Plunging profits in the two premier investment banks of Wall Street triggered a contrasting reaction from investors, who punished Goldman Sachs for a sharp fall in investment banking fees while rewarding Morgan Stanley’s push to a more stable business.
The earnings further underscored the benefits of Morgan Stanley’s expansion into wealth and asset management under chief executive James Gorman. Goldman, however, remains heavily dependent on dealmaking and trading for profit, a business that is undervalued by investors because of its unpredictable profits.
Both Goldman and Morgan Stanley have seen investment banking fees fall by nearly 50 percent, amid a lack of new mergers and stock market listings. However, record wealth management profits at Morgan Stanley helped offset the decline.
That allowed Morgan Stanley to post fourth-quarter net income of $2.2bn, beating analysts’ estimates, while Goldman fell short of estimates by $1.3bn in what chief executive David Solomon admitted was a “disappointing” performance.
Jason Goldberg, banking analyst at Barclays, said: “Clearly Morgan Stanley is benefiting from the ballast provided by its wealth management and investment management business units.”
Morgan Stanley shares 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 the bank’s stock price to the value of its assets, is now 1.7 times, compared to 1.04 times for Goldman, according to Morningstar.
“They said our business model was tested this year,” said Gorman on the phone with analysts. “We focus on the markets we know best.”
While Morgan Stanley has focused on acquisitions that support wealth management and asset management, one of the critical pillars of Goldman’s efforts to diversify is its consumer banking business. But Solomon is now scaling back those efforts after years of losses and investors are unhappy.
Solomon acknowledged Goldman had “tried to do too much too soon” in retail banking after its first business in 2016 under previous chief executive Lloyd Blankfein.
Part of Goldman’s consumer business is being folded into a newly formed “Platform Solutions” division that posted a fourth-quarter pre-tax loss of $778 million, largely due to provisions to cover potential losses Goldman made to consumer customers.
In what some analysts take as a reference to Goldman, the earnings presentation of Morgan Stanley listed unsecured consumer credit in the list “Why We Don’t Like Money”.
“It’s very clear that Morgan Stanley just has more resilience in its model,” said Christian Bolu, a research analyst at Autonomous Research. “That’s what Goldman wanted, but it clearly hasn’t arrived yet.”
Goldman is now doubling down on its asset and wealth management business in hopes of replicating the kind of recurring earnings that Morgan Stanley generates.
“The number one priority for asset and wealth management is to increase management fees. It’s robust, predictable,” Goldman chief financial officer Denis Coleman told the Financial Times.
Part of that will be achieved by reducing investments on Goldman’s balance sheet, which is still in the era when the bank would sell its own capital for investments. The business can generate good profits in good years but it can also force the bank into painful losses, such as a $660 million loss from stock market investments in the fourth quarter.
Goldman is working to sell investments on its balance sheet while also raising outside funds to invest.
A disappointing few months for Goldman have been felt at the bank, with the company earlier this month cutting about 3,200 employees, about 6 percent of its workforce, as well as embarking on a broad cost-cutting program. By contrast, Morgan Stanley cut its headcount by 1,800 in December and has no plans for more layoffs, the bank said on Tuesday.
Morgan Stanley holds extra capital above regulatory requirements that will allow it to make more investments if the right opportunity comes along, Gorman said.
“We are not from the view that we are heading into a dark period,” Gorman added. “We want to make sure that the position for growth. This thing will turn, M&A [and] underwriting will return, I’m positive it. So we want to have a good position.