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Morgan Stanley Sees Lone Trading Jump as Goldman Drops

Goldman Sachs Group CEO Lloyd C. Blankfein
Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein is facing a prolonged slump in fixed-income trading as he seeks to boost return on equity, which has been less than 12 percent for four straight years after topping 30 percent before the financial crisis. Photographer: Scott Eells/Bloomberg

Morgan Stanley posted a jump in first-quarter trading revenue while Goldman Sachs Group Inc.’s dropped, the first such divergence in two years.

Morgan Stanley today reported a surprise 9 percent increase in fixed-income trading revenue, the only gain among major Wall Street banks, and had the biggest improvement in equity trading as it overtook its larger rival for the top spot in that business. Goldman Sachs suffered the sharpest decline in equity trading, citing a slump in Japan and emerging markets.

Goldman Sachs, led by Chief Executive Officer Lloyd C. Blankfein, still beat analysts’ estimates as the firm posted the most investment-banking revenue among U.S. banks for the first time since the financial crisis. Morgan Stanley CEO James Gorman got a rare win as fixed-income revenue was the highest in two years even as the company continued to shrink capital used by the unit.

“When the Street disappoints in fixed-income, Morgan Stanley does well, and when the Street does well, Morgan Stanley tends to disappoint,” Brad Hintz, an analyst at Sanford C. Bernstein & Co., said in a Bloomberg Radio interview. “Weak fixed-income quarter: Morgan Stanley did well.”

Morgan Stanley rose 4.1 percent to $31.11 at 9:51 a.m. in New York, the biggest intraday advance since January. Goldman Sachs climbed 1.4 percent to $159.42.

Gorman’s firm still had the lowest trading revenue among the Wall Street banks at $3.36 billion, and both it and Goldman Sachs trailed JPMorgan Chase & Co. and Citigroup Inc. All of the New York-based firms are facing a prolonged slump in fixed-income trading, which has fallen in nine of the past 13 quarters.

Business Mix

Morgan Stanley’s revenue from trading, a business overseen by Colm Kelleher, included $1.65 billion from fixed-income, currencies and commodities, and $1.71 billion from equities. Goldman Sachs’s revenue from sales and trading, led by Pablo J. Salame, Isabelle Ealet and Ashok Varadhan, was $4.43 billion. That included $2.84 billion from fixed-income trading and $1.6 billion for equities.

JPMorgan and Citigroup both had bigger decreases in FICC trading than Goldman Sachs or Morgan Stanley, driven in part by a different mix of businesses in their respective divisions.

“Rates and foreign-exchange are bigger businesses for the big banks, while commodities, which had a little bit better quarter off a depressed base, and credit, which was more resilient, are bigger drivers for the bulge-bracket firms like Goldman and Morgan Stanley,” Devin Ryan, an analyst at JMP Group Inc., said before the results were announced.

Goldman Sachs and Morgan Stanley both said they had significantly higher revenue from commodities, a business that had slumped and faced regulatory scrutiny during the past year.

‘Demand Increase’

“The commodities business looked like it did very, very well,” Hintz said. The lack of significant move in commodity markets in the quarter implies “there actually was a demand increase, rather than speculative position taking,” he said.

Goldman Sachs’s equities revenue fell 18 percent. While that was driven in part by the sale of a reinsurance business last year, it was a bigger drop than many analysts estimated. The division “experienced challenging market-making conditions, particularly in Japan and certain emerging markets as equity prices declined,” Goldman Sachs said today in a statement.

Goldman Sachs’s first-quarter net income fell 10 percent to $2.03 billion, or $4.02 a share. That beat the $3.49 average estimate of 25 analysts in a Bloomberg survey. Total revenue declined 8 percent to $9.33 billion.

Morgan Stanley’s profit advanced 56 percent to $1.51 billion, or 74 cents a share, according to a statement. Adjusted earnings were 68 cents a share, topping the 60-cent average estimate of 26 analysts surveyed by Bloomberg. Revenue climbed 4 percent to $8.8 billion, making Morgan Stanley the only U.S. bank among the six biggest to post a first-quarter increase from a year earlier.

The revenue figures exclude an accounting gain known as debt valuation adjustment, or DVA.

Download: Bernstein’s Hintz Says Banking Business Is Back (Audio)

Download: Earnings

Download: Earnings

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