Earnings Call Transcript - MS Q3 2024

Operator, Operator

Good morning. Welcome to Morgan Stanley's Third Quarter 2024 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. Morgan Stanley does not undertake to update the forward-looking statements in this discussion. 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 Chief Executive Officer, Ted Pick.

Ted Pick, CEO

Good morning, and thank you for joining us. In the third quarter, Morgan Stanley delivered strong revenues of $15.4 billion, $3 billion of net income and a 17.5% return on tangible. The results reflect top-line growth across our businesses and demonstrate operating leverage. Year-to-date results reflect the firm's ability to generate consistent quarterly performance, $15 billion of revenues, sequential EPS of $2.02, $1.82, and $1.88, and year-to-date returns on tangible of 18%. Across the firm, we advanced toward our strategic goals while continuing to invest in growth. We are delivering on asset aggregation by leveraging our unique platform and scale in Wealth and Investment Management. Through the first nine months, we achieved $200 billion of organic growth. It's worth noting that over the last year, total client assets are up almost $1.4 trillion. Total client assets across Wealth and Investment Management have now reached $7.6 trillion, on the road to $10 trillion. Our strategic investments across the Integrated Investment Bank are reflected through share gains in our Institutional franchise. The breadth and depth of our global team working seamlessly across all three regions was evident through the summer and post Labor Day, as we helped clients navigate volatility against economic and policy uncertainty. As a whole, the Integrated Firm is achieving operating leverage with our year-to-date efficiency ratio improving by approximately 300 basis points to 72%. We have achieved this while continuing to thoughtfully invest across business and infrastructure priorities. Institutional and individual clients are engaged, and we are well-positioned to capture opportunities against different market condition backdrops. Strong fee-based flows in Wealth and the strong performance in Institutional Securities speak to clients seeking Morgan Stanley's advice. Improved underwriting markets combined with increasing participation among financial sponsors and corporates across Investment Banking support a constructive outlook. A broadening equity market and evolving interest rate policy are favorable backdrops for our markets businesses. Continued individual client focus on tax customization strategies are a tailwind for our Parametric business inside Investment Management. Now, with three quarters of 2024 on the board, we are striking a cadence that we will execute against. Our team is unified across the four pillars of strategy, culture, financial strength, and growth. Morgan Stanley's strategy is to raise, manage, and allocate capital for institutions and individuals. We will continue to execute on this strategy with a culture of rigor, humility, and partnership. And with high levels of capital and liquidity, Morgan Stanley will continue to execute on a plan of durable growth across our Integrated Firm. Sharon will now take us through the quarter. Nice job, SY.

Sharon Yeshaya, CFO

Thank you, and good morning. The firm produced revenues of $15.4 billion in the third quarter. Our EPS was $1.88, and our ROTCE was 17.5%. Results in the third quarter show the inherent strengths of our business model and our ability to grow revenues while also driving profitability. The firm's year-to-date efficiency ratio was 72%. In addition to strong revenue growth, efficiency gains are the result of disciplined prioritization of our controllable spend. An ongoing review of our real estate footprint, as well as lower litigation and consulting spend, contributed to this year's operating leverage while maintaining strong infrastructure to support ongoing growth. Now, to the businesses. Institutional Securities revenues were $6.8 billion. Notwithstanding advisory and equity underwriting markets remaining below historical averages, the segment's revenues represented a near-record third quarter. Performance accelerated towards the end of the quarter and was driven by the benefits of scale and the global reach of our Integrated Investment Bank. Activity outside the U.S. drove the segment's outperformance relative to historical averages. Our global footprint positioned us well to capture share. As risk events around the world drove activity, including the Bank of Japan's monetary policy changes, shifting expectations around the size and the timing of the Fed's first rate cut, and China's announced stimulus, we supported our clients. Investment Banking revenues increased to $1.5 billion. The year-over-year improvement was driven by continued strength in underwriting, led by debt underwriting, and further aided by a pickup in advisory revenues. Steady improvements in corporate and sponsor activity as well as our investments in talent and client relationships are yielding results. Advisory revenues of $546 million increased year-over-year on modestly higher completed M&A transactions in the quarter, with particular strength in EMEA. Large fee events from closed deals in EMEA, including those involving financial sponsors, supported the strongest quarter in over a decade for the region. Equity underwriting revenues were $362 million. While global market volumes remain well below historical trend lines, revenues were higher year-over-year, with a notable pickup of activity in Asia, driven by IPOs and follow-ons. Fixed income underwriting revenues more than doubled versus the prior year to $555 million. Results were driven by strong non-investment grade issuance, supported by both refinancing and event-driven activity, as well as a record third quarter volume in the investment grade market. Pipelines are healthy and diverse. We continue to believe we are in the early stages of a multi-year capital markets recovery. Corporate activity is gaining momentum, and the desire among sponsors to transact is steadily materializing, not only domestically but also abroad. While we are cognizant of the broader macroeconomic risks at play, we are well-positioned to deliver the Integrated Firm with a deliberate focus on comprehensive solutions for our global clients. Equity revenues were robust at $3 billion. The business navigated bouts of market volatility well and remained nimble as we supported clients; in particular, performance in the Americas and Asia was strong. Prime brokerage revenues were above historical averages, as client balances once again reached a new peak, driven by higher equity markets. Cash results improved versus the prior year, reflecting higher volumes across the regions. Derivative results were also up year-over-year, reflecting an increase in client activity coupled with an improved trading environment in Asia associated with China's announced stimulus in the final weeks of September. Fixed income revenues were $2 billion, driven by strength in macro, particularly rates, largely offset by results in commodities that were stronger in the prior year. Results reflect solid performance in EMEA and Asia, as well as a coordinated global effort to support clients through periods of volatility. Macro revenues increased versus the prior year, attributed to higher client engagement as our rates business navigated the markets well amid shifting expectations around the size and the timing of the Fed's first rate cut. Micro results were roughly flat year-over-year. Results in commodities declined compared to the strong prior year, which benefitted from elevated volatility in energy markets. Turning to ISG lending and provision. In the quarter, ISG provisions were $68 million, driven by portfolio growth, partially offset by an improved outlook. Net charge-offs were $100 million in commercial real estate and corporate loans. Turning to Wealth Management. In the third quarter, the business produced a record revenue of $7.3 billion and record PBT, highlighting the model's strong operating leverage. Strength in Wealth Management reflects a combination of constructive markets and a disciplined execution of our strategy. Client assets in Wealth Management reached $6 trillion. Fee-based flows were strong, demonstrating the power of our scaled and differentiated client acquisition funnel and the value of advice. Our multichannel model is driving durable long-term growth and profitability, benefiting from continued investments in our expanded offering and technology. Moving on to our business metrics. Pre-tax profits of $2.1 billion drove the margin to 28.3%. In the quarter, DCP negatively impacted the margin by approximately 90 basis points. Asset management revenues were $4.3 billion, up 18% year-over-year, driven by the cumulative impact of positive fee-based flows and higher markets. Fee-based flows in the quarter were robust at $36 billion, and year-to-date flows are on pace to exceed last year, supported by an ongoing contribution of assets from advisor-led brokerage accounts to fee-based accounts. Clients are diversifying fee-based accounts to include fixed income and alternative products. Fee-based assets now stand at $2.3 trillion. Net new assets were $64 billion, bringing year-to-date net new assets to $195 billion, which represents 5% annualized growth of beginning period assets. Net new assets in the quarter were supported by our advisor-led and workplace channels, with a notable contribution from new clients in the advisor-led channel. Transactional revenues were $1.1 billion, and excluding the impact of DCP, were up 10% year-over-year. Overall, higher levels of client activity supported results. Loan growth was $4 billion for the second consecutive quarter, driven by mortgages. Total deposits increased sequentially to $358 billion. While average sweeps were down slightly, we have seen recent signs of stabilization, particularly as the Fed began cutting rates. This is encouraging. Net interest income was $1.8 billion. Looking ahead to the fourth quarter, we would expect NII to be modestly down from the third quarter results, largely on the back of lower rate expectations, consistent with the forward curve. We are committed to continuing to execute as the opportunity in front of us remains significant. We currently touch 19 million relationships, 1.3 million more than last year. Our expanded offering includes unique market access for high-net-worth clients across a broad range of alternative products and, more recently, robust private market services, which continues to attract demand. We are investing in our intellectual capital, unique products, and an integrated infrastructure to help our advisors serve their clients. Turning to Investment Management. Revenues of $1.5 billion increased 9% compared to the prior year. Results reflect higher asset management and related fees, which increased 5% year-over-year, driven by higher average AUM. Long-term net flows were approximately $7 billion. Inflows were primarily driven by continued demand in alternatives and solutions, and were further supported by our fixed income strategies. Since the acquisition of Eaton Vance within alternatives and solutions, Parametric customized portfolios have been a consistent source of strength. Our multi-year investments into Investment Management's partnership with Wealth Management includes initiatives around advisor education on our tax-efficient product capabilities. This has helped drive steady demand originating from our own Wealth Management clients as well as the broader retail base. Liquidity and overlay services had inflows of $9.3 billion, led by our Parametric overlay strategies. Performance-based income and other revenues were $71 million. Results supported gains in infrastructure and real estate. MSIM's total AUM now stands at $1.6 trillion. Our investments in customization and alternatives are showing returns, demonstrated by positive long-term flows this quarter. We continue to invest in secular growth products in order to meet global client demand. Turning to the balance sheet. Total spot assets grew to $1.3 trillion. Standardized RWAs increased sequentially to $490 billion, as we actively supported clients. We accreted approximately $2 billion of Common Tier 1 capital. Our standardized CET1 ratio stands at 15.1%. We continue to deliver on our commitment to the dividend, which we raised to $0.925 per quarter, and we bought back $750 million of common stock during the quarter. Our year-to-date results serve as hard evidence that we are executing on the opportunity set, benefiting from being global and diversified with the resources to invest in growth. Across Wealth and Investment Management, we reached $7.6 trillion of total client assets. Expanding markets and increased client engagement should further support asset growth as we progress toward $10 trillion in client assets.

Operator, Operator

We are now ready to take any questions. We'll take our first question from Steven Chubak with Wolfe Research.

Steven Chubak, Analyst

Hi, good morning.

Sharon Yeshaya, CFO

Hey, good morning, Steve.

Ted Pick, CEO

Good morning, Steve.

Steven Chubak, Analyst

Ted. Hey, Sharon. How are you both doing? So, wanted to start off with just a question on op leverage. You noted that the management team has been very focused on driving more efficiency. We're definitely seeing now on the ISG side, 75% incremental margins, even in Wealth, you're delivering 35% incremental margins. Just wanted to gauge the sustainability of some of those higher-marginal margins, just given some of the efforts you cited on the efficiency side while continuing to invest for growth?

Sharon Yeshaya, CFO

Certainly. Thank you for the question and for recognizing our progress. We have been focused on this throughout the year, and our intention has always been to take a long-term view regarding efficiency. This spring, we began to look beyond a one-year budget to a two- to three-year outlook, considering not only revenues but also identifying areas for efficiency improvements and where we can consolidate investments to create room for growth investments. I mentioned occupancy because it stands out in the SEC disclosures. Year-to-date, this line item has only increased by about $11 million, and we have created opportunities to invest in optimizing our space as well as in necessary infrastructure. This includes data centers, new buildings, and new technologies that facilitate better space utilization. We are approaching this with a self-funding mindset. Additionally, we have seen a decline in professional services, which relates to our integration efforts. Even though we stopped disclosing on an integration basis, we identified areas to enhance our professional services strategy for long-term benefits. On the flip side, there have been increases in areas like BC&E, as we've focused on supporting our clients. We're also investing in infrastructure in anticipation of future growth, including cyber resilience, which is vital for our business moving forward. We're also committed to investing in financial advisors, new products, and technologies that will enable them to attract new clients, as reflected in our net new assets for the quarter. Overall, it's essential to ensure that we have the right infrastructure—essentially the foundation and building blocks—so that we can support growth as it happens. We are addressing this from multiple angles, and it is a long-term process that we will continue not just within this business cycle and budget cycle, but over the years ahead.

Steven Chubak, Analyst

Thank you for that insight, Sharon. I wanted to follow up on the Wealth business, as the KPIs showed strong performance overall, particularly in September, indicating considerable momentum in the third quarter. I am curious if there were any specific factors that may have contributed to this strength. When we see such momentum, it's natural to question how lasting or sustainable these KPIs will be, especially concerning the unexpected growth in sweep deposits.

Sharon Yeshaya, CFO

Yeah. Specifically, I'd say actually all the KPIs and all the underlying are strong, sweeps being one that I called out as the deposit trends are certainly encouraging, especially since the Fed began to cut rates. We've seen that over the back end of September and even as we look into the beginning of the fourth quarter on a relative basis in terms of expectations. So, that has been positive. The underlying for me on all of the asset growth, both on NNA as well as fee-based assets, there's not one particular driver, but rather you've seen the advice-based side really picking up. You've seen clients and FAs engage. There continues to be investments into markets on a monthly level from brokerage sweeps, which you didn't see last year. So, needless to say, the markets are improving. You're seeing momentum in the economy. Uncertainties are lifting, and retail clients are engaged both from seeking advice but also coming to the platform as new clients, which I think is a particularly good trend to watch.

Operator, Operator

Our next question comes from the line of Ebrahim Poonawala with Bank of America.

Ted Pick, CEO

Hey, Ebrahim.

Ebrahim Poonawala, Analyst

Good morning, Ted. To start, I’d like to ask about your capital priorities. Can you share your thoughts on the current capital ratio while we await the Basel re-proposal? Over the past decade, we've seen strong capital allocation, both organic and inorganic. Considering the current landscape, where are you directing capital? What do you see as the best investment opportunities? Are they in markets, wealth management, or international sectors? I’d appreciate your insights.

Ted Pick, CEO

Thanks for the question. As you know, we're at 15.1% CET1. The new number is 13.5%. So, our buffer is 160 basis points. We like that buffer. It gives us room to operate. You saw that we had some risk-weighted asset increases, but we still managed to keep the ratios at 15%-plus. So, there's a story here, which is to continue to price best-in-class financial strength along the lines of capital and liquidity, but also to lean into the businesses as the market opportunity affords. We did that clearly in both businesses. You saw it in the Investment Bank, where we gained share across the primary and both markets businesses, but you also saw it in Wealth Management, some of the technology spend that Sharon described. In the sort of forced hierarchy of what we would wish to do at any given moment around capital allocation, as we said before, it's the dividend first that is sacrosanct, and we continue to grow it. Second here, because of the secular growth and where we are in the cycle, as Sharon just described, there is a good cause to be investing in all three segments, Wealth Management, Investment Management, and the Investment Bank, and to do so across the world. We're clearly seeing rates of equitization increasing in places like Japan and India and on the continent. So, having a global franchise and investing in that, we think is existentially important. And then, the buyback is opportunistic. We'll be buying back $3 billion-plus this year, as that's an ongoing lever that we're going to pull. Of course, the Basel uncertainty likely lasts through the election, and we have our points of advocacy that are aligned with the industry, but also those things that matter very much to Morgan Stanley specifically. And we're going to continue to make our case concertedly and respectfully, and we'll see how it plays out after the election. But as it stands now, 160 basis points of buffer on CET1, 5.5% SLR, we are investing in the business, and we're achieving operating leverage. So, these things are always a movable feast, but we are keeping a very close eye on it, and we're happy with how we're optimizing the allocation.

Ebrahim Poonawala, Analyst

Got it. And one quick follow-up for you, Sharon, on sweep deposits and net interest income. As we think about potential rate cuts, could this serve as a trigger for clients to reallocate their investments? Is the net interest income nearing a bottom due to the cash balances that clients have maintained? Are we close to that point? Additionally, if we enter quantitative tightening before the end of the year, could those deposit balances face one less headwind and potentially grow next year despite the rate cuts?

Sharon Yeshaya, CFO

Certainly. Let me address the last part of your question first for clarity. Quantitative tightening hasn't really influenced us; it's more relevant for a commercial bank. Therefore, I don't believe it will directly cause a decline or an increase in our situation. I’ll set that aside since our deposit base is somewhat different. When we reflect on our historical trends and language, it's important to note that the interest rate environment has significantly changed since the second quarter. We don’t have control over the movement of interest rates. What I can discuss is our deposit levels. The trends we've observed are very promising. Considering our recent performance, especially following the Fed's interest rate cut, my near-term guidance indicates we may see a slight decrease on a quarter-over-quarter basis. Looking ahead to 2025, we will reassess based on the status of sweeps, but more importantly, on expected interest rates, which will depend on the Fed’s actions in November and December, and the outlook for early 2025. I want to provide some perspective regarding our discussions on sweeps and net interest income over the past couple of years. I recognize that this is a significant topic for investors, particularly concerning sweeps. However, sweeps have played a stabilizing role in some respects. When considering net interest income for Morgan Stanley, the difference between this quarter and the last is $175 million. We generate $100 million daily from this business. Thus, we need to focus on our model, our strategic approach, and our execution. The increase in asset management fee-based revenues this year is double the decline in net interest income. Therefore, we should maintain perspective now that we see the current status of sweeps, the market recovery, and the continued rise in asset management fees, which represent sustainable revenue as we progress.

Operator, Operator

Our next question comes from Glenn Schorr with Evercore.

Ted Pick, CEO

Hey, Glenn.

Glenn Schorr, Analyst

Hi there. With RWA up 10%, I initially thought this was driven by trading and client activity, especially since PB balances are at record highs, even though it comes with a slight decrease in the bar. I'm interested to know whether you believe this fluctuates with the environment, or if your capital plan continues to support this strong client base across markets. Additionally, since you've made significant investments, Wealth doesn't require much more capital infusion, it seems. Given your approach to the capital plan, do you anticipate any significant changes in the business mix? We have all gotten used to a substantial portion of this company being focused on asset and wealth management. Thank you for addressing both of those points.

Sharon Yeshaya, CFO

Sure. Let me address your question in reverse order. In Wealth, we observe a small but consistent increase over time related to risk-weighted assets. This is mainly driven by lending growth. As we aim for greater household penetration and encourage more usage of these products by financial advisors, we expect to see capital allocation in that direction moving forward. In terms of ISG, we have implemented risk-weighted assets in that area. The growth has predominantly come from corporate loans and lending commitments, especially within the framework of our FID Secured Lending, which is integral to our Integrated Investment Bank and the firm as a whole. Over the past two years, we have indicated that we foresee an Investment Banking-led recovery and have invested in talent accordingly. The risk-weighted assets are being utilized effectively in the Investment Bank, and that is also where we are witnessing positive results. This is evident with increases in debt capital markets and various segments of fixed income driven by more sustainable lending revenue. Our outlook is tied closely to the stability and resilience of the Investment Bank, rather than it being something fleeting. Naturally, we will see fluctuations based on deal activity and the corporate environment, but that gives you a broad perspective of our view.

Ted Pick, CEO

What I’d like to add is that it’s important to note, as you review the metrics, that revenues in the Investment Bank have increased by 20% year-over-year and have remained relatively stable, down 2% sequentially. However, during that same timeframe, the value of risk across the Investment Bank is almost unchanged and is actually slightly down. We have managed to achieve significant operating leverage without increasing the underlying measured risk in the business, which aligns with the durable revenue model that Sharon described for our Integrated Investment Bank.

Operator, Operator

Our next question comes from Devin Ryan with Citizens JMP.

Ted Pick, CEO

Hi, Devin.

Devin Ryan, Analyst

Hey, good morning, Ted and Sharon. First question on NII in Wealth. Obviously, a lot goes into that, but it would be great if you could maybe speak to some of the second order impacts of lower interest rates that we should be thinking about and maybe some that are a little bit less obvious like changes in margin utilization or securities lending or securities-based loans or even customer engagement with certain types of products or really anything else I'm missing there. Just love to kind of get some more flavor around the implications and how you guys are thinking about the second order impacts on NII as you look out over the next year or so.

Sharon Yeshaya, CFO

We continue to observe loan growth for the second quarter. While there have been stronger quarters in the past, this marks the beginning of a steady increase in mortgages despite the current rate hike and higher rates. As rates eventually decline, we can expect to see refinancing activity that will boost lending. Additionally, as we enter tax cycles with current asset levels, there should be an increase in securities-based lending. These lending products have been relatively subdued compared to historical trends, so it wouldn't be surprising to see more activity in the future.

Devin Ryan, Analyst

Thanks, Sharon. I want to go back to the impressive quarter you had in net new assets in Wealth. You mentioned a significant contribution from new clients in advisor-led. I'm interested to know if there's anything else you can share that supported this momentum with new clients, specifically whether there are new products or internal programs that are driving this, as it seems to be a key factor. I'm curious if this growth can be sustained.

Sharon Yeshaya, CFO

Sure. Regarding new clients, I want to refer back to a recent public conversation Jed had, which focused on our efforts with stock plans and how we're connecting financial advisors to new clients through what we call human referrals. This involves situations where someone reaches out to a call center or attends an event and wants to be paired with a financial advisor. We are utilizing technology, including various AI components, to effectively match individuals with advisors who can meet their needs. We've seen these human referrals exceed 100,000 year-to-date, a significant increase compared to previous figures. This indicates our investment in technology is paying off as we’re better equipped to understand individual needs. We're providing clients with insight into the value of our advice, reflected in our net new assets. The results demonstrate that our investments are truly yielding positive outcomes.

Operator, Operator

Our next question comes from Dan Fannon with Jefferies.

Ted Pick, CEO

Good morning, Dan.

Dan Fannon, Analyst

Hey, good morning. I was hoping you could expand upon some of the strength of activity outside the U.S. Some of the events you cited seem country specific, but can you talk to how you see the rest of the world participating and what you guys have said will be in Investment Banking recovery? And certainly we know the U.S. is focused in terms of the potential cap markets recovery, but curious how you think about the broader base outside the U.S.

Ted Pick, CEO

The Integrated Investment Bank premise that we built over the last 10 years and really intensified over the last five years was that it takes a real local commitment to have a global investment bank. We've made real investments on the continent, for example, in Iberia, in Italy, in France. We continue to be the largest presence actually as tenancy matter in Canary Wharf, so in the UK. So, our European commitment is real across both Investment Banking and increasingly in the markets business. That's in the Investment Bank. But also we have a thriving Investment Management business, LPs, who are well ensconced on the continent, and we're building that integrated capability with alternative solutions and the like. We have been strong, as you know, in Asia for really decades. And that spoke to the power of a global investment banking institution that when we had disruptive events, as Sharon alluded to, in Tokyo and then in China in the last couple of months leading into this quarter, it was important that we have a leading investment banking and markets presence both in Japan and in Hong Kong and Mainland. So here, the seamless execution will pay off as cross-border M&A intensifies as parts of the world outside of the U.S., where, of course, we have our concentrated bet as a regional matter, to the point you were asking, you see good growth in revenues both in Asia and in Europe. You saw year-over-year growth of almost 25% for the firm in EMEA, Europe, Middle East, Africa, and then 30%-plus in Asia. That speaks to having a local presence such that when the Investment Banking cycle really kicks in and companies wish to engage in strategic activity, which includes, obviously, getting bigger or making a sale and potentially going public locally that we're going to have the kind of presence to transact. So, running the global investment bank is going to pay for years to come. And I would add, by the way, that an important part culturally of what we've done at Morgan Stanley for many years which is bearing fruit, is to mobilize some of our senior talent from one region to another, not just across businesses but across regions, which is important when you have 30 of your 80,000 people outside the United States that they're familiar with our operations in places like India and Budapest.

Dan Fannon, Analyst

Great. That's helpful. And then, just as a follow-up, within Investment Management, longer-term inflows certainly a positive, but if we look at the backdrop, markets are up significantly year-to-date, revenues have moved modestly but still have expenses. So, as you think about the asset mix that's coming in the door that's skewed more towards lower fee, whether that's within Parametric or fixed income, how do you expect or how do you plan on improving the overall profitability of that segment as you think about the longer-term trends that are putting more pressure on fees?

Sharon Yeshaya, CFO

I'll take that. You're correct to note that there is a shift in the mix as we observe various types of flows. Additionally, it's important to acknowledge that we are also making investments in expenses to ensure we can effectively service our clients in line with the secular growth trends we're observing. This is true for both Parametric and alternatives. We are investing in both areas as we see consistent growth opportunities. It’s important to understand that alternatives will generally incur higher fees compared to what you might find with Parametric. However, I don’t view this merely as a fee competition; rather, it's about having greater assets, which leads to more opportunities and positioning ourselves as leaders in the market to attract new capital. Overall, I consider this a strategy focused on building and aggregating assets while ensuring we are available to meet our clients' needs. We need to allocate capital for investments like enhanced market data for Parametric and developing relationships with Wealth, which will impact our margins in the short term but should enable growth in the long term.

Operator, Operator

Our next question comes from Brennan Hawken with UBS.

Ted Pick, CEO

Good morning, Brennan.

Brennan Hawken, Analyst

Hey, Ted, good morning. All right. So, I'm willing to risk the wrath of Sharon here and ask a question on NII. And I totally appreciate it's just a part of the Wealth business, right? So, totally get that. But I thought it was really encouraging to see the end-of-period deposit costs tick down pretty decently quarter-over-quarter. So, maybe is that driven by the fact that you've seen a lot of those deposits shift into like the higher cost and therefore, higher beta products? And so, would that be sustainable? And then, when we're thinking about a combination of that de facto higher beta, the potential for reinvestment tailwinds in the securities book and loan growth, is it too optimistic to think that NII could grow next year?

Sharon Yeshaya, CFO

Thank you, Brennan. I appreciate your understanding of the business and the various factors influencing it. You're pointing out that there are still many areas for growth beyond just the deposit mix. While it’s positive to see some progress, we also have to consider the Fed rate cut, which will impact the cost of certain deposits. The beta will vary depending on the type of product; for example, a savings product tends to have a higher beta compared to a sweeps product, which has a lower beta. They serve different purposes and have distinct dynamics. Moving forward, the direction will depend largely on the Fed's rate decisions. There have been numerous changes in the past quarter, making it challenging to predict where the Fed might go and what investment opportunities will arise. I want to highlight three key factors that will influence net interest income, two of which show promise. We're seeing growth on the asset side as demand for lending opportunities increases, which is positive. Additionally, the trends we've observed since the initial rate cut are also encouraging. Historically, when interest rates decline, different segments of deposits tend to increase, which is another positive indicator. However, the situation regarding reinvestment and overall net interest income largely hinges on the Fed's actions. Just a quarter ago, a 50 basis point rate cut seemed unlikely, but here we are. Let's assess our position after the November and December meetings and reevaluate our expectations for the year based on the interest rate outlook. The three core factors are known, and while two are influenced by our clients' activities, I've shared positive data trends that we've been experiencing.

Operator, Operator

Our next question comes from Glenn Schorr with Evercore.

Ted Pick, CEO

Hey, Glenn.

Glenn Schorr, Analyst

Hi. With RWA up 10%, I had expected that it was driven by trading and clients, given that PB balances are at record highs, even though the bar is slightly down. I'm curious if you think this fluctuates with the environment, or if your capital plan supports this strong client base across markets. Additionally, now that you've made significant investments, does Wealth require much more capital infusion? Considering your capital strategy, do you foresee any significant changes in the business mix? We've all grown accustomed to a substantial part of this company focusing on asset and wealth management. Thanks for both of those.

Sharon Yeshaya, CFO

Sure. Let me address them in reverse order, starting with Wealth. Wealth has experienced a small but consistent increase over time related to risk-weighted assets, primarily driven by lending growth. As we consider increased household engagement and greater adoption of these products by financial advisors for our clients, this will likely guide our capital allocation moving forward. On the other hand, in ISG, the risk-weighted assets implemented in that sector show significant growth, particularly in corporate loans and lending commitments. Much of this growth is linked to corporates and the FID Secured Lending. This is fundamental to the Integrated Investment Bank and the firm as a whole. Over the past two years, we have anticipated a recovery led by Investment Banking. We have also made substantial investments in personnel, especially within the Investment Bank, which is where we are seeing risk-weighted assets effectively utilized and positive results emerging. This includes growth in Debt Capital Markets and various fixed income areas, driven by more sustainable lending and financing revenue. This reflects our strategy regarding the stability and sustainability of the Investment Bank rather than being purely episodic. While performance will inevitably fluctuate with market transactions and corporate conditions, this is the overall framework I would emphasize.

Ted Pick, CEO

What I want to emphasize is that when you review the metrics, the revenues in the Investment Bank have increased by 20% compared to last year and are essentially stable, decreasing by 2% sequentially. During this time, the trading bar, which measures risk within the Investment Bank, has remained largely unchanged and is even slightly lower. This allows us to achieve significant operating leverage while maintaining the measured risk in the business, highlighting the sustainable revenue model that Sharon mentioned regarding our Integrated Investment Bank.

Operator, Operator

Our next question comes from Devin Ryan with Citizens JMP.

Ted Pick, CEO

Hi, Devin.

Devin Ryan, Analyst

Sharon Yeshaya, CFO

We are seeing loan growth for the second consecutive quarter, which is a positive sign, though we have experienced stronger quarters in the past. This growth appears to be just the beginning. There has been a consistent increase in mortgages despite the current rate hike cycle and elevated rates. As rates decrease over time, we anticipate a rise in refinancing activity that will boost lending. Additionally, as tax cycles progress and asset levels remain where they are, we expect an uptick in small business lending. Currently, those lending products have been relatively subdued compared to historical levels. It wouldn't be surprising to see an increase in that activity moving forward.