Declining earnings at the two premier Wall Street investment banks drew mixed reactions from investors, who chastised Goldman Sachs for sharply cutting investment banking fees while rewarding Morgan Stanley’s push for more stable businesses.
The earnings further underscored the benefits of Morgan Stanley’s expansion into wealth and asset management under Chief Executive James Gorman. However, Goldman is heavily dependent on deals and trades for profit, businesses that are undervalued by investors because of their unpredictable returns.
Both Goldman and Morgan Stanley saw investment banking fees drop by almost 50 percent amid fewer mergers and new listings. However, record wealth management revenues at Morgan Stanley helped partially offset the declines.
That helped Morgan Stanley post a fourth-quarter net profit of $2.2 billion, beating analysts’ estimates, while Goldman missed forecasts by $1.3 billion, a performance CEO David Solomon admitted was “disappointing.”
“Clearly, Morgan Stanley benefited from the ballast provided by both its wealth management and investment management business units,” said Jason Goldberg, a banking analyst at Barclays.
Morgan Stanley shares fell almost 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 is currently about 1.7 times, compared with 1.04 times for Goldman, according to Morningstar, which compares a bank’s share price to the value of its assets.
“It’s fair to say our business model has been tested this year,” Gorman said on a call with analysts. “We focus on the markets we know best.”
While Morgan Stanley has focused on acquisitions that bolster wealth management and asset management, one critical pillar of Goldman’s diversification efforts has been its consumer banking business. But Solomon is now scaling back those efforts after years of losses and investor anxiety.
Solomon acknowledged that Goldman “tried to do too much too quickly” in retail banking after first entering the business in 2016 under previous CEO Lloyd Blankfein.
Part of Goldman’s consumer business is being merged into a newly formed Platform Solutions division, which suffered a pretax loss of $778 million in the fourth quarter, largely due to provisions designed to cover potential losses on loans Goldman made to consumer clients.
In Morgan Stanley’s earnings presentation, which some analysts took as a reference to Goldman, the unsecured consumer loan was listed as “Things we don’t like to own.”
“It’s very clear that Morgan Stanley has more stability in its model,” said Christian Bolu, research analyst at Autonomous Research. “It’s something that Goldman aspires to, but they’re not there yet.”
Goldman is now doubling down on its asset and wealth management business, which it hopes can replicate the recurring revenues enjoyed by Morgan Stanley.
“Our number one priority in asset and wealth management is to increase our management fees. It’s continuity, it’s predictability,” Denis Coleman, Goldman’s chief financial officer, told the Financial Times.
Part of that will be achieved by reducing Goldman’s so-called balance sheet investments, a holdover from the era when the bank would bet its own capital on investments. That business can generate lucrative profits in good years, but also force the bank into painful losses, such as a $660 million loss on stock investments in the fourth quarter.
Goldman is working to sell the investments on this balance sheet, while at the same time attracting outside funds for the investment.
The disappointing few months for Goldman are being felt across the bank, with the company laying off about 3,200 jobs earlier this month, about 6 percent of its workforce, as well as embarking on a sweeping cost-cutting program. In contrast, Morgan Stanley cut 1,800 jobs in December and has no plans for more layoffs, the bank said Tuesday.
Morgan Stanley maintains additional capital above regulatory requirements, allowing it to make additional investments if the right opportunity arises, Gorman said.
“We don’t think we’re entering a dark period,” Gorman said. “We want to make sure we’re ready for growth. This thing will turn, M&A [and] underwriting will come back, I’m positive. Therefore, we want to take a good position for this.”