Morgan Stanley Q3 2021 Earnings Call Transcript

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Provided by Quartr
October 13, 2021

Key Takeaways

  • Exceptional Q3: reported $14.8B in revenues and delivered ROTCE over 20%, with YTD revenues of $45B up nearly 10% over full-year 2019.
  • Institutional Securities achieved a record quarter in Investment Banking and M&A, with strong Equities performance and stable Fixed Income, driving market share gains.
  • Wealth Management added over $300B of net new assets YTD and expanded MS at Work relationships to 14M+, positioning it as a long-term growth engine.
  • Investment Management’s fee-based revenues nearly tripled over five years to $1.5B in the quarter, with YTD net flows exceeding $100B and a growing alternatives platform.
  • Early adoption of the SACA regulatory change will raise RWAs by $35–45B, potentially reducing the CET1 ratio by ~120bps, though mitigation efforts have begun.
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Earnings Conference Call
Morgan Stanley Q3 2021
00:00 / 00:00

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Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

Good morning. On behalf of Morgan Stanley, I will begin the call with the following disclaimer. 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. 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
James Gorman
Chairman and CEO at Morgan Stanley

Thank you. Good morning, everyone. Thanks for joining us. It was an exceptional third quarter the firm delivered. It's contributed to year-to-date revenues of $45 billion. To put this in context, year-to-date revenues surpassed full year 2019 revenues by nearly 10% as of this stage. Our business model continues to generate durable revenues, high returns, and strong operating leverage. We produced an ROTCE of over 20%, both in the quarter and on a year-to-date basis. Institutional Securities continues to gain share. It performs strongly across all regions and all three major businesses. The work we have done to integrate our businesses across the investment bank is clearly paying dividends. Of note, investment banking had its best quarter in history, and within that, M&A also produced its own record quarter. Equities were extremely strong and fixed income was stable.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

The wealth management business, which includes E*TRADE now, of course, is growing assets at levels far beyond what we've seen. Through the first nine months, this business added over $300 billion of net new assets, compounding growth on a client asset base of over $4.6 trillion. We believe this is going to be an economic engine for Morgan Stanley for decades to come. The majority of our advisors had positive net new assets year to date. It's this broad-based strength that's key to driving these asset levels. We're seeing momentum though across all our newer channels, self-directed and workplace. Self-directed client engagement remains elevated. U.S. corporate stock plan wins increased over 90% versus last year. In the quarter, we continued to broaden our reach, especially through Morgan Stanley at Work, where we now have in excess of 14 million unique relationships.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

While it's early days, we believe that over time, Morgan Stanley at Work will be a meaningful growth driver for the overall business, providing additional connectivity to a wider range of prospective clients for broader wealth management services. In investment management, fee-based asset management revenues were $1.5 billion in the quarter. By the way, that's nearly triple the average quarterly level of five years ago. Our $1.5 trillion of assets under management represents a more diverse asset mix, further enhancing the range of value we can provide clients. Expanded solutions and customization, sustainability, and value-added fixed income, along with our sizable and growing alternatives platform, position us well to capitalize on ongoing secular growth trends. Year-to-date net flows within investment management have exceeded $100 billion.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

Finally, as it relates to capital, we bought back $3.6 billion of stock consistent with our overall capital plan and doubled our dividend, thereby delivering shareholders nearly 3% return. We're not complacent in what is obviously a slightly more turbulent market environment. We do expect the Federal Reserve will begin tapering soon, and that will be followed by increasing rates in 2022. We remain optimistic about the firm's position and business outlook, but we will exercise more caution if we see a significant uptick in volatility. Throughout, we remain committed to our core values that drive our culture and ensure we do business the right way. A final word on capital. As you know, SA-CCR, the standardized counterparty credit risk regulatory change is beginning next year for the largest banks. It impacts the calculation of counterparty credit risk and thus risk-weighted assets.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

We've decided to early adopt in the fourth quarter. That, of course, increases RWAs, and with that, lowers the implied CET1 ratio. Our current CET1 ratio, which includes the impact of our recently doubled dividend and our buyback as of the third quarter, is 16%. The pro forma impact of SA-CCR, absent further mitigation, could theoretically reduce that by approximately 120 basis points. We have a lot of flexibility to mitigate, and that work has already begun. Early adoption allows us to pick up a benefit in future CCAR tests, which may itself offset a part of this impact over time. I'm now going to turn the call over to Sharon and she will discuss the quarter in greater detail, and then we'll both take your questions. Thank you.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

Thank you. Good morning. The firm produced revenues of $14.8 billion in the third quarter, once again, representing one of the top three quarters of the last decade. Excluding integration related expenses, our EPS was $2.04, and our ROTCE was 20.2%. Year-to-date revenues reached a record of $45.2 billion. Institutional Securities continues to power performance with particular strength in investment banking and equities. Wealth Management and Investment Management each set year-to-date records. While investing for growth, our business model demonstrated operating leverage. The firm's year-to-date efficiency ratio improved to 67%. To the businesses. Institutional Securities delivered an extremely strong quarter with $7.5 billion in revenues.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

Year-to-date, the revenues of $23.2 billion were the strongest in over a decade. The integrated investment bank is working seamlessly to serve our clients and to gain share. Balanced revenues supported overall results. Advisory, in particular, was a standout, with record quarterly and year-to-date performance. Importantly, Institutional Securities is delivering remarkable operating leverage. The pre-tax margin, which was 38% year-to-date, has significantly contributed to the firm's strong efficiency ratio this year. Investment banking revenues were a record of $2.8 billion, increasing 67% from the prior year. Exceptional performance in advisory and continued strength in underwriting drove the quarter's results. The Americas and Europe led the year-over-year increase. Advisory revenues were a record $1.3 billion, reflecting increased completed M&A activity versus the prior year. Results were supported by greater sector diversification compared to last year. Equity underwriting revenues were $1 billion, marking the fourth consecutive quarter at or above this level.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

The increase from the prior year was driven by strength across products. Fixed income underwriting revenues were $567 million. The year-over-year increase was driven by strength in non-investment-grade loans, supported by the combination of the rate environment and elevated levels of event-driven activity. Investment banking pipelines remain healthy across sectors and regions, and activity is expected to continue on the back of current momentum. Financial sponsors are deploying capital, and corporate clients are looking for strategic opportunities as a source for growth. Equity revenues were very strong, increasing 24% from the prior year to $2.9 billion. Our equities business remains a global leader. Results benefited from sustained client activity throughout the quarter. Revenues in Asia were particularly strong, underscoring the importance of our diversified global footprint. Cash and derivative revenues were both higher versus the prior year. Broad-based client engagement continued through the summer months.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

Prime brokerage revenues increased versus last year on higher equity market levels. Fixed income revenues declined from the strong prior year to $1.6 billion. Still, the business delivered a solid third quarter. Micro results remained above historical averages but reflected lower revenues in securitized products and credit corporates compared to the prior year, which benefited from wider bid-offer spreads. Macro also declined versus last year, with lower revenues in both rates and foreign exchange. Commodities was strong, and revenues improved versus the prior year as North America power and gas benefited from robust client activity. Turning to Wealth Management, the prior quarter will be a more relevant benchmark as a comparison period, given the acquisition of E*TRADE. Revenues were $5.9 billion, down 3% from the prior quarter. However, excluding the impact of DCP, which declined by approximately $300 million, the revenues increased 2%. Integration-related costs were $113 million.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

Excluding integration-related expenses, PBT was $1.6 billion, and the margin was 27.7%. We realized a record of $135 billion of net new assets, which underscores the power of the asset gathering platform we have built. Net new assets in the quarter were strong and balanced, inclusive of assets from existing clients and new clients, stock plan vesting events, and net recruiting. Year-to-date, NNA exceeds $300 billion, representing a 10% annualized growth rate of beginning period assets. In the quarter, we added $43 billion of predominantly retirement assets through an asset acquisition. These incremental assets are reflected in total client assets, fee-based assets, net new assets, and fee-based flows. We are particularly excited about the approximately 600,000 participants associated with these retirement assets who will now have access to educational content and analytical tools delivered through the Financial Wellness platform.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

Deepening these relationships and ultimately converting workplace relationships to advisor-led or self-directed clients based on their individual needs is at the core of our expansion strategy. The workplace channel serves as an asset acquisition funnel that will fuel our growth over time. We are excited by the momentum in the workplace. Year-to-date, new stock plan participants have more than doubled. We have nearly $500 billion in unvested assets. In the quarter, transactional revenues were $832 million. Excluding the impact of DCP, revenues declined 4%, in line with seasonal patterns. Self-directed daily average tradings were approximately 960,000 in the quarter, in line with the average level for the full year of 2020. While moderating from the exceptionally high activity seen earlier this year, client engagement remains high. DARTs this quarter were three times above E*TRADE's pre-acquisition record. Asset management revenues were $3.6 billion, up 5% sequentially.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

Year-to-date, these revenues increased 29% to a record $10.3 billion. The strength in fee-based flows supports our view that clients first consolidate assets onto our platform and then migrate these assets to advisory. Bank lending balances grew $7 billion sequentially to $121 billion and have grown 23% year-to-date. Growth in securities-based lending and mortgages drove the increase, reflecting strong client demand for new lines and increased household participation. Net interest income was $1.3 billion. Prepayment amortization was negligible in the quarter, but it did impact the sequential move. Excluding for prepay for both quarters, NII was up 4%, benefiting from the incremental growth in lending balances and decreased deposit costs. For the remainder of the year, we expect NII to build sequentially on the back of loan growth at a pace slightly below the third quarter. The integration of E*TRADE remains on track.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

Today, dual clients of E*TRADE and Morgan Stanley can choose to provide their Morgan Stanley advisor with visibility into their E*TRADE accounts. By year-end, clients will be able to link their self-directed accounts via single sign-on, building on our digital client experience. Moving to investment management. The timing of the Eaton Vance acquisition makes the prior quarter a more relevant benchmark. Revenues were $1.5 billion, declining 15%. While asset management and related fees rose sequentially, the increase was offset by lower performance-based income and other revenue. Total AUM remains strong at $1.5 trillion. Total net flows were $12.3 billion in the quarter, driven by liquidity and overlay services. Long-term flows reflected a single redemption of $7.5 billion in our solutions business by a large asset manager.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

The redemption was approximately half of the asset manager's AUM with us. We expect the remainder of the AUM to be redeemed in the first half of 2022 as the asset manager brings its equity trading implementation in-house. Excluding this idiosyncratic outflow, we saw positive long-term net flows with continued demand for Parametric customized portfolios, private real estate, and private credit, and sustainable strategies through both Calvert and MSIM funds. Asset management and related fees were $1.5 billion, reflecting the high proportion of durable and recurring revenues in this business. Performance-based income and other revenues were a loss of $17 million in the quarter. Gains across the platform were offset by lower accrued carried interest in our Asia private equities business, primarily driven by a single underlying public investment in one of the funds. The broadening of our growing alternatives portfolio helped mitigate this overall impact.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

The integration with Eaton Vance remains on pace. We continue to invest in secular growth areas, particularly sustainability, alternatives, and customization for wealth management platforms and clients. Turning to the balance sheet. Total spot assets increased to $1.2 trillion. Risk-weighted assets grew by approximately $11 billion, primarily driven by increased client activity in the quarter. We continue to deliver on our commitment to return capital to shareholders and are executing on our $12 billion buyback authorization, buying back $3.6 billion of stock in the quarter. Our standardized CET1 ratio now stands at 16%. As James mentioned, we intend to early adopt SA-CCR during the fourth quarter this year after taking into consideration the potential benefits to certain capital metrics such as the future SCB calculations. With our current portfolio size and mix, the adoption would imply an estimated increase to our risk-weighted assets of approximately $35 billion-$45 billion.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

This would also apply a reduction to our CET1 ratio by approximately 120 basis points upon adoption. We have commenced mitigation efforts, which should offset some of the impact to our CET1 ratio. We will continue to remain well-capitalized post the adoption of SA-CCR. We continue to benefit from the diversification of our franchise. The firm is firing on all cylinders. As we enter the end of the year on a strong footing, we are capturing share in Institutional Securities. Clients remain engaged and pipelines are healthy. We are excited by the momentum we see in Wealth Management's ability to attract and consolidate assets, and the benefits of the improved diversification and investment management. Importantly, we are meaningfully investing in technology across all of our businesses. With that, we will now open the line up to questions.

Operator

Thank you. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Glenn Schorr with Evercore ISI.

Glenn Schorr
Glenn Schorr
Analyst at Evercore ISI

Hi. Thanks very much. I'm curious. The flows in the Wealth Management channel continue to impress. I think you guys are by far the largest distributor of alternative assets, and as that space grows and as that becomes a bigger part of client portfolio, I wonder if you could help us frame, have you ever broken out either the asset level or percentage of high net worth portfolios that you have today versus where you think that can grow to?

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

Hi Glenn, it's Sharon. I think if memory serves me, there was a strategy deck that we did in 2017 or 2018 that does give a portfolio mix that you can see for advisory-led assets. It can give you some rough sense from those documents. I would say though, that I had also noticed this trend. When we go through it, there has been a slight shift, but you're obviously talking about a very large asset base. I would definitely say that both anecdotally, and it does bear out in some of the numbers that you see a slight increase towards alternatives as a composition of the portfolio.

Glenn Schorr
Glenn Schorr
Analyst at Evercore ISI

Okay, maybe just a quick follow-up on your SA-CCR comments because they were reasonably comprehensive. Which specific assets are most impacted, just so I can think through mitigation and how much of an impact it can make? I'm curious, what does early adoption do for you besides brownie points? How does that possibly help in future CCARs?

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

Yeah. Glenn, in case you're confused, this is James. It's the accents are so different, you see. On SA-CCR, it affects counterparty credit risk. There were models that were in place that Basel has been working on replacing. They actually started in 2014, the idea was to implement it in 2017. They relate to most of the derivative contracts and the determination of where they're margined and not margined, and how to treat that from a risk-weighted asset perspective. There's a complicated formula that applies a weighting to default risk and then the NPV of future payment obligations under various contracts. It's taken a while for them to get it done. They actually deferred it, I think, during COVID. They've given the banks till the beginning of next year to put it in place, they're allowing banks to preannounce.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

The benefit of starting early is it affects the peak to trough in your CCAR calculations during the CCAR cycle. There'll be some offsets later and we just felt we needed to get into it sooner rather than later. Most of it is in ISG. I think about, let's say the RWA number, I think we've got it $35 billion-$45 billion. Honestly, that's moving around a little bit because this is complicated stuff. We certainly don't think it's worse, and hopefully it's the lower end of that. Some of it is in the wealth business because of all the options in that business, but it's a relatively small part of it. I think like 10%-15%.

Operator

Our next question comes from the line of Brennan Hawken with UBS. Your line is now open.

Brennan Hawken
Brennan Hawken
Analyst at UBS

Good morning. Thanks for taking my questions. I'd like to start on the net new assets in wealth. Sharon, I believe you flagged an acquisition of a retirement business. Number one, this is basically just a team of consultants that'll sit within wealth, so it could be called a large-scale recruiting. Is that fair? Number two, is the idea that you guys are interested in getting more importantly and more sort of strategically, is the idea that you guys want to get a little bit more aggressive in 401(k) DC plans in order to complement the stock plan business and enhance the workplace offering?

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

Brennan, nice to speak to you. It's fair. I think that it is a large-scale team that you can consider in terms of that asset acquisition. I think that as you rightly point out, it is an extension of our strategy. What you're really trying to think about is how do you get more participants that you can touch, that you can begin to sell both products and assets that are appropriate for them. More than that, offer them true services like Financial Wellness that we're already doing through the stock plan business. If you think of retirement assets, and then you think of who's the actual holder of those retirement assets, and those are the participants, so through municipalities, through pensions, et cetera.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

All of a sudden, you have just another layer of people that you first offer Financial Wellness and education to, and then you can introduce them to the services that Morgan Stanley has, the same way that you would introduce the services to a workplace client. An extension of the strategy and a continuation of the concept of the funnel.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

Because this is a very important topic broadly, my key takeaway on it is we used to have a very monolithic model for asset gathering. You had existing clients who maybe brought new money to you from other institutions or accumulated wealth. They also spent wealth, so that would go up and down. You had financial advisors who left and who you recruited. For many years, we were frankly net deficit of financial advisors, as were frankly most of the broker-dealers in my 30 years of doing this. A couple of years ago, the net deficit changed materially for us. We are seeing net positive attrition, very few advisors leaving, and significant advisors coming in, particularly large teams from across the street in the banking industry. That's positive.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

The channel that the workplace has opened up and the opportunity to gather assets, which was a part of the driver behind this quarter's numbers, is basically a new channel. Then obviously the E*TRADE channel is a new channel. Now you're seeing this sort of acquisition of RIA-type teams. Of which this is one. It's gone from sort of a one model, a defense and attack model of keep your people and try and get some of the marketplace, to a multi-pronged model. Obviously we can't predict the future, but it looks like this is set up to have multiple channels of growth in the years ahead, which is the strategy.

Operator

Our next question comes from the line of Steven Chubak with Wolfe Research. Your line is now open.

Steven Chubak
Steven Chubak
Analyst at Wolfe Research

Hi, good morning.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

Hey, Steve.

Steven Chubak
Steven Chubak
Analyst at Wolfe Research

Sticking along that same topic of just the corporate stock plan business, it looks like the organic growth continues to sustain really strong momentum in terms of new corporate stock plan ads. I was just curious how client conversion levels are tracking today within your ecosystem relative to the levels you were seeing prior to the E*TRADE deal. Was hoping you can just provide a broader update, not just on the corporate stock plan momentum, but even just how you're tracking with the revenue synergy targets from E*TRADE since you announced the deal.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

Sure. It's nice to speak to you, Steve. I would just echo what you said. Yes, we saw US stock plan wins increase 90% over last year. Just to put that out there and put it in perspective. As you think about conversion, we're still working through some of the metrics as it relates to retention. Anecdotally, we are seeing strong retention. Obviously, there were different metrics as you think about what E*TRADE defined as retention and how you might define retention going forward given this new structure. I think that the synergies as they've played out are very strong. We obviously never gave a direct revenues target. If you think about what E*TRADE was doing, the concept was always, well, how do you think about the whole spectrum of client wealth? We're seeing our teams work very closely together.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

We're thinking about new ways to offer Morgan Stanley services like research, et cetera, and advice that you would see through your advisor, also through your E*TRADE portal. All of that's really much in track. We continue to think about meeting our companion accounts, for example, which was 50% right now and 90% in the U.S. accounts by next year. All of those sort of touch points and milestones, we're on track, and we look forward to giving you, I think, more detail as you think about the January deck next year.

Operator

Our next question comes from the line of Matt O'Connor with Deutsche Bank. Your line is now open.

Bernard Von Gizycki
Bernard Von Gizycki
Analyst at Deutsche Bank

Yes. Hi, good morning. This is actually Bernard Von Gizycki on from Matt's team. Thanks for taking my question. My question relates to the investment banking backdrop and how it relates to direct listings. Investment banking results are very strong, and as you previously noted, pipelines remain healthy across sectors and regions, and momentum should continue. With that said, there've been a number of direct listings this year versus just one in 2018. Given Morgan Stanley has been an advisor on a number of these deals, could you share your observations if the increase of these private to public structures, although small in numbers still, have been more of a byproduct of a favorable market backdrop, or is it more of a structural change in the private markets? Any comments you could share on future industry pipelines for direct listings.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

I think that the key point that we've always said about direct listings is that it's another tool in the toolkit, and it's really dependent on the client's situation and the needs at that point in time. These are specific situations, but I would say that, while potentially can be a contributor to the advisory results, what I would focus you on for advisory are two things. One is the diversification across the sectors and the geography. What we're seeing is not just one product necessarily driving results, or one sector driving results, but rather that the pipelines broadly are healthy. As James said last year, we continue to invest in this business. I think that's sort of how we think about the business going forward.

Operator

Our next question comes from the line of Gerard Cassidy with RBC Capital. Your line is now open.

Gerard Cassidy
Gerard Cassidy
Analyst at RBC Capital Markets

Thank you. Good morning, Sharon, James. Can you guys share with us, obviously, the markets have been very strong. You guys have done a great job, obviously, in capturing that growth along with some of your peers. Do you have any sense what normalization would be in the markets and what kind of market share you could maintain in a more normalized market, whether that's somewhere between 2019 and today? Any color there. Second, James, you talked about increased volatility. What are some of the metrics you're looking at to measure if the markets became more volatile and you guys would maybe get a little more defensive? Thank you.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

Well, on the normalized markets, it's clearly been a major shift between the U.S. and non-U.S. institutions post-crisis. I'm talking about capital markets here, Gerard. The barriers to entry for those businesses, if you look a lot of the regional banks and investment banks that tried to be global investment banks and didn't work out so well, the scale economics of it, the barriers to entry, just so large. Frankly, the technology's so demanding and complex that it's pretty hard to be a wannabe or a new entrant trying to break into the group that is dominating sort of the global flow of capital markets. Within that, we're obviously performing very well. We've picked up a lot of share consistently across fixed income and equities, and increasingly in banking over the last several years.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

I don't see that abating. I don't see a compelling reason why that would change. In the wealth and asset management space, again, scale is your friend. We've done two huge deals in the last year and then Smith Barney a decade ago. At $6.5-ish trillion. Clearly at scale, we're one of the biggest asset managers and wealth managers in the world, and that generates about $30 billion revenue. Again, it's hard to pick up advisors one by one. There aren't that many firms out there of size that really move the needle on scale, and there aren't really any direct firms of size. You saw the Schwab and Ameritrade deal, which combined two competitors. You got Fidelity. You got a couple of smaller ones, but E*TRADE was kind of the last big one that was available. I'm pretty confident about our market position.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

I don't see why it would deteriorate at this point. Doesn't mean it can't, but that would be more internal, what we've done to ourselves, than external, what the market is going to do to us, is my gut on that. On volatility, you're looking at all sorts of stuff. You're looking at the day-to-day movements in market prices. You're looking at when the Fed starts tapering, what the impact of the market is, what they start signaling in terms of how many dots suggest there'll be rate increases next year. It's gone from, I think, 4 to 9. That's going to introduce volatility. Some of the geopolitical discussions around, obviously, U.S.-China relationships, Taiwan, that injects volatility. Like anything, we look at monetary policy, inflation numbers, geopolitics, and then see how that bleeds into market activity.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

From that, we sort of dial up or down on the margin, our risk. You look at specific transactions, you look at multiples of EBITDA that deals are done at. You're looking at days of distribution on syndicated deals. There's a lot of more tactical stuff, but I try and take a thematic view. My thematic view is it's good to be watchful right now. There's certainly nothing to suggest there are any issues, but the markets are bouncing a little bit. Over the next 18 months, we'll see more of that as the Fed starts to move.

Operator

Our next question comes from the line of Mike Mayo with Wells Fargo Securities. Your line is now open.

Mike Mayo
Mike Mayo
Analyst at Wells Fargo Securities

Hi, can you hear me?

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

Yes, Mike. Hey.

Mike Mayo
Mike Mayo
Analyst at Wells Fargo Securities

Hey, how you doing? Well, during the quarter, you made what seemed like a pretty significant announcement with a partnership with Microsoft, and I'm not really sure about the ramifications of that. It looks like you're going to use Microsoft to transition more to the public cloud, if I have that correctly, and then you're also going to be providing services to Microsoft to help them position their business. I wasn't really clear on that. If you could get to mention that, talk about maybe efficiency benefits by using the cloud. How much do you want to transition your workload to the cloud? What is it that you'd be doing in return?

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

Yeah, it was an important deal. Obviously, Microsoft is one of the great companies in the world, if not the largest company in the world. A fantastic partner for us. We did do a multi-year deal with them. I won't give you the financials, as you would understand. A multi-year deal with them. By the way, they're not the only cloud provider we use. There are great players in AWS and Google, and we have relationships with all of them. We wanted to make a significant move. It gives us more capacity to process and analyze data. It gives us time to market tools. There's more resilience and flexibility in the cloud. Obviously, some of the digital initiatives that we're using to improve our client experience, we do through the cloud. It's one of the pillars of our technology strategy.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

We've tried to drive more innovation across our businesses. If you look at what we've done in wealth management with some of the virtual financial advisor, the LeadIQ platform, Next Best Action, these kinds of things, they're all AI-driven. I think what you're seeing is with first the acquisition of Solium and then in E*TRADE, our wealth businesses have a much stronger technology backbone, and we've been driving a lot of innovation in that space. The cloud decision with Microsoft is really a corporate one, and I think will just lead to a much more efficient Morgan Stanley and more resilient, by the way. It's not totally with Microsoft. We're very proud of our partnership with them. We're a huge company, and we're going to keep evolving.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

We have developed a special relationship with them on some other things that we're working on that I don't want to go into, obviously, on the call. That's between us and Microsoft. It's a great move, Mike. We're really happy about it.

Mike Mayo
Mike Mayo
Analyst at Wells Fargo Securities

Can you dimension what you think the potential savings are or how much workload you might move or give us some sense? I think what we're finding is some banks, like Capital One, are 100% on the public cloud, and then there's a series of other banks that don't really want to be on the public cloud. Where are you in that continuum? Do you want to have more of a private cloud, or do you want to be more on the public cloud? What kind of savings do you think you could get?

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

Yeah, I can't dimension savings. Obviously, we're balancing it between both private and public. Capital One is a very different business model. They don't do M&A. They don't underwrite equity deals. They don't have global trading businesses. It's really a function of you drive your technology decisions based upon the path to innovation and what your business model needs to support different technologies. One of the programs Rob Rooney and the team set up several years ago was something we call our Distinguished Engineers. We have some unbelievably capable engineers, software engineers, computer scientists around the world who work with us, and we've created a cohort where they're basically driving and feeding innovation across the firm. No, I can't break it down to a simple, you go to the cloud, and it will improve our efficiency ratio by 1.2%. I can't do that.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

I do know that when you drive it down into the actual business activities, it's making us both a more efficient, more resilient, and faster-moving player. Frankly, being in partnership with Microsoft is a very good thing for Morgan Stanley. They're best in class as a tech company.

Operator

Our next question comes from the line of Dan Fannon with Jefferies. Your line is now open.

Dan Fannon
Dan Fannon
Analyst at Jefferies

Thanks. Good morning. I was hoping you could expand a bit on the advisor trends. You talked about larger advisor groups coming over, the recruiting. Could you maybe put some numbers around that in the context of maybe previous periods, a year ago or something prior to that, and maybe the backlog or the outlook for advisor growth as you think about the next kind of 12-month time period?

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

Yeah, Dan, we don't put out numbers on actual teams that we bring in. We have a weekly report, which I get every Friday night about 7:15 P.M., scrutinize it pretty closely, it shows which people we've recruited, what their trailing 12 months revenue are, what their assets are, then which ones that we lose to different competition and what the sources are, where they're going to. As I said, I've been doing this a long time, at my previous firm and here, for most of that period, we were net deficit. We were losing advisors to RIAs. We're moving them sometimes to private banks. You're losing some of the smaller producers to places like Linsco Private Ledger. That has all turned.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

I think the power of the brand, the beauty of having this integrated investment bank combined with this wealth and asset management business is you've now got world-class Parametric Calvert sustainability funds to offer our advisors, world-class alt platforms through infrastructure, mezz finance, private equity, real estate, but you've also got new issuance. We're so active in the equity markets that if you're a world-class advisor managing, and some of our advisors, they're managing books of $20 billion and $30 billion. They are enormous operations themselves. Do you want to take a book of several billion dollars to a firm that is not a global leader in the equities markets and is not a global leader in underwriting? I don't think so. We've got a huge competitive advantage by having such a world-class investment bank, which feeds the advisors.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

The research, which we amortize across the cost of all the three platforms, enables us to invest more in research than you do if you're just a wealth shop or you're just an institutional shop. Again, we don't break down individual teams, and it's more than anecdotal. I have the numbers obviously in front of me. Well, not literally in front of me, but in my office. It's real. We're getting very big teams coming in.

Operator

Our next question comes from the line of Devin Ryan with JMP Securities. Your line is now open.

Devin Ryan
Devin Ryan
Analyst at JMP Securities

Great, good morning. I want to come back to some of the comments on investment banking strength and obviously the expected ongoing momentum there. It feels like a number of the areas are still actually seeing acceleration even in the third quarter, like advisory. That's driving investor questions around how much of this is structural versus just being in a great cycle. As we think about, I guess, Sharon, some of the comments you made about sponsors playing a bigger role, I'm just curious how you guys would quantify how much bigger that part of your business is today relative to maybe a few years ago, because clearly, that's an area where there's more capital and sponsors are kind of always transacting. Just love to get some sense of how much bigger that is and whether that could continue.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

Sure. I think that if you think about sponsors, but if you really think about everything, right, what's gone on is you have cash that you've raised and debt in other parts of the market, given where the industry was at the beginning of the pandemic. You have the cash that needs to be deployed, be that either from a corporate or from a sponsor, et cetera. As you push that through the system, people are looking for opportunities for growth, either from the corporate lens or from the financial sponsor's lens. I would say that it's an active part of the business. It's not the only part of the business, though, and that's the point that I was trying to make before when I mentioned sector diversification.

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

You might look at a financial sponsor as a sector, but you can also think about all different types of materials or retail or consumer discretionary, et cetera. All of that pie in terms of where it's coming from is changing. That diversification, I think, is what's helping the activity. I think that corporations are looking for growth. I'd say that it's not just one sleeve that is driving what the results that you saw, at least over the course of this quarter and the future pipeline.

Devin Ryan
Devin Ryan
Analyst at JMP Securities

Sure. Okay, appreciate that. Just to follow up here, wealth management, terrific momentum on the lending side. As we think about just the evolution here of Morgan Stanley winning a higher percentage of the overall customer's balance sheet or their wallet, where do you guys feel like you are at the moment on the liability side relative to kind of the potential? Are there any other products there that could be an interesting kind of extension or kind of a focus for growth?

Sharon Yeshaya
Sharon Yeshaya
CFO at Morgan Stanley

I think that it continues to be the beginning of that process. When you think about where we came from and then the penetration that we've seen from the household side, the numbers are still small. While there is a loan growth momentum, and we've obviously done quite well, there's technology that James mentioned that's also in the loan space. So if you are an advisor and you see somebody or you receive information that your client has looked at a mortgage calculator, for example, you'll get notified. You'll speak to your client about the product that you might have. I think that that extension of how you use technology to service your client better, and then also just the sheer numbers given that we became a bank later in our life cycle, provides a further runway for growth along that space.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

I would just add, when we bought E*TRADE, they had a relatively small loan book, and that was for good reason. I don't know if you remember, Devin, but I forget exactly what year it was. It was probably 2005, 2006 when they had problems with this large HELOC portfolio they had. That made them very gun-shy about the lending space. Just our mortgage product alone has enormous capacity with the E*TRADE clients. That's even before you get to start to think about the stock plan clients, ultimately. We're just thinking about converting their equity grants into accounts. That's project number one, but project number two is obviously managing their full liability side as well. A lot of space to go.

Devin Ryan
Devin Ryan
Analyst at JMP Securities

Okay. Terrific. Thank you.

Operator

Our last question comes from the line of Andrew Lim with SocGen. Your line is now open.

Andrew Lim
Andrew Lim
Analyst at Societe Generale

Hi. Good morning. Thanks for taking my question. Crypto's been in the news lately, and I just wanted to get your view on how you expect that space developing and your strategy and how to offer products to clients. How do you expect to engage with clients in the crypto space?

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

We're not directly trading crypto for retail clients, and there are other players who are choosing to do that. We give access for them to buy crypto through various funds and things. Listen, I've said it publicly before, I'll say it again. I don't think crypto's a fad. I don't think it's going to go away. I don't know what the value of Bitcoin should or shouldn't be, but these things aren't going away, and the blockchain technology supporting it is obviously very real and powerful. It remains, Andrew, a work in space. For us, honestly, it's just not a huge part of the business demand from our clients. That may evolve, and we'll evolve with it. Right now, it's certainly not what's driving our economics one way or the other.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

We're watchful of it, we're respectful, and we'll wait and see how the regulators handle it.

Andrew Lim
Andrew Lim
Analyst at Societe Generale

Sounds great. Thanks a lot for that.

James Gorman
James Gorman
Chairman and CEO at Morgan Stanley

Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.

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