Morgan Stanley CEO Pick on Deals, Earnings, Election (full interview)

I'm standing by here at Morgan Stanley's headquarters in Times Square alongside Morgan Stanley CEO Ted Pick. Of course, you had your third quarter earnings report today. You're watching your stock soar. You're having one of your best days ever, really. If you hold, it'll be at least your best intraday in four years and certainly your best day since you became CEO. What do you think is the biggest contributor to Morgan Stanley's performance at this point in time? Well, first of all, Shanali, welcome to Morgan Stanley. Thank you for wearing Morgan Stanley blue. We're thrilled to have you here. I think the story of our earnings is one of consistency, consistency on the top line. This quarter, 15 billion plus, and now all three quarters, 15 billion plus. And we've seen balance in the two major segments of wealth management and institutional securities where the profitability is roughly equal. We've got great performance in the third segment, investment management too. And then importantly, if you think about our sequential EPS, 202 in the first quarter, 182 in the second quarter, 188 in the third quarter. So I think it's a consistency story more than anything. I'd say the second thing is operating leverage. As you know, we reduced our operating leverage needs by about 300 basis points improvements such that when you see our returns on tangible, they were 17.5% for the quarter, 18% for the year to date. So it's, it's an operating leverage story too. And then of course we're talking about growth, we're talking about growth and wealth and investment management and in the investment bank, not just off this quarter, but in the years to come. You know, it's interesting because of course in wealth, you're already really the largest of course, but when it comes to investment banking, I remember a year ago, what you told me was that equities fixed income and across investment banking, you're focused on being number one. Now, not withstanding today's report, you still have a ways to go with the other two investment banks when it comes to revenue. How are you closing that gap? I think that's a great question in the sense that we want to generate real returns and be in front of clients in the investment bank. And you see the share gains, you see that we've done 3 billion in equities for the last couple of quarters. By the way, we did that 3 billion with lower VAR. So the 3 billion versus last year's number in the mid twos and equities was done with roughly the same VAR. So there's an element of the composition of that revenue base is about getting closer to clients. You could feel those metrics. And I think the fact that we were able to navigate what happened in Tokyo, what happened more recently in China without a ton of volatility in the books, able to monetize that with clients in prime brokerage and cash equities and derivatives is important. And then if you look at our fixed income business, it's been stable, really a stable business which has underlying volatility just as part of what foreign exchange and rates and credit are. But they've been stable. And I feel like in both those businesses, there's an element of the leaders pulling away from the pack just because it costs a lot to run those businesses every year. If you're going to be connected with the clients, you need to be connected across the entire product suite. But also, you know, you have to be connected around the world. And so we've been spending time in Tokyo. We've been spending time on the continent. We've been spending time in India, making sure that we are connected with clients. And of course, in Hong Kong, we had an important quarter. So I feel good about the global business. I feel that we now can really lay claim to being one of several global investment banks. You tell me how many you think. But that that business can generate real operating leverage. And when the cycle demands it like it is now, where things are beginning to happen, that we can lean it. You know, it's interesting value at risk. For those of you at home, that is that is what Barr is. And it's interesting. You are watching markets near record highs, 46 record highs this year already. You're watching hedge funds with record amounts of leverage. Do you worry at all about where we stand today, given what it's taken to get here? Well, we certainly are always paying attention to where there's leverage in the system because we lend and we are market participants. So we're keeping an eye on all of our counterparties, our clients, constantly looking at terms of trade, where we are in the capital structure. I do think leverage, though, has some distinction within the asset classes. So, for example, our prime brokerage business is it is at highs and some of the traditional long short investors, as you say, are operating at fully and on a fully invested basis in many cases. But if you look at other segments like the multi strats or the quants, they're actually operating at leverages roughly close to the long term average. So there is leverage capacity. But I do take your point that it is very important for us to continue to pay attention to where there may be leverage in the system now. Leverage is more expensive given we have higher rates. And the reality is we're all looking to do the right combination of high margin business with clients, which means that you have to be thinking about clients durably over decades. Which clients are going to be in the businesses you care where might be we be working with a client across our firm to manage those assets, source assets, structure, finance. So it's not just the classic investment banking play. It's also their interaction with us in the wealth management context, their interaction with us in the investment management context. And you've heard Shenali me talk about the integrated firm. That's where we think it's powerful, not just because there's interconnectivity, but there's also sort of an ongoing diligence around who we're interacting with, at what level. How do they think about their strategy and culture? Now, I also want to move away from trading and over to M&A and IPOs, because this morning you told analysts that you are bullish. When do M&A big deals? And IPOs in large form come back? And how large will they be when they do? I think you hit on it. They're going to be larger. They can be larger because it is a process to go public under Starbucks and for smaller companies that may be orphaned without the proper research. If they have a great growth story, why can't they go public? We're going to continue to be the underwriter to exciting young companies that only have a small number of years of operating experience and get through the entire 33 and 34 Act process of going public and grow, and then eventually either become acquiring vehicles or they themselves get bought out. That will continue. But what is more likely, as you know and you spend a lot of time talking about, there is a trillion three of dry powder held by financial sponsors. There is at least three trillion in the ground, 10,000 portfolio companies, and for the first time in almost 15 years, the rate of deployment is outpacing the rate of raising. So why is that important? As we both know, because that equation means they need those private equity sponsors need to monetize. How are they going to monetize? They could sell. They could sell to other sponsors. They could try to find a deal with a strategic or they could go public. So I think the beauty of going public as larger companies is coming back. But I also think it's going to be a global phenomenon. I think you see equitization rates really starting to increase in places like Japan that have been so quiet for the better part of 35 years where we have a leading business on the continent, places like Italy. You'll see it in the Middle East. So it's a global business, probably smaller unit size, but larger companies that need the full suite of our products. You know, we hear over and over at Bloomberg that people are waiting till the election. They're waiting till the election. And a lot of investors are guiding to volatility headed around the elections. How are you preparing for that? And how are you hearing from clients on how choppy things can get? We stay close to clients, as you would expect, because it's a coin flip on any of the red, blue, blue, red combinations. They're nimble and staying pretty liquid around what might happen. The reality, though, is not only do we not know what the combination is going to be, we don't know what the policy reaction function is actually going to be off of what has been said. And for that reason, I think you have a number of investors that are actually just sort of continuing to plow forward on the view that the economy is in pretty, pretty good shape and that consumers and corporates are in great shape so that when there is an election outcome, once there's a sense for whether new policy will actually get affected, then they can have a reaction. And obviously, that also then brings into question what monetary policy will look like. I think our job is just to stay close to clients and to make sure our infrastructure is fit for purpose. So we do run table tops to make sure that not just that we can help offer solutions to clientiality, but also that we, you know, we have our act together internally. Even after the election, is there a sense of which party at this juncture is better for the stock market? Do you have a view? No, I don't. I really don't, because I don't know that we can imagine what the combinations will be, what the mandate will be, and what the policy action will actually be coming off of what's been said during the campaigns. What I do know is that the economy continues to be in pretty good shape. And that gives any new administration some tailwinds. But of course, they need to also continue to imagine where we are in the in the election cycle. They also have to pay attention to deficits and national debt and all the things you've been talking about. You know, there is the election itself, the vote, and then there is the moment till the vote is certified. Do you expect uncertainty to clear up quickly or do you think it will last for a while? I know what I'm hoping for is what we all hope for, which is that the election is a certain outcome and then we just go about getting a sense of what policy is. If there's uncertainty, that could go on for a bit of time. But markets tend to be reasonably sanguine about that kind of uncertainty. For a number of days, there could be some jittery behavior. But assuming we know where we're going, the markets should align in due course. You know, another uncertainty is capital rules around the big banks. The U.S. is mulling revised capital rules with lower capital requirements than initially put forward. How do you feel about the direction of travel? I feel like the direction of travel has been constructive. We are carrying a capital buffer, as you know, about 160 base points. We continue to carry that kind of buffer because it's an uncertainty that affects Morgan Stanley. And, you know, if I think about the three pillars of things that I care about, Shenali at this place, I care about a strategy, which is to raise, manage and allocate capital for individuals and institutions. I care about our culture, which is one of rigor and humility and partnership. And I care about financial strength, capital liquidity. So whatever the, we'll call it vicissitudes of the discussion going into the election, I think it's probably the case that we're not going to have a resolution on this until after the election. But I think the industry has made its case on where some where some real modifications should be made. And I think the regulator is largely listening and we'll have to see how that plays out coming out of the election. Ted, do you think if Trump were to win the election that these capital rules are revised almost entirely? No way of knowing. No way of knowing, because I think in fairness, there is a desire to put the puck on the ice and it may be in everyone's interest, whatever the administrative combination to get something done. And if if the industry feels it's reasonable and it's reasonable for Main Street and for our client base, there will be an effort to go forth. On the other hand, if it continues to be a tough one, we're going to have to continue to talk. You know, one more question for you before I let you go today. I was joking. It's like the comeback of the Morgans. Your stock commands a higher price to book ratio than even JP Morgans does today. Why do you think that is? Well, I think it's because we've got we've got a durable business model and we know we do. You know, we raise, manage and allocate capital for clients, individuals and institutions. And that puts us in two spaces that are secular growers and they're global growers. The classic wealth management business with 15,000 financial advisors. Our fantastic e-trade platform, our growing workspace, our investment management solution with parametric tax customization product, part of a growing investment management space. As you know, that is a secular grower for all. And then the investment bank where there's a ton of growth.