Morgan Stanley Q1 Earnings Conference Call: Full Transcript

Kathleen McCabe: Head of Investor Relations:

Good morning. This is Kathleen McCabe, Head of Investor Relations. During today's presentation we will refer to our earnings release and financial supplement, copies of which are available at www.morganstanley.com.

Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release. This presentation may not be duplicated or reproduced without our consent. I'll now turn the call over to Chairman and Chief Executive Officer, James Gorman.

James P. Gorman: Chairman and Chief Executive Officer:

Thank you, Kathleen. Good morning, everyone.

Let me get straight into it. Obviously 2016 got off to a difficult start. Markets were challenging, equity issuance was effectively nonexistent and retail activity was extremely subdued, reflecting the many uncertainties with which investor grappled. these included negative interest rates internationally, questions around the pace of Fed activity in the US, the growth rate of the Chinese economy and growing concerns about geopolitical issues, by the migration crisis and potential for exit, among others.

The securities businesses were exposed to a number of these factors, which led to a more challenging revenue environment than what we have come to expect in the first quarter of the year. That said, all was not lost. M&A was robust, equities once again delivered a strong performance and wealth management generated a pre-tax margin greater than 21% despite market headwinds and fewer trading days.

We made real progress in our expense discipline, ahead of our broader initiative called Predict Streamline, which as we said, will play out over the next two years. So where are we now? Though it's impossible to predict the future, we are seeing a slightly better turning markets, certainly in comparison to what was evident at the start of the first quarter leading into the early days of February. The M&A pipeline is strong and some greens shoot suggest the equity underwriting calendar may open up.

The S&P level at the end of the first quarter, below but that's across in our wealth management business, where we continue to grow our lending book and see flow in the managed accounts.

Importantly fixed income, notwithstanding the 25% cut in headcount improved sequentially. By no means, can this be considered strong, but the business is showing some resilience in this difficult environment. In January, we laid out our strategic goals for 2016 and 2017. While we are yet to see the revenue growth we anticipated, it remains early days. In a minute John will take you through the progress we've made to-date. It must be said, that if these markets were to continue as is, our goals will be extremely difficult to achieve and we'll therefore take additional appropriate actions.

We obviously accept the degree of volatility in the revenue environment that has led to lower revenue pools, although we do not expect this as a permanent state. We also recognize that we cannot control the environment in which we operate, but we are focused on what we can control such as expenses. As part of streamline, we are reshaping our expense base and having backed on an aggressive evaluation of our global infrastructure costs reviewing each product, business and geography globally to convince ourselves that we need our footprint, as it is currently configured.

We operate under a multitude of capital tests and requirements. In January, we discussed our belief that we have sufficient capital for our business mix and risk profile and we're taking actions that should result in longer term reduced capital requirements. For SLR and CET1, we are well in excess of the requirements, which we will be subject to in 2018 and 2019 respectively.

In terms of capital return, which has been one of the cornerstones of our strategic plan, our binding constraint is CCAR. To be clear, this is not a comment with respect to our capital return plans for this year, which we deem appropriate, but more for the following years. In order to drive capital returns to shareholders on a more substantial basis than our current CCAR submission is asking for, we must continue to reduce those parts of our business to give rise to the high stress losses and capital deductions and/or balance sheet usage.

While in a difficult quarter, we still made a billion dollar, our ROE was 6%. This is not acceptable.

Finally, we received feedback last week on our resolution plan which was the deemed credible by the FDIC, but on account of one deficiency, it was not the incredibles by the Federal Reserve. As you were told, we received very detailed comments and we are confident we will be able to address the items were raised. We have dedicated significant resources and time to this important priority and we will continue to work with our regulators to improve it.

This management team would do what is necessary to ensure that we continue to progress against our strategic plans. I look forward to doing an update at the Morgan Stanley Financials Conference in June. So let me now turn it over to John to walk through the quarter in greater detail. Thank you.

Jonathan M. Pruzan: Chief Financial Officer, Executive Vice President:

Thanks James. Good morning. As James said, the beginning of 2016 got off to a challenging start as negative sentiment and volatility prevailed in the global markets, undermining the traditional strength in client activity we have typically seen at the start of the year.

Concerns about global growth, China, commodities and interest rates resulted in divergent performance of global indices and mixed results across international markets. Against this turbulent backdrop, we remain focused on delivering for our clients and helping them navigate these difficult markets. We continue to demonstrate strength in our equities and M&A businesses and stability in wealth management.

For the quarter, we reported revenues of $7.8 billion, essentially flat versus fourth quarter '15 when excluding DVA for the fourth quarter. During the first quarter, we early adopted the accounting guidance that requires the DVA be presented in accumulated other comprehensive income as opposed to net revenues. Results for previous quarters shown in the supplement were not subject to restatement under the guidance. In my remarks, the prior period amounts exclude DVA.

Noninterest expenses for the quarter were $6.1 billion comprised of $3.7 billion of compensation expense and $2.4 billion of non-compensation expenses. We remained focused on reducing expenses and as James mentioned, streamline initiatives have begun to take shape.

Some of the areas we are focused on in streamline include: first, our work force strategy. We continue to remix our global work force and have approximately 40% of our infrastructure employees in our centers of excellence around the world. We are targeting to increase the number of employees deployed by 10% to 15% and are actively working toward achieving this by year-end 2017.

Many of the initiatives involve leveraging best-in-class technologies. For instance, we are adopting virtualization and private cloud computing to increase agility and asset utilization while achieving a significant reduction in our data center expenses. We are building the next-generation wealth management desktop and mobile suite for both our financial advisors and clients while optimizing and automating our operations and work flow. We are also partnering with incumbent technology companies and emerging startups on a number of initiatives to improve efficiency and lower costs.

And lastly, we are focused on rationalizing our footprint and infrastructure to ensure we are as efficient and productive as possible. In particular, there are opportunities across our institutional securities and wealth management businesses where we have the ability to drive efficiencies while improving collaboration.

Turning to institutional securities, revenues were $3.7 billion, up 5% quarter-on-quarter. Non-compensation expenses were $1.4 billion for the quarter, down 13% versus the fourth quarter, driven by a decline in professional services. Compensation expenses were $1.4 billion, reflecting a 37% ISG compensation ratio.

In investment banking, we saw continued strength in our M&A business, offset by a tougher backdrop for our underwriting businesses. IPO volumes were down 82% quarter-on-quarter and high yield volumes were down off of already low levels in the fourth quarter.

For the quarter we generated $990 million in revenues, down 18% sequentially. Advisory revenues for the quarter were the strongest post-crisis at $591 million, up 15% as the deals announced last year continue to close. Equity underwriting revenues were $160 million, down 55% versus 4Q, driven largely by the significant decreases in IPOs. Fixed income underwriting revenues were $239 million, down 31% versus the fourth quarter, reflecting a slowdown in high yield and leverage loan markets.

In equities, we saw continued leadership with revenues of $2.1 billion, up 13% sequentially. Prime brokerage revenues were higher this quarter as we work closely with our clients and continue to focus on the efficiency of our balance sheet and returns. Derivatives revenues were up sequentially, driven by increased client activity as clients try to navigate volatility and hedge risk exposures. And cash equity revenues were down versus 4Q against the backdrop of lower global equity markets and a limited new issue calendar, and we continue to show leadership in our electronic product suite.

Fixed income and commodity sales and trading revenues were $873 million, up 59% versus the fourth quarter although down 54% versus the first quarter of 2015 when we had a very strong commodities quarter, both in our oil-merchanting business which we sold in 4Q last year and our commodities trading businesses. Throughout the quarter, we saw a continuation of the challenges experienced in the second half of 2015. This translated into ongoing muted levels of client activity across our fixed income and commodities business. Despite these headwinds and the 25% reduction in headcount, we maintained out client focus and improved results from the fourth quarter.

We saw some improvement quarter-over-quarter in corporate credit with strength in investment grade and we saw continued weakness across commodities.

Fixed income RWAs were down $4 billion in the quarter to $132 billion and our SLR balance sheet was down approximately $9 billion to $345 billion. While revenues for the quarter were up sequentially, they are not where we ultimately want them to be. We are focused on driving execution and bringing our sales and trading businesses together to leverage synergies across the platform.

Others sales and trading revenues were down quarter-over-quarter driven by hedging losses for our relationship lending book. Other revenues were down versus fourth quarter driven by an increase in our allowance for loan losses for our held for investment portfolio. In the quarter, we have continued to see pressure on the energy complex and have seen some credit migration and some bankruptcies. Our loan loss provision on our HFI portfolio of $127 million this quarter was predominantly against our energy portfolio.

As a reminder, 40% of our approximately $15 million funded and unfunded energy exposure is fair value or held for sale where we mark-to-market daily and have taken markdown this quarter. Our energy exposure is down about $1 billion from last quarter and importantly we have not seen any meaningfully signs of contingent.

Lastly, average trading VaR for the fourth quarter was flat versus last quarter at $46 million.

Wealth management revenues for the first quarter were $3.7 billion, down 2% versus the fourth quarter, reflecting muted client activity in an unfavorable market environment as well as fewer trading days. Our PBT margin for the quarter was 21.4%, up slightly versus 4Q '15 reflecting the stability of the business. Bright spots for the quarter were continued momentum in our lending strategy and the ongoing secular trend to manage accounts.

Flows for the quarter were approximately $6 billion with decent pickup in March. The NII story continues with net interest income up 7% sequentially and 21% year-over-year, driven by solid loan growth.

Funded lending balances in wealth management grew approximately $2 billion or 5% during the quarter and $12 billion or 30% year-over-year. Credit metrics remained strong with an average FICO score of greater than 750 for our mortgage borrowers. Transactional activity was particular weak as clients remained on the sidelines due to market volatility and the lack of new issues. The first quarter for commission revenues were the lowest we have seen in the last five years, reflecting the very cautious attitude of investors in this highly uncertain environment. As global and domestic uncertainties abate, we would expect to return to a more normal level of activity.

On the expense side, compensation was down 3% quarter-over-quarter, driven by lower deferred compensation plans returns. Non-compensation expenses were down 5% versus fourth quarter, driven by seasonally lower expenses in marketing and business development. Deposits in our bank deposit program were $152 billion in the first quarter, up $3 billion versus the fourth quarter, lower than the quarter's peak, reflecting some improvement in client activities as market conditions have improved.

In investment management, revenues were $477 million, down 23% quarter-over-quarter. Revenues from asset management fees for the quarter were $526 million, up 5% versus 4Q, reflecting the steadiness of this revenue line and AUM was essentially unchanged at $405 billion.

Investment revenues in the quarter were a loss of $64 million, driven volatility and particular weakness in emerging market investments, resulting in markdowns and some reversal of carry. Overall expenses were down 13% quarter-over-quarter driven by compensation, which was down 23%.

Turning to the balance sheet; total assets were $808 billion at March 31st, up from the $787 billion at December 31st. The increase reflects the low fourth quarter spot asset level given lower client activity at the end of the year as well as higher levels of liquidity in the first quarter. Our average balance sheet, however, was down to $802 billion in the quarter from $814 billion in 4Q. Pro forma fully phased-in Basel III advanced RWAs are expected to be approximately $386 billion down from $395 billion in the fourth quarter.

Our pro-forma fully phased-in Basel III Advanced common equity tier 1 ratio increased to 14.5%. Our pro-forma supplementary leverage ratio for the quarter was 6%, up from 5.8% in Q4.

During the first quarter, we've repurchased $625 million of common stock or approximately 25 million shares and our Board declared a $0.15 dividend per share.

Lastly, in the quarter, as you will see in our supplement, we modified our segment common equity allocation disclosure to base it on fully phased-in regulatory capital, as the market has focused more on these ratios than the transitional ratios. As we have said in the past, we look at capital through multiple lenses, so this is not a totally new view for us. Capital is allocated based on risk-based and leverage-based requirements under both business as usual as well as stress scenarios. This resulted in a reduction in parent equity from $21 billion to $6 billion and the resulting $15 billion is allocated across the segment. We will now allocate equity to our segments only at the beginning of the year and it will remain fixed throughout the year.

Turning to the outlook; across sales and trading, we do not believe that the backdrop we saw in the first quarter will become a permanent state and have already seen some improvements in market conditions. However, given the numerous uncertainties across the regions we would expect to see some uneven markets and client activity. We are engaged with our clients and focused our delivering content, liquidity and solutions.

In banking, M&A pipelines are healthy and client dialogs remain strong, but we would expect to slow down from last years' elevated pace. We are cautiously optimistic that equity under-writing volumes will improve after a very muted first quarter, probably more weighted to the second half. We have seen IPOs in the US and EMEA starting to come to market. How these transactions are received will be important to confidence going forward.

In debt underwriting, we would expect the investment grade markets to remain stable and are seeing signs of life in the non-investment grade markets although still selective at the bottom of the capital structure.

In wealth management, we would expect to see the stability and trend seen in the last several quarters to continue and in investor's management, we expect asset management fees to remain stable and expect potential lumpiness in the investments line. We will continue to focus on project streamline and managing our risk profile.

With that, we'll open up the line to questions.

Question-and-Answer

Operator:

Ladies and gentlemen, if you have a question at this time, please press the star and then one on your telephone key pad. If your question has been answered or you would like to remove yourself from the queue please press the pound key.

Our first question comes from the line of Michael Carrier with Bank of America. Your line is open.

Michael Carrier:Bank of America:

Thanks guys. James may be first one for you, and just this is based top of the strategic updated that you provided on last quarter, just on the ROE target. Trying to get a sense when you think of I think in that situation I think revenues were up maybe in a low single digit although that being driven by the wealth management segment. And then in this environment obviously whole industry has some weakness and revenues were down 20% for you guys, so when we think about those targets and that revenue range up low single digits to down 20.

How much if they cost structure can be managed particularly for -- obviously not down 20 but even if for plus or minus 5% on the revenue base is that still in environment where by the end of 2017 the targets are still

James P. Gorman:

Good morning Mike. I think first of all the targets are point out 2017 targets and they did having them they were driven impart by three efforts from this project streamline and the ability to take at a billion dollars of compensation on compensation expenses assuming a flat revenue environment of the modest revenue growth of 3% to 5% and then of course continue in so that capital plans.

I think it's I know we're going to get a lot of calls on this because that's the payrolls of putting a target as you get asked about it every time, every quarter until you finally get there but we did put it up in 2007. So I think it's very early days here that's as we said an unusual bankrupt I think everybody would acknowledge the calendar was very weak as we say retail investors were very skittish we still had some clean up in the investment management areas, so it was an unusual bankrupt.

So we are not really at the stage of setting and getting those targets at this point, what I was trying to make clear in my opening comments that we're definitely not standing still, if indeed the environment continue as it is we would be much more aggressive on the cost front that's our job and we intend to do it. I am not about to predict well that means in terms of targets with standing by 9% to 11% by the end of 2017 and let see how this place out over a couple of quarters, but we're very focused on this we think this business mix is attractive against those kinds of targets we have no problem with that we think we are in position where overtime we're going to be during increasing capital distributions. We believe that the markets are unlikely to be at the level that we're at in the first quarter but again we have to do with reality for turns out that is the case we will react accordingly.

Michael Carrier:

okay thanks and then just as a follow-up maybe on the wealth management business you still pretty good trends for what you guys can control just given that we got the final department of labor in a fiduciary role.

I am just wanted to get your sense on as we -- you have to implement that on some of the either pressures you know the business how much from a cost structure is already been put into the budget I mean still from a pre-tax margin standpoint any really change on that and just your view overall on how to manage our business with the new role.

Jonathan M. Pruzan:

Sure Mike it's John. We are still digesting to evolve the integrity of the final rule but I think as we said in the past we had been preparing for this eventuality for a while now and we have been investing for this eventuality and when we put out our 23% to 25% margin target for next year we had this in mind. As we said we have the largest advisory platform in the industry as well as significant investments in our digital platform, so we think that we are well positioned here we are going to work with our clients to provide solutions to their investments needs and I think at by the end of the day overall impact to both our clients and our financial results are very manageable.

James P. Gorman:

I just add one thing to that, the deal were ruling obviously it's good to have a in running so we know what we're dealing with and frankly given the annuitization focus of the business that sort of consistent with where we as the --going. But it's one of many things that are going on in that business and I would as John said I would pay attention of many of the things including gross in the bank the expense savings the digital strategy that we are putting place lot of things going on that we'll be updating over the next 12 months. This was an important one but it's not the deal on the --.

Michael Carrier:

Okay thanks a lot.

Operator:

Our next question comes from the line of Devin Ryan with JMP Securities. Your line is open.

Devin Ryan: JMP Securities:

Hey, thanks. Good morning, maybe just another one here on GWM, and really just thinking about the contribution of kind of managed accounts relative to the existing business and is that shift is that accretive or diluted profitability in the segments and then I guess you just eluded to this but with bringing on some executives with digital expertise how should we think about the role of maybe verbal advice tools within your broader set of services declines.

Jonathan M. Pruzan:

So, a couple of questions there, I think in terms of the trends in the business again we've been very pleased with the stability of this business we've been investing in this business for a while we've been yielding the synergies and bringing the two platforms together bringing the teams together and the results have been reasonably stable and what is a difficult backdrop. The digital platform is a really exciting opportunity for us, we've talked about a couple of things as being sort of secular trends the role of managed account and people wanting advice for their balances that's something that we can continue and one or other premises for the merger of Smith party in the first place and we saw that continue, we've got about $800 billion in managed accounts now about 40% of our assets and we think we can continue to grow that.

And so that is a very important part of the strategy, and I think the digital strategy is just going help provide our clients with the types of services they need we have over 2.5 million households, many of our clients like to interface with their advisers on the phone some like to come in some like to use technology so making sure we have good products and services across that full spectrum is going to be important and I think the recent higher that we made on our digital strategy that to lead that wealth management is really going to be yield some interesting innovations going forward.

Devin Ryan:

Okay, great. That's very helpful and then with respect to trading it was critical and it sounds like the quarter ended on a better note, so you just may be help us think about that as this carry into April and is it across businesses and really within credit specifically -- one area that was with the headwind so, how are markets there and how the activity started this quarter.?

Jonathan M. Pruzan:

While in terms of the fix performance in terms of the different items I highlighted some pickup in credit I would say we are more oriented toward the credit products and we saw some modest improvement in those areas which still a difficult backdrop in challenging environment for those products are they are still below where we would like to see them in below their historical levels.

On the macro side our rates business held in okay, FX was clearly slower given our footprint as well as sort of the more muted the muted volatility that we saw in the FX rates this quarter, but all in all again it was a decent quarter for us in light of the backdrop and in light of our business mix. We did see a pick up towards the end of March it's sort of a follow through a little bit here in the first couple of week of April although obviously events over the weekend and what we've seen in agents some of the commodities is just to start reminder that we are going to continue to see periods of volatility here.

Devin Ryan:

Got it, that's helpful and then I guess just on that note. The fair mark fair value mark within the energy book did you disclose that?

Jonathan M. Pruzan:

No, no we did not.

Devin Ryan:

Okay. Can you provide any additional color on that?

Jonathan M. Pruzan:

Again from the energy perspective what I would say is that 40% is those fair value and health for sales the health for sales March you are fee run through other revenues the fair value will run through the sales and trading line items and we mark to mark that daily.

Devin Ryan:

Got it. Thanks for taking my questions.

James P. Gorman:

Thank you.

Operator:

thank you our next question comes from the line of Matthew O'Connor - Deutsche Bank. Your line is open.

Matthew O'Connor: Deutsche Bank:

Good morning

James P. Gorman:

Good morning

Matthew O'Connor:

Just following-up on fixed income to start here, obviously a lot of moving pieces with macro restructuring that you are doing but as you think about kind of more of a steady state or a typical first quarter and I appreciate it's very hard to claim but are you thinking leverage of 50% higher from where we are here or how you right sizing the cost base, what revenue environment are you thinking the business was capable generating?

James P. Gorman:

Let me try to tackle that there are couple of different components there. But let's first of all let's put into context, when we look at the first quarter of '15 versus the first quarter this year I said back in March that wasn't really a good starting point for comparison for a couple of reasons first of all if you recall last year we benefited from the extreme weather in the first quarter not only was that from our physical oil business but we saw significantly higher levels of client activity.

Since after the first quarter last year we continue to restructure and reshape this business both in terms of its footprint and capital intensity, we fill the oil-merchanting business in the first quarter or the end of the last year we had about $190 billion of RWA dedicated to the business and today that number is closer to a 130 more recently we changed the leadership and then in December we took out a 25% of headcount so this is a different model a different business, it's got less capital it's more focused and in short we are undertaking a major restructuring it's against the difficult backdrop the backdrop is been more negative against our more credit oriented businesses and we had a decent quarter I wouldn't say it was a great quarter but it was certainly a decent and we want to build on the early progress that we see here, we don't expect to see types of quarter that we saw in the first quarter of '15 but we are focused on doing better and getting more consistent results.

You asked about profitability levels, I think in January when we rolled out the strategy we said we want to credible and critical fixed income business. We are going to take capital out we are going to take cost out we're going to try to maintain the revenue footprint and therefore it was obviously going to improve the overall profitability of the business.

The last couple of years we have generated somewhere in the order of $4.2 or $4.3 billion of revenue. We are trying to maintain that revenue base the first quarter is slightly below that run rate but again decent results and we are still focused on trying to maintain that revenue footprint.

Matthew O'Connor: Deutsche Bank:

Okay that's helpful and then just definitely the non-comp cost came down nicely both in quarter and year-over-year. I think there is still quite a bit of benefit that come from your initiatives there but just walk us through how we think about the trajectory both maybe heading into 2Q and 3Q and then I think most of the savings you talked about hitting next year and just -- about that still the case.

Jonathan M. Pruzan:

Yes I think that's the right way to think about it. Some of the comments that I mentioned about the initiatives under way are really going to take those things take time to evolve into the cost savings we're making good progress and as I mentioned before the streamline initiatives many of them will hit towards the back half of this year and next year but this -- the progress that we made to-date is just maniacal focus I making sure we control our discretionary spend and we are being very prudent here.

Matthew O'Connor:

Okay. Thank you very much.

Operator:

Thank you. Our next question comes from the line of Guy Moszkowski with Autonomous . Your line is open.

Guy Moszkowski: Autonomous:

Thank you. Good morning, thanks for the reallocation disclosure on the capital that's helpful to understand what the real capital usage did it from business clients is. I guess my question on the back of that pillars, is there any change to the expectation that stick as a result of the strategic actions that you took late last year that it could free up more than 5 to 8 billion in capital over time. I mean now that we see 43 billion in ISG capital a 5 to 8 billion free up given how much of that 43 billion we know must belong to fix it seems like it's actually not that much.

Jonathan M. Pruzan:

Listen I think, the plan that we laid out in January in terms of the actions around the balance sheet in SLR footprint leads to about $5 to $8 billion of freed up capital we said in the past that we might reinvest some of that back in to other ISG businesses so that's line item might not move as people would expect. But again we're going to evaluate all of our businesses and all of our assets and investments to see if we can be more capital efficient right now we think that 5 to 8 billion is the right number.

James P. Gorman:

I just to add Guy. The real game in town relating to capital is CCAR and we are approaching I think we are approaching a point in time when the basic architecture of the CCAR model will be in place that doesn't mean that the actual scenarios won't change it here of course they are going to change a year but the architectural being in place by that I mean I think next year we'll see the G-SIB buffer put in the CCAR and when that is put in they are likely to be various other changes as I understand -- to the CCAR model which would net against the G-SIB buffer. Once we have lot of that under the four ratios in CCAR in each of them over their 9 quarters, we'll have a much better sense of what our true capital buffer is.

So the moment we are selling a little bit blind I mean the numbers we've laid out as what we see is sort of visible buffer right now but I hope is that overtime this is not the final in state for us in terms of excess capital. We think overtime that we will have more excess capital from that but to get there we need to do within the compliance of what the CCAR stress test demanding and as we get the final what I think is likely to be the final architecture of
CCAR next year again not the final models but the final architecture we will be able to adjust that business models accordingly.

Guy Moszkowski:

That's fair and help well in terms of how you're thinking about it. Thanks. May be a follow up on that, is has the fixed income business continues to evolve but the thing it would seems it is going to evolve to be more of a digital markets business with probably less of a human but also probably overtime still less of an economic capital footprint associated with it. Is that fair and could you talk about your vision for fixed income now that has been overseeing as for the long enough time to make be start to think about how it becomes more digital?

Jonathan M. Pruzan:

Yes, sure Guy, I -- we do think that there are some trends in the fixed income business that will lead themselves to more electronification, we've talked about certain areas of it of FX and other places, as you know we have true leadership in our electronic products weakened equities and we're going to use some of that learning's to see if we can migrate that into the fixed income area, but we do we see further electronification the speed in which that happens is obviously are going to be determined overtime, and we do think we are well-positioned given our leadership that we've shown in digital and electronic products in the past.

Guy Moszkowski:

Thanks that's really helpful, and then just one final question which is more on the current credit environment, in energy and materials and mining, can you give us a sense for what you are loan loss reserve as a percent of exposure is for the banking booked portion of those exposures.

Jonathan M. Pruzan:

Again what I would say, Guy, is as you know not all of our portfolios is held for investment a good chunk 40% is fair value and help for sale which gets mark daily. I said in March at the conference I was generally more concerned about the global macro backdrop and what that does to the trading environment and what that means for our client activity than our energy exposure. So I think we are going to continue to manage this tightly we are trying to reduce it where we can, we brought it down a $1 million quarter-over-quarter.

We continue to hedge as appropriate we have seen the weakness we would expect that would continue a bit but again we are going to continue to manage it tightly .

Guy Moszkowski:

Okay thanks very much.

Operator:

Thank you our next question comes from line of Brennan Hawken with UBS. Your line is open

Brennan Hawken: UBS:

Good morning guys thanks for taking the question. The quick follow up John the comment on maintaining the previous $4.2 billion revenue footprint, you gave some helpful color there on the difficult environment and how you view the results but maybe can you help us frame how to think about physical commodities going away you know you've indicated how that reduces the seasonality effect but is there a way to sort of frame out how much of that revenue left with the sales closing so we can think about the right jumping of point.

And then to follow-up on the comments about the revenue environment adjustments versus an cutting cost further has the improvement in March and April been enough for you to say that maybe you don't need to relook or does that commentary include the improvement in March and April?

Jonathan M. Pruzan:

Okay. So I would say a few things; one, we are the revenue target or is goal the run rate in the first quarter is slightly below that level I think the fact that we no longer have the physical oil business should reduce the seasonality that we saw in this business clearly but also many of the changes that we made are going to try to hopefully improve the consistency of this business, so we would expect more quarters to look similar than the volatility that we've seen in the past, is the first comment. Secondly I do think that we obviously saw a pick-up in March and signs early April, we think we can improve our results are still below sort of what we have seen historically run rate in some of our stronger product areas and we expect to improve our revenue results from this quarter.

So again this is a one quarter results. This quarter is a decent starting point because we didn't have the physical oil business in it but we obviously had a difficult macro backdrop but these numbers are probably more reflective of the opportunity going forward than that first quarter of 2015 and this a multi-year process we are not going to see all of the changes in just one quarter.

James P. Gorman:

I just add a couple of points to that. Firstly it relates to commodities lot of focus on the revenue delta year-over-year which I understand there was a cold snap last January that obviously flattered the commodities numbers there and obviously not having the business had a recently material impact on the revenues but the broader picture is strategically what we trying to do I mean we there is a reason one of the regulators determined that we had incredible plan and the other found a one deficiency and part of this is because we have simplified our business model. There is a reason that we are confident about project streamline and part of it is because we have fuel businesses less infrastructure less legal entities and what we do with commodities and then selling the physical oil business or get to the simplification reduced RWAs it reduces capital it reduces risks ordered compliance legal finance oversight of that part of the business and it's all about simplifying Morgan Stanley and making the better understandable business from a regulatory perspective and from an investor perspective.

Nothing that happened in the first quarter changes that view. On the expense side, we have been grinding away at our non-comp expense for a while, we have had some major headwinds with legal expenses but with litigation and with the cost of lawyers and depending these various claims. We've clearly making progress on that we've been focused as John used the work maniacally I think that's fair on a non-comp expenses. That is completely separate from project streamline.

Project streamline is a major initiative to figure out the most efficient way to run our infrastructure with the most depreciation footprint.

So those two things will go unabated irrespective of whether the second quarter strong or weak what the first quarter was strong or weak they are things which we have clearly on plan. We need to get the ROE of this business up and one of the ways we are going to do that is being much more efficient at our expense management.

Brennan Hawken:

Excellent. Thanks for all that color. And then thinking about the loan book here, you all saw NII growth faster the loans here in this quarter in wealth management. So it's right to think about the pick-up in LIBOR or probably benefiting the PLA portion of that loan book right, just the mechanics to that are the right way, just want to clarify that the mechanics with that the right way to thinking about it, and then thinking about the provision side of things on the institutional side, you just in the HFI piece I think provision was up around 200% versus last quarter.

So that's just on HFI not that 40% you're talking about 4 right John and how should we think about that in a world where oil stays at about 30 bucks a barrel.?

Jonathan M. Pruzan:

Okay let's do loans first. As we said in the past we're excited about the bank strategy what we call our deposit deployment strategy taking out a lower cost lower yield in securities and converting them into loans, we've seen good progress. You mentioned LIBOR, I think we are more sensitive to the fed funds rate we've seen a little bit pick up obviously given what happened in December.

But I think the real growth at NII across within the wealth management business is going to come from the fact that we expect the average earning assets to grow probably by in the bank to grow probably by $10 to $15 billion. This year you saw some of the balances in the wealth business it was up dramatically over last year's period.

So the key driver to NII growth in the bank which a good portion of that close to wealth management is we are going to have more average earnings assets yielding somewhere in this 2% rage. So that's a driver to that and I would pay closer attention to fed funds and to LIBOR, and the second question was

Brennan Hawken:

The provision for the investment?

Jonathan M. Pruzan:

Provision, so the $127 million provision is for the totality of the firm some of that as I said the prominence was towards our energy portfolio a small piece of that goes against wealth management business and then for our commitment it's actually part of the expense line but that 127 was for the total firm not just for ISG and energy.

Brennan Hawken:

Yes, sorry I was talking actually about the ISG piece I think you said in the footnote that it's a 108.7 million this quarter versus 37, how is that?

Jonathan M. Pruzan:

Yes, know that's right and again the vast majority of that is to the energy portfolio.

Brennan Hawken:

Okay, and any color if oil stays low outlook.

Jonathan M. Pruzan:

Nothing different than what we said in the past we are focused on it we clearly would expect that continued weakness and we're monitoring it very closely?

Brennan Hawken:

okay, thanks for the color.

Operator:

Thank you. Our next question comes from line of Mike Mayo with CLSA. Your line is open.

Mike Mayo: CLS

Hi the news your talked about progress with business mix banking equities and other areas but the ROE as you pointed out is only 6% in the first quarter and the ROE is been below the cost of capital for last decade and the market further expects you to miss your 2017 ROE target of 9% based on consensus earnings forecast and might [Inaudible] have based on a stock price below tangible booked value. So the question is do you think that you can still meet your 2017 ROE target of 9% and what that our total revenues grew somewhere between 3% and 5% and that we did the right thing around right sizing our fixed income business and freeing up the right capital.

As I think you said we feel pretty good honestly about the expense - we made some really good progress against non-comp expenses and maintain comp discipline before we really got into the mid of project streamline. So I've put a check against sort of early indicator on that one. On the revenue growth, clearly we didn't have revenue growth so that would be a negative at this point one quarter into the program. But I mean clearly things brighten up a little bit towards the end of the quarter, not going to get into the business to try to predict stuff but we would be surprise and probably you would be a most of people on this call if this environment stays as is for the next two years and hopefully I was very clear if it does we will continue to take significant action, we are not going to stand and just watch it and on the capital plan we've just put in a CCAR submission, we have the G-SIB buffer coming the next years capital plans, CT1 fully phased-in ratio I think is 14.5% to 14.6% supplemental leverage ratio is 6%.

Couple of years ago supplemental leverage was 4.2% I think our CT1 fully phased-in and it's probably in the top two or three of the global 15 or 17 banks. So we feel very good about that capital ratios what we need to understand is how we come through CCAR. The stability of those scenario obviously changes every year depending upon the economic conditions like interest rates and market chops and the like and as we see how the CCAr deals with certain parts of our business and the stress -- that are implied by that we will adjust those businesses if necessary it's too early to lay out what that might be because we haven't seen the results of it yet.

But my main message to and to our shareholders is that when we put out 9% to 11% again subject to the revenue growth, I talked about which was modest that was real certainly not subject to negative revenue growth we did it with a pretty well thought through plan that's being building and I am the first to acknowledge that we haven't hit our cost of capital for last several years I think with that being defensive of it's fair to say I am not sure very many banks have and I am not sure that the denominator what you require to holding capital has been a standing ball in fact it's been a bouncing ball that it's gone up every year.

So listen we are making steady progress, we are committed to our goals, we will continue pushing on expenses we'll do what we can free FX this capital and we believe the environment is likely to improve from where we saw the bottoms of the first quarter. More than that I think it's too early to predict.

Mike Mayo:

Alright. Thank you.

Jonathan M. Pruzan:

Sure.

Operator:

Thank you. Our next question comes from the line of --with Glenn Schorr with Evercore ISI. Your line is open.

Glenn Schorr: Evercore ISI:

Thank you. On the reallocation capital I am curious on what brought that on your undoing or conversations with the regulators and then focusing specifically on wealth management to go from a 19 down to a 13 I am curious on how much growth is built-in given that your reallocating once a year meaning your loans grew 30% the deposits are growing significantly. How much growth is built in there because I am assuming you feel like wealth management should be better than a 13% ROE business.

Jonathan M. Pruzan:

So on you first question. In terms of as you know since taking over I have been talking about we are looking multiple lenders of capital. So we've been analyzing and looking at our businesses under multiple frames for a while as you notice from my prepared remarks and James prepared remarks we always keep referencing that fully phased-in, it seems like the market has not interested in what the actual transitional ratios are and they are more focused on fully phased-in and so at the end of the year we thought it was the right time as we start 2016 from a disclosure standpoint to putting the fully phased-in ratio numbers.

In terms of the second question, I actually my supplement doesn’t have it can I just and looking for the page there we go, my supplement is missing page 12 Glenn, here we go. So in the first quarter of '15 you saw the 19% wealth management ratio I think the better comparison the change in the capital allocation if you look at the middle two columns the business went from 14 to 12 we did you saw the revenues were slightly off this quarter and so we the PBT that was down. Part of our wealth management business as you properly point out is a lending business and so when we move to the fully phased-in ratios we are allocating more capital to that business as it continues to grow in that high-quality lending book.

ROE for this quarter was slightly improved to 13 we think that business can be better than the 13% ratio that we are showing particularly if we see some better signs in the transactional and transactional activity, so we think we can build from 13 but this business does require capital given our lending focus.

Glenn Schorr:

Understood. And then I forget I am not sure you broke out the actual either accrual reversals or marks in investment management for the private equity and real estate funds but just curious what you could tell us about the book and if all the prior accruals have been now reversed out?

Jonathan M. Pruzan:

No I didn't comment on that. So the investments line which as we've talked about in the past has been lumpy and it's really a function of the overall investment environment that line represents not only the performance base fees that we receive but also reflects our investment in these funds. That number over the last 24 -- 25 quarters is really averaged about a little over $100 million a quarter.

It's been negative less than a handful a time this quarter. It was negative it was negative $64 million about a third little less than a third to that, Glenn it was from reversal of carry the rest was from investment markdowns. And that in terms of what we have left, as we've said in prior quarters we had written a significant portion of our carrier related to our Asia funds down at this point but going forward we still have carry really mostly in our infrastructure and real-estate funds and we'll disclose the accumulative amount of that carry in our quarter -- in our it has gone down this quarter.

Glenn Schorr:

Okay. Thanks very much John.

James P. Gorman:

Yes. Thanks Glenn.

Operator:

Thank you. Our next question comes from a line of Steven Chubak with Nomura. Your line is open.

Steven Chubak: Nomura:

Hi. Good morning.

Jonathan M. Pruzan:

Good morning.

Steven Chubak:

So I wanted to dig in John into the capital allocation disclosure for a moment and one of the questions we're getting quite a bit is how we should reconcile the revised fully phased-in capital allocation that you have with essentially a CCAR require or spot required capital target potentially the minimum level of capital on this for CCAR to get to so supporting higher payouts and so that can be of math suggest that when we exclude the unallocated portion and goodwill and intangibles you're allocating $52 billion across your businesses and as a percentage of risk-weighted assets it's about 13% target, so little bit higher than what we are contemplating previously and I just wanted get a sense is to what a 13% core Tier 1 is a reasonable long-term target based on the current mix and should we expect this to come down or how should we expect this to project as mitigation efforts to take all?

Jonathan M. Pruzan:

so I think I followed your math I don't think that 13% number that's not I wouldn't make that conclusion as James mentioned CCAR is the binding constraint the capital return. This our capital allocation model is not a proxy if you will for the CCAR model because the model as James said where the infrastructure changing in the variable change year-over-year but we will continue to manage our capital efficiency and see if we can take more capital out of the businesses and return that to shareholders. What our absolute level of our spot capital ratios won't be the ultimate determinant of how much capital we can return but actually the stress test in nearly adverse case will be the driving force about how much capital we can return and that numbers going to change as the test of all.

Steven Chubak:

Okay so the how much capital you need under CCARs not exclusively contemplated than under this to provides capital allocation that you have disclose?

Jonathan M. Pruzan:

Correct.

Steven Chubak:

Okay. Got it thank you for clarifying that and just one more question on as it relates to your G-SIB as far as clearly you have made significant progress in reducing your RWAs and some of your peers have known that they've moved into lower buckets and I was wondering whether you could disclose or you believe your surcharges down today under both method one and method two?

Jonathan M. Pruzan:

I think what we've said is that the -- me the G_SIB buffer for this year is for us is 3%.

Jonathan M. Pruzan:

And you see room for you to move into a lower bucket just given some of the actions that you're taking on FX side.

Jonathan M. Pruzan:

I think we obviously monitor that very closely and if there is an opportunity to move to a lower bucket we will clearly be focused on trying to do that and what the trade between revenues and profitability but we clearly moderate that but at this point we are in the 3% bucket.

Steven Chubak:

That's it from me. Thanks for taking my question.

Jonathan M. Pruzan:

Thank you very much.

Operator:

Thank you. Our next question comes from line of Fiona Swaffield with RBC. Your line is open.

Fiona Swaffield: RB

Hi, thanks for taking my questions, I had two questions, one there is a recent Basal paper on them free leverage same way I think in the past you have talked about the standardized counterparty credit risk in fact I wanted if you had any comments whether that paper would make a big difference to SLR, and the second issue is just on fixed income you mentioned a $132 billion I think of RWA's o you're making significant progress.

Do you think it's likely could reach the $120 billion earlier than 2017 is it that you're having success in the run off of like a free assets. Thanks

Jonathan M. Pruzan:

Sure so I think the first question relates to the soccer proposal to be honest I have reviewed and I haven't spent a lot of time on it and the first reader it could be beneficial but I don't say SLR ratio, but I don't think we have a quantification of that just yet and then on the second question which was I am sorry if you can repeat, one more time.?

Fiona Swaffield:

It is on the fixed income RWAs I think you mentioned $132 billion...

Jonathan M. Pruzan:

Yes we continue to make progress. We are very focused on it. The goals we laid for '17 and beyond if we can get there quicker we will but also recognizes that number might bounce around a bit based on client activity but we're pretty happy with the progress we've made.

Fiona Swaffield:

Thank you.

Jonathan M. Pruzan:

Thank you.

Operator:

Thank you our next question comes from Christian Bolu with Credit Suisse. Your line is open.

Christian Bolu:Credit Suisse:

Good morning and thanks for squeezing me in. So couple of fill up questions on the wealth management business. So I guess commissions were down 18% year-over-year. You mentioned reduced retail risk appetite.

Just curious if the department of labor will had any impact on advisor behavior that effected that number and then secondly just longer term, I mean if you're moving towards fee based assets just curious how that squeeze with you comment that time, you expect commissions to bounce back overtime.?

Jonathan M. Pruzan:

On the first I would say no, and on the second I think the migration to manage accounts will have an impact on the transactional accounts but these levels are really beyond the shift from transactional of to manage money so I think we can't see a rebound from where we are today.

Christian Bolu:

Okay, fair, and then on the comp ratio and GWI. You called a fair value in deferred comp it in the release having an impact on the comp ratio. Would be helpful if you quantify that for us just so we have a good jump of points for next quarter.

Jonathan M. Pruzan:

We'll look at it for future disclosures but we don't disclose that number.

Christian Bolu:

Okay, and a just lastly more of a bigger picture question I guess really nice margin expansion in wealth management organic growth just remains poor or weak whether measured by fee base flows or financial adviser headcount. I am just curious if you think organic growth is necessary for the long-term health of this business?

James P. Gorman:

Why don't I give John a break from it and by the way we have extend this call for about we're going to extended about 10 minutes pass the time, we trying to give everybody a chance to get their questions and so we will be brief. As long as there is inflation of financial assets and as long as there is population growth and as long as the business model remains relevant to wealthy investors that business will continue to grow. In addition to of fact obviously we are putting more products through the pipeline but pretty more baking and lending products through it.

So yes.

Christian Bolu:

Okay. Thank you for squeezing me in.

James P. Gorman:

Sure.

Operator:

Thank you. Our next question comes from () . Your line is open.

Analyst:

Great, thanks very much for taking my questions. I just want to understand specifically within () as it relates to your broader guidance would the business have been profitable at the current run rate of revenues given the expense reduction and at the projected level of capital extraction would it achieve the 9% to 11% ROE targets?

James P. Gorman:

Again the ROE target for the firm for all of our capital and as we mentioned in the past we are clearly trying to drive improved profitability in that business by maintaining the revenues reducing the capital and reducing the cost.

Analyst:

But in terms sort of the level of run rate revenues to achieve profitability was that accomplished?

James P. Gorman:

we laid out a plan just this past January that said we were going to try to maintain the revenue footprint that we've seen in the past reduced the capital intensity and reduce the cost so we are looking to improve the velocity and the consistency of those results.

Analyst:

Thanks very much.

Operator:

Thank you your next question comes from Matt Burnell with Wells Fargo Securities. Your line is open.

Matt Burnell: Wells Fargo Securities:

Good morning thanks for taking my question first a quick one. John at what point this quarter if at all did you all think about utilizing the minimize exception to potentially increase your buyback this quarter since they have been pretty steady at the $625 million level over the course of this current CCAR cycle?

James P. Gorman:

We didn't -- we chose not to exercise typically as we are more focused on the annual CCAR cycle but then we exercise that was the first time we put into water to do a capital buyback several years ago obviously we reserved the right at any point in the future but this time we're focused on getting the CCAR plan in.

Analyst:

okay make sense and then secondarily quickly, in terms of the somewhat lower revenue run rate in terms of the within wealth management for the revenues for FA those have been running at around $920 million a quarter if that level stays and you don't really get much of a bounce back does that imply much meaningful reduction in terms of headcount in that businesses as well.

Jonathan M. Pruzan:

than M. Pruzan:} I mean again that just a function of sort of a client assets are down given the volatility in the market FA number of FAs is pretty stable we've been investing in that business and recruiting we would like to continue to keep that business roughly that size and that just a numerator denominator dynamic.

Matt Burnell:

Okay, thanks for taking my question.

Operator:

Thank you. Our next question comes from line of Jim Mitchell with Buckingham Research. Your line is open.

James Mitchell:Buckingham Research:

Hey. Good morning. John maybe just a quick follow up on energy can you give us some more the details on what's funded unfunded what's not investment create anything else I think last quarter you also discussed what the exposure was can you give us some of those more details.?

Jonathan M. Pruzan:

I'll try to do this very quickly in the interest of time. So, the $14.8 billion total funded and unfunded the numbers haven't changed dramatically 60% investment grades about 30% drawn E&P same thing about $4.1 billion about a $1 billion drawn mostly virtually of in non-investment grade and then the $2.3 billion of undrawn is predominantly to investment grades.

James Mitchell:

Okay. That's all I got. Thanks.

Jonathan M. Pruzan:

Great. Thank you.

Operator:

Thank you. Our last question comes from line of -- JP Morgan. Your line is open.

Analyst:

Quick question on the cost side. Your comp level in the IBS implied for managed year-on-year down 32%. Just wondering if you could discuss a little bit how it relates to the sale of the business deferred reduction exists or comp production -- production and a streamlining business or streamlining operation just trying to understand better how we just think about the run rate of the cost line with streamline project coming on?

Jonathan M. Pruzan:

Again I think the we made nice progress here early the streamline initiatives that really sort of towards the back end of this year and next year because there are more structural and fundamental nature that's how we try to address that.

Analyst:

So it's all related to the commodity access partner.

Jonathan M. Pruzan:

No, no I am sorry no it's definitely not related to the commodity this is broad-based savings across the businesses and this initiative is from somewhat?

Analyst:

Okay. Thanks.

Jonathan M. Pruzan:

Thank you very much.

MS:

With that I think we will wrap up our call. Thank you everyone for dialing in and we look forward to specking with you again in next quarter. Thank you.

Operator:

Ladies and gentlemen that concludes your conference call for today. Thank you for your participation.