just throwing all that in the blender does suggest that this 26% is probably a reasonable jumping off point and you can build off that base, but hoping you could maybe provide some context around that.

[Sharon Yeshaya, Chief Financial Officer at Morgan Stanley]

Well, what I would say is that we put out our goals in the last strategy deck, and we're obviously making progress towards those goals. And when you think about what gets you to 30%, the framework that we've offered the investment community is that there is sort of three parts to it. The first is migration to advice. The second, and really the monetization of the funnel will go through this. The second, when you think about it, is solutions and products that we're offering. And then the third is the benefits of scale. And what was encouraging about this quarter is that all three of those things happened, the first being the fee-based flows that we saw at $26 billion came from brokerage accounts. They came from people taking money that was already in the channel, that we've said will eventually be deployed, and it is being deployed, and that's what you're seeing here.

If you look back, it's that particular transition, that conversion is at a two-year peak, again encouraging color, Steve. The second piece, solutions, products differentiated offering. I called out structured products. People have interest in products, as Ted said, as markets begin to improve, those could be new issuance, that can be derivatives, that can be solutions through structured notes. That's what we're seeing beginning to happen here. So, yes, again, an encouraging sign. And the third is that we continue to gain the benefits of scale and operating leverage. So, all three things are working. Of course there's room to run, but what we're trying to do is make sure that we also have the right trade-offs between investing in the business, giving ourselves room for technology, and being able to build a 30% margin for sustainable business and durable revenues over time.

[Operator]

We'll move to our next question from Brennan Hawken with UBS. Please go ahead.

[Ted Pick, Chief Executive Officer at Morgan Stanley]

Good morning, Brennan.

[Brennan Hawken, Analyst at UBS Group]

Hey, how are you, Ted. Excellent. I'd love to start with a question on NII. I know I've asked this in the past, but we saw stability in the wealth management NII, which, Sharon, you've spoken at length about both on this call and in the back. But we did see the firm wide NII dip again, and it was the fourth quarter where the firmwide NII declined. So, could you explain how those diverged, and maybe what caused some of that divergence?

[Sharon Yeshaya, Chief Financial Officer at Morgan Stanley]

Sure, I think we talked about it before, Brennan, but I'm happy to talk about it again and highlight that the reason that we point you to the wealth management NII is a business driven NII. When we look at the trading NII and we look at firm NII, it really depends on the products that you have, where you're booking them, what you're using as your funding source. That falls into the various pieces of the trading revenue. So, we call, you know, we focus you in from our disclosures really on the wealth management NII, when that NII is being driven by a business concept rather than just where you might be booking certain trading trades.

[Brennan Hawken, Analyst at UBS Group]

Okay, got it. Is there something going on in the institutional NII that would cause sort of steady declines and with those specific products, that maybe might be a trend that we could explore a little bit?

[Sharon Yeshaya, Chief Financial Officer at Morgan Stanley]

Now, I would really step you back and tell you that that's not how we manage the business. And the trading revenue is going to fall where the trading revenue falls, based on the products that we transact in in that quarter, and the wealth management revenue, I've given you the drivers with the deposits, with interest rates, with spreads, and with reinvestment. And they're really two separate things that you should be looking at.

[Operator]

We'll move to our next question from Mike Mayo with Wells Fargo Securities. Please go ahead.

[Ted Pick, Chief Executive Officer at Morgan Stanley]

Good morning, Mike.

[Mike Mayo, Analyst at Wells Fargo Securities]

Hi. You had big year-over-year growth in wealth management client assets, up by about 20%, but the wealth management revenues increased by 5%. Still decent growth, but it seems like a little disconnect there. So, I'm wondering what kind of wealth management client assets you're growing?

[Sharon Yeshaya, Chief Financial Officer at Morgan Stanley]

Certainly. So, when you're growing the wealth management client assets, it's going to be all sorts of places. Like I said, we begin to see assets. They can come in actually in the brokerage side, and over time, they will migrate, or can migrate based on the client preferences into the advice side. Those different assets are going to have different fees associated with them. For us, it's about growing the funnel, Mike, and then beginning to see this movement towards advice.

Now, I'd also point out that once you're in the advice led channel, even if you're in the fee-based channel, you might not directly be in the S&P. There's a composite, there might be preferences to be in fixed income products [Technical Issues] great trends in the advice driven model, in fee-based assets, and the advice -- the asset management revenues. The asset management revenues, Mike, are at a record high. So, I would just highlight that as well as proof point that this model is working.

[Mike Mayo, Analyst at Wells Fargo Securities]

And then just one follow up for Ted. Ted, I think your outlook for the industry capital markets was about as bullish as we've heard. Yet I think you used the word potpourri, IPOs in the valley, cross border by sector, financial sponsor, Japan, highest in years, event financing. Specifically, what are your backlogs? How do they compare with last quarter? And just one more time, the level of your conviction that this time is surreal because there's been a lot of false starts the last two years. Thanks.

[Ted Pick, Chief Executive Officer at Morgan Stanley]

Yeah, I think it's a reasonable question. The backlogs are all up. I think it will be a slow march back. People are not going to jump into some of the speculative paper that we saw during the SPAC period clearly, but the receptivity to recent IPOs that were high quality was quite impressive, quite broad interest among investors. The need to execute on cross border M&A is here. It's for many companies an existential reality. Their supply chains have been disrupted by two major global conflicts, and they need to near shore and make the trade off, which means they need to potentially bolt on pieces supply chain that's in front of them. They may need to take regulatory risk. There may need to be structuring and financing advice around that, so-called solutions where we think we're strong. The other motivating piece, Mike, is and I do think there's going to be growing consensus on this -- the financial sponsor community is sitting on product that has a three-, four-, five-year life as a private company, ready to come out one way or the other, either through a public offering or to be sold in the private markets. That is the best way for the financial sponsor community to return capital to their LPs and keep the thing going with raising ever big funds.

So, there will be a competitive dynamic, I believe, between the financial sponsor and corporate community with respect to assets that are available, whether they are public or private, in order to continue to create value for their LPs or shareholders. The fact that the U.S. economy continues to grow, that China is weaker, that parts of Europe are weaker, highlights the fact that people indeed want to get even more exposure to the U.S.

With respect to Japan, what's interesting there is most of our client base are both buyers and sellers of assets, which is to say they're sitting on enormous yen denominated deposits, but they wish to grow the economy. So that is a market, obviously, where we're active in the financial sponsor and corporate communities, both in and out, will continue to be. So, I am quite bullish about the full investment bank capability. For those that have a global reach, it could take several years and have some lumpiness along the way, but I think the next three, four or five years will be quite active.

[Operator]

We'll move to our next question from Dan Fannon with Jefferies. Please go ahead.

[Ted Pick, Chief Executive Officer at Morgan Stanley]

Good morning, Dan.

[Dan Fannon, Analyst at Jefferies Financial Group]

Good morning. Hoping you could provide an update on overall client cash levels within wealth, and how you think about the revenue opportunity as that cash is eventually redeployed.

[Sharon Yeshaya, Chief Financial Officer at Morgan Stanley]

Sure. So, we did see the percentage of client cash. So, we've given you, I think, 22% in the advisory channel is now down to say 21%, 20% levels, depending on what channels that you're looking at. But that, I would say is not a function of the actual cash levels coming down, but rather that the equity markets have risen. So, just to be clear, in terms of the actual mix. The reason I bring up those percentages is they're still high relative to the pre-COVID historical levels of, say 17%, 18% that we've given on previous calls. So, there is still room to see the deployment of cash over time into the markets.

[Dan Fannon, Analyst at Jefferies Financial Group]

Understood. And as a follow up, in the release, you mentioned about half of the flows came from your family office offering. Not sure we've heard that stat before, or so I was hoping you could bring in -- provide some context in terms of the size of that business for you, and then also just the mix of flows more broadly in terms of the channels. If you could provide a few more specifics in terms of the percentage breakdown.

[Sharon Yeshaya, Chief Financial Officer at Morgan Stanley]

Absolutely. I'm so glad you asked. As it relates to the family office offering, because we have been talking about it for some time. We launched, and we really formally enhanced our family office offering in 2021. We discussed it on some of our earnings calls as a place where you could begin to see the integrated firm. And by that, I mean a way to offer our wealth management clients different solutions from institutional securities. So, our fund management products, where you're actually able to look at your portfolio from a more integrated basis, the way that you would as an institutional client. As we begin to offer new solutions to our clients, there are more ways to get touch points with different, and deepen different client relationships and bring them on board. So, this is an example of that. The reason we pointed out is also to highlight too, that there are lumpy flows that come through these channels. And so, when we say these flows can be lumpy, there are different sales channels across the offering, and those different channels have different sales cycles. And so therefore, you will see ins and outs of various pieces of NNA over time. But in this particular quarter and over the long-term history, we have seen a very diversified set of channels. We have the workplace, we obviously have the advice-based relationship, different pieces of stock plan, etc., that come in through the channel, and there is diversification there.

[Ted Pick, Chief Executive Officer at Morgan Stanley]

Yeah. What I'd add to that is to Sharon's point on integrated firm, we have this -- Sharon made reference to this gem of a business that we have in the institutional equities division called Fund Services, which caters to alternative asset managers and effectively does their documentation work and effectively all of the release to the -- to their LPs. The question that has been asked over the last number of years is when some of these folks go on to open their family office and manage their own wealth, what about having a product that has the feel of an institutional product from when they were running their asset manager for their family office or for related business. So, the folks in fund services got together with the folks in wealth management who run our outsourced CIO product, and they effectively came up with a mousetrap that gives the look of an institutional product for folks who are very, very much in the ultra-high net worth category. And this helps work towards a piece of the wealth bracket that we've all been focused on over the last number of years, which is the very high net worth space, which is very competitive, but in bringing together some of the capability and kit from the equities business over to the wealth business, and have them work together with the founder in her next life managing a family office, it's actually a nice seamless way to keep the funds in house and to deliver institutional style capability to the clients. So, this is something we are putting our foot on the accelerator on, and is a great example of our equities division and the wealth management folks are working hand in glove to deliver something for clients.

[Operator]

We'll move to our next question from Devin Ryan with JMP Securities. Please go ahead.

[Ted Pick, Chief Executive Officer at Morgan Stanley]

Good morning, Devin.

[Devin Ryan, Analyst at JMP Securities]

Great. Good morning, Ted. Good morning, Sharon. Question just on trading. Obviously, results have just been incredibly resilient at a high level. And I know you all have spoken about both market share opportunities for Morgan Stanley, but then there's still this kind of expansion of the overall industry wallet. And so, love to maybe just hit on that second point. And when you think about that wallet opportunity, the expansion of the wallet, what are some of the biggest opportunities in kind of the growth algorithms? I think a lot of us are sitting here saying results have been phenomenal. How can they continue to improve from here? Thanks.

[Sharon Yeshaya, Chief Financial Officer at Morgan Stanley]

Sure, I'll take that. When you think about the expansion of the wallet and consider where we came from and where we are now, as more and more of the corporations and coverage of the corporations is becoming more integrated, there are many solutions that a bank such as ourselves can offer. Be that from a global perspective, if you think about where rates are as just a tangible example, interest rate hedging that you can offer corporations as they think about transactions, there are different types of foreign exchange transactions that you can think about when you're looking at M&A or you're looking at other corporate deals that you have to do in-house for a global franchise. So, there are corporate solutions that you see. We expect to see growth in from a wallet perspective. And there's also financing where you have different types of markets and channels that are growing. Private credit being an example, where financing different assets by different types of sponsors are places where we could see opportunities for a wallet share growth more broadly.

[Ted Pick, Chief Executive Officer at Morgan Stanley]

What I would add to that is we're in the middle of the PE ecosystem with respect to M&A financing risk. If you ask a number of the asset managers, both real money and alternative asset managers, they would say we are a partner of choice. So, opportunity exists within credit where there's a big focus on the financing side. It's obviously stable revenue. And we're getting after some of the opportunities that lie across fixed income and inside of our new issue business to originate structure, finance credit, of course, a focus on private credit and then in equities to continue to expand our prime brokerage capability and to build out derivatives. So, this ecosystem around the financial sponsors who know our firm very well, with all of the integrated firm capability, this is a space and a client base that we are focused on, along with, of course, our leading strategic clients on the corporate side.

[Devin Ryan, Analyst at JMP Securities]

Okay, terrific color. Thanks. And then a follow up just on the debt capital markets outlook. Obviously very strong quarter. We have heard a little bit about maybe some pull forward just on the year in terms of people front loading. And so just want to get a sense of whether you feel like that maybe played out as well for Morgan Stanley. And then when you think about the pipeline for debt underwriting, I appreciate that deals come together quickly. So, there's maybe not as much of a formal pipeline, but is the tone there is similarly strong, is what you're seeing for M&A and equity underwriting, and also appreciate there's probably some interconnectivity there as well. Thank you.

[Sharon Yeshaya, Chief Financial Officer at Morgan Stanley]

Yeah, I would -- I would point you to, as you said, there is interconnectivity. Remember that I think many of the peers have also mentioned there could have been some pull forward that you saw. It's also been a market that's been open over the course of the last two years. So, I wouldn't -- I don't -- I wouldn't draw the same parallel that you might have seen in M&A or an equity where you had a real dearth of activity the last two years, but rather that market, especially in IG, has been relatively open when you think about high yield and other non-IG kinds of concepts. And of course there is the event related transactions. But from an IG market that markets been well open over the last two years.

[Operator]

We'll move to our next question from Gerard Cassidy with RBC. Your line is now open.

[Ted Pick, Chief Executive Officer at Morgan Stanley]

Good morning, Gerard.

[Gerard Cassidy, Analyst at RBC]

Good morning, Ted. Thank you for taking the call. Ted, you had some very encouraging comments on the outlook for the capital markets, which is great. A question for you. You mentioned about the high yield and leveraged loan market. You're starting to see event financing, which is good. How is the competition from the private credit side? Because they have made inroads obviously in the last couple of years. Are you guys seeing that the traditional investment banks are getting some of that market share back?

[Ted Pick, Chief Executive Officer at Morgan Stanley]

The competition is real, and we all need to adapt to stay relevant in the ecosystem. I think there's going to be room for folks in the private space to participate in deals, but I certainly do not believe, as some seem to suggest, that the global investment banks will not have a large role to play as underwriters of securities and all the benefits that that brings to the issuer versus someone issuing private credit and potentially being the owner over time if things don't go well. So, I think we're in a world where the ecosystem will at times have many of the players acting as partners, sometimes will act as counterparties, and at times even competitors. But I think the ecosystem has more than enough room on a global basis for both the emerging private credit space but also the incumbents to continue to be able to do their thing.

[Gerard Cassidy, Analyst at RBC]

Very good. And just as a quick follow up to that, once again, your outlook is very encouraging. Ten years up again today, there's talk of it moving even higher. The front end of the curve is talking about higher for longer. If we get into a really higher for longer rate environment, does that kind of weigh on some of the optimism of the outlook that you presented today, or no, it doesn't really have a material impact on it. Thank you.

[Ted Pick, Chief Executive Officer at Morgan Stanley]

Well, it's a great question. It depends on whether rates are higher because they are sustaining continued growth in the U.S., or if they are higher for a period of time and are followed by a tough landing, in which case we're in recession and clearly then things will slow down. I think our view is that the U.S. economy continues to progress quite nicely, that balance sheets amongst our client base are quite strong on the institutional side and on the wealth side, and that there is plenty to do, and that the higher rates that we see are in part, if not more than in part, dictated by a view that we continue to have some inflation, and that the economy is in healthy shape and maybe asynchronously relative to other places in the world. But that, again, speaks to U.S. strength. And as you know, first and foremost, we have our activity based in the U.S., but over time, there will be strength in places again, like Japan and Europe, and then eventually in the China complex, where we will be busy too.

So, my bullishness is not a mark to market on any given week or month. It's a view that corporate boardrooms have been quiet for three, four years, and that is not sustainable. They need to move. They were ready to move before the pandemic. Then the pandemic came, and then there were higher rates. Those higher rates seem to be well absorbed. Yes, now we need to have models that factor in appropriate cost of capital, as we saw in prior regimes, where cost of capital mattered. And now, in a period that comes after financial repression, where we'll have some inflation and some real rates, and companies and financial sponsors will adapt and the strong companies will prosper. So, we are setting up for that, and we believe will be a multiyear cycle. And I would say finally, that what we're most excited about, of course, is the model that we are working with both the institutional community, but also our wealth management clients, to adapt and to optimize as we move into the next cycle.

[Operator]

There are no further questions at this time. [Operator Closing Remarks]