Good morning. Welcome to Morgan Stanley’s Second Quarter 2022 Earnings Call. On behalf of Morgan Stanley, I will begin the call with the following information and disclaimers. This call is being recorded. During today’s presentation, we will refer to our earnings release and financial supplement, copies of which are available at morganstanley.com. Today’s presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release. This presentation may not be duplicated or reproduced without our consent. I will now turn the call over to Chairman and Chief Executive Officer, James Gorman.

Thank you, operator. Good morning, everyone, and thank you for joining us. We are doing the call a little differently this time. I am in London, Sharon is in New York. So, if we have any logistical gaps for a second or two, please understand, but I think we will be just fine. The firm delivered a very solid quarter against obviously what is a more challenging backdrop. Our businesses proved resilient, reflecting an important aspect of our strategy, and that is to, as we have said many times, deliver stable performance in a difficult environment while remaining well capitalized. The integrations of E*TRADE and Eaton Vance continued to expand our opportunities to reach new clients, grow assets and support the firm’s overall stability. Net new assets in Wealth Management of over $50 billion, despite the volatility and clients’ tax-related withdrawals in the quarter, underscored the scale of our business and its power to attract assets. And in the face of a sharp decline in equity markets, Wealth Management delivered a strong profit before tax and improved margin supported by the benefits of rising rates. Investment Management benefited from its diversification and we saw continued momentum in private alternatives, parametric customized portfolios, and the countercyclicality of our money market business. Finally, in Institutional Securities, our strong franchise in equity and fixed income helps materially counter what everybody knows to be limited activity across Investment Banking. Our results this quarter also reflected two notable headwinds that are worth calling out. First, we saw a significant movement in the investments related to deferred cash-based compensation plans. While the marks on these investments are substantially offsetting compensation expense, they created significant drag on top-line revenues in the quarter across the firm, particularly in Wealth Management, where the impact on revenues exceeded $500 million. Secondly, the quarter results also included the legal costs of $200 million that reflects the likely resolution of regulatory investigations by the SEC and the CFTC regarding employees’ use of unapproved personal devices and the firm’s recordkeeping requirements. This has been the subject of industry-wide scrutiny. Our return on tangible common equity, excluding integration expenses for the deals that we have done, was 14.3%, down 20% in Q1 and from last year. As I said at the outset, our objective to demonstrate resilience and balance in a more difficult economic cycle was achieved this quarter, helped in part by the acquisition of E*TRADE and Eaton Vance in what was otherwise a challenging environment. Finally, the Fed stress test further affirmed our differentiated business model. Our diversified business mix, as well as our strong capital position, provides us the flexibility to invest for future growth and support our robust capital return program. As such, we increased our quarterly dividend by 11% and announced a $20 billion multiyear buyback program. Having a dividend that’s aligned to the more stable earnings from Wealth and Investment Management is a leading priority of this firm. And by the way, with the current stock price, the current dividend has a yield of approximately 4%. With the buyback, we wanted more flexibility than an annual fixed commitment allows. Given the nature of our business model, it’s especially appealing to have this additional flexibility to deploy capital at what we believe to be attractive valuations. I will now turn the call over to Sharon. And as always, at the end, we will take your questions.

Thank you and good morning. The firm produced revenues of $13.1 billion in the second quarter. Our EPS was $1.39 and our ROTCE was 13.8%. Excluding integration-related expenses, our EPS was $1.44 and our ROTCE was 14.3%. Our results reaffirm the stability of the franchise against a challenging backdrop and the benefits of a balanced business model. The integrated investment bank continues to serve clients’ evolving needs in a dynamic environment. Wealth Management benefited from its scale and rising rates. Despite the decline in global asset prices, our expanded product set in Investment Management proved supportive to that business. The firm’s year-to-date efficiency ratio, excluding integration-related expenses, was 70%. This includes the $200 million legal matter related to the firm’s recordkeeping requirements that James discussed. Given the broader market uncertainty and inflationary environment, we are focused on discretionary spend while balancing continued investment initiatives and ensuring the right controls are in place to support future growth. As a management team, our priority is to diligently address what we can control given the market realities. We will continue to review incremental spend as we regard efficiency as a critical performance objective. Now to the businesses, institutional revenue of over $6 billion demonstrates the power of our balanced franchise against the difficult market backdrop. Revenues declined from the exceptionally strong prior year, while the backdrop was challenging for Investment Banking, particularly underwriting, fixed income and equities led the strength of the quarter as clients navigated volatile markets. Investment Banking revenues were $1.1 billion, down significantly from the prior year. Heightened volatility led clients to delay strategic actions and new issue activity. Advisory revenues were $598 million, reflecting lower completed M&A volumes. Equity underwriting revenues declined to $148 million. Results were in line with global equity volumes, which fell meaningfully versus the prior year. Fixed income underwriting revenues were $326 million, also down compared to the prior year as bond issuance was muted across both investment-grade and non-investment-grade companies. The Investment Banking pipeline remains solid. Conversion to realization will largely be dependent on market conditions and corporate confidence. Equity revenues were $3 billion, reflecting the strength of our business against a volatile backdrop. Prime brokerage revenue... [Technical Difficulty]

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Our revenues declined versus the prior year and reflected a loss of $413 million. Mark-to-market losses on corporate loans held-for-sale including event loans offset by gains on hedges were $282 million. This reflected the widening of credit spreads. Notable declines in deferred, in deferred cash-based compensation plans compared to gains in the prior year also contributed to the decline. Turning to ISG lending, as a reminder, over 90% of our ISG loans and commitments are either investment grade or secured. Our Institutional Securities Group credit portfolio continues to perform well. Our funded ratio on corporate loans stands at approximately 11%, in line with pre-pandemic levels and well below the first-quarter 2020 peak of approximately 25%. Turning to Wealth Management, by several measures, performance was strong despite the volatile backdrop. We reported revenues of $5.7 billion. Results were meaningfully impacted by movements in DCP, which reduced revenues by $515 million in the quarter. Excluding the impact of DCP, revenues increased 6% from the prior year to $6.3 billion, a new record. The decline in DCP was substantially offset by a reduction in compensation expense. Excluding integration-related expenses, profit before tax was robust at $1.6 billion and the margin increased to 28.2%. The margin resilience in a turbulent market environment serves as evidence of the strength of the franchise and the benefits of our business mix, including the growth of our banking offerings. Transactional revenues were $291 million. Excluding the impact of DCP, transactional revenues declined 17%. Lower revenues reflect a moderation of client activity from last year’s elevated levels and limited new issuance. Self-directed daily average trades remained well above E*TRADE’s pre-acquisition high. Asset management revenues of $3.5 billion were up modestly versus the prior year driven by strong fee-based flows realized over recent quarters. Fee-based flow assets were $29 billion in the quarter and fee-based assets now represent 50% of our adviser-led assets. Total net new assets were $53 billion in the quarter bringing year-to-date net new assets to $195 billion, representing a 6% annualized growth rate. Tax outflows were roughly double that of recent second quarters and yet asset generation remains strong and balanced. Net new assets were driven by existing and new clients in the adviser-led channel, stock plan vesting events, positive net recruiting and self-directed channel inflows. Bank lending balances grew $7 billion in the quarter driven by securities-based lending and mortgages. We continue to expect full-year loan growth of $22 billion. Deposits declined $12 billion in the quarter to $340 billion. The decline was associated with seasonal tax outflows and the deployment of rate-sensitive cash. The outflows were largely in line with our expectations. The average rate of deposits increased to 28 basis points. This was driven by an increase in savings account rates and deposit mix. Net interest income was $1.7 billion, up notably from the prior year, driven by higher rates and continued strong bank lending growth. Looking ahead to the second quarter, net interest income is now a more reasonable exit rate going forward. While the magnitude of rate hikes is not certain, if the forward curve is realized and our model assumptions materialize, we estimate $500 million of incremental net interest income to be spread over the upcoming two quarters weighted towards the fourth quarter. Turning to Investment Management, revenues were $1.4 billion. Against the challenging public market environment, our results demonstrate the benefits of our diversified product mix, particularly with strength in our portfolio solutions led by Parametric customization and private alternative funds as well as our liquidity offering. We have built a portfolio that provides balance across various market environments. The benefits of these efforts were apparent in the quarter. Total assets under management were $1.4 trillion. Long-term net outflows of $3.5 billion primarily reflect recurring headwinds in equity strategies that were partially offset by strong demand in alternatives and solutions, particularly in Parametric customized portfolios. Collaboration with our Wealth Management business as well as other U.S. wealth management platforms is a driver of strength for our customized offerings. Liquidity net inflows exceeded $30 billion. We have invested in our liquidity business in the past decade, which has positioned our franchise well to benefit from the current rising rate environment. Asset management and related fees were $1.3 billion. The impact of lower assets under management was partially offset by higher liquidity fee revenue as rates came off of a zero-bound. Performance-based income and other revenues were $107 million in the quarter. We saw broad-based gains in our private alternative portfolio with particular strength in infrastructure and the energy sector investment. The decline versus the prior year was driven by movements in deferred compensation plans and markdowns on public investments. Overall, our integration with Eaton Vance continues to progress well. We have seen early success in leveraging our global distribution across our combined businesses. Turning to the balance sheet, total spot assets declined 4% from the prior quarter to $1.2 trillion. Our standardized CET1 ratio was 15.2%, up 70 basis points versus the prior quarter. Standardized risk-weighted assets notably decreased to $461 billion from the prior quarter as we manage our exposure efficiently across our businesses amid a market decline. The result was a reduction in risk-weighted assets of $40 billion. Other comprehensive income related to our available-for-sale securities portfolio reflected an increase of unrealized losses of $1.1 billion. While this should be earned back over time, it reduced our CET1 ratio by approximately 20 basis points in the quarter. Our supplementary leverage ratio was 5.4%. During the second quarter, we completed our $12 billion buyback plan that we announced last year. The most recent stress test results further reaffirmed our durable business model, and we announced a dividend increase of 11% and a $20 billion multiyear repurchase authorization. Looking ahead, while the second half of the year remains difficult to predict, we are focused on our underlying business drivers. Lower asset values will impact revenue in both Wealth and Investment Management. However, in Wealth Management, rising rates are already driving net interest income higher, supporting performance and net new assets remain healthy in Investment Management. The diversification across fund strategies should continue to support results. What we do not know is how much volatility we will see in the coming months and how it will impact our Institutional Securities business. However, our competitive position remains strong and we remain close to our clients while they assess current valuations and the overall environment. With that, we will now open the line up for questions.

Thank you. [Operator Instructions] We will take our first question from Christian Bolu with Autonomous.

Thank you. Good afternoon, James, I guess, and then good morning, Sharon. Maybe start on the macro, James, it’s a very confusing time on the macro front and there are some positives but a ton of headwinds. I’d also say this quarter was unusually noisy for Morgan Stanley and I think you kind of put up your lowest return on equity in almost 2 years? So just curious how you are thinking about the macro backdrop, how is Morgan Stanley positioned for that backdrop? Maybe how you think about your pathway to achieve some of your longer-term targets in the current backdrop? Thanks.

Sure. Thanks, Christian. I think you hit on the head, the environment – if I had to use one word to describe it, it would be complicated. We have the Russian invasion of Ukraine, obviously, a historic occasion. We have historically low rates with very significant rate increases going around the world. We have got the tail of COVID. We have got obviously the fears of inflation and actual inflation. We have got enormous political change just here in this country, the UK, where I am at the moment. They had a leadership change a few days ago, supply chain issues, China-U.S. relations, etc., so yes, very complicated. I think it’s important to say though, it is not 2008 complicated. This is a different type of financial stress in the system. And frankly, the banking sector is much stronger than it was going into the last time we went through a major reset in ‘07/08. Morgan Stanley is in particular, I won’t speak for others, but we are in specifically much better shape. We are long in the U.S. in our businesses, largely because Wealth Management is almost entirely U.S. and the U.S. is yet again sort of a great region to be in, in the world. And yes, while we might head into some form of recession – and I, like many others, have tried to handicap it, but I think it’s unlikely to be a deep and dramatic recession at least in the U.S. I think Asia is a little behind. It depends how COVID rolls out, and it’s sort of reemerging a little bit in some countries. And then Europe is obviously fighting the hardest right now because of the war in Ukraine, because of the pressure on gas and gas prices and so on. So when I look at Morgan Stanley, sort of all together, we did exactly what we wanted to do this quarter. Yes, it’s the lowest return on equity for a couple of years after, I think, 3 consecutive record years, but hey, this is the most difficult environment we’ve been in decades. So I’m okay with the lower return on equity, particularly when it has a ten-handle on it. We have a CET1 capital ratio that is 200 basis points above our requirement. Our ROTCE was nearly 14%. If you look at the Wealth Management margins, we did a 27% margin, including integration this quarter, 28% without it. Those numbers were unheard of a few years ago. So you add it all together, the environment, very complicated, lots of uncertainty. But frankly, for our business model, I think we fare relatively well. And evidence of that is our confidence in the future, and I’m sure we will talk about that in terms of capital and so on.

Okay. Thank you, James. Maybe, Sharon, some more specifics around the buyback, just thinking about how you’re thinking about buybacks in the second half of the year. I mean your CET1 did grow quarter-over-quarter, but I think a little of that was RWA declining. It looks like actually CET1 dollars have been falling for a while. So I don’t know, can you maintain the sort of $2.7 billion-ish buyback per quarter going forward or any more specifics around how long it will take to exhaust that $20 billion in buybacks you announced?

Well, multiyear obviously means more than 1 year. So sort of just to put that in perspective, but I think that the most important thing about the buyback and also the capital more broadly is we’ve been very prudent and efficient around our capital usage. I think that we’ve always said that capital is very much tied to strategy. They are one and the same. And so we think about them holistically. When we think specifically about the buyback and the concept of a multiyear repurchase plan, right, two points: one, we did complete our old authorization. So therefore, we had announced a new authorization. And in addition to that, the point is we provide ourselves with tremendous flexibility in an environment such as this one where there are, as James said, multiple macroeconomic factors but also a commitment to continue to return capital to those shareholders, be that both in the evidenced by the increase in the dividend. And I think that what we’re looking for is really – is flexibility around the capital purchase plan.

I just want to add something. I mean it was an important move to $20 billion number. And we said multiyear for a reason. Obviously, we’re not going to do that in 1 year, but we have enormous flexibility quarter-to-quarter now, and that’s really important. And with 200 basis points of capital access, we can use some of that flexibility. Listen, the stock traded – I don’t know what it is this morning, $72 or something, it was $109 a couple of months ago. I like buying the stock at $72. And by the way, every time you buy a share at $72, you’re retiring a dividend worth $3.10. So there is a sort of virtuous circle, if we bought back – we’re averaging about 6% of shares outstanding net, we’re buying back plus a 4% dividend, shareholders get great return without getting out of bed. So this is a statement of confidence of, a, our capital position; and, b, the resilience of our business model.

Thank you. We will take our next question from Glenn Schorr with Evercore.

Hi, thanks. Maybe just a follow-on on the buyback conversation and broaden it out. When you look across all the big GSIBs, lots of higher – I’m sorry, lots of the GSIBs, lots have higher GSIB buffers coming, capital deficiency to their targets and don’t have the access that you have. So I get it, buyback cheap stock is great. Are there any other options that you ponder like maybe using that capital to grow share in any parts of the business or just save it for a rainy day, like I am curious on how that dynamic works being one of the only ones with the excess position?

Well, it’s – Glenn, this is sort of the ultimate question. We’ve built through a decade of, frankly, hard work and discipline, a great excess capital position. Not for nothing along the way, we did two major acquisitions. So we’re using it on deals and two small ones, Solium and Mesa West, you recall, the majors, of course, E*TRADE and Eaton Vance. We’ve taken the dividend. Last year, we doubled the dividend. And this year, we took it up another 11%. It wasn’t so long ago, our dividend was $0.05 a quarter. The incremental change this year is $0.075 a quarter. So we’ve used that. We’re investing in the business everywhere, particularly around the workplace retirement space. We’ve invested in the digital bank and building out the wealth space. We’ve invested in asset management and our capability, and we’re going to be doing more of that, taking the Eaton Vance Funds internationally, expanding the Parametric program. And then we’re investing in banking. I mean, obviously, the banking calendar has been terrible the last few months, but that’s not – we’re interested in the next 10 years, not the last few months. So the only thing we haven’t done with excess capital is do a special dividend. And that’s something I’m just personally not a fan of. I just don’t – I think it’s like giving shareholders a problem and saying, we don’t know what to do with your money. Here, you take it. So what we like to do with that money, invest it in the business, check; give you a smart dividend with a 4% yield, check; and do buybacks and have flexibility around it when the stock is trading. At the beginning of the year for every x dollars we spent, we’ve got 4 shares retired. Now we’re retiring 5 shares. I like that.

Cool. I appreciate all that, James. A follow-up on Wealth Management, Sharon, thank you, you gave color on new money coming in which types of accounts and new clients. I’m curious, what are they doing with it? In other words, is it sitting in cash? Our cash position is higher than they usually are. What products are they going to? And then thirdly, you’re the largest gatherer of alternative assets. Has this market brought any noticeable impact to that opportunity on the wealth channel? Thank you.

Sure. Let me start with the last. No, no change in opportunity. I think we continue to actually work very closely with different alternative managers as we go forward and think about – educate FAs, educate FAs, educate their clients and use that relationship to continue to create the right products for our clients, all based on education through both channels. In terms of what are they doing with that money, I think what you do see is a lot of the money ends up moving into fee-based over time, right? So look at the fact that we aggregated all these net new assets over recent quarters that first often comes into the system as cash when they are brought over. And then that cash is then deployed into various types of fee-based asset accounts. I think it’s worth noting and just repeating that those fee-based assets are now 50% of our adviser-led channel and those assets, which is a big move from those somewhat 40s, low 40s that we had seen in previous years. In terms of very specifically what we’ve seen over the course of the first half of this year in terms of different types of products, we were sitting at the end of the fourth quarter with cash levels at around 17% to 18% around the self-directed and the advice-based channel. We’re now around 21%. Of course, that could be reflective of some of the equity asset values and the other asset values coming down to increase. But there is somewhat of – there is a pause, I think people are waiting and observing in certain end markets to deploy that cash. And I think that that’s just – you can see that in the transactional coming down a bit and/or it’s coming down a bit, but I don’t want to suggest that the engagement isn’t there, because we still are at levels where our engagement as thought about by the most Daily Average Revenue Trades metrics and just what we’ve seen in transactionals, it’s still higher than levels where we were from a pre-pandemic basis. So people are engaged, people are active, and they are seeking advice from their Financial Advisors.

Thank you. We will take our next question from Steve Chubak with Wolfe Research.

Hi, good morning. So wanted to ask a follow-up question on the deposit outlook, as you noted in the prepared remarks, just lots of crosscurrents this quarter on the deposit side, tax seasonality, cash sorting and maybe some offset from higher market volatility? And given the net interest income guidance, Sharon that you had laid out, I was hoping you could speak to what you’re assuming for deposit betas and the deposit growth trajectory given the myopic focus on cash sorting and recognizing that you already laid out some pretty explicit guidance on the loan growth side?

I think what you just noted at the very end is very important because all of this is weighted into that net interest income forecast, right? Deposit beta is just one piece of that conversation, the behavior and then also how we continue to build in aggregate, be it new assets through net new assets and also various types of cash sorting, but the movements of cash between products and that behavior of deposits. Specific to your question around the beta, as we’ve said, we are informed by the last rate hike cycle, and it does have to do with the weighted beta at 50, which I had noted last quarter, and we will just reiterate again this quarter. There really has to do with the deposit composition mix that we have. So we have obviously accumulated very increased levels on those smaller accounts with smaller account levels. And we might have other accounts where we’ve seen larger inflows into larger accounts, right? So account balances that are higher might also have gone up over time. And that helps to explain the deposit beta, which we see now based again, as I said, on that deposit composition mix. It will not just be, though, of course, around deposit beta. A lot that is embedded into the forecast, as I said, has to do with how we see those deposit behavior moving over time. And again, a lot of that is informed by what we saw in the last rate hike cycle.

Very helpful color, Sharon. And maybe just a follow-up on the earlier discussion on organic growth, I mean the 4% number, which, considering the more pronounced tax seasonality, elevated market volatility, was certainly an impressive result. If the market volatility persists, should we view this as a reasonable floor on organic growth? And I was also hoping you could just speak to the cadence of flows from April to June, just to give us a sense of how organic growth is trajecting over the course of the quarter?

Well, the cadence is obviously – you’re not going to – you’ve seen more in the second quarter – I mean you’ve seen a different mix, right, in the second two months than the first month because you had a tax outflow season. So that kind of gives you the change in those two numbers. I think what we have seen is a continue – you have a lot that comes in from a flow-based basis is just – if you think about workplace, you’re going to see that development and continue. As people have exercised their options, they continue to move forward. So there are various types of offsets. I think what’s important as we look forward, in terms of where the floor is; look, we have said historically, we don’t expect to be in that very low single-digit range, which we were before the acquisition of E*TRADE. We said that 11% was too high. So that kind of gives you that middle range. Exactly how it will pan out, what I can say to you is that it does look – it’s still healthy, and we’re still – we still feel well positioned. As it relates specifically to other indicators that you might think about – for example, recruiting. When recruiting pipeline remains healthy. And what we often see and tactically, anecdotally is when those recruits come over, they will be – they could be in a market volatility event actually be quicker to begin to bring those assets that were held away into the channel, why? Because they are seeking to be with their Financial Advisor through that advice-led channel more immediately, so as you called it, there are cross currents. And I think they are going to bear in mind in this environment.

Thank you. We will take our next question from Dan Fannon with Jefferies.

Thanks. Good morning. Wanted to follow up on Investment Management and the fee outlook, you have, obviously, beta working against you in some of your higher fee products, but you have fee waivers coming off on the money market side. So as you think about mix and client behavior going forward, how do you think about the fee rate in that business longer-term?

It’s a great question. I am sure you will see the disclosure also that will come out in the Q specifically for this business. But just to give you a sense, the fee rates themselves haven’t changed. What changes – what has changed is the mix of the actual flows themselves. So we’ve seen a decrease over the course of the last two quarters in some of those equity accounts, for example, which, as is disclosed, could be higher – can have higher fees. But what we have seen is an increase in balances. In things like liquidity, we’re now not seeing the fee waivers since we’ve moved off that zero-bound floor. We had given you previous guidance of $200 million that we expected to see as an incremental fee positive over the course of the year as those waivers went away because rates came off that zero-bound. We stand behind that guidance, and you’ve continued to see that flow into the numbers. I think, though, what is important is, obviously, where could you see things change is the liquidity balances, right. It’s a rate time balance question, as I said before. And the balance is in this case, I think, is a testament to the amount of time and the investment we’ve put into this business to find relationships also across the integrated investment bank where we’ve worked with partners in Institutional Securities, for example, to help forge relationships that will help bring in some of those deposits into those money market products.

Great. Thank you. And then just as a follow-up, given the backdrop we’re in where revenues are a bit more challenged or uncertain. As you think about non-comp expense, and you highlighted being focused on this area and being efficient, but have you proactively started to make decisions around spend and cutting back or as you think about that flexibility in the back half of the year, is there a way to quantify levels of growth or lack thereof and any changes?

So the first point that I would highlight to you is that ex-integration, our efficiency ratio is at 7%, and that includes the legal charge that James mentioned this quarter. So I think we have shown and continue to demonstrate discipline around our expense base, very similar to the way we think about capital. Resources, we think about it very holistically and as part of our strategic decision-making process. As we walked into the second quarter, we were aware that the environment was changing, and we all had been seeing the same events that – we’ve all witnessed together as it relates to the geopolitical front and the macro side. And we came in and we took a hard look, and we continue to do so, individual product by product, investment by investment, project by project to understand where are the potential growth in expenses coming from, how are we thinking about balancing, as James said, that near-term investment, making sure that we need to get on certain things. We always need to ensure that as we invest also with a longer-term horizon, the right controls are in place as we continue to grow the business efficiently, but are there projects that can be delayed that we might be doing on the margin? So I’d say that, that work is in flight, has been in flight. It’s not new information, and it’s certainly something that we are keeping our eyes on.

Thank you. We will take our next question from Ebrahim Poonawala with Bank of America.

Hi, good morning. Just one more follow-up on the Institutional Securities business. So you talked about market share opportunities, which you clearly have. Would love to hear your thoughts around just the health of, one, how is the plumbing in the capital market functioning? We saw a bunch of headlines around hung deals, etc., during the quarter. So just how are clients holding up on the institutional side? And given how strong the franchise already is on the Prime Brokerage side, is there more opportunity there? I realize that was a big driver of the growth this quarter. So would love to hear your thoughts?

The – from – basically, in terms of the capital market functioning, as James said, this is not – we're not in a position of the same kind of stress we’ve seen in other necessary cycles. We’re still seeing functioning markets. You can see that in just some of the funded balance points that I made across the ISG portfolio in terms of funded balances being at 11% versus even the pandemic; we have seen those balances up to 25%. So I would certainly say that you see institutions that are in a good place. I also think from a corporate perspective, it is worth noting that many came into this from an environmental perspective in a much better position than they have before because they did issue and we’re in a good spot from a balance sheet perspective in the period of low rates that you saw over the course of last year. Of course, there are days where it’s more difficult to come to market. That is very clear as you see that in the underwriting results. So just to provide that balance, of course, it’s not the same thing as having a green screen every single day. But I think that you are seeing both institutions and corporations, etc., taking advantage of days where the market is open, and they are able to do that, and from that perspective, the market is functioning. As it relates to Prime Brokerage, we have been very balanced in that business. I think we have been a tremendous leader in that business. And we continue to effectively look for the relationships that we are well-suited for both in this environment that makes sense to partner with clients. You see that on the balance side. You see that on the revenue side. And you see that the mix also matters to us. And so from that perspective, we have been very focused on the equities business more holistically for over a decade now.

Thanks for that. And just on the fixed income. So, appreciate that you all right-sized the business a few years ago. Like given the capital constraints at your peers, does it make sense maybe, James or Sharon, to like lean in and revisit areas where you could actually pick up share on the fixed income side or no?

Listen, there are always opportunities in an environment where you can try and pick up share. We are in a bit of an uncertain world, as I opened with. I don’t think this is the time to be overly aggressive personally. I like the fact we have excess capital. I like where our CET1 ratio is. Obviously, as you drive up risk-weighted assets, you read into that. We actually brought up risk-weighted assets down by $40 billion this quarter. I think the institutional team in both fixed income and equities were very prudent and appropriately so. So, listen, if the option is to trigger another 50 basis points on the SCB or generate another, I don’t know, $100 million, $200 million in revenue. That for me is a very easy call right now. I like the 50 basis points that we haven’t had to trigger that some of our competitors have. So, listen, we will be eyes wide open, but we are not trying to win the game right now. There is a – the fixed income business has gone from doing, I don’t know what they were doing, $500 million, $600 million a quarter in the back half of 2015. And we are consistently somewhere between $1.75 billion and $3 billion, that’s – they have done a phenomenal job. They have materially gained share. I think we are around 10% share, up from 6% or lower in those days, stable business, great leadership. So, yes, we will be opportunistic, but we are not going to be greedy.

Thank you. We will take our next question from Brennan Hawken with UBS.

Good morning. Thanks for taking my questions. I wanted to follow up on Steve’s questions on deposit beta, but rather talk about the balance side of things. So, the brokerage sweep deposits declined by about $30 billion this quarter. Sharon, I think you referenced that it – that was driven by both tax payments but also some yield seeking. Could you maybe break that down a little bit, or do you have a sense about what that attribution would be, just so we can kind of level set and think about how much further potential deposit loss there could be from further yield seeking?

Yes. I think the better – I mean I think that one quarter would be a little bit difficult to kind of draw those conclusions. I think the way I would think about it, Brennan, is a little bit differently, which is some of the questions I know we have received are, well, why didn’t your beta come down because you had E*TRADE. And so those balances should be in a position where you should have an average weighted beta that’s lower over time. So, I think the best way to kind of answer your question a little bit more head-on in terms of where the underlying crux is, is we have seen balances also increase in the higher account level. That’s built into the model. It’s built into our expectations. It’s built into the forecast. And we have said, as I said directly in my remarks, we also saw the deposit behavior very much in line with what we expected. And so it is working in terms of that predictability. But why is the beta then higher, some of that beta just has to do with – you have some higher balances. Why? Because you accumulated them likely at periods of time where yields were lower, and there was excess cash that was sitting in position. And so some of that higher balanced amount begins to leave seeking out higher-yielding payments. So, I think that can help give you a little bit of construct in terms of what’s going on from the balance perspective to more directly, I think answer the question rather than just look at one quarter’s behavior.

Sure. Okay. That’s fair. Thank you. And then when we think about the SBL book, you flagged the $22 billion of continued loan growth. So, it seems like you are expecting loan growth in the back half to be about half of what you saw in the first half, a little more than that, but not by much. So – and it makes sense, it would slow. Can you talk about what we have seen from an LTV perspective in the SBL book and whether or not some of that slowing loan growth is going to reflect some maybe some SBL pay-down, or is there the potential of some SBL reduction just because LTVs are getting high, and so there is going to need to be some of that just mechanically and maybe also how you manage those LTVs in these choppy market environments?

Yes. So, the LTVs are very well managed. No, it’s okay. Okay. I am just trying to remember it all. So, from the LTV perspective, as you would expect, we are very much actually in line with where we have been from historical years. And the reason for that is it is a very well-managed book. And why any uptick at all, as you would expect, obviously, the value of the underlying has gone down. But from a historical basis, we have always been within that – sort of given a 40% range or low-40% range, we are in that range, and we are very much, like I said in line over the last couple of years. Now as it relates directly to what we are looking forward and seeing, I think what’s important here is that from a mortgage perspective, you might see some slowing just obviously given where rates are. Now, why would the SBLs come down, you just might not have as much interest or engagement in the product with lower asset values. So, I don’t look at it in terms of, oh, there is a management issue, rather that is a very well-managed portfolio where we haven’t seen issues in a lot of different market environments with the calls from an operational perspective more broadly, etc., but rather just the engagement from that relationship side, is this the right product to be using now. You might not have those conversations as much with the asset values coming down. So, a very practical answer to the question that you gave.

Thank you. We will take our next question from Mike Mayo with Wells Fargo Securities.

Hi. Just a follow-up on the loan growth, the $20 billion loan growth target from the start of the year, it looks like you are still looking at that. But how are you thinking about loss rates on those new loans given perhaps a new economic forecast? We note that provisions for wealth losses are already tripled with the level of last year. Kind of what’s the risk in that portfolio? And does it make sense to have a loan growth target? It’s always easy to make loans. It’s just tough to get paid back sometimes. Thanks.

Yes. I think that the loan growth target is, I mean just in terms of – it’s more of an expectation to help people understand what the net interest income projection is. I wouldn’t call it as the target. To the point that was brought by Brennan, obviously, the expectations on a quarter-over-quarter basis have come down. So, we did see some pull forward, and that’s all we are reflecting in that. As you look at the provisions themselves, they still vary on a relative basis to other provisions across various – both institutions, and even our Institutional Securities franchise is quite low. In terms of what drives that, as you know, it’s all – it is based on the CECL concept, in the life of loan concept. And as you also know, it is a complicated idea between both qualitative and a quantitative scenario. For us, as we disclosed in our Q, the factors that we look at that are most important is really around GDP. We did see a degradation in the GDP expectations, very consistent with what’s going on in the macroeconomic outlook. And we are expecting the recession that we have talked about, the probabilities are in the 50-50 range. And that’s very consistent with also what we have said publicly.

And so did you have any extra CECL provisions this quarter?

No. We feel appropriately reserved for where we are right now.

Thank you. We will take our next question from Gerard Cassidy with RBC Capital Markets.

Thank you. Good morning. Sharon, in the workplace channel, you guys had some good growth in the number of participants on a year-over-year basis; it was up 17%. The unvested asset values declined about 33%. Can you give us a little color? Was it primarily just market conditions bringing that down, or is there something else there?

It’s a great question, and you draw a good point distinction. No, those are just the value – it’s just the value of the assets themselves have gone down that those holders have. Now the increase in participants has a lot to do with the fact that we just continue – as we continue to – we mandate, we have seen that increase the number of participants. What I would say in terms of just an opportunity in terms of engaging with those clients is, obviously, it is a difficult time in environment for some of those individuals. And we do – we continue to educate and use financial wellness as a tool, especially in these environments, to explain the advice-driven model and provide us with an opportunity actually in this kind of environment to discuss what financial advice and what financial wellness is, specifically as people see different declines in their potential portfolio.

Thank you. We will take our next question from Matt O’Connor with Deutsche Bank.

Good morning. Appreciate all the details on Slide 11 here, the allowance for credit losses. Maybe you have had it before, but more relevant now, and good detail. If you had to kind of guesstimate in a moderate recession that $1.2 billion of total allowance for credit losses, where does that go?

I think that is a very difficult question to answer. I think that what you can look at and think about it is, obviously, the economic scenario makes sense. The GDP makes sense, the size of the – where the growth actually comes from and goes, and then there is some extension of duration that you can see dependent on the rate rise expectation.

Okay. Any way to frame, does it double or triple? Obviously, a lot of the loans are in Wealth Management, which is just not going to – you would think have as much loss content, but any way to frame generically how high it could go?

Yes, I would...

I mean you know what I would do – I would say is why don’t you think about it as it relates to COVID, right? You can think about where we were from a COVID perspective. And so let’s talk ISG specifically. The provisions this quarter are 82%. It was almost 4 times that when you think about where we were from a COVID perspective.

I would just point out that – sorry. I would just point out that the Wealth Management piece, allowance for credit losses percentage is 0.1. These are very different kinds of loans from traditional consumer banking loans. So, you are just not going to see at least for that part of a major, major move. For the others, I think it’s just – you can’t project. I mean who knows what kind of recession – a recession might be, how long it might be and so on. But we manage this business conservatively, and we don’t have a big traditional middle market, small business loan book. We just don’t have that kind of business.

That’s helpful. And then just a clarification question, the total deferred cash-based compensation for the firm, you mentioned $515 million revenue impact in Wealth, but what’s the firm-wide revenue and expense impact, please?

It’s non-material per business line, which is why we don’t call out the number.

The reason we called it out in Wealth, just to be clear, was Wealth actually had a great quarter, revenue growth, new money growth, fee-based growth and margins year-over-year, the same at 27% in a very difficult environment. So, we thought it was kind of raining on the party a little bit that the deferred cash-based compensation took $500 million off the top line number, even though it comes out of the compensation expense number almost dollar-for-dollar, not quite. So, that’s why we called it out. Ordinarily, we wouldn’t call out deferred cash-based compensation. We don’t make a big deal of it. It’s kind of an accounting issue. It’s not a business issue. So, we are not often that excited about it. But we just thought given you would all be interested in how the retail investor was behaving right now and what was going on in that business and how panic they were, the short answer is not very, behaving well, business stable, saw growth. Hence, we want to call it out.

Thank you. We will take our next question from Jim Mitchell with Seaport Global.

Hey. Good morning. Maybe just on the RWA decline, was that a deliberate reduction, or is that more market-driven? And if somewhat – some deliberate actions, can you kind of give us a little more clarity on what those actions were specifically and if that can continue?

Yes. It was both is the way I would answer it. There are obviously market declines that had to do with it as well. But this was a very thoughtful use and approach around efficient uses of risk-weighted assets. And where does it make sense from a business perspective given the uncertainty, and I think there is a very – as I said, the same way when we think about the expenses, it’s about being efficient and thoughtful and very prudent and flexible with all of that environment. So, it’s both of those things that were taken into account when thinking about the RWA decline.

Listen, I want to make an important point here. We regard our capital ratios as sacrosanct. These are a big deal for us. We have spent a decade building them. We like having excess capital for exactly this environment we are in now. We can buy back up to $20 billion and a bunch that we are going to be doing, hopefully, in the low-70s. So, making sure we give ourselves that flexibility, demonstrating discipline in a tough environment. I think Ted and the ISG team did a phenomenal job in driving that number down. And obviously, it’s driven in part by volatility in the market, so things outside of their control. But this is something that we should and will try and control as best as we can.

Right. Maybe as a follow-up on that, James, I think you have talked about hoping the change in the mix of your business over time would push your DFAS losses and SCB down slightly. This year is probably a period of victory relative to what some happened to your peers. But do you think there is still room to see that come down over time given your changing mix?

Absolutely. Look at the PPNR number, was materially up as stress losses were also up, not surprisingly. The test was incredibly demanding in this environment. But notwithstanding that, we increased the dividend and we still came out at 13.3, I think versus 13.2. We are very focused on the SCB buffer not getting away from us. The change in business model, the growth in the asset management business, the growth in the workplace retirement business, all of these things, which frankly are very capital-friendly. Yes, that number is going to keep moving. Then we have an argument we have been – an argument I won’t put it that way, but let’s just say a different point of view with the Federal Reserve about how they treat financial adviser compensation during a time of stress. And we have argued for a long time that financial adviser compensation is obviously variable. So, that expense comes down when revenues come down. The Fed has not yet seen it our way, but we are continuing to push that argument strongly. When it does, we believe that will free up another bunch of capital.

Thank you. We will take our next question from Mike Mayo with Wells Fargo Securities.

Hi. James, you have talked about variable expenses for variable revenues, and the revenues were down, and comp was down. But at what point do you pull the lever on kind of plan B? I mean you said 50-50 on a recession. And Sharon talked about maybe delaying some projects. But when it comes to resource allocation, headcount, more aggressive moves to prepare for a difficult environment, you said yourself that it’s uncertain, it’s not the time to take too much extra risk to push your market share. But is it time to go to plan B or more recession-like scenario in terms of your resource management?

No, it’s not. We are overwhelmingly in the U.S. We had 6% revenue growth in the Wealth Management business, produced ex integration 28% margins. This is a business we definitely don’t want to harm in this environment. And we are managing, I mean I guess it’s quasi plan B., managing the RWAs as we just said in the balance sheet, reflecting a more stressed environment. We met as a Management Committee last September, I think and I spoke to the Management Committee about I felt there was much more downside risk to the market. The magnitude of it, I didn’t have a strong feeling for, but I thought it was somewhere between significant and are really significant. And I think we are in the sort of significant phase right now. So, we started pulling back, Mike, at that point. We have got a very clear handle on headcount growth and where that growth is. We have also got a lot of regulatory obligations. We have got to continue to fulfill as all the banks do. But right now, we are definitely not in a sort of crisis mode at all. I mean that’s what – if we were, we wouldn’t be buying back $20 billion increase in the dividend 11%. On the other hand, balance sheet growth will be very measured. I think we will pick up share by banks coming back to us, not necessarily us having to move forward. And as I think Sharon articulated very well, we are doing a pretty systematic review of the prioritization of all the projects going on around the firm and also in a big company like this with $60 billion of revenue, we have a lot of stuff going on, and we have choices as to when we do it. So, I would call it a sort of plan A minus, not a plan B, if you will, but that’s the mindset we are in. However, if things get worse, and in my career, I have seen a lot of recessions, a lot of crises, a lot of damage done to the environment, if things really deteriorated, particularly in the U.S., then we take a much more aggressive position. And we obviously have the ultimate weapon, which is compensation.

Thank you. There are no further questions at this time. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.