Morgan Stanley Q1 2023 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
April 19, 2023
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Operator

Good morning. On behalf of Morgan Stanley, I will begin the call with the following disclaimer. This call is being recorded.

During today's presentation we will refer to our earnings release and financial supplement, copies of which are available at morganstanley.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release. This presentation may not be duplicated or reproduced without our consent.

I will now turn the call over to Chairman and Chief Executive Officer, James Gorman.

James P. Gorman
Chairman & Chief Executive Officer at Morgan Stanley

Good morning, everyone, and thank you for joining us.

First quarter of 2023 was very eventful for our industry, but not so eventful for Morgan Stanley. Firm delivered strong results, with revenues of over $14.5 billion, net income of $3 billion, ROTCE of 17%, and net new asset flows of $110 billion. At the same time, we bought back $1.5 billion of stock, while maintaining a CET ratio of 15.1%. Many ways, it was an excellent test to Morgan Stanley and the opportunity to show the strength and stability of our business model. Let me just touch briefly on the turmoil in the banking sector. In my view, we are not in a banking crisis. But we have had and may still have a crisis among some banks.

I believe strong regulatory intervention of both sides of the Atlantic led to the cauterization of the damage. I consider the current issues is not remotely comparable to 2008. I was pleased that Morgan Stanley, along with the other large US banks, became part of the solution by providing an uninsured deposit line of $30 billion to First Republic Bank. Someone who lived through the darkest days of 2008, where Morgan Stanley was seen as part of the problem, it's indeed rewarding to be here 14 years later as part of the solution.

Turning back to our own company. While the performance of the overall business was strong, the results reflected the impact of the environment. In Wealth Management, positive flows of $110 billion were a very strong result, reflect continued growth in the model, together with the flight to quality. This obviously gives us a good start to our $1 trillion every three years target. Investment Management also benefited from diversification as long-term outflows moderated and we saw strength in Parametric and also on the liquidity product.

Overall margin of the Wealth Management business was 26%, impacted by modest increases in credit reserves, slightly lower growth of NII versus forecast, and ongoing integration expenses. We continue to focus on the levers within our control with an eye towards expense management. In ISG, underwriting and M&A remain very subdued. As I've said previously, these are revenues delayed, not dead. Already we are seeing a growing M&A pipeline in some spring-like signs of new issuance emerging. That said, it largely remains a back half 2023 and full year 2024 story.

On the positive side, our fixed income and equity trading teams performed very well in managing through some historic rate moves. Total trading revenues were solid. I expect the markets to remain choppy through this earnings season and for the next several months. However, absent any geopolitical surprise or limited progress on bringing down inflation, I think 2023 is likely to end on a constructive note in most areas. Morgan Stanley is very well positioned not just for 2023, but for several years ahead, as we see significant growth opportunities across all three of our client platforms.

I'll now pass it over to Sharon for more details on the first quarter.

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

Thank you, and good morning.

The firm produced revenues of $14.5 billion in the first quarter. Our EPS was $1.70, and our ROTCE was 16.9%. The firm's results demonstrated the durability of our business model, evidenced by the resilient ROTCE, robust asset consolidation and wealth, and our stable capital and liquidity levels. In Institutional Securities, fixed income and equities supported our clients, while navigating volatile markets. Wealth Management showcased $110 billion of net new assets, and Investment Management continued to benefit from the investments we have made to diversify our offerings.

The firm's first quarter efficiency ratio was 72%. Deferred cash-based compensation plans negatively impacted our firm's efficiency ratio by approximately 60 basis points. Ongoing technology and marketing and business development investments, as well as higher litigation costs increased operational expenses versus the prior year. Given the broader market uncertainty and the inflationary environment, expense management remains a priority, although we continue to prioritize investments in our long-term goals. Now, to the businesses. Institutional Securities revenues were $6.8 billion, an 11% decline from the very strong prior year. Fixed income and equity results partially offset weakness in banking, as we helped our clients intermediate markets through this period of heightened uncertainty.

From a regional perspective, Asia delivered its third highest quarter ever, with strength in areas of both fixed income and equity, aided by the policy dynamics in Japan and the China reopening. Investment banking revenues decreased year-over-year to $1.2 billion. Solid revenue and advisory supported results, while ongoing market volatility continued to pressure equity and non-investment grade underwriting. Advisory revenues were $638 million, benefiting from the completion of previously announced transactions. Revenues were down versus the strong prior year on the back of lower announced volumes in 2022.

Equity underwriting revenues were $202 million, down 22%, largely as a result of depressed IPO activity. While IPO and follow-on activity remained muted, issuers selectively accessed market windows. Fixed income underwriting revenues were $407 million. Results were supported by an open investment grade market and opportunistic loan activity. Clients are engaged, as we help them navigate an uncertain backdrop. And our investment banking backlog is building. Financial sponsors continue to look for opportunities to invest.

Within underwriting, we are encouraged by the issuance activity during constructive windows. Of course, further conversion from pipeline to realized is predicated on clarity around macroeconomic conditions, stable financing markets, and increased corporate confidence. Equity revenues were $2.7 billion, a solid quarter against an uncertain and volatile backdrop. We continue to be a leader in this business and the results reflect our global and diversified footprint. Cash revenues decreased versus the prior first quarter on lower global volumes. Derivative results were solid, compared to a strong quarter last year, as we helped navigate challenge -- as we helped clients navigate challenging markets.

Prime brokerage revenues were down as equity market levels declined. Clients remained engaged and balances increased steadily throughout the quarter. Fixed income revenues of $2.6 billion were strong, though lower versus the prior year's elevated result, which was impacted by the beginning of the Fed rate hiking cycle and the start of the war in Ukraine. This quarter's performance was driven by rates and credit. Macro revenues were down modestly year-over-year, with relative strength in rates versus foreign exchange in the comparison period. The volatility created by varying expectations around global central bank policy aided results across region.

Micro results were up versus the prior year, supported by client engagement. Commodity revenues moderated meaningfully, compared to the robust results in the previous first quarter, largely due to reduced volatility in European markets and the mild weather in the US. Other revenues of $245 million improved versus the prior year, largely driven by higher revenues on corporate lending activity and gains related to DCP. Turning to ISG lending and provisions. Our allowance for credit losses on ISG loans and lending commitments increased to $1.3 billion. In the quarter, ISG provisions were $189 million and net charge-offs were $70 million. The increase in provisions was driven by the higher recessionary probability and worsening outlook for commercial real estate.

The charge-offs were substantially all from a handful of specific loans. Turning to Wealth Management, revenues were $6.6 billion. Movements in DCP positively impacted revenues by approximately $100 million, compared to a negative impact of nearly $300 million in last year's first quarter. Net new asset growth of $110 billion was a standout, as we continue to execute on our long-term strategy. Pretax profit was $1.7 billion and the PBT margin was 26.1%. The margin reflects the more favorable revenue mix, offset by higher credit provisions and an increase in expenses as we continue to invest in our business, inclusive of integration related expenses.

Credit provisions were $78 million, including those that impacted revenue, and the integration related expenses for the quarter were $53 million, in line with our expectations. Forward growth drivers remain robust. Net new assets were very strong at $110 billion for the quarter, representing a 10% annualized growth rate of beginning period assets. While NNA will be lumpy and should be looked at on a full year basis, the results illustrate our ability to attract assets and the payoff of our investments to support growth. We saw contribution from all channels, with notable strength in the advisor-led channel, particularly amongst existing clients.

The events in March and the rising interest rate environment over the past year impacted client behavior. Clients increased their allocation to cash equivalents, such as money market funds and US Treasuries by over 60% versus last year. At the same time, deposits declined in the quarter by 3% to $341 billion. We believe investable assets stayed within Morgan Stanley, as our clients worked with advisors to help navigate the volatile markets. Today, advisor-led assets invested in cash and cash equivalents stand at a peak of 23%, compared to historical average of approximately 18%.

Over time, we believe clients will reinvest these balances across more assets when the market outlook improves. In the interim, given our broad product offerings, clients are choosing to invest in cash with Morgan Stanley through the cycle, positioning us to provide them with more reinvestment choices down the road. Net interest income was $2.2 billion, up 40% year-over-year. Results reflect the impact of higher interest rates and lower sweep balances. Fee-based flows of $22 billion were strong. Asset management revenues were $3.4 billion, down 7% versus last year, reflecting lower market levels.

Transactional revenues were $921 million. Excluding the impact of DCP, revenues were down 12% versus last year due to fewer new issuance opportunities and reduced activity levels, compared to the beginning of 2022. Lending balances declined this quarter to $144 billion, led by paydowns in securities-based lending, reflecting the higher interest rate environment. Importantly, our strategy is working and we are seeing channel migration from workplace to advisor-led. Advisor-led flows originating from workplace relationships reached $28 billion in this quarter alone, double versus this time last year, and this compares to the approximate $50 billion we saw annually over the past three years. Furthermore, almost 90% of these flows were from assets held away, also consistent with what we have seen historically.

Our strategy remains in place to best serve our clients and support the firm's path to reach $10 trillion in client assets. Moving to Investment Management. Revenues of $1.3 billion declined 3% year-over-year, primarily on lower AUM due to the decline of asset values and the cumulative effect of outflows over the prior year. Total AUM ended at $1.4 trillion. Long-term net outflows were $2.4 billion, as equity outflows moderated in the quarter. In fixed income, outflows in floating rate loans were partially offset by high yield and emerging markets.

Finally, alternatives and solutions delivered strength, driven mostly by demand for Parametric's fixed income, customized portfolios as well as inflows into private credit. Liquidity and overlay services had inflows of $13.9 billion. Positive liquidity inflows of $37 billion were partially offset by outflows related to a single client relationship. Asset management and related fees decreased versus the prior year to $1.2 billion due to lower average AUM, partially offset by higher liquidity fee revenue. Performance-based income and other revenues were $41 million. Results were supported by gains in our private alternatives portfolio, reflecting the diversity of the platform. Integration-related expenses were $24 million in the quarter, in line with expectations.

A key focus area remains maximizing our global distribution capabilities, and we continue to see momentum internationally, particularly from the Eaton Vance fixed income team. Our investments across a broad array of strategies and capabilities, including active ETFs, Parametric customization and alternatives position us well to benefit from the diversification, as well as to serve our global client base. Turning to the balance sheet. Spot assets were $1.2 trillion, largely in line with the prior quarter.

Our standardized CET1 ratio stands at 15.1% and SLR at 5.5%. Standardized RWAs increased quarter-over-quarter primarily on client activity, consistent with seasonal patterns. We continue to deliver on our commitment to return capital to our shareholders, including buying back $1.5 billion of common stock. Our tax rate was 19.3% for the quarter. The vast majority of share-based award conversion takes place in the first quarter, creating a tax benefit. We continue to expect our full year tax rate to be approximately 23%, which will exhibit some quarter-to-quarter volatility.

As James discussed, the fallout resulting from the events in March is not indicative of the systemic stress that the industry faced during the global financial crisis. Our clear and consistent strategy allowed us to enter this environment well positioned. The outlook for the remainder of this year is difficult to predict. We are keenly aware that opening and functioning markets and economic stability are integral in aiding confidence moving forward. In the interim, we remain focused on supporting our clients and attracting assets to our platform.

With that, we will now open up the line to questions.

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Operator

Thank you. [Operator Instructions] We'll take your first question from Daniel Fannon from Jefferies.

Daniel Fannon
Analyst at Jefferies Financial Group

Thanks. Good morning. Just thinking about the environment and the opportunity, can you talk about advisor recruitment? I assume retention is high, but as you think about the opportunity, given some of the fallout with some of the regional banks in the current environment, maybe talk about how you're positioned and maybe how that differentiates versus, say, a year ago?

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

Certainly. The advisor recruiting pipeline remains healthy. We continue to see assets aggregated from all channels; as I mentioned, both recruiting, advisor-led and workplace. And when we compare it to a year ago, I think that what we continue to see is that we remain a destination of choice, not only for new advisors, but also, obviously, as we stated from the assets held away that we continue to aggregate in both the net new assets from existing and from new clients.

Daniel Fannon
Analyst at Jefferies Financial Group

And then just as a follow-up, with NII generally, probably a little more challenged versus where we were last year, how do you think about Wealth Management margin expansion in this environment? And maybe specifically, can you talk to you the NII trend as you think about this year and how we should think about that, given some of the deposit dynamics you mentioned, as well as the current rate environment?

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

So -- first, let's take NII. As we said, what we've been looking at is we've been thinking about it in terms of modeled client behavior. Obviously, March itself had a different modeled client behavior than we probably would have expected for other months within the quarter. But when we look ahead, we're currently not expecting expansion of the quarterly NII as we go forward. Now, as that relates to the margin, a 26% margin, obviously, still impacted by certain things such as integration-related expenses. We mentioned also litigation. And we continue to really invest in the model as we go -- as we have and also as we go forward. All of that being said, our eyes are still on the 30% goal that we had set forth, and we will continue to achieve as we move through time to progress to those goals.

Operator

We'll hear next from Glenn Schorr from Evercore.

Glenn Schorr
Analyst at Evercore ISI

Hello. Thanks. Maybe we could follow up on that conversation. I'm just curious, you mentioned that interesting stat of 23% sitting in cash and cash equivalents, up from 18% historically. If we weave that into -- normalizing over time, but also deposits were down 3% and cost of funds is up a bunch. As we go through the year, do you anticipate the normalization of the cash component at the same time, deposits continue to come down and migration continues to the yield-seeking, like, can -- I guess, my question with all that ramble is -- can the margin get back into that range while we have these cash-seeking and yield-seeking behaviors happening?

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

So, I think that for us to predict exactly what the behavior will be, obviously, if we think about what happened in March, that's a very difficult thing to predict. But I think what you're highlighting in your question, Glenn, as I parse out the very beginning of it is, right now, cash and cash equivalents are at a higher level, a higher-level than we've ever seen historically. As we begin to see those assets be deployed into different types of products, that ability and that advice will obviously be accretive. It will also help us as you see asset levels rise. So there is a pull/push factor as you think about those things.

In addition to that, as we continue to aggregate assets, we will gain from scale. The more assets that we see the more we will see in balances, the more that will probably help as you think about just what the cash balances are more broadly, because assets are being attracted to the platform. And in addition to that, we will gain for the longer objectives of what that might mean for the margin and for the Wealth Management business more broadly.

James P. Gorman
Chairman & Chief Executive Officer at Morgan Stanley

If I could just add -- and excuse my voice, I have a chest cold, Glenn, on the simple math to take the margin of that business from 26% to 28% is about $120 million. Obviously, we are still absorbing some integration stuff relating to the platform that will be done this year. We had slightly higher reserves. We have been investing pretty aggressively in the business. And frankly, I think prudent -- appropriately, the payoff is $110 billion, which is a net new asset organic growth of 10%. So, I'll take that any day long, the assets sustain the building. So yeah, we have a lot of levers to push that margin around a couple of percent points. That's not frankly a source of great anxiety to me at this point. And I think you'll see us probably push a few of those levers as we get through this year and certainly next year.

So the trade-off is, I think we all want to keep investing for growth. We see a real window here. This $10 trillion target is for real. The $1 trillion every three years, is 300 -- whatever it is, $330 million a year -- $333million, I guess, and starting off with $110 million, I think we have pretty good visibility to net new money. So, it's a balance. But as we get through this integration, as it's finally completed, some of those costs roll off. We'll get a little -- we'll get a little tighter in the expense management in the Wealth business. I know Andy and his team already focus on that. So -- and then the deposits stuff will -- it's kind of going to be what it's going to be, depending on where rates go and what the Fed does.

Glenn Schorr
Analyst at Evercore ISI

Appreciate that, and thank you for fixing my question. The follow-up, I have a simpler on commercial real estate. Can you just help us just dimensionalize the portfolio? What exposure do you have and how do we get comfortable that this isn't a gift that keeps on gifting? Like, I'm sure there is details within the provision that you took that could help us. Thanks.

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

Absolutely. I think what's important about that portfolio is that it is diversified. In addition to that, we have been reducing the exposure in the ISG direct, CRE portfolio over the course of the last year or so. So, obviously, we keep our eyes on it. As you know, CECL is a life-of-loan concept and so, as you see economic deterioration, you do need to account for that. And the same goes for what we're seeing in the commercial real estate market. So, I think that those are the two main points I would point you to, is that it is diversified and we have been continuing to reduce that direct exposure.

Operator

We'll hear next from Ebrahim Poonawala from Bank of America.

Ebrahim Poonawala
Analyst at Bank of America

Good morning. I guess, just first question, wanted to follow up on, James, a comment you made about being -- expecting 2023 to end on a constructive note. I was wondering if you can elaborate on that just in terms of -- a lot of this is tied to macro. How do you think the economy paying off in terms of the Fed's fight against inflation, damage it does to the economy and the markets? And as you think about ending 2023, where do we think -- where do you think we'll be on all these fronts by the time the year ends?

James P. Gorman
Chairman & Chief Executive Officer at Morgan Stanley

Well, our house call-out for the markets went about flat from where they started at the beginning of the year, and I certainly support that. I think the two wild cards out there, geopolitical risk, which we can't really handicap. My gut is the US-China relations, while having their moments of tension, remain overall stable through this year, and global trade remains stable. The second risk, of course, is that the Fed's actions doesn't bring down inflation. Well, the evidence so far is it is bringing down inflation. But they're probably not -- I think it's likely we'll see at least one more and probably -- possibly two more rate increases. That gets you to sort of high 5%, 6% type interest rates, which is not shocking.

And if we get through that -- again, many people are calling for a modest recession. It might be, I don't know, obviously, but my gut is whether it's a modest recession or we dodge that bullet sort of doesn't matter that much. What really would matter is if inflation is not tamed, Fed has to go much higher than people are expecting. You go into a much deeper recession. That's certainly not a likely outcome at this point. So that's why I say that -- I think used the words constructive. For Morgan Stanley, if the sort of green shoots we're starting to see, again, I don't think they're a Q2 type event, but back half of the year and next year in banking and underwriting.

We just had a Global Risk Committee yesterday discuss some of the stuff and certainly, the underwriting calendar looks like it's picking up a little bit through the back half of the year. I think the Wealth Management, what Sharon pointed to, the 23% in cash-like securities moving into active investments that will happen. I mean, through the long history of this business, people don't hold a quarter of their money in cash. That just is not real. So -- and I suspect once we pass this sort of inflation, Fed action, there will be a long pause would be my gut, followed by some rate cuts starting in 2024. I do not expect that this year.

So when I put it all together, relative to sort of other periods that I've been through my career, I think it feels, given the land war, given the geopolitical stuff, given the inflation surge, given COVID, it actually feels surprisingly benign from what it could have been. Now, that's not denying there are clear stresses, the commercial real estate that I think Glenn just asked about, across the banking sector, what's going on in some of those banks with very idiosyncratic portfolios that frankly didn't match duration, interest rate risk well is -- were issues. There are parts of the world that are still having slow growth.

So it's not a perfect -- kind of reminds of the Rolling Stones song, you can't always get what you want, but you get what you need. And I think about Morgan Stanley coming out of this, and we're kind of getting what we need. We're getting a 15% CET1. We're getting a 17% ROTCE; decent revenue; decent earnings; obviously, opportunity to take some costs out; and I think very well positioned on a go-forward basis. So that's where the word constructive came from. Sorry, it's a long answer for one word.

Ebrahim Poonawala
Analyst at Bank of America

No. Appreciate the color. And just as a follow-up, when we think about capital return in terms of, one, the pace of buybacks, given the macro uncertainty, any perspective there? And just opportunistically, do you see this as creating opportunities inorganically M&A-wise for Morgan Stanley as we look forward?

James P. Gorman
Chairman & Chief Executive Officer at Morgan Stanley

We've maintained -- it's a very good question. I'll deal with sort of what the capital position is now and what the opportunities are for excess capital. On the capital position now, CET1 is running at 15.1%. We obviously have control over that dial to a large extent. So -- and we have tilted conservative. I think it's fair to say. I haven't seen all the numbers, but I'm pretty sure we're at the top of or above all of our competitor set again, and we've been that way for quite a while. So, on current capital requirements, with the last stress test, we're at 13.2%, I think, or 13.3%, somewhere around there. So 15% is a very healthy buffer. But we've got a new stress test coming out. So many people feel that's going to be a little tougher than what it was last year. It might be, and we've obviously got plenty of capital for it. So, I don't expect any issues whatsoever.

And then we have Basel III coming out in, I think, sort of late May, June time period, where -- and again, that will be implemented probably 2025, that looks like, earliest. So again, there's time for the banks to adjust their capital position. So, we will have much better visibility as to what we're dealing with by, say, July 1. And I -- again, I don't -- I suspect it might drive some changes in how we run our balance sheet, but I don't think it's going to involve anything particularly draconian. Now, given that, we like to maintain a healthy buffer. We have done -- obviously, the deals we did in the last couple of years, E TRADE and Eaton Vance, which -- I just said I couldn't be more happy with both the timing of those deals, the pricing of those deals, and the performance of the businesses. And when we see a really robust market environment, you'll see that even more so in spades.

We've had a very healthy dividend yield. I think it's over 3.5% return, something like that now. We believe in the dividend, I've said for years, and I think of the Wealth Management business as a dividend stock, and we're clearly making more money in that business than we're paying out in dividend. And we're buying back. I mean, we dove the buyback down a little bit, I think, to $1.5 billion. We were probably running $2.5 billion at our peak last year on a quarterly basis. And we did that just -- it was an interesting environment. I mean, let's just say, you had two of the biggest banks fail in the last 15 years.

So being a little prudent, a little conservative, watching that going on, you don't want to be too grabby is my attitude. So I think we have lots of flexibility. There is no doubt we can and, over the years, will do more acquisitions, in my mind. There is no doubt about that whatsoever, and it will be in the wealth and asset management space, and we constantly keep a list of who's attractive and who would be a good fit. But obviously, I couldn't say if there was something imminent, but there's nothing imminent. But it's something we focus on. So, again, I'm sorry, I'm giving long answers this morning. It must be this cold I've got.

Operator

We'll move next to Steven Chubak from Wolfe Research.

Steven Chubak
Analyst at Wolfe Research

Hi, good morning. So, I wanted to start off just unpacking the NNA flow that you saw in the quarter. I mean, 10% is really an impressive result. The fee-based flows continue to lag brokerage. And just wanted to better understand what you see as a sustainable fee-based flow rate. And just as we try to evaluate the durability of the 10%, how much of the quarterly inflows were from FRC, where you're clearly a destination of choice for some of those attriting advisors?

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

I'm going to try and remember all of your questions, Steve, in order. So, if I forget one, just remind me. The first point on FRC, I'll take first. In terms of the regionals, more broadly, as I mentioned in the prepared remarks, I believe we had about $90 billion that came in without any relationship to those regionals. And so, that showcases to you that's well above the average that we've seen. So I think it just continues to show that the investments that we have made are really working as we move forward. So that's sort of point number one.

The second point that I mentioned and I think you asked, where are those assets coming from? It's really, in this particular quarter, was in that advisor-led space, both from existing accounts and new clients. To me, what was most remarkable when I was going through the diligence materials really was what we're seeing from existing clients. So the idea that we continue to be a destination of choice for our existing clients and attracting assets held away, again, speaks to all the conversations that we've all had over the course of the last seven years or so, talking about investments to give our advisors more time to service their clients as we move forward.

Then the final question that you asked around the fee-based flows, actually a very strong fee-based flow number, to be honest, from our perspective, in an environment where individuals -- we think about it, cash and cash equivalents are high. You're thinking about putting your money into managed kind of accounts associated with -- from that fee-based concept. You're unlikely to do that in a period of time where you think the cash and cash equivalents and safety might be what you're looking for right now. And so, that is, in fact, the dry powder that we have that over time could move into the fee-based assets. So I think it's actually a strong number, given the environment that we have on the backdrop.

Steven Chubak
Analyst at Wolfe Research

No, really helpful color, Sharon. And just for my follow-up, with -- on sweep deposits, those are now running below 4% of AUM. That's historically been a strong support level for transactional cash within the advisory space broadly. I was hoping you can give some perspective on how we could think about where sweep cash could potentially bottom. And have you seen any continued mix shift into sweep or deposit pressures in April so far?

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

As it relates to April, I talked a little bit in one of the earlier questions about modeled client behavior and that what we did see is that in March, we really deviated from some of that modeled client behavior. Now, in April, we have been more in line with modeled client behavior. So that does speak to your point of maybe we are in a position where, from a transactional cash level, we're there. But again, as James said, it is an uncertain environment. And so, from that perspective, we'll have to wait and see how we move through time from here.

Operator

Moving next to Brennan Hawken from UBS.

Brennan Hawken
Analyst at UBS Group

Good morning. Thanks for taking my questions. I'd actually love to follow up on that last question from Steven. So, April is more modeled. April is typically a tax payment month, which is a headwind. So, are you seeing -- where is that cash getting funded from? Are you seeing some of the taxes -- tax payments coming out of both sweep and the other higher-cost deposit sources? Is it more biased to the higher cost? Could that provide some relief? And when we put all that into the mix and think about NII going forward, should we be thinking about stable NII? We know it's not growing, but funding -- this funding cost elevation maybe could lead to some downside. So, curious how we should be thinking about that.

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

I think that your question in terms of April in terms of where it's coming from, the exact breakdown is challenging to see in terms of exactly where it's coming from, from all of the deposits' perspective, because there's -- could -- as you know, cash is fungible, So, you could take something and then move it into a different security or a different asset. So, to parse that out is challenging. I do think that what's more important, as you highlight, is that it is tax season. And so, to not see an acceleration is obviously one of the more optimistic signs that you are moving through more modeled client behavior. Now, what it means from funding, we obviously have many funding, different prices. I don't think that funding is a concern.

As you mentioned, it does matter from an NII perspective. But it will be a function of two things, Brennan. As you know, rate expectations have also changed since January. And so, the -- our NII forecast and predictions are based on modeled client behavior in terms of cash, sweeps, et cetera, and also where interest rates are and where the forward curve is for Fed funds. And so, as you begin to see if that changes, that could change your NII forecast. We are still, if you look at modeled client behavior, asset-sensitive. And so, from that perspective, I think that gives you a few different pieces to put together in terms of how to think about the forward look, based on different assumptions.

Brennan Hawken
Analyst at UBS Group

Okay. Thanks very much. Obviously, a lot of uncertainty, so I appreciate that color. And then one more on the net new asset component. I'm sure you guys have a -- an offer for -- promotional offer and it's tied to the higher-yielding cash alternatives. What percentage of the net new assets came into -- from that promotion this quarter? And in the past, you've spoken about how when you bring that cash in, it -- a majority of it stays in the system. Do you have any more granular statistics on what portion of that stays in the system? It's obviously good that it comes into the system, but kind of curious when we think about stickiness and how much is hot money and how much is actually durable. Thanks.

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

So the best way to think about the stickiness within the system is actually NNA, right, because you're going to see the outflows would be a net negative to the NNA more broadly. And so, the consistent growth over time, if you look at it all the way back even to when we saw promotional levels back, I remember we spoke about this in '18 and -- I think it was '17 and '18, in those early years, that was still seeing net new asset inflows over time. So, for me, the most important thing is, well, what's the net. The net continues to be positive and continues to ramp higher. In terms of the CD, exact offerings and what that would mean from NNA, it's considered NNA if it's brought out from outside of the firm.

And again, what's important here is that we continue to see more in the advisor-led space. And that, over time -- again, think about the channel migration from workplace into the advisor-led space. What's important here is that when people begin to see money into advisor-led, we actually see more money from assets held away. So, I know that doesn't answer your question directly, but I think it's important to highlight, as people begin to work with an advisor, what we said to you is 90% of the assets that then come are from assets held away outside the building. So just again, another proof point that once they understand what the advisor has to offer, it helps aggregate new assets into our system.

Operator

We'll hear next from Gerard Cassidy with RBC Capital Markets.

Gerard Cassidy
Analyst at RBC Capital Markets

Thank you, good morning. Sharon, can you share with us -- when you guys talked about -- I think James said around 25% of your Wealth Management customers' assets are in cash or cash equivalents, which is high, of course. What interest rate do you guys sense, meaning, do rates have to fall 100 basis points or 200 basis points for that money to move back into more traditional assets?

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

So I don't actually know that it's the absolute value -- the rate level, and I will answer it in two different ways. First, you have to remember that the events in March didn't make people -- I mean, we all read the popular press, and most individuals begin to think about what is the most risk-free asset, that being a US Treasuries. So, one should not be surprised if they begin to move assets into US Treasuries. So, I do think that it's a function also of uncertainty and not just the absolute level of where interest rates are or aren't.

Now as I said, you -- we have these moments that are opportunistic, both when you think about the corporate activity and then when you think about the individual activities, so both for ISG and in Wealth Management. And that was evidenced last August, last October, and then earlier in January and February, that when markets become calm that you begin to see movements into asset classes and further activity, as evidenced by our self-directed channel as well. So I don't know that there's an absolute level of rates, but I would say it's related to confidence in the system more broadly and a belief in asset levels being in a place that will bottom and then potentially will rise as we go forward.

James P. Gorman
Chairman & Chief Executive Officer at Morgan Stanley

I totally agree with that. I think, Gerard, if people can get a 4%-ish return in a very uncertain environment, that's not a bad thing to have in your portfolio, at least for 25% of their portfolio. As they get better visibility -- as we all get better visibility of when the Fed stops moving and we go into this recession that's appearing or not, or if it's modest, then I think you start seeing more engagement. I mean, it's just -- we've all been through this. It's human behavior. We've had a pretty significant shock to the system in the last few months, which, thankfully, the world kind of -- the financial world got through, but could have turned sideways. And higher rates came at a time of increased uncertainty. So, it's entirely rational that people would take advantage of higher rates and increased uncertainty by packing in cash. But they're not going to stay in cash at 4% forever. That's not going to happen.

Gerard Cassidy
Analyst at RBC Capital Markets

No, thank you. I appreciate that. And then just as a follow-up question, Sharon, you talked about the credit, the provision and linking into commercial real estate. Of the total loan portfolio, what percentage of that is in commercial real estate mortgages? And are there any construction loans in that portfolio?

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

As it relates specifically to the construction loans, I don't know about the exact construction loans that you might have. I'm certain that somewhere there could be a construction loan. But more broadly, I think the absolute level, we do disclose from the ISG side around that $10 billion, and that was in our filings from last quarter.

Operator

Devin Ryan from JMP Securities, your line is open.

Devin Ryan
Analyst at JMP Securities

Thank you. Good morning. I just want to start just on market share opportunities that maybe are accelerating here. You touched on some on the call. But one of your peers highlighted private banking in Europe, just on the heels of some of the banking stress or potentially even just opportunities, where you're going to get paid more for committing capital when your capital is becoming more scarce in the system. So just love to maybe think about some of the things that you're seeing just over the last month or so that might be sustained going forward.

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

Capital opportunities in Europe? Sorry, could you repeat? What's the question?

Devin Ryan
Analyst at JMP Securities

Yes. The question is just where there's opportunities to take market share kind of on -- in the wake of the banking turmoil. So, your one peer had highlighted private banking in Europe as one example. But just whether there's others as well here just on the heels of the recent stress?

James P. Gorman
Chairman & Chief Executive Officer at Morgan Stanley

Yeah. Let -- Devin, let me have a go at that, because that probably builds off the capital discussion and where we'd invest. We do not have an appetite for private banking in Europe. In fact, we sold our private bank in Europe to Credit Suisse several years ago. It's one of the first things I did, because we'd had an unhappy experience. We had owned the business for 21 years, and we lost money for 20 of them. And I kind of took a fairly simple view that if you lose 20 out of 21, you've probably got to lose it. So, we got out. You need scale. And frankly, it's not a good fit, I believe, with the current regulatory structure that we operate under. So, much more interested in the US and Asia and some in LatAm.

The US business, it's just going to be an asset-gathering monster. There -- to bring in $110 billion in one quarter and $1 trillion over the last three years, there aren't many companies in the world that have $1 trillion assets under management. So I think we've got to keep our eye on the prize here and not get distracted by going down some rabbit hole because somebody else is in stress. Maybe somebody else is in stress, because it's not a very attractive rabbit hole when you get down inside it. We know what we've got here and it's a killer machine. Asia is growing nicely; again, LatAm, some.

But the workplace conversion is a massive opportunity now that we're focused on. Obviously, we're tracking financial advisors from the scene of -- somewhat of a safe harbor, I guess, across the industry. In our organic flows, if you compare them to our traditional competitors, the warehouses or the online brokers, our organic flows, I think, are, on an annualized basis, high -- significantly higher than the traditional players and higher than anybody in the industry. So that's how we think about it. Again, Asia, more interesting; Europe, not interesting; LatAm, a little bit interesting; and US, definitely interesting.

Devin Ryan
Analyst at JMP Securities

Got it. Okay. Thank you. Helpful. Just a follow-up. It sounds like you're starting to see maybe a little bit better momentum with financial sponsor clients. So, would love to maybe just touch on those specifically and kind of what the appetite is to do deals or to sell assets and kind of what the -- you think the trigger point is to kind of engage them further.

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

Certainly. I mentioned this actually when I spoke at a February conference this year, which is that when you think about financial sponsors, they may be in a different position than what we would consider traditional M&A, i.e., they are faster to market. They are in a position where you might not have the same level of activity from a board. And because of the size, you might have different regulatory restrictions. And so, from that perspective, we would expect that they might be first before we see really traditional activity open up, and that is -- that remains kind of the view that we have. And also, as the pipeline begins to build, that's also what we're seeing. In order for that to move forward and become realized, it's really about the opening of the markets in terms of the financing activity. As we have seen some of the backlogs clear, that's clearly very helpful. But again, it's about stabilization and it's about confidence.

Operator

We'll move next to Mike Mayo from Wells Fargo.

Mike Mayo
Analyst at Wells Fargo & Company

Hi. What is going so right -- what is going so right in Asia that it's your third best quarter in an environment like this? And then what is going so wrong in Investment Management? Since you closed Eaton Vance, the first full quarter -- it was second quarter '21, if I have that correctly, Investment Management revenues are down almost one-fourth. So, it's -- shout-out to certainly E TRADE and Wealth doing well, but in terms of Investment Management, like, it just looks from the outside, like, Eaton Vance isn't panning out the way you expected. But first, the positive on the Asia, what's going right; and then the negative one, what's not going right in Investment Management?

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

Certainly. So, let's take Asia first. What we saw over the course of the quarter was China reopening, obviously, supporting us from the equities side and perspective in terms of client engagement. And what's going right also from Asia has been the -- what we have a franchise that we've really built in Japan. And in an environment where interest rate dynamics change, such as what's going on within Japan, that's certainly helped us from the macro perspective and the macro business within fixed income. So I think that where that's very important and critical is that it speaks to the global perspective and it speaks to our global franchise. Why that is important when you think about investment management, and I will tie the two together, is that you have to invest more broadly to be able to create an environment of diversification.

And so, Asia might be asleep. Japan, for example, could be asleep for many years. And all of a sudden, central bank activity picks up, and you're there to support your clients with that global franchise. Think about Investment Management quite similarly. What we're doing is we continue to build a franchise, where we're able to have diversified products that are there to capture our client assets. You highlighted what's going on within Investment Management. Well, asset levels are down tremendously. However, since we've purchased and we announced the deal associated with Eaton Vance -- look at Parametric. We've raised over $45 billion in that product alone. Again, diversification of the portfolio, diversification of product, to be there in a period of time where you see activity. That's what we're trying to do and build.

James P. Gorman
Chairman & Chief Executive Officer at Morgan Stanley

Yeah. I mean, I'll just add.

Mike Mayo
Analyst at Wells Fargo & Company

Okay.

James P. Gorman
Chairman & Chief Executive Officer at Morgan Stanley

I wouldn't, frankly, render a judgment yet on the Eaton Vance deal. I think it's a little soon through a challenging market environment. I'll tell you, I'm personally thrilled with it, and I'm highly confident that five years from now, we're going to look back and be thrilled with it. A lot of people said the Smith Barney deal was a dumb idea, and a lot of people said E TRADE was a dumb idea, and a lot of people said we overpaid for Solium, and these things have moments of sort of settling, if you will. It's like good house, its foundations have to settle.

And in a very challenging environment, I think the business is holding up great. So, I'm very happy with that transaction. Great people, great company, some fabulous brands. And I think, Mike, if you come back and ask that question in three years' time -- hopefully, you won't reverse the questions, but maybe you'll say what's going right with Eaton Vance and asset management, what's going wrong in some other place. Because I'm sure, as I said in the Rolling Stones song, you can't always get what you want, given the environment, something might be working. But yeah, I'm pretty relaxed about that one.

Mike Mayo
Analyst at Wells Fargo & Company

I appreciate the answer. Just a short follow-up. It looks like you're not giving any NII guide, or if you did, I missed it, and we just want some help with our models here. If you want to kind of guide us in a certain direction? I mean, clearly, funding costs have gone up in the industry.

James P. Gorman
Chairman & Chief Executive Officer at Morgan Stanley

I mean, super hard. I'll be blunt. We sort of guided a little higher on growth in the first quarter and came in plus 1%, which I guess was better than most. But just super hard. So let's get through -- I think let's get through this quarter. We'll learn a lot, tax season, as Sharon said. It's kind of -- the numbers have reverted back to what we're modeling, which is good. We'll see that. We'll see how much of this cash that's moving. We'll see whether there is further deposit outflows or not. I mean, it's just super hard to guide right now. So I don't think -- I know it's sort of -- I don't know if it's fair or not, but it makes your modeling harder, which I appreciate. But also, I don't want to give guidance that we don't really have an intellectual basis or fact basis for doing it. It's just too hard. We're not stressed about it; that much guidance I will give you. But I just don't want to put numbers on the sheet of paper at this point.

Operator

We'll move next to Matt O'Connor from Deutsche Bank.

Matt O'Connor
Analyst at Deutsche Bank Aktiengesellschaft

All right. Good morning. Can you talk about the sustainability of the strong fixed income trading revenues? Obviously, on an absolute basis, very good; down from a really strong year-ago level, and benefited from rate volatility, but at the same time, advisory and DCM was sluggish. So, how do you think about this kind of -- not just 2Q, but the next several quarters in the kind of environment that we're in, and maybe some improvement in IB? Thanks.

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

So the -- our business has done, I think management has done a phenomenal job in really transforming this business to be a client-centric model, focused on velocity of assets, focused on supporting our clients. So the deeper we've gotten into that the more we've been able to grow our wallet share more broadly. And we've been able to be in and around this 10% number. So, that's clearly based on the activity that we've seen. Now, to your point, should we see an opening up of markets, could there be greater activity, that would also, obviously, support the wallet more broadly. But we would expect to be there to continue to gain our appropriate share of that client activity.

Matt O'Connor
Analyst at Deutsche Bank Aktiengesellschaft

Okay. And then maybe just broadly speaking, like, as you think about prime brokerage in both FICC and equity, like, what's your thought there in terms of committing capital kind of on an incremental basis, like, providing more or less from here, or not really any change?

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

We continue to invest in that business more broadly. You can see that even on the technology side. We're really proud of the equity franchise and business and the transformation that's had for well over a decade, being a market leader. Clearly, as we think about committing capital, it's also, again, about our clients being active in that market. As we see -- and I highlighted this in my prepared remarks, we do see client balances increase. We've also -- are -- obviously been there to support our clients, and we are looking for the appropriate risk-adjusted return as we continue to invest in that business.

James P. Gorman
Chairman & Chief Executive Officer at Morgan Stanley

Yeah. I'd just add. If you step back from this sort of over a five-year view, firstly, just take hats off to the team led by Ted and Sam Kellie-Smith and then Jay Hallik and Jakob Horder in fixed income. It's come a long way from, I think, a 6% share. I think we troughed that. I don't even know below -- after crisis, it might have been much lower, but sort of 6%-ish share for half of the last decade, and then steadily moved up to, now, 10% and pretty stable. It's kind of what we wanted. I mean -- and on the equity side, you can buy share, for sure, more, but you want to be in the part of the prime brokerage business that we want to be in. We don't want to be in the sort of the broker of last resorts.

So -- but if you step back from it and what you've really got is kind of an oligopoly-type structure emerged out of the financial crisis, where a smaller number of institutions have the global capability for global sales and trading, and we're now one of them. And that was probably not a given 10 years ago. It certainly wasn't a given. And you've just seen, obviously, Credit Suisse has been merged, and that business -- lots of parts of that business, I suspect, disappear relating to the trading side and the prime brokerage. So, our position gets stronger, not weaker. All that said, we are pretty careful about how much balance sheet we want to use to grow aggressively on the margin, because we simply have good options in terms of wealth and asset management businesses. So, it's a balancing act, but I think the team has done a great job, and I feel really good about where they landed the plane this quarter. Tricky quarter, by the way, particularly in rates.

Operator

We'll hear next from Jeremy Sigee from BNP.

Jeremy Sigee
Analyst at BNP Paribas

Thank you. Just a -- quite a specific one, actually. I thought comp costs were a bit heavy in Wealth and in Investment Management. And you mentioned the deferred comp plans linked to investment performance. Is that heavier deferred comp cost? Is that something that stays with us throughout the year, or is it -- does it move around? Is that a 1Q-specific, or is that stuck with us for the rest of the year as well?

Sharon Yeshaya
Chief Financial Officer at Morgan Stanley

No, Jeremy. As you'll remember, that moves around with the investments. You'll see both on the revenue line and the expense line. And so, you should look at them together, and that's why we've enhanced the disclosure so that you can think about them from both sides, understand both the margin and the comp ratio, both historically and as we move forward.

Jeremy Sigee
Analyst at BNP Paribas

That's perfect. Thank you.

Operator

[Operator Closing Remarks]

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