Morgan Stanley maintains advantage over Goldman Sachs on booming asset unit

Morgan Stanley maintains advantage over Goldman Sachs on booming asset unit

Plunging profits at Wall Street’s two top investment banks prompted contrasting reactions from investors, who penalized Goldman Sachs for a sharp drop in investment banking fees while rewarding Morgan Stanley’s push into more stable businesses.

The gains further underscored the benefits of Morgan Stanley’s expansion into wealth and wealth management under Chief Executive James Gorman. However, Goldman still relies heavily on deals and trades to generate its profits, companies that are less valued by investors due to the unpredictability of earnings.

Investment banking fees at both Goldman and Morgan Stanley fell nearly 50 percent amid a lack of mergers and new listings. However, record income from wealth management at Morgan Stanley helped partially offset the declines.

This allowed Morgan Stanley to post net income of $2.2 billion in the fourth quarter, beating analysts’ estimates, while Goldman came in under guidance at $1.3 billion, in what CEO David Solomon admitted was a ” disappointing” performance.

Jason Goldberg, Banking Analyst at Barclays, said: “Morgan Stanley has clearly benefited from the ballast provided by both its Wealth Management and Investment Management businesses.”

Morgan Stanley shares closed up nearly 6 percent in New York, while Goldman shares fell 6.4 percent. The S&P 500 was virtually unchanged.

Morgan Stanley’s price-to-book ratio, which compares a bank’s stock price to the value of its assets, is currently about 1.7 times, according to Morningstar, compared to Goldman’s 1.04 times.

“It’s fair to say that our business model has been tested this year,” Gorman said when speaking to analysts. “We focus on markets we know best.”

While Morgan Stanley has focused on acquisitions that have strengthened its wealth and wealth management business, one of the key pillars of Goldman’s diversification efforts has been its retail banking business. But Solomon is now scaling back those efforts after years of losses and investor unease.

Solomon admitted that Goldman had “tried to do too much too quickly” in retail banking after its initial foray into the business in 2016 under former chief executive Lloyd Blankfein.

A portion of Goldman’s consumer business will be merged into a newly formed Platform Solutions division, which suffered a pre-tax loss of $778 million in the fourth quarter, primarily due to provisions to cover potential losses on loans Goldman extended to consumer customers.

In what some analysts saw as a reference to Goldman, Morgan Stanley’s earnings presentation placed unsecured consumer credit on a list of “things we don’t want to own.”

“It’s very clear that Morgan Stanley just has a lot more durability in its model,” said Christian Bolu, research analyst at Autonomous Research. “That’s something Goldman is striving for, but they clearly haven’t gotten there yet.”

Goldman is now doubling down on its wealth and wealth management business in hopes it can replicate the kind of recurring income that Morgan Stanley is generating.

“Our top priority for wealth management is to increase our management fees. That’s the durability, that’s the predictability,” Denis Coleman, Goldman’s chief financial officer, told the Financial Times.

Part of this will be achieved by reducing Goldman’s so-called on-balance-sheet investments, a holdover from the days when the bank used its own capital for investments. This business can generate lucrative gains in good years but also force the bank into painful losses, such as a $660 million loss on stock market investments in the fourth quarter.

Goldman is working to sell these on-balance-sheet investments while raising outside capital for investments.

The disappointing months for Goldman are being felt across the bank, as earlier this month the company cut about 3,200 employees, about 6 percent of its workforce, and embarked on a sweeping cost-cutting program. By contrast, Morgan Stanley cut 1,800 jobs in December and has no further layoffs, the bank said on Tuesday.

Morgan Stanley holds additional capital above regulatory requirements that would allow it to make further investments when the right opportunity arises, Gorman said.

“We don’t believe we’re heading into a dark period,” Gorman added. “We want to make sure we are positioned for growth. This thing’s gonna turn, M&A [and] Underwriting will come back, I’m sure. We want to be well positioned for this.”