And I think we are much focused on looking for those efficiencies without giving up any of the strategic investment that we want to make on our way to 30% PBT margins in wealth and 70% efficiency of the firm. The way I’ve articulated the strategic goals is to effectively reiterate — we will achieve those goals. But along the way, we will invest, and that investment opportunity exists on the current portfolio in an exciting way. And that is why for me, the most important message we wanted to send out to folks today with this concept of the integrated firm. Now we have the portfolio of businesses together. We have a unified partnership culture. We have the two halves of the firm, will toggle by 5 or 10 points on revenue or profitability given a period of time and now we can scale that organically and hit the numbers and work the income statement a little bit.
Operator: We’ll move to our next question from Steven Chubak with Wolfe Research. Your line is now open.
Steven Chubak: Hi, good morning. So what I wanted to start off and Sharon with just a question on incremental margins and comp leverage in a lower rate backdrop. We know NII is going to be a source of drag in the coming quarter, certainly if the forward curve manifests, but you should see improved momentum from equity market tailwinds, stronger fee base flows, a better IV backdrop. But the Street is modeling comp dollars flat, revenues up about $2 billion. I’m just trying to get a sense of how we should think about incremental margins as revenue momentum improves but the growth is coming in mainly for more compensable areas.
Sharon Yeshaya: So you obviously did hit the nail on the head in terms of the different pieces, right? So you can’t look at the different line items the same way. You’re going to have a comp ratio change as FAs get compensated, as you would expect, on the grid associated with those fee-based revenues. As it relates to NII, yes, that was noncompensable as I just told you the expectation on a quarter-over-quarter basis, if client behavior remains unchanged, you are sitting in a position where you’re beginning to better understand what that behavior is and that NII will be roughly in line with where it was in the fourth quarter, at least for the first quarter. So yes, the comp itself might change, but the actual growth in the ability to see the fee-based assets grow is higher.
There are also other offsetting factors that we have to think about as we look back into the last year. Remember that what I highlighted was you had negative implications associated with mix of revenue in those asset management lines because of the fact that we saw investors invest in the fixed income products. You add market dynamics associated with billing, et cetera. So there is place — there are rather places that you can see growth in the asset management line. Yes, they will be compensable, but we would see benefits of scale, both from the asset side and hopefully, from the market side as you see different pieces being invested as you move forward. I hope that helps to frame the answer to your question.
Steven Chubak: No, that’s really helpful. And just for my follow-up, I was hoping you could just speak to the sensitivity to lower rates. It’s a big area of focus for investors. You benefit from having the majority of your deposits in premium savings where admittedly you have bigger pricing flexibility at the same time, the asset side is still very sensitive to the short end. So I wanted to get a sense as to how you expect the NII trajectory to unfold as the Fed begins easing and whether there’s any appetite on your side to extend duration to maybe lock in some higher yields.
Sharon Yeshaya: That’s a great question. And the answer is fully premised on what we see first with deposits, right? So your sort of first order condition, as you look ahead into 2024 is what happens to the deposit mix. What I said on the call is that we’re encouraged in my prepared remarks, we’re encouraged by what we’ve seen to date as the beginning of January. If you were to assume that, that were to hold, the next question is, what is the pace of the interest rate cuts that we see? If you see an instantaneous shock, we disclose to you what that means, right? So an instantaneous 100 basis point shock lower will be negative, around $600 million, right? However, if it was more gradual in nature, which is similar to what you might see in the forward curve, you will have offsets associated with the reinvestment of the portfolio.
So that will offset the rate decline, right? We’ll largely offset those rate declines. But it will depend first order condition is — our deposits stable is the mix stable, and that’s what we’ve seen so far. So let’s see if that holds. And then second, what is the pace of the cuts over the course of the year.
Operator: We’ll move to our next question from Devin Ryan with JMP Securities. Your line is now open. Please go ahead.
Devin Ryan: Thanks so much and good morning Ted and Sharon. Maybe just start with a question on investment banking and good to hear about the tone improvement there. Sponsors have been less active than corporates, at least from the data we track, and we know sponsors have record dry powder, but higher interest rates, current valuations have been a little bit challenging for them. So just the question is whether they are in a position to return in force over the next year. I think that’s probably going to be necessary for full normalization in investment banking. And then just what you’re seeing when you talk about the pipeline that you have, which are good, what are sponsors doing in those pipelines?
Sharon Yeshaya: Sure. Overall, the pipeline is more diversified than we’ve necessarily seen in historical years. We expect to see continued momentum in energy that we’ve seen over the past year, we see optimistic signs in real estate, and we see optimistic signs in technology. As it relates to sponsors, we would expect sponsors to come back that will obviously take time, and I do think it will likely take a couple of potential prints in certain places and other things that will be encouraging will be on the equity IPO side. What I’d say is we’ve moved from a period of time that was window driven and that market is beginning to build momentum. And so the juxtaposition between the outlook for ’24, I think in ’23 is important there as well.
Devin Ryan: Okay. Terrific. And then a question for Ted. So I think you’re pretty clear here, the strategic trajectory is not changing dramatically. But we often get the question around stylistically what’s changing. And so you have a different background than James. I think everyone has their own management style, and you run some big businesses very successfully from Morgan Stanley. So what could maybe just hit on briefly how you would characterize kind of your style and just the ability to leverage your experience and what may change as a result of that? Thanks.
