Morgan Stanley (NYSE:MS.PK) Q4 2022 Results Conference Call January 17, 2023 8:30 AM ET
Company Participants
James Gorman – Chairman and Chief Executive Officer
Sharon Yeshaya – Chief Financial Officer
Conference Call Participants
Glenn Schorr – Evercore ISI
Ebrahim Poonawala – Bank of America
Brennan Hawken – UBS
Steven Chubak – Wolfe Research
Dan Fannon – Jefferies
Gerard Cassidy – RBC
Mike Mayo – Wells Fargo
Matt O’Connor – Deutsche Bank
Operator
Good morning. On behalf of Morgan Stanley, I will begin the call with the following disclaimer. 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. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release and strategic update.
Within the strategic update, certain reported information has been adjusted as noted. These adjustments were made to provide a transparent and comparative view of our operating performance against our strategic objectives. The reconciliations of these non-GAAP adjusted operating performance metrics are included in the notes to the presentation or 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
Thank you, operator. Good morning, everyone. Thanks for joining us. The macro backdrop of the last year presented challenges we haven’t seen for some time. The combined impact of persistent inflation and rapid central bank tightening pressured asset levels and led to very little strategic activity and capital raising.
Despite volatility throughout the year, Morgan Stanley demonstrated resilience and delivered on an ROTCE of 16%, including integration-related expenses from our deals. The firm did what it was supposed to do with our more stable Wealth and Investment Management businesses offsetting declines in Institutional Securities.
This is hard evidence of the transformation we’ve made to become increasingly durable and a stark contrast to the 8% ROTCE we had in the last notable challenging environment of 2015. When markets rebound, we will capitalize on growth once again across the full firm and from an even stronger position.
Before turning to Sharon to discuss the details of the fourth quarter and the full year, I’ll walk you through now how we plan to achieve these goals in our annual strategic update appropriately titled delivering growth through the next decade. Briefly first, I’d like to acknowledge the many contributions Jon Pruzan made as CFO and COO. As you know, he’s retiring from Morgan Stanley at the end of this month, and we wish him the absolute best.
Please now turn to the deck into Slide 3. What informs our confidence in growth strategy is that we know who we are. We’ve been clear about that for over a decade. Our clarity of purpose has been a key driver of our success to date, and the next decade will be no different.
On Slide 4, you can see we’ve been consistent since the financial crisis. We have a client-centric franchise with a common objective to facilitate capital flows between those who have it and those who need it. We’re committed to our clients and to the markets we’re in, clearly illustrated by the leading competitive positions we have. In each of our businesses, we have a significant competitive moat, which will enable us to maintain and further enhance our strength.
Slide 5 highlights the strategic decisions we’ve made over the past decade that are focused on aligning markets — ourselves to the markets where we perform best. And these are core businesses with scale in major markets that are on the whole more balance sheet-light and benefit from more durable fee-based revenues.
We continue to invest in these areas to drive future growth. We have proven track record in our ability to acquire and integrate the businesses that are aligned with this strategy, namely within Wealth and Investment Management. Importantly, we’ve also taken action to get out of businesses that are not core to this flow of capital.
While we may facilitate activities across varied markets, we do not own businesses that are built around unsecured consumer credit payments, physical handling of commodities and the like. Instead, we focus on markets we best, and our ability is there to support our clients in those markets.
Please turn to Slide 6. This illustrates the ongoing growth and shift of our business mix. As we continue to grow our client assets, we expect Wealth and Investment Management will become an increasingly larger portion of the firm’s pretax profit. The stability of the firm will be further enhanced by this growth, all the while coupled with a preeminent institutional franchise.
Fair to say our business model was tested this year, as you can see on Slide 7. 2022 was a paradigm shift. But first the common acts continuation of the first pandemic in 100 years, the first war in Europe over 70 years and the highest inflation in 40 years. Despite lower asset values and an anemic underwriting calendar, the firm performed well.
We generated, as I said before, a 16% ROTCE and the most excess risk-based capital of our peers and attracted over $300 billion of net new assets, all while integrating two major acquisitions. So, now moving to the opportunities to maximize growth in the next decade, let’s start with Wealth Management.
On Slide 8, you can see we have leadership positions across channels, reflecting our combination of best-in-class advice and best-in-class technology. And we have the ability to meet any client wherever they are in their wealth accumulation journey. This allows us to grow with our clients along the way and provides the opportunity for clients to migrate across channels.
The growth of our business is reflected in our higher average daily revenues, something I’ve been tracking for well over a decade. 2022, every trading day saw revenues in excess of $80 million, and over 1/3 of those exceeded $100 million a day. Contrast that with only three years ago, where 95% of trading revenues were each below $80 million, and none exceeded $100 million.
It is through the journey as illustrated on Slide 7, Wealth Management has gone through a powerful transformation, as you all know, including with the most significant recent acquisitions in E*TRADE and Solium, which have expanded our client base with two new channels. Today, we have 18 million relationships. We focus on deepening those relationships far up the right product at the right time and consolidating assets under our platform. From here, we’re building on the scale and the tools to reach — and the reach that will propel future growth.
Net interest income has certainly been part of the profitability expansion to date, and you can see the driving forces highlighted on Slide 10. We have invested in expanding our bank offerings, allowing us to offer attractive products to our clients on both sides of their balance sheet to meet their needs. We’ve nearly doubled our lending balances over the last three years, and we expect to continue to grow attractive high-quality loans.
On the other side, our deposit franchise has grown significantly since 2019 and will continue to support future NII through various cycles. Approximately 90% of our deposits are sourced from our Wealth Management client base. And in the current rising rate environment, our cost of deposits is more efficient than that we experienced in the last rate hiking cycle. Sharon will discuss this important topic and our outlook around NII further in a few minutes.
Let’s turn to Slide 11. This now talks about NNA growth, net new assets. Over the last three years, our platform generated nearly $1 trillion of net new assets showing a clear step change from prior periods and marking Morgan Stanley as a leader across our peer group as an asset accumulator.
Given the scale and reach of our businesses, we expect to deliver this pace of asset accumulation going forward. Obviously, there will be up and down individual years. But over a three-year period, we expect to drive approximately $1 trillion in net new assets.
Most importantly, as you can see on the right-hand side of this page, no single source is accounting for greater than 25% of this net new money. Some people think it’s just a result of recruiting. It is absolutely not. It’s a combination of several things, which the team has described as filling the funnel of net new money.
You can see on Slide 12, which shows our growth in client assets, we have experienced that through our workplace channel. We estimate now that relationships wealth held away has expanded by about 4x in the last three years. Our ability to serve clients across the entire wealth spectrum, we’re well positioned to consolidate a portion of these assets.
Further, the workplace channel continues to bring new relationships to the platform. We’ve executed on key steps to deepen those. We’ve already reached our goal to roll out companion accounts to 90% of workplace participants and to achieve 30% retention of stock plan assets. We look forward to even higher retention.
The results of our client-driven strategy are illustrated on Slide 13. The workplace channel has driven the majority of our growth in client relationships and stands at 12 million relationships to date. While it can take several years to deepen those, we’ve already seen success in some parts of the offering that of our stock plan administrative services.
Over the last three years, we’ve had approximately $350 billion of after-tax vested inflows. Vesting assets gives us more opportunity to deliver an integrated client experience, and that’s allowed us to showcase the power of advice.
To date, we’ve already seen advisor-led flows of approximately $150 billion that originated from a workplace relationship. Portion of those assets are the stock plan investor balances, but a larger portion are from assets that were previously held away. In short, we will — as we deliver our full suite of capabilities, our strategy to attract clients to advice is working.
Investment Management has also delivered strong fee-based growth over the course of its own transformation, as you can see on Slide 14, which encapsulates the business together with Eaton Vance. This business has more than doubled its durable asset management and related fees since 2014. And importantly, this significantly larger revenue base is more diversified.
Increased diversification from fixed income, customization and alternatives continues to support results in more volatile equity markets. We remain very aligned to key growth areas. Our alternative investment capital is at $210 billion with strong growth in private credit, real assets, including infrastructure, our multi-strategy hedge fund platform and special situations. And customization by our market-leading parametric business continues to be a significant growth engine.
Shifting to Institutional Securities on Slide 15, we have a global and balanced franchise. And our integrated investment bank has and continues to focus on meeting clients where they are active. This has served us well as our strength is evident across various market environments. We remain a leader in equity in Investment Banking and have steadily rebuilt our fixed income franchise focused on our strongest capabilities.
On Slide 16, you can see our institutional business remains a top three global leader in the industry, as demonstrated by a wallet share position. We have demonstrated our ability to defend share and gain it in relatively more capital-light businesses. At the same time, we’ve shown prudent several resources as illustrated clearly by the disciplined RWA usage, which actually dropped from ’21 to ’22 and our consistent G-SIB surcharge of 3%.
Let’s move to our capital strategy on Slide 17. We have 200 basis points of excess capital above our regulatory requirement. This is intentional. Our capital strategy has focused on bringing the risk down in our businesses, and we’ve seen a steady decline in our SCB excluding the dividend add-on reflective of our more durable business mix. Our capital position gives us enormous flexibility, and we’re comfortable with our decision to be prudently positioned.
On Slide 18, you can see our excess capital position enables us to continue to invest in our business for future growth and deliver robust returns to shareholders. Our business transformation, especially the durable earnings from Wealth and Investment Management, enable us to double that dividend — enabled us to double our dividend in 2021 and further increase it by 11% in 2022.
At the same time, we’ve reduced our shares outstanding from the much higher levels driven by the impact of our recent acquisitions. Taken together, we delivered a 9% capital return to our shareholders last year. We remain committed to ongoing shareholder return, adjusting always for whatever the business performance is and the regulatory requirements demand.
Shifting to how we see the future state on Slide 19. Starting with the expected path to $10 trillion in client assets across Wealth and Investment Management, we’ve demonstrated our ability to generate over the last three years positive net new assets of approximately $300 million a year. Combining that with reasonable average market assumptions give us the confidence this will lead to $10 trillion in client assets in reasonable years ahead.
Now let’s consider this within the broader firm picture, and bear with me for a minute. In 2022, the firm delivered $14 billion of pretax profit. In this future scenario of $10 trillion of assets, which I believe will happen, generating approximately 50 basis points of revenue which is about what we’re doing currently at a 30% pretax margin, which is within 2% of what we’re doing currently.
If you put that math together, it should create of itself over $14 billion of pretax income. As you can see, that exceeds that of the full firm today just from the wealth and asset management businesses. So if you pull it all together, just to wrap it up, Slide 20 reiterates our confidence in our performance goals. They have not changed on account of what’s going on in the markets in the last 12 months. These are the metrics we need to support our longer-term objectives.
Of note, we’ve added a new goal that I spoke to earlier that we’ve talked about in the last six months to generate $1 trillion in net new assets approximately every three years. Again, I’m sure there will be volatility quarter by quarter, year by year. But as we’ve demonstrated through the funnel of sources, we expect an outcome over three years of approximately $1 trillion. That’s about by the way up to 5% to 7% of beginning period assets within wealth and asset management.
As we approach 2023, we do so with quiet confidence, recognizing we have a line of sight with the durability of our Wealth and Investment Management businesses and our market share leading positions across much of Institutional Securities. As always, our objectives are subject to major moves in the economic, political or regulatory environment. However, with a constructive outlook and a proven track record we’ve delivered thus far, we fully expect to achieve our goals over time.
I will now turn the call over to Sharon, who will discuss the fourth quarter and annual results and we’d be delighted to take your questions.
Sharon Yeshaya
Thank you, and good morning. In a complex year, the firm delivered solid results. Full year revenues were $53.7 billion, and PBT was $14.1 billion. The fourth quarter contributed to $12.7 billion in revenues and PBT of $2.8 billion.
The strategic investments we have made over the last decade have paid off. Wealth Management had a record year and Fixed Income had its strongest performance in over a decade. While the firm was broadly impacted by increased volatility and economic uncertainty, the business model performed very well in a challenging environment as it was designed to do.
The full year results included $470 million of integration-related expenses of which $120 million were incurred in the fourth quarter. Excluding these impacts, EPS was $6.36 and $1.31 for the full year and for the quarter respectively. The full year ROTCE was 15.3% and 15.7% excluding the costs associated with integration.
In the quarter, severance expenses of $133 million related to a December employee action and a net discrete tax benefit — or net discrete tax benefits of $89 million largely offset each other through net income. The full year efficiency ratio was 73.2%. Excluding integration-related expenses, our full year efficiency ratio was 72.4%.
Total expenses were approximately flat to the prior year. Lower compensation expenses principally related to movements in DCP and on lower revenues were offset by higher non-compensation expenses primarily driven by investments in technology as well as increased marketing and business development spend.
As a reminder, this year also included a $200 million charge related to a legal matter regarding the firm’s record-keeping requirement in the second quarter. As the environment evolved over the course of 2022, we actively managed our expense base. Cognizant of the ongoing macro uncertainty, we continue to review efficiency opportunities.
We are in the final stages of completing our integration of both E*TRADE and Eaton Vance. And this will be the last quarter we present measures that exclude integration-related expenses from reported results. However, particularly as it relates to the integration of E*TRADE, the final back-office integration remains scheduled to conclude in 2023.
We expect to incur approximately $325 million of additional integration-related expenses this year. These expenses will largely be spread evenly across quarters with approximately 2/3 related to E*TRADE and 1/3 related to Eaton Vance.
Now to the businesses. Institutional Securities full year revenues of $24.4 billion declined 18% from the record prior year. In the fourth quarter, revenues were $4.8 billion. Overall, quarterly client engagement across fixed income and equities tapered from the higher levels seen in the first nine months of the year, reflective of seasonality and the macroeconomic environment.
Weaker Investment Banking results persisted, reflecting the challenging banking backdrop. Investment banking revenues were $5.2 billion for the full year, down 49% from the record prior year. Advisory delivered its second best result, supported in part by the completion of previously announced strategic transactions. Underwriting was more challenged, in line with the broader market.
Full year global equity volumes dropped to levels unseen in the last 20 years. Debt volumes contracted following the first quarter. And while the market was receptive to higher quality issuance, activity was limited to constructive market periods.
Fourth quarter revenues of $1.3 billion decreased 49% from the prior year. Lower completed M&A and underwriting market volumes weighed on results. As we have highlighted in prior quarters, client dialogue and engagement remains high as clients seek advice to navigate the difficult environment.
Greater economic clarity should lead to increased confidence to undertake strategic transactions. And looking ahead, we expect issuers to take advantage of these windows of opportunity.
Equity full year trading — excuse me, equity full year revenues were $10.8 billion, representing another strong year of over $10 billion and making us a global leader in this business. Revenues declined 6% from the record prior year primarily driven by lower market activities.
Revenues were $2.2 billion in the quarter, reflecting lower asset levels and volumes. Prime brokerage revenues were lower than the prior year as average client balances declined from record levels driven by lower equity markets and deleveraging.
Cash results declined on lower client activity across regions. Derivative results increased slightly as the business navigated the market volatility well. Last year’s fourth quarter also benefited from a mark-to-market gain on an investment versus a markdown this quarter.
Fixed income revenues of $9 billion for the full year were the highest in over a decade. The divergence between the Fed’s guidance on financial tightening and conditions and the market expectations engaged clients and drove revenues in macro while volatile energy markets benefited commodities.
Quarterly revenues were $1.4 billion. Macro performance benefited from higher client engagement as inflation expectations moderated, and clients repositioned in rates and foreign exchange. Strength in micro was supported by active secondary markets as expectations for inflation tempered and credit spreads tightened, driving an increase in client activity.
Results in commodities were down significantly and primarily reflected lower revenues in the power and gas businesses. Other revenues included $356 million of mark-to-market losses on corporate loans held for sale and loan hedges. These losses were substantially offset by net interest income and fees of $287 million.
Turning to Wealth Management. For the full year, Wealth Management produced record revenues of $24.4 billion and a record pretax profit of $6.6 billion, resulting in a PBT margin of 27%. Excluding integration-related expenses of $357 million, the PBT margin was 28.4%.
Full year results reflect mark-to-market impacts of our deferred cash-based compensation plans referred to as DCP. This negatively impacts our full year revenues by $858 million with a corresponding decrease of $530 million in compensation expenses.
As we have explained historically, there is typically a timing difference between the mark-to-market gains and losses on the economic hedges and the deferred recognition of the compensation expense over the vesting period. The revenue and the expense impact of DCP is now included in our financial supplement.
Fourth quarter revenues were a record of $6.6 billion and the PBT margin was 27.8%. Including integration-related expenses of $94 million, the PBT margin was 29.2%. Total client assets were $4.2 trillion. Fee-based flows were $20 billion in the quarter, and asset management revenues were $3.3 billion. Net new assets of $311 billion in the year represent a 6.2% annual growth rate of beginning period assets.
Fourth quarter net new assets were $52 billion with contributions across channels. Transactional revenues in the fourth quarter were $931 million. Including the impact of DCP, transactional revenues declined 15% from the prior year. The decline was driven by lower levels of overall retail engagement and fewer new issuance opportunities, partially offset by increased transactions related to fixed income products.
Bank lending balances grew by 17% in the year or 13% — or $17 billion in the year or 13% and stand at $146 billion. The pace of lending growth slowed for the second consecutive quarter and was largely unchanged sequentially. While mortgages and tailored loans continue to grow slowly, this was offset by pay downs in securities-based lending due to the higher interest rate environment.
Total deposits rose 6% sequentially to $351 billion driven by continued demand for our savings offering among our Wealth Management clients. We have seen success with our strategy to provide advisers with expanded tools needed to offer their clients choice in varied market environment.
Further, the pace of sweep outflows also moderated in the quarter. As a result, we have a favorable deposit mix, largely sourced from our Wealth Management client base with attractive pricing and options to meet our clients’ needs.
Net interest income was $2.1 billion in the quarter. The 52% increase from the prior year was driven by the benefits of the increased rate environment, an efficient deposit mix and strong lending growth over the last 12 months.
Looking ahead, we do not believe that NII is peaked. We entered the year with an attractive deposit base with higher intrinsic value. While we expect the growth of NII to moderate from the pace of the last two quarters, we anticipate continued expansion in the first quarter of approximately 5% sequentially, assuming the forward curve is realized.
Investment Management reported full year revenues of $5.4 billion, declining 14% from the prior year. The challenging market backdrop led to lower accrued carried interest in several of our private funds. Also — and also impacted our AUM, which declined to $1.3 trillion.
Fourth quarter revenues were $1.5 billion. Long-term net outflows of $6 billion in the quarter were driven by equities and fixed income, reflecting the challenging public market backdrop, partially offset by demand for alternatives and solutions, particularly parametric customized portfolios as well as our special situation strategies and private credit.
Fourth quarter asset management and related fees were $1.4 billion, declining on the back of lower average AUM, partially offset by higher liquidity revenues. As a reminder, performance fees are recognized on an annual basis, largely in the fourth quarter, which drove the increase versus the third quarter.
Quarterly performance-based income and other revenues were $90 million. We saw broad-based gains in our private alternatives portfolio, though lower than the prior year. The diversification we gain from having fixed income, parametric customization and alternatives positions us well to perform through the cycle. We continue to invest in this business and leverage our premier global distribution capabilities to support future growth to meet continued global client demand.
Turning to the balance sheet. Total spot assets were $1.2 trillion. Standardized RWAs declined by $9 billion sequentially to $449 billion, reflective of our prudent management of resources. Our standardized CET1 ratio was 15.3%, up 50 basis points from the prior quarter.
Solid earnings, lower RWAs and gains in OCIs partially offset by capital actions contributed to our strong CET1 ratio. We continue to execute our buyback program, and we repurchased approximately $1.7 billion of common stock in the quarter.
The full year tax rate was 20.7% driven by the resolution of certain historic tax matters and the realization of certain tax benefits. We expect our 2023 tax rate to be approximately 23%, which will exhibit some quarterly volatility.
The firm’s results demonstrate the ability of our business model to perform in an evolving environment. While there are, of course, uncertainties as we look ahead into 2023, we remain the growth opportunities in the year ahead.
Our combined $5.5 trillion of assets across Wealth and Investment Management provides us balance. Importantly, our scale positions us well to capture the asset opportunity when the markets recover. Finally, while still very early in the year, we are encouraged by the levels of client engagement we’ve seen so far.
With that, we will now open the line to questions.
Question-and-Answer Session
Operator
[Operator Instructions] We’ll go first to Glenn Schorr with Evercore ISI.
Glenn Schorr
I appreciate all the slides, too. Okay. Two big picture questions, I guess. One, James, with the 200 basis points of excess CET1 requirements, the big buffer served you well. You’ve got a lot of buybacks, but also it’s dilutive to returns. And I’m just curious how you balance that of keeping that buffer or is that buffer more temporary weighting on Basel III end game final results? Or is that something you want — you plan on sitting at? I’m just curious on your big picture resting spot for that excess capital.
James Gorman
Sure. Glenn, it’s a great question, and it’s sort of pivotal to the whole strategic positioning of the firm because right now, I think capital strategy is critical. There are a few things going on.
Firstly, we have been able to reduce our peak to trough in CCAR because of the change in mix in our business. Secondly, because of the market environment we’ve reduced RWAs, just we’ve taken maybe a more prudent lean in. And obviously, we can reverse that at any point in time, which heats up CET1.
Thirdly, we have the Basel III finally looks like it’s coming to fruition at some point in the first half of the year, although I don’t expect that banks will be required to implement whatever the new capital rules are until the beginning of 2025. So while there’s a pretty long time frame, a year is a long time in this business, let alone 1.5 years, I still think that it’s prudent to kind of have some capital sitting there and just — I’d rather be in a position where we have excess capital when particularly in an environment where we don’t see obvious places we’ve put it to work.
Now that said, we did our best. We bought back I think it was $8 billion and $10 billion last year. We doubled the dividend the year before. We increased the dividend 11% last year. Obviously, we’re — I mean, it’s fair to assume that we’re going to continue moving on capital distributions.
But I like a number of 15%. We actually — we triggered a little higher than that this quarter. We could easily drop down to 14.5%. That wouldn’t bother me at all, but that will be driven by the environment and business opportunities. So, great position to be in coming into a change in the regulatory outlook potentially, and we can always act aggressively, and we’ve proven we will do that when we have more clarity.
Glenn Schorr
I appreciate that. One other big picture is so Wealth Management is growing great. Everybody is happy. I think historically and even now, you’ve been considered very equity-centric from whether it be wealth and asset management or your dominant equities platform. So curious if you’re thinking about it’s possible with these higher rates, lots of clients shift to a more defensive stance. There’s good income out there to be earned without much risk or too much risk. If we see a more material shift towards fixed income appetite in general, do you think that in any way disadvantages Morgan Stanley as a firm and overall profitability?
James Gorman
I mean, listen, our share of fixed income is 10%; banking, 15; equities, 20. So obviously, the fixed income call grows. By the way, I share a few years ago, it was 6%. So the team under its head in Sam Kellie-Smith has done a phenomenal job. But if the pool grows faster in fixed income, just arithmetically, you’re not going to do as well as if the pool grew faster in equities.
That doesn’t bother me a whole lot. I mean, we’ve never tried to be the FX EM shop. We’ve never had the global rates trading, FX trading macro businesses that some of the correspondent-driven commercial banks have had, the HSBCs and Citis.
And that’s a business model just different. We don’t have as big transaction services, so we’re not going to have as much FX. That said, what the team have done in macro under Jakob and the credit in Jay Hallik in commodities is really impressive.
So I’m totally fine with that. And we clearly have the product. It’s not like we don’t sell muni bonds to our clients, and we don’t have fixed income underwriting, et cetera. We have the product. It’s just arithmetically, given our share relative to the others, we wouldn’t grow as fast. By the way, I was happy to see I think equities was back at number one this quarter, core franchise. And we’re really well positioned, Glenn. I’m not bothered by that at all.
Operator
We’ll take our next question from Ebrahim Poonawala with Bank of America.
Ebrahim Poonawala
I guess maybe first question, just Sharon, following up on the efficiency ratio about 72% for 2022. As we think about the journey from 72% to something sub-70% kind of in line with your strategic target, a sense of what it means. Is it this time? And are the businesses growing, which are more efficient and that changes the mix? Or could we see that up 70% even over the next couple of years? Would love to hear it in terms of both from a timing standpoint and what needs to happen at the firm to get to a sustainably below 70% efficiency ratio.
Sharon Yeshaya
Sure. So if you think about, we were — we’ve been below 70%, right? So if you look back to the last couple of years, and there are periods of time where we are below, there’s obviously two pieces to it, both the expense side and the revenue side. I think that as we continue to gain scale across the businesses, each of those dollars that we put to work will be more and more efficient.
As I highlighted, where we’ve been investing a lot of those dollars is on the technology side. I noted that in my prepared remarks, and we have seen that both from the cyber resiliency side and also just as we think about the broader integrations of all of the platforms that we’ve acquired over the last couple of years.
So as I think through it and I think about the timing, obviously, a different revenue environment will certainly help. And there’s tremendous operating leverage, particularly as you think about the Institutional Securities business, which will help to drive that.
Now if you go through each of the businesses, each of those businesses also exhibit operating leverage, right? If you have a constructive market environment, we’ve seen very strong margins also from the Investment Management business. We’re on our way to achieve the 30% margin target as you relate to the Wealth Management business.
So I’d say it’s a balance of both, both the revenue environment and how that turns around and then just continued discipline in making sure that we have the right investments as we think about our expense base going forward. So we’ve been extremely prudent and disciplined as we think about the base over the last especially nine months that we’ve seen with this type of environment.
Ebrahim Poonawala
Got it. And I guess just a separate question around market activity obviously highly uncertain how investment banking activity shakes out. But if the Fed were to power and the central banks have done with the majority of the rate hikes, is that enough to drive a rebound in M&A, ECM, DCM? Or do we need a lot more in terms of just confidence returning to the market before we see IB activity picking up? Like what are you hearing for the clients?
Sharon Yeshaya
Sure. Why don’t I start and if James has anything to add? I basically say that from — if we think about the Investment Banking pipeline, the pipeline itself isn’t what’s changed. What’s changed is that movement from the pipeline to realize.
And when we think about what will cause that, that policy pivot, a peak in inflation, something that allows the CEOs that are actually having those conversations in boardrooms to have more confidence both with their own economic outlook and — or excuse me, our own company outlook, the economic outlook that hinges on and then also just price clarity valuation certainty.
Those are the things that as you think through it, we would expect to see move from the pipeline stage into the realized and announced stage. So the macro environment that you laid out where there is more clarity on the economy and then also a reduction in volatility should help that move forward.
James Gorman
Yes, I would say I think Sharon stayed right. And I am highly confident that when the Fed pauses, deal activity and underwriting activity will go up. I would bet the year on that, in fact. CEO’s job is to drive growth in their businesses, and they do that two ways, organic and inorganic. And I’ve been doing this a long time, and I’ve done both. And the only tricky part about inorganic once you’ve got your strategy set is timing. And sometimes, you’ve got to ignore timing, but if the market is really volatile, it behooves CEOs, particularly those relatively early in their careers to be a little cautious, and that’s what we’re seeing. That will change.
Operator
We’ll go next to Brennan Hawken with UBS.
Brennan Hawken
And just like to wish Jon Pruzan best of luck, looking forward to watching his next chapter play out. So Sharon, would love to double click on your expectations for NII. I hear you that it’s sort of based on the forward curve playing out, and encouraging certainly to hear it’s not peaked. But could you maybe give a little bit more color around expectations beyond forward curve? What do you assume for deposit dynamics? Do you think that the decline in sweep balances will continue to decline? What’s underlying that? Thanks.
Sharon Yeshaya
Sure. So, let’s take a step back and just say, why did we outperform in the fourth quarter, Brennan? And if you think about that, we obviously — when we look at the liability side, we outperformed there, and we performed on the asset side.
So if we unpack a little bit of the liability side, I take it into two pieces. As you highlighted, it’s obviously about the deposit mix and also about pricing. So what we’ve seen in the deposit mix is that we have seen a moderation in the pace of outflows of those CDPs. Obviously, what — where we will go from here, we’ll need that to play out. But that is something that we take out into account when we think about the first quarter guidance.
The second point is, obviously, on the actual liability pricing, we did see an outperformance of that pricing. And when we exit the first quarter, we take that in — exit, excuse me, the fourth quarter and take that into the first quarter, that’s a benefit as well. So, the Fed hiking 125 basis points over the fourth quarter and then being able to have disciplined pricing over the fourth quarter will serve us well in the first.
Brennan Hawken
Okay. Thanks for that. And then certainly different question. Wealth Management, if we look at the client asset trends, they were barely up quarter-over-quarter. Basically, total client assets in wealth were up about the equivalent of the net new assets and can clearly see that self-directed and workplace were a little weak, probably because their exposure — more exposure to the Qs and the more growthy stocks. Was — but I would think, given what we saw in the markets that there’d be a bit more of a tailwind to client assets. Was there anything unusual that was happening there?
Sharon Yeshaya
No. Actually and what you highlighted is broadly correct in terms of where you see the broader exposure, the underlying exposure of those different channels. So, it’s just a function of the assets that you actually see as well as the mix of the underlying assets based on the channel.
Operator
We’ll go next to Steven Chubak with Wolfe Research.
Steven Chubak
So wanted to dig in a little bit further, Sharon, as it relates to Brennan’s question on NII. The two pieces I want to understand a little bit better is, one, what are you assuming for SBL growth in the coming year or even loan growth broadly across the wealth complex? And secondly, you saw really nice deposit growth in the fourth quarter. I wanted to understand how much of that is a function of tax loss harvesting that you expect to be redeployed? Or do you think any of that deposit growth is actually going to prove to be a bit stickier?
Sharon Yeshaya
Sure. I’m just going to take them — I’ll take them in order. The first is, as you asked about loan growth. The NII guidance in the first quarter is not dependent on the loan growth projections. Obviously, the loan growth itself will be a function of the environment. As I said, from an SBL perspective, we have seen some pay downs and it will be dependent on market conditions.
Now, the second quarter — the second question that you asked me around the deposits and the deposit growth, obviously, there are — there could be a portion of it that does come from, as you mentioned, different inputs that you might see, be that interest, et cetera, in the end of the fourth quarter.
But broadly speaking, what we’ve seen with the deposit base is that we have many channels, i.e. savings, for example, where we can begin to get those deposits and attract new deposits to the institution and to the bank from other sources, external assets held away that come in.
And also, as you think about every piece of NNA that comes in over time, the $1 trillion that James mentioned, there’s generally a portion of that, that’s actually held from a cash perspective. And so that, I think, also needs to be taken account when thinking about the build as you go forward from the deposit, a longer-term deposit perspective.
Steven Chubak
That’s great. And just for my follow-up, as it relates to the trading outlook, I thought you guys did a really nice job of articulating some of the potential sources or drivers of inflection in Investment Banking activity. Admittedly, we’ve experienced a couple of years of pretty gangbusters trading and market activity.
I was hoping to get your perspective on how you’re thinking about the outlook for the trading businesses. If you’re willing to go so far as to suggest what normalization might look like across both FICC and equities would be really helpful.
Sharon Yeshaya
Sure. I would look at it more holistically from an institutional perspective. And so when I think about what does it mean? We entered — I remember doing an investor conference in February of last year. And we talked a lot about what is normal and is 2019 normal. And our answer then was we would expect to actually normalize somewhere between 2019 and 2020 from an industry wallet perspective.
In fact, it looks as though the industry wallet has just been right around that range within those two bonds. And when we look ahead, we would expect to remain above that 2019 level, and we’ll have to see what the upside is.
But a lot of that growth in Sales & Trading has come from the divergent central bank policies and has also come from the fact that you have higher yields, right? So when you think about investing in the fixed income product, and you go into that going forward, that could create different dynamics than we would have seen over the earlier 2010 through 2019 or ’17 outlook for Sales & Trading.
Operator
We’ll go next to Dan Fannon with Jefferies.
Dan Fannon
I wanted to follow up on the wealth business and the rollout of the companion accounts and the 90% that you’ve headed. Can you talk about the behavior change or what has happened subsequent to clients receiving those companion accounts and try to get a sense of what that could mean on a longer-term basis in terms of increased activity and asset flows?
Sharon Yeshaya
Absolutely, as James highlighted in his prepared remarks, the intention is to generally be in a position where we’re able to offer the right type of advice and content and wealth advice over the course of time when we go into the workplace. And so when we think about the retention of assets or we think about the companion account rollout, eventually, what that’s really doing is to make sure that we’ve provided content.
We look at content, as I’ve said before, as a passport into the employees. And you think about that as financial wellness. Something that Jed highlighted in his presentation in the spring is, generally speaking, will you see $1 of vested assets that come into the institution through the stock plan business, we actually see approximately $9 compared to that $1 that come from assets held away.
That’s the consolidation of assets once you have this advice-based channel and the advice-based relationship. And so, what we’re trying to do is build on that. We have an FA referral process. We continue to use technology to help match the right individuals with the right FAs.
We have better relationship management within E*TRADE and making sure that larger accounts are also connected appropriately to the right teams. These are all ways to build the right advice for the right clients to provide them choice and give them a reason to bring assets held away into the institution.
Dan Fannon
Got it. Okay. And then just as a follow-up, you talked about the longer-term efficiency potential. But I guess the thing about fourth quarter, there was some severance looking at non-comp expense as you think about next year. I just want to understand how we should think about the base level of expenses and potential changes and/or where you’re looking to be more efficient into this year?
Sharon Yeshaya
I mean, we’re always, as I said in my prepared remarks, looking at efficiency opportunities where there might exist. We just, as you highlight through the severance, we just had a December employee action. So, we obviously walk in with a different level of comfort as we kind of think about the expense base going forward. But as we’ve done with our own resources from a capital perspective, we’ll remain nimble and prudent, and look forward if and as the economic environment changes.
James Gorman
I think just on the efficiency ratio, it’s worth pointing out and Sharon mentioned this earlier, if you actually average the last two years, ’21, ’22, you end up right at 70%. ’21 was about 67, ’22 at 73. Part of it is revenue driven. We took the efficiency that will take some expenses out in the coming year.
We also want to feed the beast. I mean, we’re growing parts of this firm. We’re trying to — we don’t — we’re not of the view that we’re heading into a dark period, whatever negativity in the world is out there. That’s not our house views.
So we want to make sure we’re positioned for growth. This thing will turn. M&A underwriting will come back. I’m positive of it. So, we want to be well positioned for it, but we’re going to manage to that number of around 70% as best as we can.
Operator
We’ll go next to Gerard Cassidy with RBC.
Gerard Cassidy
I have a bigger picture. James, you gave us some very good detail about the expectations for growth in the Wealth Management and the new assets, $1 trillion every three years. When you’re looking at your three channels, the advisor-led workplace and self-directed, where do you see the most growth? And which one has the best margin that can get you to that 30% goal?
James Gorman
Well, the advisor is the biggest, obviously, by far. We have 15,000, 16,000 advisers, phenomenal business. The direct channel is from the acquisition of E*TRADE combined with our Morgan Stanley Direct, great business. Obviously, it’s a little more market sensitive, a little more active, particularly on the option side during bullish market environments.
And the workplace is sort of the sleeper. I’ve said previously, I think, two years ago, I thought in a decade, we’d look back at this firm and say that the workplace was the most significant strategic change to happen over the last decade. I truly believe that the workplace employee, the retirement space is sort of the next frontier, and we’re right in the middle of that.
So as to margins, they’re probably margin accretive in reverse order. In other words, workplace first, the direct second and the adviser third, that’s simply a function of advisers. We have adviser payout, and God bless them for the jobs that they do, and we’re very happy to pay them.
So I think it’s a combination, Gerard, of all three of them. We will hit the 30% margin. I mean, we’re almost there now in a more challenging environment. So that zero anxiety about whether it’s this year or next year, it’s coming, and all of them will contribute.
Gerard Cassidy
Very good. I appreciate that. And Sharon, you talked about the marks that you took in the corporate loan portfolio in the quarter, just over $350 million, I think you said. Can you share with us how big is that portfolio? And where did the marks come from? Were they bridge loans? Or what drove those marks?
Sharon Yeshaya
So you have different disclosures as it relates to various loans and lending that we gave. As we think about that line, it’s inclusive of losses across the loan portfolio. And it was also worth highlighting there that we also mentioned the interest that you received on the loans that we hold as well as the fees associated with those loans.
Operator
We’ll go next to Mike Mayo with Wells Fargo.
Mike Mayo
James, last quarter, I asked you when will you be ready for plan B if the pipeline doesn’t seem like it’s going to be converted, and you said you’re at plan A minus, so just kind of looking for an update there.
And in terms of the headwinds, if I hear you correctly, it sounds like the pipeline is still good but down quarter-over-quarter because some of those deals have converted. And also, you said it’s still not back yet.
And as it relates to the Twitter financing, you were the lead bank. Can you disclose any write-down that you had on Twitter or simply the leveraged loan category? So that’s the headwind. On the other hand, I guess, there’s been some reports that you’ve reduced headcount. So if you could just give us more color on that, especially Twitter?
James Gorman
Okay. Let me try and unpack that a little bit. I’m not going to talk about Twitter. We don’t talk about single names as you would expect. You did see the line — the other ISG line. You can assume that whatever marks we took on any single name are reflected in that. And I think the way I think about this is we run a portfolio business. We obviously have single credits at any point in time that disappoint relative to others.
But it’s the total package, and the total package, if you look at it actually turned out to be very fine given the environment we’re in. So on the plan B, I don’t know if the rip we did — we took about 1,800 heads in early December, would equate to a plan B.
It certainly felt like it. We’ve reduced — we took a severance charge, Mike, which affected some of the efficiency ratio for this year, but we’ll improve it for next year. And that was the rightsizing. We were frankly a little overdue. We hadn’t done anything for a couple of years. We’ve had a lot of growth, and we’ll continue monitoring that.
Obviously, with the way bonus pools work, we reflected the performance of the firm in the bonus pool. So we’re not very different from the rest of the world in that regard. And that obviously resets comp a little bit.
So, I feel good about where the whole package is. I’m actually, as I said earlier alluded to I’m a little more confident about the long — medium-term outlook for the market. I’m not talking about the first quarter or two, although Sharon said the first quarter has actually started well.
But the medium-term outlook for the markets, I see the Fed has moved from 75 to 50, likely to go to 25. The next stop on the train line is zero and then to mention they start cutting. Not sure they’re going to cut this year, but I think there’ll be zero increases this year for sure.
So that’s the inflection point. And there’s a lot of money sitting around waiting to be put to work. And that’s our job is to be the flow of capital between those who have it, and those who need it. So I’m pretty confident actually about the outlook. So we’re — we’ve done our plan B, I guess. We’re not anticipating a plan C. And we’re going to watch and wait for a little while, but I feel pretty good about it.
Operator
We’ll take our last question from Matt O’Connor with Deutsche Bank.
Matt O’Connor
I was wondering if you could talk a bit more about the flows within Investment Management, both the long-term and liquidity and how you’re thinking about the outlook there specifically in the long term?
Sharon Yeshaya
Sure, absolutely. The long term, obviously, what we saw over the course of this year was some movements in equities. That was the most notable. That obviously had to do with some of the higher growth specific — the specific funds that we have there. But I think you have to really think about those long terms from a long-term basis, right? So you’re just focusing on this year, but there were many, many years of very strong flows into that business.
What’s important is actually the diversification that we had because of Eaton Vance, where we have other products that we’re able to offset some of the long — some of the outflows in, say, the equity product, for example. So parametric is one where we continue to see inflows throughout even the course of this year. We’re really focused on the secular growth trends, sustainability, alternatives and customization more broadly. Those are the things that we think as we move forward, we’ll be positive for those line items.
Operator
There are no further questions at this time. Ladies and gentlemen, this concludes today’s conference call. Thank you, everyone, for participating. You may now disconnect.
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