James Gorman: We’re Seeing Fruits Of Long-Term Strategy

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Following is the unofficial transcript of a CNBC interview with Morgan Stanley (NYSE:MS) Chairman & CEO James Gorman on CNBC’s “Squawk on the Street” (M-F, 9AM-11AM ET) today, Thursday, October 14th. Following is a link to video on CNBC.com:

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Morgan Stanley CEO Gorman: We’re Seeing Fruits Of Long-Term Strategy

JIM CRAMER: Chairman and CEO James Gorman. Welcome to “Squawk on the Street,” thank you for, for coming in to talk about how well your, your bank is doing.

JAMES GORMAN: Happy to do it as long as you don't ask me to go on Jeopardy, Jim.

CRAMER: No, we're gonna hold off on that. That's a different, different subject. But, you know what, you deserve to be on because, you know, what is the best wealth management business in the world. 300 billion in new money this year, what is happening that people can bring in 300 billion in wealth management?

GORMAN: Yes, it's amazing. I mean the team's done an unbelievable job. The reality is we're managing, you know, over four trillion, nearly four and a half trillion and with success comes success. We have a lot of clients who feel very comfortable with the brand, the platform. The technology we've invested in through E*TRADE. I mean it's just, it's all come together. This has sort of been our dream for over a decade and finally we're seeing the fruits but I mean, 12 years ago or so, I think our assets were about 500 billion. So, they've gone up, eight, nine times in that period and as you know, this is very sticky money. It's a great business so we're thrilled.

CRAMER: Well that's what we're going to talk about. At one point, Morgan Stanley before you came in, had what I regarded as episodic earnings. They’d be good, and then bad and good and bad and therefore it's very hard to give a price earnings multiple. The business that you're bringing in, including by the way E*TRADE, is really sticky and steadily growth, growth, secular growth. And I'm wondering what you when you sit around your board meetings, doesn't someone say, you know what, how come we're still at 12 times earnings because this is a secular growth story, it's not cyclical, I'm trying to understand why you're not given a greater price.

GORMAN: Yeah, well it's getting there. I mean to be fair we were, you know, we were sub 10 and I thought that was just nuts. We’re now managing if you put wealth and asset management together, which gives us the balance, that's about six and a half trillion on that we're generating revenues of over 30 billion. Just that, and that's very sticky but on the other hand the investment bank and what it's done the resurgence of fixed income after it was restructured dramatically in 2015. You know, equities is number one, the investment bank itself and M&A is on fire, the equity underwriting. So, Jim, it’s this balance and speed concept that I've talked about, and, you know, we're starting to get the multiple. I mean we're getting the recognition, you look at some of the other pure wealth players in the marketplace, they're trading at, you know, 20, 30 times earnings, you know, we'd love a piece of that and I think our investors are starting to understand that so it's getting there.

CRAMER: Well I think it is. I mean if you added buy now, pay later, I guess we get 30 times earnings. I’m always struggling about the love of Robinhood and how important it is and I want to stack that up against you and I want you to include a company that you bought at the time was called Solium but it's a company that you've made into Shareworks, who is a younger investment base and whose base is larger?

GORMAN: Well first I have a lot of respect for Robinhood. I mean what they do introducing a lot of young investors to the marketplaces. I know you've said this and I believe that that's a good thing and as long as they’re prudently investing they understand the markets go up but they also go down then, you know, we're, they've got ,they've got a real winner so a lot of respect for what those guys have done. But, you know, we've sort of done the same thing but we've done it within the Morgan Stanley platform and brands so maybe it doesn't get that kind of recognition solely as a technology company. I mean that's basically 300 programmers they gave us an opportunity to get into the workplace space between Solium and E*TRADE and our existing business, we're touching over 30 million households and they’re wealthy households, right. There's significant money and by the way they want to borrow and they want to park their cash there, they're taking out mortgages, so it's got multiple verticals so if we can, we can go after to help these people find financial stability and that's what I'm really excited about. It's the combination of the traditional advisor model, the E*TRADE direct model and the solely Morgan Stanley workplace model. We're getting people at work, you're getting them online and you're getting them through an advisor and that to me is the magic mousetrap.

DAVID FABER: James, it’s David. You know, I’m looking at your stock price which is not doing much of anything right now and I'm wondering, is it the perhaps because people think when it comes to capital markets, this thing just can't keep going at this rate. You pointed it out, of course, whether it's fixed income or now equities, you know, the outperformance of expectations, the percentage gains, year over year or from ’19. I don't know if you've ever seen anything like this in your career but can it continue at this rate?

GORMAN: Oh, sure, sure it can and listen the market, you know, I don't have a problem when I see the market if our stock is at $100 I don’t know I haven't, I can’t look at the screen right now because I'm looking at your camera but we’re at that or about that, you know, we were $50 a year ago, the stock was up 34% I think in 2020 during COVID. We’re up 40 plus percent this year already. I mean it's, it's, you know, the market cap is over 180 billion it's had a phenomenal run, but there's a whole lot more to go. I mean if you, if you take that thread that Jim was pulling on about the mobile expansion and you take the fact that we built these enormous businesses that have huge scale advantages and, and to operate on a global basis, as you know, David in M&A and capital markets across borders, that's not an easy lift. You don't just turn up one day and say that's the business I want to be in. You got to build that over decades. So, I think they're incredibly resilient, the share gains that we've done through the institutional side, you know, have worked out great and I think it's gonna keep going. I'm really positive on the story—

FABER: You do I mean because—

GORMAN: We brought a market environment so—

FABER: Right but we watch it no I mean, we're here at the New York Stock Exchange. We see the listings happen for a long time it was Chinese companies then it was SPACs then it was now it's just straight IPOs. That's one part of capital markets activity but you really expect that you're always, I mean that you're going to maintain these kinds of growth rates when it comes to equities under a fixed income for the next year or two?

GORMAN: You know, yeah, we're not going to compound at this level but look at some of the other things going on, I mean you've got global GDP growth in pretty much every major economy in the world is going through global GDP growth. We've got enormous fiscal stimulus. We've got record low interest rates, people want to transact, you've got the, you know, the move from commercial lending to capital markets across all of Europe is still in the very early days so, you know, I'm not uncomfortable in saying we've got we clearly have a growth platform out there, whether it will be at the level we're seeing right now in M&A, obviously not. That's our pipeline suggests that's with us for a while to come, but that's not going to be, you know, over the next five years. We're not going to maintain that kind of growth, but the resilience of the model, the scale advantages, we've got the efficiency ratio now under 70%. I mean all these things are real, then when you double the dividend which we did, you're giving investors, you know, a 2.8% yield at 100 bucks. I mean that's not for nothing, right, and you're buying back about 3% of stocks so investors are getting a return of 7% before we get any of that through.

CARL QUINTANILLA: James, one of the headlines from the call was about crypto where you said it's not a huge part of the business demand from our clients. Is that because it's early days, do you expect that to change?

GORMAN: You know, Carl, you know, I’ve said this before I think crypto, you know, it's not a fad. It's not going away and obviously the blockchain technology supporting it is a real innovation. We're not seeing among very wealthy clients they might put, you know, I talked to people maybe 1% of their portfolio in it. Nobody's putting 10% of their portfolio into it. So, it's an interesting thing I mean a lot of people want to participate, they don't know how crypto is all really going to play out. I see, you know, Bitcoin this morning I think it's trading. I don't know 55,000, 60,000. So, a lot of people made a lot of money on it but it's not, it's not a core part of their diversification strategy. It's an option that they're playing out and with very wealthy people. Now with some of the younger folks, it's it's different. They, they're using, they've got less money at risk and frankly they're at a stage in life they can take more risks so you're seeing more, more interest at that level. E*TRADE had much more interest than the traditional Morgan Stanley client base.

CRAMER: That makes sense. James, you have drawn a line in the sand with people coming to work, people showing up, being able to judge someone as a first-year associate, second year, third, very traditional and I've always felt very right. Pushback? People think that you're wrong, people not wanting to go to Morgan Stanley versus other places, what is the culture right now on this issue?

GORMAN: Yeah, I don't think there's been a decision I've made that I haven't had some pushback it's, I tell people you don't get just the good bits of being a leader, you get the good and bad bits and some of it is people don't like it when you make decisions. And by the way that counts for everything from what you put in programming on the show to, you know, what's going on in politics. So that's okay, I can deal with that and, you know, fundamentally what I said was and, you know, the quote I use which got a lot of attention was, “If you can go to a restaurant, you can go to the office.” What I didn't say Jim was and you've got to be in the office five days a week forever. Clearly, we've moved to a more flexible work environment but we'd like to see people in and around their colleagues at least several days a week. I mean, let's that's how we do our best work, that's where our best innovation happens from bringing people together and training and developing them. I mean it's okay for me working from home. I've, I'm at the tail end of my career. For the kids who are 25, they want to be in and around and learn from the seniors so again we'll be flexible and we are being flexible, but we still want to see you in the office some of the time job dependent, etc. We've had some folks as you would imagine on the trading floor they’ve been in five days a week from the get go and that's what their job demanded. Client facing people have to do what the clients want, so we'll be flexible, but we're certainly intentional. I think it's very important to share your learning and development skills with the young kids.

FABER: Yeah, I think there's no doubt. I do sense frustration from some of your peers, James, though in terms of people not showing up on Fridays and yet knowing at this point as you say flexibility is part of the allure for other employers and seems to be something that you simply have to provide regardless of whether you want to. Do you agree?

GORMAN: I don't know. I mean, David, you know, it's interesting some of the early companies that came out and said, you can absolutely do whatever you like in terms of working, they've retracted from that. I mean it's not every employee gets to choose exactly how they work in the same way they don't choose how they get paid or when they get promoted. Now there's got to be a balance in this so you're not going to please everybody on this topic. What I've said is between now and the end of the year, we're still in the category of what can we do from a health and safety. In New York City, for example, we require you to be vaccinated to come into the buildings. Guess what? 96% of our employees are vaccinated and they showed us their attestation cards. Other parts of the world, they're not even open. Now, you know, Australia, where I grew up, I mean they've barely opened the economy up yet they're still, you know, in lockdown phases in different parts of the country. By 2022, ‘23, then we'll really see what the right model is by business group and then by individual.

CRAMER: Well, I've got to tell you James, the stock is down which is a rare opportunity because this was a great quarter. My charitable trust owns it. We talk about it a lot when it comes to the CNBC Investing Club and I just can't thank you enough for coming on and explaining why your bank is different and positive and I think much better than almost everybody else in the industry. James Gorman, CEO of Morgan Stanley.

GORMAN: Thanks, thanks guys and by the way, the stock being down it's not all bad news. We are in the middle of a big buyback program so I’m okay—

FABER: There you go. Alright.