Morgan Stanley (NYSE:MS.PK) Credit Suisse 24th Annual Financial Services Forum February 14, 2023 12:45 PM ET
Company Participants
Sharon Yeshaya – Executive Vice President and Chief Financial Officer
Conference Call Participants
Susan Katzke – Credit Suisse
Susan Katzke
Okay. Good afternoon. For those of you with us virtually, I am Susan Katzke. I cover the large-cap banks for Credit Suisse. Our next speaker in the bank group is Morgan Stanley, and I’m quite privileged to have Morgan Stanley’s CFO, Sharon Yeshaya, back and here with me today. We’re going to run this as a fireside chat. We’re going to work to extract some more detail from Sharon, following up on this year’s strategic update.
Before we go there, I’m going to read the compliance disclaimer. This discussion may include forward-looking statements, which reflect Morgan Stanley management’s current estimates and subject to risks and uncertainties that may cause actual results to differ materially. Morgan Stanley does not undertake to update the forward-looking statements. This discussion, which is copyrighted by Morgan Stanley, may not be duplicated or reproduced without their consent, is not an offer to buy any security. So welcome back.
Sharon Yeshaya
Hi, Susan. It’s great to see you. Happy Valentine’s Day.
Susan Katzke
Same to you. Same to you.
Question-and-Answer Session
Q – Susan Katzke
So on that note, let’s set the stage on the macro and the market environment, and maybe we can start along those lines with your assessment of the markets from CEO confidence, investor risk appetite and go from there.
Sharon Yeshaya
Sure. First of all, thank you for having me. It’s so nice to be here again. Obviously, coming back down to Florida is always enticing, especially in the winter months, although it was obviously relatively warm in the Northeast.
As it relates to CEO confidence, investor confidence, obviously, a tremendous amount to unpack as it leads to all sorts of business and market activity. When we think about CEO confidence, the CEO remains engaged. That’s the word that we’ve been using. So there’s certainly dialogue. The question is just, you have a fog of uncertainty. It’s beginning to lift. What does that mean as we move forward? How do you think about that when we move forward from here? And how much will he or she decide that it’s the right time to act?
Obviously, as we think about the CEO confidence, it has changed and evolved. I think the last nine months have been more challenging, but we’re continuing in what we would consider a very active dialogue as we move forward. The question is, I’m sure we’ll get into, is how do you get from realized — or excuse me, from a pipeline state to a realized state, specifically with a lot of these conversations?
On the investor side, what’s obviously very helpful from an investor — from an institutional investor perspective is that he or she is very dynamic in their behavior. And so what they’ve been looking for has been some sort of stabilization of those uncertainties. And what we’ve seen over the course of the last six weeks is more client engagement, specifically, as you consider that and juxtapose it towards the end of last year. So more engagement, more clarity in terms of where they think that the economy will be going and so, therefore, more activity as we think about these last six weeks versus the back half of last year.
Susan Katzke
Okay. So then what are you seeing in terms of actually retail client activity and engagement, less so about capital markets, but when you think about the wealth and investment management channels?
Sharon Yeshaya
So the conversation or the explanation and the characterization that we had about the retail client, let’s compare it to where we were last year. We said he or she is sidelined. They are looking for opportunities, and they will be both rational and opportunistic as they move forward.
Where we are today is similar to periods of time that we saw last year. So one example of that opportunistic behavior was what we saw last year in August. We began to see capital markets become more receptive to activity. You’ll remember, in August, it looked as though there might be some sort of policy pivot or a moderation in inflation. And so from that perspective, we saw DARTs pick up. Remember, DARTs is just an activity metric, obviously, when you think about the retail investor.
What we’ve seen in the last six weeks is very similar to that. Again, a pickup in that activity from the individual retail investor.
Susan Katzke
Okay. So this is positive. Let’s go to trading. And let’s think about trading in the context of the strength that continued in 2022. And I hate to use this word, but we’re kind of like we’re at this more normal level of volatility, right? I mean you look at the VIX, you look at the move, we’re closer to the 20-year averages, after having been stagnant post financial crisis and then at crazy levels through the pandemic. So we’re normal. We’re not outsized. How does this inform your view of what’s ultimately normal in terms of the fee pools in trading? And kind of where we’re indicating for 2023?
Sharon Yeshaya
So I remember we had this conversation last year on what is normal.
Susan Katzke
Yes.
Sharon Yeshaya
And I think it’s a really difficult word to assess. But I think that normal should be taken in the context, as you say, both over the last couple of years, when we think of them as bookends, and I’ll describe that in a second. But also when I think about the sales and trading wallet, I actually think about it as the full institutional securities wallet. So I don’t — I’m not specific to sales and trading, but rather I think we need to think about it more holistically. Because you can see different types of activity in different buckets, being advisory, underwriting, sales and trading, can move based on where that volatility or that change in activity is.
So if we step back and we think, “Okay, where were we last year when you and I were having this conversation?” We said the two bookends were basically 2019 and 2020. And the reason that we picked those two bookends was, if we look back over those couple of years, they were very different distinct backdrops.
In 2019, when we think about it, you had true globalization across the different monetary policies. So it felt as though everything was kind of moving in tandem. Remember that parts of the sales and trading wallet, people say, “Would it ever recover? Would you ever see numbers that were bigger?” Then all of a sudden, 2020 hit, and it was a completely different backdrop. And by the end of that year, all policy rates were at zero. You were flushed with liquidity, and everything was kind of going gangbusters as we think across all of those markets. And so neither bookend felt realistic at the beginning of last year, but we said we would probably end up in between those two places.
And in fact, as you mentioned, that’s kind of where we were. And when — I think I answered a similar question on the earnings call, and I said, “When I’m looking at 2023, 2023 from a wallet — industry wallet perspective, it feels reasonable to assume that it will be similar to 2022.” However, that mix might change. I’m not talking just about these last six weeks, but I’m talking about the year more holistically. We might be in a situation in which, over time, to your point, volatility normalizes, maybe we don’t see the same levels of activity in sales and trading, but that should open up underwriting. It should open up various portions of advisory that, I’m sure, we’ll discuss. But that mix, and to your question, yes, 2023, I think, reasonably could look like a 2022.
Susan Katzke
Okay. So let’s go that next step to the investment banking pipeline, because you said repeatedly that the pipeline itself remains quite healthy. And I think it’s important because we’ve been through multiple cycles. I’ve been through more than you, I think. But the cycles, oftentimes, the markets would roll over and you wipe out the pipeline because it wasn’t so high quality of pipeline to begin with. And now these pipelines have actually held in quite well.
Can you speak to kind of how much more market support at this point is needed to actually start to monetize the pipeline? We started to see — I mean, DCM is much stronger at the start of this year. Where are we going?
Sharon Yeshaya
Sure. Let’s take it step by step, because I think market support and this idea of just is one thing, and that we can talk about broad pipeline and then underwriting and what we’ve seen at the beginning of the year.
So first, you use the term market support. And interestingly, I don’t really think of it as support. I think of support is the outcome. So support is what happens when you see green markets. But what leads to those green markets and what leads to that veil of uncertainty lifting is if you think of a probability distribution, and you think about where we were last year, you had fatter tails. So what we need to see and what we’ve begun to see is those fatter tails compress and then the consensus and the view and actually the macroeconomic backdrop coalescing around one particular outcome. And we’re beginning to see that. So obviously, as that continues, that should help and support activity.
Specific though, to underwriting, it certainly feels better than where we were last year. Yes, at the end of last year, specifically those nine months were very anemic. But interestingly, actually, on a year-over-year basis, DCM is still down, especially in January. So it’s not as though we’re actually totally back to the races, so to speak, from an underwriting perspective, but rather, it feels better. And what that “it feels better” means is that the market feels receptive to transactions. So that for us, as an adviser, allows us to be in a position to say, “Client, you should consider coming to market now.” And I think those are the dialogues that we’re having right now. Obviously, where and how quickly things push out through the market depends on just how long the markets are receptive. And is there some sort of uncertainty that we haven’t factored in yet that comes into play over the course of the next couple of months and quarters.
Susan Katzke
And are you surprised how well this pipeline has hung in?
Sharon Yeshaya
Well, I think that when you think about the pipeline, I don’t know if I would say I’m surprised, because a year ago, we said that the pipeline was strong. It was just these uncertainties. Remember, a year ago, we said there were two kind of factors that we were looking at. We were looking at traditional M&A activity, and that was old and new economies. And we were specific in saying from the pipeline perspective, where could you see that activity come through. And right now, where we still see this pipeline is on those larger economic sectors. So that could be FIG, that could be tech, that could be health care, that could be real estate, really, the underlying drivers of the larger economy as a whole.
But the second point, right? So that could take more time to play through. That has a Board, you have public markets, you are waiting to understand valuations. But you also have another factor that’s separate from what we think of as traditional M&A, and you have a greater pipeline of financial sponsors. And we discussed that, you and I, last year. And that sponsors, you still have transactions where you would expect them to come to market. And they could be smaller in size. They may not have the same sort of — there might not be the same regulatory things around them, just given their size and who they are. But what you need for the sponsors is you need an opening up again of that underwriting the leverage loan, that marketplace and really those pipes to begin to allow for the financing.
So what you could see, as we kind of think of, “Well, what’s the pipeline? What comes next?” You could see financial sponsors first, and then you could begin to see the rest of the larger traditional advisory that you and I have seen over the course of the last 10, 20 years, begin to come through.
Susan Katzke
Okay. So there’s some help that we begin to rebuild that M&A backlog at some point this year. Perfect. So let’s switch gears and dig in on Wealth Management a little bit and talk about net new assets and flows through the funnel. And you’ve got two goals that are out there, one new one. So that’s the $1 trillion in net new assets every three years that goes alongside, building to $10 trillion in assets over the longer term. And your track record supports our confidence in the achievability of these goals. But every year is different. The strength of 2021 was like through the roof, and then we had a solid 2022, but 2022, [wasn’t] 2021. So let’s talk about what’s normal for flows, considering how the complexion of those flows shifted from ’21 to ’22 and the year ahead.
Sharon Yeshaya
So again, this concept of normal is always interesting. But what we use to come up with the “normal” is what has happened or what has informed us in terms of our different sources and our different channels. And what’s “been normal” over the last three years is actually to get to $1 trillion of assets, right? So it’s not surprising that we would suggest that, that could be in the realm of normal and would also be our goal.
What that also equates to is we’ve given you a range, and we said 5% to 7% of beginning period assets, feels like that is “normal”. That’s a run rate that one could expect. Not surprisingly, that translates into your $1 trillion of assets. So I think that when you look at where are we versus that guidance that we’ve given, that’s where it comes from. It stems from a historical perspective.
Susan Katzke
So then I’m thinking of your strategic update deck.
Sharon Yeshaya
Yes.
Susan Katzke
And you showed us that no single source drove more than 25% of the NNA growth. But what were the bigger drivers over the last three years? And do you see those sources shifting materially from one year to the next?
Sharon Yeshaya
It’s funny you asked about the sources because I said this last year, but I think it’s a really interesting point, is that three years ago, when we were sitting here, we did — we only really had achieved one source of scale, which was the advice-based pipeline. We were still in a situation where we hadn’t even announced E*TRADE to The Street, right? And if you think about four years ago, we hadn’t even announced Solium. So we weren’t even contemplating a workplace channel. So just perspective of kind of where we’ve come from over the last three years is really interesting to informal what is normal.
The difference between now and those years is that we now have three true channels that are of scale and can attract assets. So you have the advice-based channel, you have the workplace channel and you have the self-directed channel. And each of those underneath has their own sources. And those are the sources in that strategic deck that we said currently are not more than 25%. The point of that was to really show and showcase the diversification that we have across the business. So that if you have years where recruiting is strong, if you have years where there are more assets held away coming in, if you have years with more stock transactions coming through, you’re going to be able to capture those flows, and you can toggle and you have the strength and the scale across each of those different channels.
Susan Katzke
And have you seen — I guess you don’t have a long enough time period yet to really see a shift from year-to-year.
Sharon Yeshaya
Yes, the only shift is going to be because you didn’t really have one of scale over those periods of time.
Susan Katzke
Okay. So let’s talk about acquisitions because in the last couple of years, they’ve been a contributor to your growth. You did a handful of, I guess, institutional retirement consulting platforms. So I’m curious how those FAs have integrated on to the Morgan Stanley advisory platform? How profitability of the relationships has improved? And I guess, given those two factors, whether or not you’ve got an appetite for more? And those have been some big chunky pieces.
Sharon Yeshaya
Yes. Let’s start with your last question first, which is do we have appetite for more. We’re always interested if it makes sense strategically, if it makes sense cultural perspective, if we understand how that could work with our business and how it could help us with the funnel. Remember, what the funnel actually is it’s three stages. And where these asset acquisitions come from is the very top of the funnel.
So the first is, let’s understand — let’s grow our client relationships. Let’s have more client engagement that we can have and offer content, financial education and begin to engage with these clients, which you might call also prospecting, right?
The next is build trust and credibility. That’s through, again, things like education and better understanding the client through data, et cetera. The next and final stage is when it makes sense to the client, migrate them to advice, right? So you go through those stages.
What these asset acquisitions have helped us with are the build-out of these client relationships. So in 2020, again, when — well before we started on this — or when — before we’ve fully integrated all of these different acquisitions, we were in a position where we had 13 million client relationships. In the strategic deck, we discussed that now we have 18 million client relationships. That’s a very large jump, obviously, in the relationships that we now have with retail clients. A portion of that was from these relationships that we had from these different asset acquisitions. And so what we’re trying to do is really build out the funnel and see it.
Now your — I think final — in the middle part of your question is, well, what have you seen so far? So far, we’ve seen more engagement. We’ve seen more opportunities to begin to speak to the underlying employee that those FAs are advising through the corporate and provide them with educational content as we move forward.
Susan Katzke
Okay. And these FAs assimilate onto your platform?
Sharon Yeshaya
That’s right. That’s right. And they have the content, and then we can continue to build out those relationships.
Susan Katzke
Okay. So let’s then talk about retention at the top of the funnel, because you had put out that target and you’ve achieved your 30% stock plan retention target. So I’m curious whether you’re going to raise the bar. What drove the success in terms of getting to that 30%, because you did it pretty quickly? And is it marketing? Is it service? Is it product? And when you think about whether or not you would raise the bar on that target, where did the other 70% go?
Sharon Yeshaya
So let’s first understand what this target is, because this target is slightly different from the question that we asked right before, which was the asset acquisitions. This has to do specifically with stock plan, the stock plan retention. So last year, you’ll remember what we discussed was that what we were planning to do, and we also mentioned at this conference a couple of years ago, was to provide individuals who received stock plan to have that stock vest into a Morgan Stanley self-directed product. So that conversion, where it would move and convert into a Morgan Stanley self-directed account, we wanted to make sure that by the end of last year, the goal was that 90% of them would see a Morgan Stanley self-directed account, and that’s where their stock would vest. That helps with the original retention. So if you know that it’s just like if you think of direct deposit. So a bank is more likely to get your cash if you have a direct deposit. If you think of the same thing here, it’s a similar analog, where if you directly deposit your stock plan conversion, and it goes into a Morgan Stanley self-directed account, it’s kind of Stage 1. So that is a portion of where this increase to 30% came from. So from where we were last year and the 20s to 30 has to do with that first piece.
The next piece has to do with education. It has to do with continuing service and all of the things that you listed in your question, is it for better service? Is it from better education? Is it from better understanding of advice? All of those things are true, and that should help us as we convert and, to some degree, also retain those assets.
Now are we going to raise the bar? It will move in time. So I think we’re expecting in terms of having that move forward, we would expect that number to continue to move up. But will it end up at 100%? No, it won’t. Why? Because as you or I know or anybody who receives stock, you use that stock not just as investable stock, right? You might use it. You might sell it and you might pay off your loan. You might pay off college debt. You might decide to buy a house. You might pay off bills. So the intent is to understand what’s typical in terms of that evolution timing-wise? So we watch these assets kind of move and migrate through or down the funnel.
Susan Katzke
Okay. Fair enough. So along those lines of the migration to advice, I think, you are going to tell me it’s education in terms of migrating the relationships to the advice channel. But what’s typical in terms of that evolution, timing wise as we watch these assets kind of move and migrate through or down the funnel?
Sharon Yeshaya
Well, I think what you’re saying — yes, you both moved down the funnel to your point, but it’s also a horizontal shift. So I think of it as channel migration, right? You’re moving from what’s going on from the workplace side and how are you moving that into the advice base side. And there is proof positive that it’s working. That’s the $150 billion number that we provided in the strategic deck. And that’s why that was so powerful is that over the last three years, we can actually see that $150 billion came from workplace into the advice-based channel. And what’s been so interesting about actually looking at that number, and that James highlighted in his remarks, is that it wasn’t all direct migration, but rather you had money that moved and migrated channels but you also began to attract assets held away, right? So you’re actually getting — you can see places where you’re getting assets that weren’t necessarily in the Morgan Stanley, the four-walls of Morgan Stanley. And once they understand the content and the advice that we can offer, they begin to — those individuals begin to also migrate or move money from external sources into Morgan Stanley.
Susan Katzke
Okay. So we’ve kind of talked around the funnel a fair bit here. And I know you often talk about your category of one. So look, I mean, the model is working. It’s working well. How do you defend the model and the moat?
Sharon Yeshaya
The moat continues to grow as we build scale and invest in technology. Each of these channels has now been shown to be an industry leader, right, across all three of them. And that scale is important to both providing content education, which we’ve talked a lot about, but also operating leverage as we continue to move forward.
So the first is scale, and the second is technology. So the purchase of E*TRADE was, as James has said on various earnings calls, that was a technological investment. E*TRADE is a technology platform. So investing in technology, understanding the needs of our clients and also understanding the full spectrum of wealth that an individual has from the first monetization event or the first paycheck, all the way through retirement is critical and staying on top.
Susan Katzke
Okay. So let’s — we’re going to stay within Wealth, and we’re going to switch gears to deposits, which I know people have been waiting for this discussion because we’re so excited about deposits and the NII guidance.
So let’s start with deposit flows. You had inflows in the fourth quarter, which not many people had inflows, who had inflows. Let’s talk about the complexion of the deposit flows and the shifts that occurred throughout 2022 and kind of how you get confident in the stability of the sorting process here?
Sharon Yeshaya
So where I think people need to have a little bit of perspective is, your question is a very fair one around the fourth quarter alone. But let’s understand, and obviously, there was a lot of discussion around deposits all of last year. But let’s first understand what actually happened with deposits, why they went up to begin with. Remember, it’s a process that we have to step back all the way at the beginning of COVID. And when we began to see excess liquidity, we saw all deposits rise.
For us, what that meant is that the $1 million tier and above had a bigger composition that was rising. It was never assumed that, that entire stack was transactional cash. Some portion of that cash is going to be investable cash. And what we witnessed, as a sort of community of investors and also practitioners, was that when you moved forward through time and you saw an accelerated rate hike cycle, and there was greater product available for that “investable cash”, it moved. Did it move more quickly? Well, rates moved very quickly, right? So again, we have to put that in context.
Then your question in terms of, well, what happened in the fourth quarter? Our strategy might have been different from other peers because for us, 90% or so, and we show this in the strategic deck, of our deposit stack comes from our Wealth Management franchise. So we’ve talked a lot about not just in this cycle, but historical cycles, was how do we find a way that even if that investable cash is invested, that we keep that cash within the four-walls of Morgan Stanley? And what we did is we bifurcated products. We created a savings-based product or we had a savings-based product that we then promoted and also a CD-based product, right, where we allowed and we gave an opportunity and gave clients choice to invest their investable cash. Then a different product, which is our sweeps product for our transactional cash. And so that was what — those were the dynamics that you saw not just in the fourth quarter but throughout the course of last year.
Susan Katzke
Okay. And so within this product mix, as we think about pricing and beta and, look, I mean, you moved very quickly on price to address the customer need. And this is the clients and the franchise that you have. Has your beta pretty much topped out here?
Sharon Yeshaya
I just like the word beta. And I say that because there’s been such a focus on the word beta. And when I say beta or you say beta, we’re talking about different things because, look, you might be looking at beta of the full stack or I’m thinking about beta per product, because they are different for each product, right? Again, the point was provide our clients choice. So whether or not they’ve topped out really has to do with consumer behavior and has to do with the rate cycle. And different products are going to have very different betas because they’re intended to attract different types of deposits.
Susan Katzke
That’s completely fair. From here, in terms of the mix of the deposits, do you expect to be relatively stable? And how do you think about — and we can combine this with the loan demand as well. But in terms of whether it’s clients wanting to sit on cash because of their risk aversion to investing in the markets or whatever it is, how — are we kind of at or closer to a steady state? Or where are we in terms of the migration of those deposits right now and then the appetite for loans?
Sharon Yeshaya
So I won’t speak to the actual deposit. Where are we in terms of the consumer behavior because I think the consumer behavior is very dependent on the rates themselves? But what I will say is, let’s talk about, well, what are you going to do regardless of the consumer behavior? And part of the NNA strategy, and that’s obviously a goal in the strategic deck, is as we get more assets, a portion of that will be likely held in transactional cash. So that will help us continue to think about ways that, that deposit franchise will grow, right? Through net new assets, you will get more cash in different ways. So that’s the first thing.
The second thing is you develop more banking products or we develop more banking products or we began to service more and have more client engagement as we think about the banking products. What we’ve seen, and we have evidence, is that more FAs that are offering their clients banking products on the loan side end up seeing more net new assets coming in. So it works in tandem. You continue to think about ways to service our clients through product and choice.
And then specifically, to your question on near-term loan demand, that will depend again on the markets. And I say that because you saw it in the fourth quarter. It’s not surprising that you might get paydowns in a period of time where rates are higher and asset levels are depressed. But will it be different in different parts of the year? You’ll have to see where things go. Of course, it’s dependent on the overall macro backdrop.
Susan Katzke
Okay. So let’s wrap up this section with your guidance. Are you still comfortable with your guidance to roughly 5% NII growth from fourth quarter to first?
Sharon Yeshaya
I am, Susan. I’m comfortable with my guidance.
Susan Katzke
All right. So then we can shift to your broader financial targets here. And you’ve got the 20%-plus ROTE target out there. I don’t think anyone would look at your 16% core ROTE last year and say anything, but congratulations because, against tremendous headwinds, you put up a very strong 16%. How do you get — and what environment does it take to get back to the 20% or 20%-plus level?
Sharon Yeshaya
So thank you. I think we were all very proud of our performance and showed the true business transformation of where we could be in a challenging backdrop such as last year in terms of the ROTCE. When we look ahead and say, how do you achieve this goal over time, obviously, we have achieved it, and we’ve seen it in periods of time the previous year when you had larger securities wallet, which is what we discussed. So one is, if that wallet expands, you’ll be there.
But then the second question is going to be, “Well, how do you create a model or what’s the model to have more durable fee-based revenues throughout the cycle?” That lends back on the asset conversation that we had. So the greater the asset base, the more you’re able to attract fees and the more you’re able to stabilize yourself and move up and ratchet up that ROTCE throughout the cycle. So it’s a bifurcated approach, right? You’re going to do it on the asset side. We’ve been very clear. And then, of course, we would look to purchase if there are opportunities where that institutional securities markets grows.
Susan Katzke
And then there’s the other component. Of course, it’s operating efficiency.
Sharon Yeshaya
Of course.
Susan Katzke
So you have a target out there, less than 70% over time. And you spoke to, I guess, additional cost savings measures beyond the December headcount reduction. In the current environment, what are you actually doing what you need to be doing to get to that efficiency target?
Sharon Yeshaya
What we keep looking at, to your point, there is operating leverage, right? And so of course, as revenues, right, as I said this on the earnings call, there are two pieces. Revenues is going to be one and then just continued expense discipline. But I’ve been speaking about the expense discipline really since our April call. We’ve been looking very closely at where are the investments and then where is the overall spend. So future investments, but the historical spend as well, given how the environment has evolved.
The most basic example is something as simple as space. right? You’re in a different world than you were pre-COVID. You have to look at your space and say, “Is it efficient? Where are we thinking about hybrid opportunities for different employees? Are you really allocating your space properly?” So those are — there are simple ways. And then there are also ways where we’re looking at our technology base, and we’re saying, “Is that the appropriate place to spend. And as we move forward, how do you match growth with the efficiencies?”
Susan Katzke
And then in Wealth, in particular, where your target is the 30%-plus pre-tax margin over time, I think some might have been surprised that it was somewhat harder to come by with rising interest rates in 2022. Of course, you also had a market value headwind. But perhaps we could just touch on the confidence in getting to that 30% level.
Sharon Yeshaya
I appreciate you mentioning that because I think it’s….
Susan Katzke
Well, that’s reported itself.
Sharon Yeshaya
Exactly. I think that it is pretty — I would use the word remarkable in terms of where we are from a margin perspective. Because like everything else, it needs to be taken in context.
When we started the journey in 2009, our margins were 6% for the business. So what gives you the confidence that you can go from 27%, 28%, both ex or with integration, right, and get to 30% in an environment where asset levels are down? Well, what gives me confidence is history, because we’ve proven that we can do it. And Andy has also said it multiple times where, if you wanted to get to 30% immediately, you could do that if you chose not to invest in certain parts of your business. But originally, remember, you asked me, well, what’s important to staying on top? Investment is important to staying on top. And staying a leader as you think about those investments is critical.
Susan Katzke
And on investment spending beyond acquisition integration, is there anything in particular that’s new or different in terms of where you’re investing?
Sharon Yeshaya
New or different? No, but I will repeat what we’ve said that I think is important, which continues to be on the wealth side. As I’ve said, there are places in retirement, financial education throughout building scale and continued leadership within each of those channels on the wealth side. The institutional security side, we’ve shown that as we invest and we had a tremendous amount of focus on the sales and trading businesses. We’re also now investing on the M&A side. I’ve mentioned that on previous calls. It’s important, I think, as you look ahead to also say this cycle will turn. Investment in human capital is important. And we want to be there to advise our clients as this cycle eventually turns. And so that’s where we’re looking to invest on the ISG side.
And then finally, on the IM side, we’ve been really clear about alternatives. That includes private credit and others, when we think about customization and the Parametric brand, then, of course, the sustainability side are all important areas of secular growth as we move forward from the IM side.
Susan Katzke
Okay. So let’s — with our last five minutes, switch gears into the regulatory environment and capital. And it’s interesting, many of the things you just noted in terms of investment really aren’t balance sheet intensive investments. You’re sitting here with CET1 at 15%, and you’ve got a 13.3% requirement. And I think James has spoken to his comfort at being at the 15% level. I’m curious, we know CCAR changes from year to year. We know the regulators are — seem to be signaling, at least in my interpretation, to higher levels of capital requirements. How do you get comfortable with, is 15% the right number for where you’re holding your capital right now or narrowing that gap to your minimum?
Sharon Yeshaya
So I would draw the analog to one of my earlier answers, which is we talked about CEO confidence at the beginning of the conversation. And that was obviously strategic in nature. And we said, “Well, what would cause CEOs to move forward from an M&A perspective?” And the analogy I gave was a probability distribution in fat tails.
So when were they going to move, they will move when those tails and that tail risk comes down. Same thing for us, right? You’re thinking about a CEO that’s looking at his or her own situation, and there is uncertainty. The tails seem relatively fat, especially if you back to where we were last year, so not just the regulatory side. But remember, even last year, you had OCI that was moving as rates was moving. That was capital headwind, not just for us, but for everybody, for the entire industry. You had volatility. Volatility increases RWAs.
So let’s see where we are. Let’s understand how those uncertainties change, then we can make a decision, but that’s why we’ve been holding a buffer. It has to do with the uncertainties that we’ve discussed throughout this entire conversation.
Susan Katzke
And then just thinking for a minute about — you’ve been a pretty consistent and active buyer of your stock. You actually have also raised your dividend very consistently. The dividend is actually quite costly within your capital structure. It’s like 120 basis points of add-on to your SCB. How do you think about the dividend payout in that capital construct?
Sharon Yeshaya
So we think of all of capital as a strategy. It’s not just the dividend or just the buyback or just the investment or just the RWAs or just G-SIB, all of it is a strategic decision that we think about holistically with the company.
On the dividend specifically, think back to 2015 and 2016, where James spoke very clearly and said, “Once I understand the final rules, I would like us to have the Wealth and Investment Management continue to throw off fee-based revenues, and then I would think of that as a dividend stock. I want to pay that off as a dividend to my shareholders.” So the strategy is not new in terms of our strategic message. And we would look to increase the dividend over time as that business continues to grow. So it’s strategically aligned to our core longer-term strategy.
Susan Katzke
Okay. So now we’re going to go to the wrap-up question. Okay. So we’ll put aside capital more than adequate. Growth is — I think, it’s consistent. The returns have been consistent at this 20%-plus — or circling towards that 20%-plus level. And when we think about this in the context of being a G-SIB, these returns are quite outstanding with very high capital levels. What do you think are the two or three things that are ultimately just critical to staying on top?
Sharon Yeshaya
Most importantly, and thank you, we’re very proud, obviously, of the strategic evolution of the company. But most importantly, we’ve said we’ve set the strategy. The strategy hasn’t changed. That was the point of strategic deck this year, was this is the same strategy. We’ve been very consistent about the strategy. We have a North Star, and now it’s about execution and continuing to execute as a team to get there. So that’s the most important thing, is a clear strategy with clear execution. The second thing is no strategy by envy. I said that last year. James has said it on earnings calls. We know who we are, we will do what’s right for our business, and that’s what we have to see as we continue to march forward through time.
Susan Katzke
Okay. I think that’s a great place to wrap this up. Sharon, thank you so much for joining us again this year.
Sharon Yeshaya
Thank you, Susan.
Susan Katzke
Thank you.
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