Executive Summary / Key Takeaways

• Morgan Stanley's "Integrated Firm" strategy, spanning Institutional Securities, Wealth Management, and Investment Management, is driving strong financial performance, evidenced by record Q1 2025 net revenues, net income, and ROTCE.
• The firm is successfully executing its asset aggregation strategy, adding $94 billion in net new assets in Q1 2025 and progressing towards its $10 trillion+ total client asset goal, underpinned by robust fee-based flows and a differentiated multi-channel funnel.
• Institutional Securities demonstrated exceptional performance, particularly in Equity trading and Investment Banking, reflecting the benefits of a global footprint, strategic investments, and increased client activity in volatile markets.
• Morgan Stanley maintains a strong capital position with a 15.3% Standardized CET1 ratio, providing flexibility for capital returns (including a recently reauthorized $20 billion buyback program and increased dividend) and supporting client activity.
• While macroeconomic and geopolitical uncertainties persist, management views the environment as a "pause, not delete" for strategic activity, remaining cautiously optimistic about the investment banking recovery and projecting NII to inflect higher in the coming year.

The Integrated Firm: A Foundation for Growth

Morgan Stanley, founded in 1924, has evolved into a global financial services powerhouse, strategically positioning itself across three core segments: Institutional Securities, Wealth Management, and Investment Management. This structure, honed through decades of adaptation and key acquisitions like E*TRADE (ETFC) and Eaton Vance (EV), allows the firm to serve a diverse clientele ranging from corporations and governments to financial institutions and individuals. The current market backdrop, characterized by the reemergence of inflation and heightened geopolitical uncertainty following a period of financial repression, underscores the value of Morgan Stanley's deliberate strategy to raise, manage, and allocate capital globally.

The firm's strategic response to this dynamic environment is centered on the concept of the "Integrated Firm," supported by four pillars: Strategy, Culture, Financial Strength, and Growth. This involves seamlessly connecting its world-class franchises to provide comprehensive solutions across client needs. This integrated approach is crucial in a competitive landscape dominated by large, diversified players like JPMorgan Chase (JPM), Bank of America (BAC), and Goldman Sachs (GS), as well as specialized firms and disruptive fintechs. While competitors like JPM and BAC leverage vast scale and retail networks, and GS excels in trading and advisory, Morgan Stanley differentiates itself through targeted innovation, a strong global footprint, and the deliberate cross-pollination of expertise across its segments. Its ability to capture wallet share, as evidenced by a nearly 100 basis point gain in Institutional Securities wallet share in 2024, highlights the effectiveness of this strategy.

Technological differentiation is a critical component of Morgan Stanley's competitive edge and growth strategy. The firm is making significant investments in technology, particularly in Artificial Intelligence (AI). Tools like the AI @ Morgan Stanley Assistant and the Debrief tool are being developed to enhance advisor productivity in Wealth Management, aiming to save time and facilitate more effective client interactions by providing rapid access to information and automating tasks like meeting summaries and email drafting. While specific quantitative metrics on time savings or efficiency gains from these tools are not fully detailed, the strategic intent is clear: to empower financial advisors and improve operational efficiency. The firm also leverages technology to drive its client acquisition funnel, using data and AI to appropriately match individuals with financial advisors, a process that has reportedly doubled human referrals year-to-date compared to the past. These technological advancements are foundational to supporting the Integrated Firm, enhancing client service, and driving future operating leverage.

Performance Momentum and Segment Strength

Morgan Stanley's strategic execution translated into a period of strong financial performance, culminating in a record first quarter of 2025. The firm reported net revenues of $17.7 billion, a significant 17% increase compared to the first quarter of 2024. Net income applicable to Morgan Stanley rose by 26% to $4.3 billion, resulting in diluted earnings per common share of $2.60, up 29% year-over-year. These results underscore the firm's ability to generate durable earnings and demonstrate operating leverage, achieving a robust 23.0% return on tangible common equity (ROTCE) and a 17.4% return on equity (ROE) in the quarter. The firm's expense efficiency ratio stood at 68%, even after accounting for $144 million in severance costs related to a workforce reduction.

The Institutional Securities segment was a key driver of this performance, delivering record net revenues of $9.0 billion, a 28% increase from the prior year quarter. This strength was broad-based, with Equity revenues soaring 45% to a record $4.1 billion, fueled by strong performance in both Execution Services and Financing amidst a more volatile trading environment. Investment Banking revenues increased 8% to $1.6 billion, reflecting higher Fixed Income underwriting and Advisory activity, signaling a steady recovery from trough levels. Other net revenues also saw a significant increase, primarily due to gains on the sale of corporate loans held-for-sale. Geographically, all major regions contributed to the growth, with Americas revenues up 13%, EMEA up 25%, and Asia up 35%, highlighting the value of Morgan Stanley's global footprint in capturing client activity. The segment's provision for credit losses was $91 million, primarily linked to portfolio growth and a more cautious macroeconomic outlook.

Wealth Management continued its consistent performance, reporting net revenues of $7.3 billion, up 6% year-over-year, and net income of $1.5 billion, up 9%. The segment delivered a pre-tax margin of 26.6%. Asset management revenues, the core of this segment's durable revenue stream, increased 15% to $4.4 billion, benefiting from higher market levels and the cumulative impact of positive fee-based flows. The segment added a strong $94 billion in net new assets during the quarter, representing a 6% annualized growth rate, and generated $30 billion in fee-based asset flows. This momentum reflects the effectiveness of the firm's scaled and differentiated client acquisition funnel, which includes advisor-led, self-directed (E*TRADE), and workplace channels, driving asset aggregation and migration into fee-based accounts. Transactional revenues decreased year-over-year, impacted by DCP losses, but showed higher client activity excluding this effect. Net interest income saw a modest increase, supported by lending growth and higher investment portfolio yields, partially offset by lower average sweep deposits. The segment's provision for credit losses was $44 million, primarily related to specific residential real estate loans.

Investment Management also contributed positively, with net revenues increasing 16% to $1.6 billion and net income rising 36% to $262 million. This performance was driven by higher Asset management and related fees ($1.5 billion, +8%) on higher average AUM ($1.7 trillion) and a significant increase in Performance-based income and other revenues ($151 million), notably from accrued carried interest in infrastructure funds. The segment recorded $5.4 billion in long-term net inflows, primarily in Parametric and Fixed Income strategies, demonstrating success in secular growth areas despite outflows in active equity strategies.

Outlook, Guidance, and Risk Considerations

Looking ahead, Morgan Stanley's management remains focused on executing its strategic goals and capitalizing on evolving market opportunities, while acknowledging persistent uncertainties. The firm maintains its long-term financial targets, including a 20.0% ROTCE, a 30.0% pre-tax margin in Wealth Management, durable wallet share gains in Institutional Securities, and achieving over $10 trillion in total client assets.

Management's outlook for the investment banking cycle is cautiously optimistic. While geopolitical risks and trade policy uncertainty have led some clients to pause strategic activity, the underlying pipelines remain robust. The firm believes it is in the early stages of a multi-year capital markets recovery, anticipating increasing activity throughout 2025, provided market conditions remain reasonably constructive and predictable. The "pause, not delete" characterization suggests delayed, rather than canceled, deals.

For Wealth Management's net interest income (NII), management expects a modest sequential decline in Q2 2025 due to seasonal tax payments impacting sweep deposits. However, they project NII to inflect higher in the coming year, driven by a more stable deposit mix, expected growth in lending balances (including securities-based lending and mortgages), and the repricing of the investment portfolio. The firm expects its 2025 effective tax rate to be approximately 24%, with potential quarterly volatility.

Despite the positive momentum, Morgan Stanley faces several risks. Macroeconomic uncertainty, driven by global trade policies, inflation, and central bank actions, could impact capital markets and client activity. Geopolitical risks remain a factor. Credit risks, particularly within the commercial real estate sector (especially office properties) and margin lending activities, require ongoing monitoring. Operational risks, including potential losses from inadequate systems, human factors, or external events like cyberattacks, are inherent in the business. Legal and regulatory risks, such as ongoing antitrust litigation, investigations (like the Dutch criminal probe), and evolving capital requirements (including Basel III Endgame and the Stress Capital Buffer), could impact financial results and business operations. While the firm maintains strong capital and liquidity buffers (15.3% Standardized CET1 ratio, compliant LCR/NSFR), potential future credit rating downgrades could necessitate additional collateral requirements.

Conclusion

Morgan Stanley's first quarter 2025 results provide compelling evidence that its "Integrated Firm" strategy is delivering tangible value. The firm's ability to generate record revenues and profitability, particularly through the strength of its Institutional Securities and Wealth Management segments, underscores its effective execution and strategic positioning. By leveraging its global footprint, investing in technology, and focusing on durable revenue streams like asset management fees and diversified lending, Morgan Stanley is building a resilient business model capable of performing across various market environments. While macroeconomic and geopolitical uncertainties present ongoing challenges and risks, the firm's strong capital base, disciplined expense management, and optimistic outlook for key business drivers like the investment banking recovery and Wealth Management NII inflection support a positive investment thesis. The continued focus on asset aggregation and gaining durable wallet share positions Morgan Stanley to capitalize on future growth opportunities as markets evolve.