WHEN: Today, Tuesday, July 18, 2023
WHERE: CNBC’s “Squawk on the Street”
Following is the unofficial transcript of a CNBC interview with Morgan Stanley Chairman & CEO James Gorman on CNBC’s “Squawk on the Street” (M-F, 9AM-12PM ET) today, Tuesday, July 18. Following is a link to video on CNBC.com: https://www.cnbc.com/video/2023/07/18/morgan-stanley-ceo-q2-earnings-were-very-strong.html.
All references must be sourced to CNBC.
LESLIE PICKER: James Gorman, thank you so much for being here. I believe it’s your first interview on TV since announcing plans to step down as CEO. So, I’d love to first kick things off by asking you, why now?
JAMES GORMAN: And I thought we were going to talk about earnings.
PICKER: We will. We’ll get there. We’ll get there.
GORMAN: You know it’s, for several years, I’ve said I’ll step down five years ago in about five years, three years ago in three years and, you know, nobody believes you. They just assume you’ll stay in these jobs as long as you can. And I, you know, I’m really into having plans and being intentional about stuff whether it’s strategic planning or succession planning, it’s the same stuff. These are processes. So, we felt, the board and I ,that by announcing it at the annual meeting and say I won’t be in the job by the next annual meeting was that’s clear. That’s like 12 months, and we’re two months into it. So I just thought it was a great way to set it up, a very elegant way. Build it around the annual meeting, not a great quarter or a bad quarter or a birthday or some other event, build it around strategic planning process, the annual meeting, and then we’ll do it at some point, you know, in these 12 months when we feel like there are a few things I want to get through and help just manage through like the CCAR tests we just did, the puzzle stuff that I’m sure you’ll talk about this quarter’s earnings, which, you know, we felt were really strong. Couple of other things so I want to help the new CEO get off to a good start by cleaning the decks and as I said, you know, present a clean plate for them.
PICKER: How close is the board to narrowing in on a candidate?
GORMAN: They have a process and, you know, they’re following their process really well. I mean, I’m staying away from it because it’s ultimately the board decision. And at some point, I’m sure they’ll ask for sort of my recommendation, but they’re doing their job. I mean, it’s what boards should do. They have a very systematic process that’s run by the comp development succession committee chaired by Dennis Nally and then it goes to the full board where Tom Glocer is the lead independent director and they’ll all vote but it’s great. I mean, this is the way it’s supposed to work, right? There’s not supposed to be some shock and, and drama. It’s it’s a process and what matters is they pick somebody who has the skill set to lead this type of company, which is a global, regulated, complex bank and fortunately, we have three phenomenal candidates. So, it’s set up really well.
PICKER: Well, we’ve got 10 more months to figure out who that will be. But let’s talk about earnings.
GORMAN: Up to 10 more months.
PICKER: Up to 10 more, within the 10 months. So, stock rallying today on these earnings, which were mixed results, but a big piece of the market reaction I think has to do with the outlook on capital markets. You mentioned that especially toward the end of the quarter that the tone has really changed. Do you think that investment banking and trading some of the weakness there has bottomed at this point?
GORMAN: I don’t think the stock’s rallied on that. I mean, I you know, you’d never know. I thought the stock would be up today. In fact, we have a little pool with my team. And I was definitely positive on it for, you know, three things. One, the capital ratio was great, 15.5%. Some would say we’re too conservative, but I don’t mind being a little conservative particularly when your new capital rules coming. So that was huge. Remember, our CCAR requirement is 12.9%. So, we’re carrying 260 basis points of excess. That’s a that’s a positive. Number two, three cycles ago, we’ve doubled the dividend. Last year, we took about seven and a half cents this year. We took it up seven half cents a quarter. So we’re now yielding about 4% dividend so for shareholders, that’s pretty neat. You know, investment banks typically did not pay 4% dividends. The reason we’re paying that is half of us is a wealth and asset management business. So that was a good number and third one was the net new money stuff is just extraordinary between wealth and asset management to bring in 100 billion. We’re at 200 billion year to date. You know, give you a sense of context, a lot of people thought we should have bid for First Republic. First Republic’s total assets, wealth assets were about 290 billion. We’ve brought in two-thirds of First Republic within six months without having to buy the company and go through all the drama of integration and taking us off our core strategy. So I think they were the key numbers and then when you step back from that the weakness with things where you go, of course, they’re weak. I mean, who’s bringing companies public right now, very few. Who’s doing M&A deals very few. Trading is muted as the Fed adjusts to sort of the end of the rate hiking cycle, but that will change. So you can see through that. What you need to know is that the bones, capital, capital policy as evidenced by dividend and growth as evidenced by net new money are strong. The rest is just, its stuff. I mean, this is what we do for business, and that will improve and that was the tone we expressed.
PICKER: So I want to talk about capital in a second, but in terms of just your outlook on activity improving from here, you’ve said that things did get more constructive toward the end of the quarter. Is that the beginning of an upward trend in trading and banking? What are what are clients telling you?
GORMAN: Yeah, I mean, my gut, it’s, it’s funny, I’ve been everywhere in the last few weeks. I’ve been in Amsterdam, London, Paris, Saudi, Kuwait, I mean everywhere around the world and all over the U.S. and it’s the same story. Boards are getting ready and that’s my message to CEOs. You gotta have a plan. You know, obviously, circumstances may change it, but you can’t just wander down the road. You gotta you gotta be moving with intent. You need to, you need to understand what are the kinds of businesses if deals became available, you pull the trigger on. So that tonality has shifted. Will it happen this year? Probably not much. Right, just given time cycle of getting stuff done.
PICKER: You mean the bottom won’t happen this year.
GORMAN: No, I think we’ve bottomed. I think we’ve bottomed.
PICKER: You have?
GORMAN: Yeah, I think we bottomed in this business, you know, four or six weeks ago. Now, how much it improves from that for the rest of the year is unknown. Next year, definitely a pick up so I think, you know, and I’m seeing it with the conversations I’m having with other CEOs they’ve, we just felt like you know, April was was weak and first half of may also weak, and then it started picking up second half in June where it’s, you know, it’s not gangbusters, but we’re off the bottom. Now, how long does it take to kick into high gear? On the wealth side, it’s already done it. On the trading side and banking side, still to come.
PICKER: So part of that has to do with, you know, where do you see the economy headed? You know, we saw pretty soft CPI print last week, several reports out there basically saying, you know, mission accomplished, there will be no hard landing. Are you still in that camp? Is that what you’re you’re discussing—
GORMAN: Well, I’ve said, I think I’m on the record for probably on with you maybe certainly with CNBC for over a year that I think the odds of a recession were low. And if it happened, I felt likely to be relatively shallow and short. So I was in the like that it’s just not that big a deal with it technically we have a recession. What matters is if you have a deep recession that changes the unemployment outlook, and that that’s not happening. So no, I think the Fed, you know, they’re, I’m sure they’re going to raise this week. Will they do another one based on the recent numbers? It’s hard to argue for more rate increases, but a counter number could push that. You could get one more after this. I think the odds are definitely against that. Those who are calling for a rate cut this year, that won’t happen.
PICKER: Next year?
GORMAN: Next year will happen, not this year. So you know, we’re right at the tail end and where are we, we’re five, five and a quarter five, 5.3%. You know, I think we’re we’re in we’re clearly in the last throes of it. And at the last throes, our interest rates have peaked at this level. That’s not so bad. And with unemployment well under 4%, I mean, it takes a lot of guts to bet against the U.S. economy when the bank balance sheets are strong, the personal balance sheets are strong. We’re near the end of the rate increase period. Earnings have generally been a little more positive than people thought so yeah, I’m, listen, I’m not, you know, super positive, but I’m definitely a recession is less likely than the other side.
PICKER: Let’s talk about those bank balance sheets because there’s a bunch of regulatory actions out there. There are the Vice Chair Barr comments talking about an additional two percentage points of capital. Obviously, we’re waiting for the Basel III Endgame, maybe in the next few weeks or so. What does that mean for Morgan Stanley, you’re one of the most highly capitalized banks out there, as we just discussed. You know, what would an additional capital requirement mean for the strategic future of the firm?
GORMAN: Well, we’ve got 260 basis points of buffer, so I think we’re going to be just fine. But if you step back from it, the way it worked Leslie and you probably know all this, but about 12 years ago, the Basel we’ve had Basel I, Basel II, Basel III, they got so sick of changing the numbers, they now call it the Endgame, Basel III Endgame. Okay, so we’re at the Endgame. And by the way, a lot of the European banking sector isn’t compliant yet with Basel III Endgame, just to say it, now you’ve got the U.S. system which didn’t have Basels so we created CCAR. We’ve had CCAR I think 12 years in a row, Morgan Stanley’s performance under the stress tests which have covered every gamut of economic scenario have increasingly got better as we’ve got stronger. So, you’ve got these two competing systems, they want to harmonize them. Vice Chair Barr’s speech I think was touted a holistic capital review. So they’re going to look at the total things and put them together. The actual proposal, my guess comes out, I think it’s going to come out in a couple of weeks. Yeah, it will be, it will be tough. There is no doubt about that. Where that ends up, they’ve called for and he’s called for specifically an extensive comment period, followed by extensive transition. He said we won’t get there for in his language in the speech some years. So we’re talking about something that’s going to be real, I think, probably the start of 2027. So this is moving slowly. The comment period will be appropriately forceful, because there are things that certainly I find in the what is suggested will be the proposal that just, I don’t think makes sense.
PICKER: Like what?
GORMAN: Like the way that they’re treating operating risk RWAs. It’s not to get too weedy in it, but one of the—
PICKER: Standardized approach.
GORMAN: Yeah, and they’re now adopting, no, we won’t look at idiosyncratic like what your legal expenses have been over time. We’ll look we’re just take a standardized approach. Question is how do you calculate that and the current proposal on the Basel is to base it upon the fees that you have in your business.
PICKER: You’re a big fee-based business.
GORMAN: And that gives us the stability. That shouldn’t be something that draws more capital, it should draw less capital. So I’m sure during the comment period as we point out these what I call sort of intellectual inconsistencies with what the whole philosophy around capital stability is, I think there’ll be adjustments. So listen, we’re a big company. We have massive buffer now. It’ll be at least three years I think before this is done. I’m not, I’m not concerned about it, but we’re going to be forceful advocates for what we think we’re running. This is about making the U.S. economy strong, and the U.S. banking system to support it. This is not about what some other countries telling us what to do, by the way, when some of them aren’t even complying with their own rules. Right. Let’s focus on what’s right for the U.S. economy.
PICKER: I want to know what the James Gorman endgame is. We talked about Basel III Endgame. What’s your endgame? What do you see for the next 13 years of this firm?
GORMAN: Well, I thought you were talking about me personally, and I was gonna say it’s not gonna be like Logan Roy. So—
PICKER: I hope not.
GORMAN: We can be pretty confident about, this firm is in, this firms is in unbelievable shape. It starts with culture and shared values, which, you know, we care deeply about, now we’ve got 80,000 people, we have people who do stupid things time to time, people who break the law from time to time. If you put in, I’ve often joked if you put 80,000 people together in a town, you’d have a jail and a police force, right? You’re dealing with human nature. But the overall — values of the firm are great. I think we’ve got the firm back to where it was, frankly, revered for so much of its history. The leadership team is really stable and strong. The board is terrific, works very well but very independently with management. So all of those kinds of pieces are there. The strategy has served us incredibly well. How that evolves over the next decade, I suspect we become if we do more, we will do more deals, they’re more likely to be non-U.S. than U.S. I think there’s just, there are a lot of markets in this world that we could take, you know, our stock plan business to just would be phenomenal. The E-Trade platform phenomenally, our asset management business Eaton Vance, which is a much more domestic platform now as part of Morgan Stanley could go much more global. So, I see probably, we’ll certainly keep growing. I think we’ve created a category of one in wealth management around the world. And I think we’ll we’ll be bigger internationally.
PICKER: What about artificial intelligence? I know you’ve got some chatbots that you’re working on here. How do you see kind of technology working its way into the firm?
GORMAN: Yeah, give the wealth management team Andy and his team great credit. They saw this early and they actually had Sam Altman come and talk to our board over a year ago. They’re working with you know how to employ all of the AI technology and the interesting question is, will it lead to simply more efficiency, which means you need fewer people? Because work is being done by AI or more effectiveness, which means you have the same people, but they’re able to do much more because part of the basics of their job are done for them. And I think it’ll lead to the latter. So I don’t think it’s going to involve a great change in our structure, but I think it will involve a great change in our productivity.
PICKER: Let’s talk about client behavior in wealth management because for the first time in a long time, you can earn money sitting in cash, treasuries what five and a half percent at this point in time. You know, you saw those 100, 100 billion dollars in net new capital during the quarter. Those inflows there in wealth and investment management. Do you think we’ve reached the peak yet of people moving into higher yielding alternatives like money market funds?
GORMAN: Well, we’ve got we’ve got about 23% of our clients’ money is cash or cash equivalents. Now that I don’t know if it’s a historic high, but I’d be surprised if it’s not, pretty extraordinary. Now part of it is driven by obviously rates but part of it’s driven by general uncertainty given the change in inflation, economic growth, geopolitical tensions coming out of Covid. People were quite happy having their money in cash. By the way, they had it in cash at much lower rates too. So I think that will provide some explosive growth for the market as people recognize once we get through the end of this year, if we haven’t gone into recession, then then it’s all things pushing forward.
PICKER: And your CFO Sharon Yeshaya mentioned that in June, she started to see some evidence of that activity. James Gorman, CEO of Morgan Stanley, at least for the next 10 months. We appreciate you being here. Thanks so much.
GORMAN: Thanks, Leslie. Great to be with you.