Morgan Stanley retains edge over Goldman Sachs due to wealth unit boom

Morgan Stanley retains edge over Goldman Sachs due to wealth unit boom
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Falling profits at Wall Street’s two major investment banks drew contrasting reactions from investors, who chastised Goldman Sachs for a sharp drop in investment banking fees while rewarding Morgan Stanley’s push toward more stable businesses.

The earnings further underscored the benefits of Morgan Stanley’s expansion into wealth and asset management under Chief Executive James Gorman. Goldman, however, continues to rely heavily on trading and trading for profit, businesses that are less valued by investors due to unpredictable income.

Both Goldman and Morgan Stanley saw investment banking fees fall nearly 50 percent, amid a dearth of mergers and new listings. However, record wealth management revenue at Morgan Stanley helped partially offset the declines.

That allowed Morgan Stanley to post fourth-quarter net earnings of $2.2 billion, beating analyst estimates, while Goldman missed forecasts with $1.3 billion in what Chief Executive David Solomon acknowledged as a “disappointing” performance. “.

Jason Goldberg, banking analyst at Barclays, said: “Clearly, Morgan Stanley benefited from the drag provided by its wealth management and investment management business units.”

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

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

“It’s fair to say that our business model was tested this year,” Gorman said on a call with analysts. “We focus on the markets we know best.”

Line chart of market capitalization in billions of dollars showing that Morgan Stanley's market capitalization exceeds Goldman Sachs

While Morgan Stanley has focused on acquisitions that bolstered its wealth and asset management, one of the critical pillars of Goldman’s efforts to diversify has been its consumer banking business. But Solomon is now winding down that effort after years of losses and investor trepidation.

Solomon admitted that Goldman had “tried to do too much too fast” in retail banking after first foraying into the business in 2016 under former chief executive Lloyd Blankfein.

Part of Goldman’s consumer business is being folded into a newly formed “Platform Solutions” division that suffered a pre-tax loss of $778 million in the fourth quarter, largely due to provisions to cover potential loan losses. that Goldman has made to consumer clients.

In what some analysts took as a reference to Goldman, Morgan Stanley’s earnings presentation included unsecured consumer credit on a list of “What we don’t like to own.”

“It’s very clear that Morgan Stanley has much more durability in their model,” said Christian Bolu, a research analyst at Autonomous Research. “It’s something that Goldman aspires to, but clearly they’re not there yet.”

Goldman is now doubling down on its asset and wealth management business in the hope that this can replicate the kind of recurring profits Morgan Stanley is generating.

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

Part of that will be achieved by reducing so-called investments on Goldman’s balance sheet, a holdover from the era when the bank staked its own capital on investments. That business can bring lucrative profits in good years, but it can also force the bank into painful losses, such as $660 million in fourth-quarter investment losses on the stock market.

Goldman is working to sell these investments on the balance sheet while also raising external funds to invest.

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

Morgan Stanley has additional capital above regulatory requirements that would allow it to make further investments if the right opportunity presents itself, Gorman said.

“We are not of the opinion that we are heading into a dark period,” Gorman added. “We want to make sure that we are positioned for growth. This will change, mergers and acquisitions [and] the subscription will return, I am sure of it. So we want to be well positioned for that.”

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