Earnings Call Transcript
MORGAN STANLEY (MS)
Earnings Call Transcript - MS Q4 2023
Operator, 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 supplements, 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 updates. 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. 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 Chief Executive Officer Ted Pick.
Ted Pick, CEO
Good morning, and thank you for joining us. It's a privilege to be here. Today, I will present the annual report that represents a significant part of James Gorman's 14-year leadership, reinforcing Morgan Stanley's strategy and providing you with the transparency about our progress that you value. Let's look at the slides. Starting with Slide 3, over the past 15 years, we have transformed the firm's business model, scale, profitability, and returns. If you look at different historical periods, you will see our business evolution. Each phase faced its unique challenges. From 2009 to 2014, Morgan Stanley was essentially a self-help narrative. The transformation began with the acquisition and integration of Smith Barney. We reset the investment bank and managed to survive the near-triple credit downgrade and euro crisis. From 2015 to 2019, we navigated through financial repression, resizing our fixed income business and advancing to the top in institutional equities. During this time, we also acquired Solium, which helped us lead the corporate stock plan market. Then, from 2020 to 2022, during the COVID years, we gained incremental scale in both wealth and investment management with the acquisitions of E*TRADE and Eaton Vance, which provided us with a leading self-directed platform and enhanced our investment solutions. Throughout this period, each of our two major business lines—wealth and investment management, and institutional securities—generated operating leverage and high returns. Today, transformed Morgan Stanley has tripled client assets in its robust businesses with significant growth opportunities ahead. Despite the geopolitical, macroeconomic, and industry challenges in 2023, our business model produced consistent results. In 2023, firm revenues were $54 billion with $12 billion in pre-tax profit, which is double the averages from 2009 to 2014. Our return on tangible common equity was a solid 13%, including notable items that reduced returns by over 100 basis points. Last year's return profile was triple that of the post-crisis years. The combined earnings from wealth and investment management accounted for 60% of the firm's top line and pre-tax profit, and our unique asset gathering strategy positions us for ongoing sustainable growth. The institutional securities business also expanded throughout the transformation years with a focus on investing in its leading franchises. Our goal has been to build an integrated investment bank comprising investment banking, equities, and fixed income to serve major institutions globally. Together, today's Morgan Stanley business portfolio exhibits higher and more stable profitability. The initiatives we've executed over the last 15 years, both organic and acquired, were all within our core strategic framework. Central to our operation is serving as a trusted advisor to clients, assisting them in raising, allocating, and managing capital. This remains our core competency. We are global leaders, and we excel at it. Now, moving to Slide 4, since 2010, revenues in wealth and investment management have more than doubled, and we are currently the leading firm in the world among our peers. During this time, our client assets have tripled to $6.6 trillion. We see ongoing opportunities for growth and remain committed to reaching $10 trillion in total client assets. In wealth management, we have positioned ourselves as a top asset gatherer by expanding our business model across three channels: advisor-led, self-directed, and workplace. This business has generated $1 trillion in net new assets over the past three years, and we are persistently focused on sustainable growth. We anticipate that net new asset growth will continue to fluctuate quarterly due to seasonality and annual variances related to market conditions and the transition of workplace assets. However, we are confident in our ability to grow and strengthen our 18 million client relationships through our comprehensive wealth management offerings. Our capacity to track, deepen, and maintain client relationships through our unique platform enables us to drive revenue growth and operating leverage, targeting 30% margins. Given the recent macro challenges and our ongoing investments for growth, it's reasonable to expect reported margins to stabilize in the mid-20s range in the short term. The underlying business has previously achieved 30% margins, and we aim to attain that return profile again in the long term, against a higher revenue base. Our wealth platform is supported by investment management, where we have introduced numerous capabilities to our robust public market alpha generators. This business is aligned with key areas poised for consistent growth, including customization such as parametric approaches, private markets, and credit enhancements. Overall, the wealth and investment management business has achieved the scale necessary to invest in what matters most to clients and capture further market share through various cycles. Now turning to Slide 5. Morgan Stanley's Institutional Securities Group, our integrated investment bank, is a premier global franchise. Our capabilities, extensive client network, and distinguished brand position us as trusted advisors to essential corporations, both public and private, as well as asset managers and owners. Our teams across different regions, businesses, and client segments enable us to play a central role in global capital allocation and formation. In the last decade, we have advised on nearly $9 trillion in M&A transactions and raised nearly $13 trillion for clients, underscoring our market presence. Recently, in just one trading session, our equities business managed approximately $250 billion in notional value. Our leadership outside the U.S., acting as a true global investment bank, is vital for the Morgan Stanley brand. After over five years of managing our integrated investment bank, it's evident from client interactions worldwide that the barriers to entry for becoming a global investment bank are substantial. Today, we have fewer competitors, and we rank among the rare few capable of offering a comprehensive range of services. We anticipate that the next economic and financial cycle will be driven by corporate finance activities, which will stimulate investment banking growth, and thus we are particularly focused on increasing our 15% global share in that advisory-driven market. Now, let’s move to Slide 6. When you combine our wealth and investment management platform with our leading institutional franchise, you can see the strength of what we refer to as the integrated firm. Our ability to efficiently identify new client opportunities enhances capital flow and enables Morgan Stanley to deliver comprehensive solutions now more effectively than ever. On the right side of the slide, you can see how our premier corporate franchise spans all business segments, with clients at the core of everything we do. We address their diverse needs, from strategy advisory for executives to aiding in capital raising and risk management, and extending support to their employees through our workplace services. We uniquely serve individuals, extending from self-directed clients to ultra-high net worth clients and small institutions that fall between traditional segments. We provide best-in-class institutional capabilities paired with sophisticated wealth management solutions in an integrated service model. Additionally, we constantly invest in our ability to offer investment and client solutions, as we remain at the forefront of financial innovation and growth. Our global integrated investment bank is essential to our capacity to source and structure tailored opportunities for corporations and financial sponsors. Our structuring skills are enhanced by extensive distribution networks, catering to both large institutions and individual retail clients. By concentrating on our clients, we see significant opportunities in delivering our integrated firm. Moving on to Slide 7. Ultimately, the firm's success depends on our human capital and nurturing a distinct partnership culture. With James as Executive Chairman and alongside Andy Saperstein and Dan Simkowitz as our Co-Presidents, our top priority is delivering the integrated firm to our clients. Our shared Morgan Stanley experience, having navigated through the 15-year transformation, provides us with insight into our journey and our future direction. The intentional mobility of our leadership, shaped by James over the years, is especially vital. Andy, now leading both wealth and investment management, is well-placed to utilize his extensive retail knowledge to create client opportunities across our businesses. Dan, who has rejuvenated investment management for nearly a decade, is returning to guide institutional securities, where he previously spent 25 years, playing a crucial role in connecting the firm around opportunity sourcing, financing structuring, and capital distribution for our clients. Both individuals have enhanced our brand and successfully integrated acquisitions. Having James, Dan, and Andy as partners entering 2024 underscores the lasting strength of our culture. Our broader leadership team has collaborated since the financial crisis through our strategic transformation and remains unified in pursuing our objectives. The operating and management committees of the firm average over 20 years of tenure. This long-term continuity supports a strong learning culture centered on delivering exceptional service to clients. In addition to the expertise of our longstanding leaders, we have also welcomed key lateral hires through our acquisitions. Our businesses are backed by a world-class technology and infrastructure team, and we recently promoted 155 talented Managing Directors to partnership positions. Our 80,000 employees are the foundation of Morgan Stanley's culture, driving us to excel on behalf of our clients, responsibly manage capital, and maintain a deep understanding of the road we've traveled to achieve the firm we have today. Now, moving to Slide 8, beyond the business performance, our focus lies in three areas: the integrated firm, our culture, and the state of our financial capital. Thanks to our deliberate growth and resilient earnings over recent years, our capital position is strong as we finalize the Basel III Endgame. Our regulatory requirements, defined within our stress capital buffer, have gradually decreased since 2020, reflecting the enhanced resilience of our businesses. Regarding the Basel III Endgame, we continue to anticipate a more favorable outcome than originally proposed, especially concerning factors affecting our estimated risk-weighted asset inflation. Looking ahead, we remain committed to the dividend, which is central to the durability of our business model. While we will navigate opportunities to assist clients, expand our businesses, and repurchase our stock, the core strengths and strategic choices of the past 15 years are reflected in our quarterly dividend, which has increased from $0.05 to $0.85 per share. Ensuring the sustainability of that dividend is essential. As the firm aligns, we will strive towards our performance objectives. Slide 9 reaffirms our confidence in our targets. Our strategy and long-term value proposition remain intact, with four firmwide goals in place: reaching $10 trillion in client assets, achieving a 30% wealth management pre-tax margin, attaining a 70% firmwide efficiency ratio, and obtaining 20% returns on tangible equity. Our management team is prepared to execute against these priorities to meet our goals. We enter 2024 with optimism, and we foresee a constructive base case for the upcoming year. However, there are two significant downside risks. First, geopolitical tensions may escalate. Second, the state of the U.S. economy throughout 2024 is uncertain. The base case is benign, predicting a soft landing; however, should the economy weaken significantly and the Fed need to act rapidly to prevent a downturn, it could lead to reduced asset prices and activity. Conversely, if inflation persists and continues to pressure consumers and supply chains, it might result in a persistent Fed stance, leading to a higher-than-expected cost of capital and a potential bifurcation of the economy. These geopolitical and economic risks present uncertainties as we start 2024. Nevertheless, as we've discussed today, the current Morgan Stanley is built to withstand cycles, and based on the evidence we observe—growing M&A and IPO pipelines, increasing confidence in boardrooms, and a more positive sentiment from our retail and institutional clients—we remain hopeful for the year ahead. We will adhere to our clear and consistent strategy, managing a global business as a leading wealth and investment manager alongside a top-tier investment bank. The growth opportunities before us are significant, particularly given the synergies between our businesses and regions in supporting our overall strategy. We will continue to spearhead asset consolidation across wealth and investment management and pursue high-quality growth in institutional securities, consistently delivering our integrated firm to clients globally. In doing so, we will continue working towards our key objectives and delivering value for our shareholders. I will now pass the call to Sharon, who will discuss our fourth-quarter and annual results, and then we will take your questions together. Thank you.
Sharon Yeshaya, CFO
Thank you and good morning. The firm generated revenues of $54.1 billion in 2023, concluding the year with fourth-quarter revenues of $12.9 billion. Over the full year, the ROTCE was 12.8% and EPS was $5.18. For the fourth quarter, ROTCE was 8.4% and EPS was $0.85, with an annual efficiency ratio of 77.2%. Various factors influenced our annual and quarterly results, including nearly $900 million in notable items for the full year, over half of which were incurred in the fourth quarter. This included a $286 million FDIC special assessment charge and a $249 million legal settlement recognized in the fourth quarter, as well as $353 million in severance expenses primarily linked to a May employee action. Collectively, these three factors adversely affected full-year EPS by $0.44, ROTCE by 105 basis points, and the efficiency ratio by 164 basis points. Integration-related costs for the year totaled $293 million, with nearly 70% associated with ETRADE. With the ETRADE integration now finished, we are focused on managing our expenses while also investing in growth to achieve our long-term efficiency goals. As for our segments, institutional securities posted full-year revenues of $23.1 billion, with quarterly revenues of $4.9 billion. The full-year performance was affected by a weakened investment banking environment that started with the hiking cycle and geopolitical events in early 2022, persisting through much of the past year. Fourth-quarter revenues benefitted from stronger investment banking results and careful risk management in fixed income and equities. Investment banking revenues totaled $4.6 billion for the full year, with fewer completed M&A transactions following a scarcity of announcements in late 2022 and early 2023, impacting results. However, optimism began to grow midyear, resulting in a notable rise in Morgan Stanley's announced volumes from the third quarter into the fourth quarter, where revenues hit $1.3 billion. These results were chiefly supported by fixed income underwriting as the investment-grade market stayed open for regular issuance and was buoyed by event-driven activity. Advisory revenues showed signs of recovery compared to recent quarters, remaining roughly flat year-over-year, while equity underwriting revenues also held steady as activity remained low. Looking into 2024, we are set to take advantage of available opportunities, although downside risks are tied to consumer behavior influenced by the interest rate trajectory and geopolitical factors. We expect the U.S. to lead the global recovery, and corporate confidence will ultimately drive the momentum forward. We are optimistic as signs of growing CEO and boardroom confidence emerge, reflected in the buildup of our advisory and IPO pipeline. Our integrated investment bank is well poised to leverage the recovering environment, especially as the institution collaborates with CEOs, CFOs, and Treasurers on corporate solutions. Equity posted full-year revenues of $10 billion, indicating lower revenues across regions, attributed to muted client engagement amidst broad market uncertainty. Fourth-quarter revenues were $2.2 billion. Prime brokerage revenues in the fourth quarter were robust, reflecting narrower spreads and the geographic distribution of client balances. Cash results declined compared to last year's fourth quarter due to lower volumes, especially in Asia, excluding Japan, while derivative results increased year-over-year, showcasing growth in the client base. Fixed income revenues were $7.7 billion for the year, down from the strong results seen in 2022, mainly due to reduced client activity in foreign exchange and commodities, influenced by heightened uncertainty regarding interest rates and less volatile energy markets. Quarterly revenues were $1.4 billion. Macro performance diminished compared to the previous fourth quarter, driven by fewer monetization chances, particularly in Asia, while micro performance fell year-over-year, impacted by lower revenues in credit corporates due to movements in credit spreads amid geopolitical events. Nevertheless, results in commodities improved compared to the last year's fourth quarter, primarily owing to enhanced performance in the power and gas sector. In wealth management, full-year revenues were $26.3 billion, with a pretax profit of $6.5 billion, leading to a PBT margin of 24.9%. The reported results highlight the complex macro backdrop alongside several unique events. The extraordinary rise in interest rates notably impacted client behavior, affecting revenue mix and margins. Additionally, various expense factors influenced margins, including integration-related costs, the FDIC special assessment, severance charges, and the fluctuations in the DCP, which saw significant variances compared to the previous year. Together, these factors impacted the full-year margin by over 250 basis points. Our total client assets reached a record high of $5.1 trillion, with full-year fee-based flows of $109 billion. These flows and related fees helped mitigate the effects of market levels and changed interest mix within client portfolios, contributing to an increase in asset management revenues year-over-year. Fourth-quarter revenues were $6.6 billion and the reported PBT margin was 21.5%, impacted by notable expenses that lowered the fourth-quarter margin by over 400 basis points. Asset management revenues for the quarter were $3.6 billion, reflecting an increase of about $200 million from the prior year's fourth quarter. Quarterly fee-based flows were strong at $42 billion, demonstrating the value clients perceive in our advice-based model. Continued client allocations to higher-yielding cash alternatives and consistent monthly inflows into equity markets from sweep balances are promising indicators. The anticipated return of the new issuance calendar and improved retail sentiment could drive further investments across broader asset classes. The net new assets for the year reached $282 billion, indicating a 7% annual growth rate based on beginning-period assets, with fourth-quarter net new assets at $47 billion. Full-year net new asset growth was primarily driven by the advisor-led channel from both existing and new clients, alongside recruitment efforts. Transactional revenues in the fourth quarter amounted to $1.1 billion, with a slight year-over-year increase when excluding the impact of DCP, as clients shifted towards structured and fixed-income products. Bank lending balances stood at $147 billion, remaining relatively flat. Total deposits rose by 2% quarter-over-quarter to $346 billion, fueled by persistent demand for our savings offerings from our wealth management clients and a modest increase in sweep balances. Net interest income for the quarter was $1.9 billion, with a sequential decline mainly due to the deposit mix and blended deposit costs. Looking ahead to the first quarter of 2024, the deposit mix will continue to drive net interest income. The modest uptick in sweeps is encouraging; we believe we are nearing stable levels of frictional sweeps and client accounts. If our assumptions about the forward curve and client behavior play out, we anticipate net interest income for the first quarter to align closely with the fourth quarter. Our asset-led gathering strategy remains in place, which we believe will yield margin improvements over time. Our objectives are clear: to enhance relationships through our channels, transition assets to advice, deepen client relationships with improved capabilities and new solutions, and ultimately realize the benefits of our investment scales over time. These initiatives are already in progress, as we successfully increased client relationships by over 600,000 throughout the year, predominantly in the workplace channel, winning corporate plans and expanding participant numbers in stock plans. Over the last three years, we have historically seen an average of $50 billion in workplace assets shifting to the advisor-led channel annually. This year, client migrations increased by 25% year-over-year, despite economic challenges, and our financial advisors are presenting clients with investment options such as private credit, private equity, and various alternatives. The integration of wealth and investment management is anticipated to create greater openings for ongoing product development. As we progress from integration to optimization of client experience, we expect enhanced scale benefits from our investments. Investment management reported full-year results of $5.4 billion, with fourth-quarter revenues of $1.5 billion. AUM grew year-over-year to $1.5 trillion, bolstered by rising asset values. Long-term net outflows of approximately $7 billion were seen, driven by challenges in our active equity growth strategies. Demand for parametric customized portfolios in both equity and fixed income strategies remains strong as more retail clients seek tailored solutions. Liquidity overlay services experienced outflows of $6.6 billion, while weaker institutional liquidity flows were partially mitigated by interest in parametric's overlay product; the combined parametric brand, including overlay and retail offerings, enjoyed net inflows of over $5 billion this quarter, emphasizing the strength of our customized offerings. In the fourth quarter, asset management and related fees totaled $1.4 billion, slightly increasing from the prior year. Quarterly performance-based income and other revenues reached $61 million, with gains in U.S. private equity and infrastructure offsetting losses in real estate, showcasing the advantages of diversification within our franchise. Regarding the balance sheet, total spot assets were $1.2 trillion, with standardized RWAs increasing by $13 billion to $457 billion as we actively catered to clients. We managed our capital profile prudently and concluded the year with a standardized CET1 ratio of 15.2%, while prioritizing our strategic goals and remaining committed to returning capital to shareholders. Leveraging our repurchase authorization, we strategically bought back $1.3 billion of common stock at the start of the fourth quarter. The full-year tax rate was 21.9%, reflecting the realization of certain tax benefits early in the year, while the fourth-quarter tax rate was 26.5%, mainly due to tax implications from a specific legal matter. We anticipate the 2024 tax rate to be around 23%, consistent with previous years, despite expecting some quarterly fluctuations. Several unique and macro headwinds added complexity over the past year. Nonetheless, we finished the year stronger than we began, with $6.6 trillion in client assets and the successful completion of our E*TRADE integration. Looking at capital markets, there's an increase in boardroom confidence and our calendar is expanding. We enter 2024 with optimism while remaining aware of the dynamic environment in which we operate, as we continue pursuing our performance objectives. With that, we shall now open the line for questions.
Operator, Operator
We'll take our first question from Dan Fannon with Jefferies. Your line is now open. Please go ahead.
Glenn Schorr, Analyst
Hi, thanks very much. I love how you laid out the picture on the wealth management margin potential. And I do like that sweeps have settled in. So I'm curious, in the big picture, has FA and client behavior changed a bunch on the cash management front such that that's a potential driver of margin potential and why you're leaning towards that mid-20s near term versus the 30% where we were kind of hanging out when rates were lower and deposits were higher. Is that the primary driver of the margin thought? And do you think behaviors changed permanently?
Sharon Yeshaya, CFO
I appreciate your question, Glenn. When we consider the sustainable growth in margin, it's fundamentally about continuing the growth in fee-based assets and the shift towards the advice-based channel. We've seen significant fee-based flows this quarter and throughout the year. We are actively educating our clients, which means we have more participants leading to an increase in assets, and those assets will gradually move towards advice. Currently, we have about 22% to 23% in cash equivalents, which don’t earn a fee. As individuals start to invest that money into the markets or fee-based options, it will positively impact our margins over time. This is an area where we should see margin growth becoming more sustainable as we expand our asset base and encourage clients to move towards advice in fee-based assets.
Glenn Schorr, Analyst
Makes sense. I appreciate that. Maybe just a follow-up in wealth, if I could. It certainly doesn't show in your flows this quarter. So I guess I know where you're going to go with this, but you're definitely hearing a lot more from the bank-owned wealth management companies that are turning up the heat a little bit on recruiting and a lot more on their intent to better penetrate their banking while clients' wallets. So I'm curious if you feel any of that in your franchise, any of that where you compete and whether or not that impacts your thought process on your ability to attract some of the trillions of dollars held away that is always part of the growth story.
Sharon Yeshaya, CFO
So the first point I would say is it's obviously always a competitive market, but we're very well positioned given the tools that we've given to our advisers. A couple of points that I would make to you. The first is when we look forward into the first quarter, that recruiting pipeline is healthy. So when we think about January and what we're seeing, we see the recruiting being healthy. The second point that I'd mention is what I find to be most encouraging when you look under the M&A data, is that we're seeing new clients from Morgan Stanley. So it's not just attracting assets all the way but rather you're actually getting new clients from those participants. And then you're seeing conversion. So when you think about some of the statistics that I gave you around workplace and we've talked about these statistics, the workplace assets that move over 80% of those assets are actually assets that are coming from outside the institution. So you're bringing new clients in, and then they're bringing their assets that are sitting away into the institution. So I think we're well positioned to capture those opportunities. The final point that I'd make is on your banking products, actually, this idea of the E*TRADE integration, right? And we talked about, we've completed the integration, and I said we're looking towards the forward of the front office integration, some of that will be around banking products, et cetera, as we think and we look ahead over a multiyear journey.
Operator, Operator
We'll take our next question from Dan Fannon with Jefferies. Your line is now open. Please go ahead.
Dan Fannon, Analyst
Thanks. Good morning. Congrats on the new role, Ted. I was hoping you could elaborate on the current environment and a little bit more and maybe what you see as the biggest opportunities for growth as you look to make progress against the longer-term targets that you've outlined?
Ted Pick, CEO
Thank you for your question. We are generally optimistic about what 2024 holds, and it should be advantageous for both sides of the firm. The reallocation of cash equivalents that Sharon mentioned, whether in money markets or treasuries, is being redeployed by our wealth clients into the markets, which contributes to a growing sense of stability that is favorable for financial advisors and the wealth channel. In the investment bank, we've faced a prolonged downturn in IPOs, with the lowest volume observed in decades. We have also had a very sparse M&A calendar, reflecting early cycle activity from our highest margin products in investment banking, which we believe could benefit us as well. If we find ourselves in a soft landing scenario, we could see increased activity. We operate in the tickets business, and favorable economic conditions would bode well for both wealth management and investment banking. I wanted to highlight the integrated nature of our firm today because the collaboration between the two segments will inevitably create more growth opportunities for us. Our teams have mobilized across the enterprise and are now prepared to engage with clients across our full range of products to drive additional business. We have substantial operations in Europe and Asia. Therefore, if economic conditions exceed expectations, particularly given the anticipated struggles in Europe and challenges in China, we would expect to see some increased activity from those regions as well. This isn't just a U.S. issue; it's a global one.
Dan Fannon, Analyst
Great. Thank you. And you mentioned margin within the wealth chain or wealth segment will consolidate around the mid-20s here in the near term. Can you maybe unpack some of the inputs that will drive that outcome?
Sharon Yeshaya, CFO
Certainly. I worked through that, I think, Dan, when I actually tried to explain it in the script. So the premise in terms of the growing wealth management margin, again, is about the conversion to the advice-based model over time. Of course, individuals will have different pieces, right? But we have three different channels that we've talked about. We've talked about self-directed. We talked about workplace. We've talked about advice. From the self-directive side, we will continue to attract those clients, and those that might be interested in advice, we'll see it as we have different ways to give people a sense and a connection to FA. So we've talked about that. On the workplace side, we continue to get new participants, new corporate relationships, and that as we educate people with the wellness offering, et cetera. And we've seen evidence of this to bring people yet again to that advice-driven model. And the fee-based flows, as you see those, those will help us grow the asset management line. Then you can break it down again, the transactional line we've talked about, you're going to have new products and you're going to have a deployment of this cash that's been sitting on the sidelines that we've talked a lot about, the dry powder that could impact either the transactional line or the asset management line. And again, we're encouraged by the signs that we're seeing in NII. That too suggests that we are seeing as of right now that cash, that frictional level of cash is stabilizing. So I think you have the drivers in each of those lines as we think about the revenue side. And then as you think about the expense side, those we are looking for places to invest and gain from the scale of those investments and that will be a part of the objectives that Ted laid out when you see $10 trillion of assets.
Operator, Operator
We'll move to our next question from Ebrahim Poonawala with Bank of America. Your line is now open. Please go ahead.
Ebrahim Poonawala, Analyst
Thanks. Good morning. Welcome, Ted. Maybe just going back to the strategic update, going to Slide 13, where you sort of lay out very nicely the transformation over the last 15 years. As we look forward over the next three to five years, I was wondering if you can help fill in the blanks around strategically, I mean M&A has been a key pillar of this transformation as we think about both organic and inorganic on the M&A side, give us a sense of just where you see deal making happening over the next few years. We saw a big private asset deal being announced on Friday. And so would love some perspective there. And then I think the second thing you mentioned in terms of wallet share on the investment banking side, if we can unpack that a little bit in terms of how you expect to achieve a greater wallet share. Thank you.
Ted Pick, CEO
Thank you. It's great to speak with you. You’re asking about how the revenue mix will look in three to four years. We think it will vary over time. There may be periods, like in 2020 or 2021, when the investment bank performs exceptionally well, potentially reaching close to 50%. We could also see times when our ongoing investments in wealth and investment management lead to further growth. Currently, having 60% of our firm focused on wealth and investment management is a solid starting point. The key point I want to emphasize is that, despite a leadership change after 14 years of James' guidance, our strategy remains constant. We have integrated five acquisitions, including Mesa West, and the sentiment within the company is that we are well-positioned for now. We aim to grow the organization efficiently and organically. That said, we are open to new ideas that may come our way. Moving forward, we want to focus on expanding the business organically and improving our operational efficiency. There are still areas we can optimize in our income statement following recent integrations, and we’re concentrating on identifying these efficiencies while maintaining our strategic investments aimed at achieving 30% profit before tax margins in wealth and 70% efficiency for the firm. I've consistently stated that we will meet our strategic goals, and as we do so, we will invest in opportunities within our current portfolio. The most important message I want to share is the concept of an integrated firm, where our combined portfolio functions together. We have a cohesive partnership culture, and we can adapt the two segments of the firm to manage revenue and profitability effectively over time while scaling our operations organically to achieve our targets.
Operator, Operator
We'll move to our next question from Steven Chubak with Wolfe Research. Your line is now open.
Steven Chubak, Analyst
Hi, good morning. So what I wanted to start off and Sharon with just a question on incremental margins and comp leverage in a lower rate backdrop. We know NII is going to be a source of drag in the coming quarter, certainly if the forward curve manifests, but you should see improved momentum from equity market tailwinds, stronger fee base flows, a better IV backdrop. But the Street is modeling comp dollars flat, revenues up about $2 billion. I'm just trying to get a sense of how we should think about incremental margins as revenue momentum improves but the growth is coming in mainly from more compensable areas.
Sharon Yeshaya, CFO
You accurately identified the different components involved. It's important to approach each line item differently. There will be a change in the compensation ratio as financial advisors are compensated based on the grid linked to fee-based revenues. Regarding net interest income, that is non-compensable, and as I mentioned, if client behavior remains the same from quarter to quarter, we're beginning to gain clarity on that behavior, and we expect net interest income to be similar to the fourth quarter, at least for the first quarter. While the compensation may vary, the actual growth in fee-based assets is expected to be higher. Additionally, we need to consider other offsetting factors from last year, particularly the negative impact on revenue mix in the asset management lines due to shifts in investor preferences towards fixed income products and market dynamics related to billing. There are opportunities for growth in asset management, and while those will be compensable, we anticipate benefits from scale on both the asset side and hopefully the market side as investments evolve. I trust this clarifies your question.
Steven Chubak, Analyst
No, that's really helpful. And just for my follow-up, I was hoping you could just speak to the sensitivity to lower rates. It's a big area of focus for investors. You benefit from having the majority of your deposits in premium savings where admittedly you have bigger pricing flexibility at the same time, the asset side is still very sensitive to the short end. So I wanted to get a sense as to how you expect the NII trajectory to unfold as the Fed begins easing and whether there's any appetite on your side to extend duration to maybe lock in some higher yields.
Sharon Yeshaya, CFO
That's a great question. The answer primarily depends on what we observe regarding deposits. The key factor to consider as we look ahead into 2024 is the composition of the deposits. I'm encouraged by the trends we've noted so far as we entered January. If we assume that current conditions persist, the next consideration is the pace of the interest rate cuts we may experience. If there’s an immediate drop, we’ve indicated that it would negatively impact us by around $600 million. However, if the cuts are more gradual, which aligns with the forward curve, there would be offsets due to the reinvestment of the portfolio, which would primarily mitigate those declines. The crucial first consideration is the stability of our deposits and their mix, which has remained steady so far. We’ll have to see if that continues, along with the speed of the cuts throughout the year.
Operator, Operator
We'll move to our next question from Devin Ryan with JMP Securities. Your line is now open. Please go ahead.
Devin Ryan, Analyst
Thanks so much and good morning Ted and Sharon. Maybe just start with a question on investment banking and good to hear about the tone improvement there. Sponsors have been less active than corporates, at least from the data we track, and we know sponsors have record dry powder, but higher interest rates, current valuations have been a little bit challenging for them. So just the question is whether they are in a position to return in force over the next year. I think that's probably going to be necessary for full normalization in investment banking. And then just what you're seeing when you talk about the pipeline that you have, which are good, what are sponsors doing in those pipelines?
Sharon Yeshaya, CFO
Sure. Overall, the pipeline is more diversified than we've necessarily seen in historical years. We expect to see continued momentum in energy that we've seen over the past year, we see optimistic signs in real estate, and we see optimistic signs in technology. As it relates to sponsors, we would expect sponsors to come back; that will obviously take time. And I do think it will likely take a couple of potential prints in certain places and other things that will be encouraging will be on the equity IPO side. What I'd say is we've moved from a period of time that was window driven and that market is beginning to build momentum. And so the juxtaposition between the outlook for '24, I think in '23 is important there as well.
Devin Ryan, Analyst
Okay. Terrific. And then a question for Ted. So I think you're pretty clear here that the strategic trajectory is not changing dramatically. But we often get the question around stylistically what's changing. And so you have a different background than James. I think everyone has their own management style, and you run some big businesses very successfully from Morgan Stanley. So what could you maybe just hit on briefly how you would characterize kind of your style and just the ability to leverage your experience and what may change as a result of that? Thanks.
Ted Pick, CEO
Well, I’d say that's a great question. James and I are much more similar than not. He brings to the table a positive mojo to the business from the time that he took over CEO when things were in, as you know, a pretty rough shape and for now in his 15th year of leadership as Exec Chair, he brings a positive spirit to every single interaction that we have, whether it's our operating and management committees, our risk meetings, these calls, client interactions, cultural work with our newbies and folks that are looking to get promoted in the organization. I think that spirit of positivity is something that has been contagious in the organization. It's something that I'm a big believer in and has worked well inside of the trading businesses inside of investment banking, and I think you can feel it throughout the firm. So the reaffirmation of our partnership, our core values and this articulation of the integrated firm, which is the next step now because we went from trying to build our way back to generating the kind of enhanced scale and deep remote through these gutsy acquisitions. That brought us to a place now where we can look around and see how we can bring the firm closer together. I think the tone is one of determination. I've been at this place for more than three decades, and we had our moment sort of before the 2008 crisis, and I think it's fair to say that the entire senior partnership, including James, but also the folks that came through the organization like myself, we are determined to not revisit anything that feels like those days. So the calling card here is durability is consistency. We want to put up consistent results. Part of what you see in the strategic deck in the back page, those are very clear numbers, and we will hit them. We will hit those numbers. It will take time. We will have to do all of the three yards and a cloud of dust work associated with thoughtfully working our way to those numbers so that when we hit them in a normalized environment, which will be part of the next arrow on Page 3 in the years to come, we will have done so in a way where we can achieve full valuation on it because the view will be that they are not only achieved for a moment in time but sustainable. And that obviously is also the calling card of James' tenure, which is that of consistency and durability. So if the first is this positive mojo, the second is this ethos of consistency and rigor and durability, I think the third, at the end of the day, has been to believe in what Morgan Stanley can aspire to for clients, and that is this integrated firm that we are something differentiated in our two channels very clear on what we do and what we don’t do, and that the cycle is very much a tailwind for us.
Operator, Operator
We'll move to our next question from Christian Bolu with Autonomous Research. Your line is now open. Please go ahead.
Christian Bolu, Analyst
Good morning, Ted, and welcome to the call. Good morning, Sharon as well. Maybe Ted, for you, on the trading businesses, Morgan Stanley has suffered some share loss over the last couple of years and your peers have been aggressively allocating capital to that business and gaining share so maybe curious on how you're thinking about opportunities to grow those businesses and any plans to either invest more capital or resources into that business?
Ted Pick, CEO
Thank you for your question, Christian. It's good to hear from you. Over the years, we have achieved top positions in the Institutional Securities sector. However, as you mentioned, we've lost some market share to the first and second place competitors. We believe this trade-off has been worthwhile as it helps us shape our revenue and profitability mix. Additionally, maintaining capital is crucial, enabling us to maintain a CET1 ratio above 15%, regardless of our position regarding Basel III requirements. As you may know, I am focused on ensuring the durability of our dividend, which reflects our commitment to our shareholders and the sustainable business model they seek. In 2020, we demonstrated our ability to quickly allocate capital to our clients when market conditions are favorable. As a global investment bank, if our prime brokerage balances approach the highs of 2021 and 2022, we may need to direct capital towards equities. There are other periods where trading activity could increase, particularly in the financial sponsors sector, as large assets eventually need to be traded, relying on market engagement. I want to clarify that we are not strategically withdrawing from the investment banking sector. Looking ahead to 2024, we do not see it as an either-or situation between wealth management and institutional securities; we will actively pursue both. However, we won’t chase market share for the sake of it. Our goal is to demonstrate operating leverage within both sectors and achieve overall returns. We are focused on how we can effectively utilize our capital and serve clients over the long term. I am optimistic about the upcoming investment banking cycle, which coincides with our years of investment in building an integrated investment bank. Our firm stands out because our bankers, equity professionals, and fixed-income experts collaborate on client solutions. My vision is to extend this collaborative approach across the wealth management and investment management arms, enhancing our ability to generate operating leverage and returns. This strategic integration excites me the most about our next chapter since we have the team and the excess capital, which has set us apart and positions us well for the future, particularly concerning Basel III outcomes. If the results are more favorable than anticipated, we will adapt our strategies accordingly. We have various tools at our disposal, whether it involves dividends, reinvesting in the business, or stock repurchases. Ultimately, our shareholders should continue to expect a solid capital foundation from us.
Christian Bolu, Analyst
Awesome. Very clear, and then maybe another one on Wealth Management margins, unfortunately, maybe for Sharon. I can hear you Sharon very clearly that you think higher revenues will drive margins over time. I guess, but if I guess if I look at the business, 2019 versus today, wealth management revenues are up 50%. This is where they were in 2019, where your margins have compressed. And again, I know there's one-time items in the quarter, on the year, but it doesn't seem to me like bigger revenues have driven operating leverage. So what gives you confidence that going forward our revenue growth will drive meaningful operating leverage?
Sharon Yeshaya, CFO
Really around the conversion. That's why I keep talking about the conversion, Christian. We brought the statistics up last year. We've brought the statistics up again this year in terms of seeing conversion from Workplace about seeing net new assets coming in and then seeing those assets migrate. New clients giving FAs time. All of those things are able to give us more durable asset management-based revenue as we move forward. So to your question, and I think Steve asked a similar question, the NII will fluctuate, obviously, based on rates and on consumer and customer behavior. And so the goal, well, that has been something that we say, don't forget the bank. Don't forget the margin that you'll get from that. Over time, the goal is to have a more sustainable $1 trillion of assets coming through both wealth and investment management, those assets will earn fees to some portion of it, and we see the migration into fee-based, right? We have 50% of advisor-led assets sitting in fee-based accounts. That's the ultimate proposition from seeing an expanded margin and seeing the benefits of scale. And we have invested in workplace. We've invested in getting new channels and getting new participants. The time is now to begin to see conversion, and we have evidence factual evidence that I pointed to on this call to show you that we're making progress towards those goals.
Ted Pick, CEO
What I'd add, Christian, is, again, all goals being equally important, we will hit that $10 trillion number. So part of it is to allow for some of this latency, if you will, on assets held away on assets working their way through workplace. It's a space that we are a leader in. It's a space that is relatively embryonic in the wealth business. And we will allow for some time for those assets to convert. But the key, of course, is to have them in-house and then as well to see that folks who are our new workplace customers have assets held away in other existing brokerage accounts that they bring them the firm as well.
Operator, Operator
Due to time constraints, we'll take just one question and no follow-up going forward from analysts. Our next question comes from Brennan Hawken with UBS. Please go ahead. Your line is now open.
Brennan Hawken, Analyst
Good morning and congratulations to Ted on the new role. Since this is my only opportunity, I will ask about the long-term targets. There have been some slight adjustments; we lost some positives and experienced a slight decline in the efficiency ratio, although we did gain a positive in client assets. Is this change an indication that the long-term targets are not truly reflective of the current environment? What contributed to this adjustment that might suggest a decrease in some of the upside scenarios? You mentioned needing the environment to normalize. How should we consider the path towards these targets and what specific actions can you take, unrelated to the environment, to make progress?
Ted Pick, CEO
Yes. Excellent question. And a lot of time given to consideration on pluses and the like. This, for me, was sort of an easy call, the page is one that we all own and getting to 30% margins is a number that we want to achieve. And at that level, having hit something that is approaching $10 trillion assets, we're going to be in a really great place. And that would be a reasonable time to say, hey, how about more? And we'd say, okay, well, clearly, we're going to continue to grow assets because the asset number way that TAM is gigantic. James has mentioned $20 trillion at one point. There are client assets that will keep us busy for many generations to come. Whether the pretax margin of wealth should go about 30% at that point before or not, I'd like to get to the 30 and I want to get there durably and thoughtfully and the mid-20s is a range that you've seen us trade at the business to work well at, and we believe we can when economic conditions normalize, as Sharon described and as new assets get put to work some combination of money markets and T-bills coming into the market again, workplace coming through the funnel. All three channels work on the back of increased transaction activity and new issues and the like. We should slowly and durably work our way back to 30%. The efficiency ratio, as you know, is just another way of saying 30% margins for the enterprise. Now, by definition, the investment bank, which has more capital and more underlying risk should have margins that exceed 30% over time. So it's fair to say that if we're hitting 30% margins in Wealth Management, we certainly should be at an enterprise efficiency ratio of 1 minus 70%, 30% as well. So 30% plus could be a way of thinking about it, but I wanted to set up numbers where the team knew that they are specific and that we needed to hit them. And then finally, with respect to returns on capital, this gets to the importance of our being stewards of that capital, what we pay out in the form of dividends, what we buy back and durably how we run the place. So we thought that 20% ROTCE which is something we hit during the COVID years. But of course, those were against macroeconomic conditions which were unusual and highly favorable that we can do 20% in a normalized environment. So this may be on the margin and James liked it too, when we talked about it, stylistically, my view was and the team shares it that $10 trillion of client assets, we should get there and just keep on going. But the other three, effectively in removing the pluses, it's simply reaffirming that those numbers will be hit. We will hit 30% pretax margins in wealth, 70% efficiency ratio for the firm, and 20% ROTCE. It will take time. It will be the challenges you would expect in making that happen. And of course, we need economic conditions to line up in a favorable way. But over time, those are the firm-wide goals, and we wanted to be very specific about that for you.
Operator, Operator
We'll take our last question from Mike Mayo with Wells Fargo Securities. Please go ahead. Your line is now open.
Mike Mayo, Analyst
Okay. Well, it looks like you have a heavy lift after following James Gorman. What is your message to the wealth managers and investment managers at half of the company that you haven't run in the past? So you've proven yourself in half the company, that's clearly capital markets and Wall Street banking. But what's your message to the other half of the company at a time when they've had a step down in their growth rates, new asset flows on wealth and outflows in investment management?
Ted Pick, CEO
Thank you for the question, Mike. The Wealth business is very personal for me. My father and father-in-law were both brokers, and I grew up learning about that field. I truly believe this area has set Morgan Stanley apart over the last 15 years. Our ability to combine Smith Barney and create something unique has been crucial. It has not hindered the investment bank at all. While our merger in '97 primarily addressed social issues, the industrial aspect was valid as well. Establishing a world-class wealth manager has significant barriers to entry and requires a well-run operation to provide value to clients in a distinctive way. Thanks to Andy Saperstein's leadership, along with Jed Fin and Dan Simkowitz's investment management efforts now integrating with the Investment Bank, we have a comprehensive approach. We offer everything from self-directed services to traditional advisory channels and the new workplace channel. I've spent time with the team, and I believe we once referred to the wealth and investment management business as the ballast, which was accurate in conveying stability. However, I think it's more apt to refer to it as the engine for future growth at Morgan Stanley. If opportunities arise in the future, we could pursue them inorganically, especially internationally, where I've invested a lot of time. But as we focus on our current organic business, we are truly unified. What excites us most is how well we collaborate across all sectors, with no friction among the leadership teams in infrastructure, wealth management, and investment banking. The advantage of our current position is that we, as shareholders and guardians of the Morgan Stanley vision and culture, are all dedicated to growing both segments of the firm. As the leading wealth and asset manager, we have ample opportunity to grow towards $10 trillion in assets. Simultaneously, I believe we can continue to attract high-quality, reliable business within the investment bank and improve our operating efficiency there as well.
Operator, Operator
That concludes our question-and-answer session for today. Ladies and gentlemen, this concludes today's conference call. We thank you again for participating. You may now disconnect, and have a great day.