Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Just like the New York Yankees and the Houston Astros, this Wall Street rivalry is worth watching. 

Goldman Sachs Group Inc. and Morgan Stanley on Tuesday delivered third-quarter results, marking their first such overlap in more than three years. While it's unclear if this timing was intentional, Morgan Stanley's third consecutive quarter of record pretax earnings underscores that the firm under CEO James Gorman is no longer the underdog. Unlike last quarter though, Lloyd Blankfein's Goldman held its own. 

Happy Coincidence?
This is just the third time in a decade that the rival investment banks have delivered results on the same day. Both exceeded Wall Street's expectations.
Source: Bloomberg
*Third quarter 2017 reaction reflects pre-market trading

While Goldman doesn't have Morgan Stanley's heavyweight presence in the steadier business of wealth management, gains from its private equity investments and strength in investment banking helped offset the spate of weak trading revenue that has afflicted Wall Street for months.

One problem though, as observers of Blackstone Group LP and KKR & Co. are aware, the performance of private equity investments can be extremely lumpy. So, too, investment banking can be unpredictable, as smaller advisers like Greenhill & Co. Inc. know too well. Goldman's shrinking transaction backlog compared to both the end of the second quarter and the end of 2016 doesn't inspire the same amount of confidence that Morgan Stanley can command, thanks to its more diversified, stable business mix. 

Big Hitters
Goldman's mergers and acquisitions bankers helped the firm achieve its biggest quarter for financial advisory in more than two years
Source: Bloomberg

Admittedly, Goldman has plans to accelerate its revenue growth, in part by becoming more diversified itself. But the efforts that it outlined last month, and other details that have dribbled out in the press so far are wanting. Case in point: Reuters last week reported that the firm has assembled a separate group of investment bankers to generate compelling ideas for dig-deal hunters like Berkshire Hathaway Inc. and SoftBank Group Corp. -- surely that's already an area of focus?

Closing the Gap
Morgan Stanley's market value could soon eclipse Goldman Sachs' for the first time in over a decade
Source: Bloomberg

Back to Morgan Stanley: at 9.8 percent through the first nine months of 2017, its return return on equity is poised to land well within its 9-to-11 percent goal for the year, in part thanks to its $5 billion buyback program. That's a whisker away from being on par with Goldman, and investors are rightfully beginning to believe the two fierce competitors deserve to be valued equally.

Meet Your Match
Morgan Stanley's profitability has improved, meaning it no longer trades at a discount to Goldman Sachs
Source: Company filings; Bloomberg
*First nine months of 2017

It's well known that for U.S. banks to extend their sizable gains, we'll need rate hikes as well as corporate tax and regulatory change. But even if those don't come to fruition anytime soon, the continued evolution of Goldman and Morgan Stanley -- and comparing how they stack up against each other -- is popcorn-worthy enough.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net