Goldman and Morgan Stanley Look for Profit Elsewhere After Trading Slumps

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  • Gains from Goldman Sachs’s stock investments increase 51%
  • Nearly half of Morgan Stanley’s revenue came from wealth unit

Goldman Beats Investment Banking Revenue Estimates

Chief executives of Wall Street firms, with fortunes that have been tied to fickle trading markets, found it helped to have a Plan B.

For James Gorman, that was Morgan Stanley’s wealth-management division, which produced nearly half of the firm’s revenue in the third quarter. For Lloyd Blankfein at rival Goldman Sachs Group Inc., it was the investment and lending segment, an opaque unit that has held private-equity style stakes in firms ranging from insurer Global Atlantic Financial Group Ltd. to Danish utility Dong Energy A/S.

While both banks reported better-than-expected profit because of these businesses, investors showed a preference for Morgan Stanley’s results. The firm’s shares climbed 0.4 percent, while Goldman slumped 2.6 percent.

The business of managing money always promised to insulate Morgan Stanley from swings in trading revenue tied to the whims of hedge-fund clients. The rationale for the bank’s crisis-era acquisition of Citigroup Inc.’s Smith Barney brokerage has never been stronger than in the last six months, when volatility hit new lows and stock markets touched record highs.

“In an environment where some of our market-sensitive businesses are operating in a more subdued environment, our businesses like wealth management will create strong returns and strong growth,” Morgan Stanley Chief Financial Officer Jonathan Pruzan said in an interview after results were posted. “For a firm that has historically been tied to the trading environment, it’s a positive outcome.”

Investing Unit

At Goldman Sachs, gains from investing in other companies increased 51 percent in the quarter to the highest in almost four years as share indexes hit records. Goldman Sachs is one of the few Wall Street firms still taking large stakes in other companies, using a merchant-banking model that dates back decades. While revenue from trading equities, fixed-income and commodities slipped from a year earlier, the firm’s smaller investing and lending unit topped every estimate of analysts surveyed by Bloomberg.

“The asset price levels in the market are supportive,” Chief Financial Officer Marty Chavez said on a conference call with analysts. “While we report on the results quarterly, we think of it over a much, much longer time horizon.”

The unit has the reputation of being one of the hardest to model, making it difficult for analysts to accurately predict results. It’s also volatile: While the business generated almost one-quarter of the bank’s revenue in the third quarter, it produced less than 2 percent of firmwide revenue in the first three months of 2016.

Goldman Sachs’s better-than-expected earnings were “driven by an even stronger result within the Investing & Lending segment than what was already expected to be a great quarter,” JMP Securities analyst Devin Ryan wrote Tuesday. “Outside of I&L, we would characterize results as fine in a mixed operating backdrop.”

Goldman Sachs has said its working on building a more predicable lending business. Last month, it laid out a series of initiatives to boost revenue by $5 billion even if the trading environment doesn’t improve.

Low Volatility

In at least one way, Goldman Sachs seeks to emulate its rival. The firm wants to bolster its business managing money for the wealthy, Chavez said Tuesday. The company will hire more advisers and roll out digital products as part of a push to increase investment-management revenue by $1 billion, he said. Revenue in that division climbed 3 percent in the quarter.

At Morgan Stanley, wealth-management revenue advanced 9 percent to $4.22 billion, compared with the $4.1 billion prediction of KBW Inc. Pretax profit from that business rose 24 percent to $1.12 billion.

Trading contributes a bigger share of overall revenue at Morgan Stanley and Goldman Sachs than other Wall Street firms. Goldman Sachs’ fixed-income revenue dropped 26 percent to $1.45 billion -- worse than the 22 percent average decline of the five biggest U.S. investment banks. And the company is on track for its weakest annual commodity performance on record, Chavez said on the call. Morgan Stanley’s bond-trading revenue fell 21 percent to $1.17 billion, but still met Gorman’s target of earning at least $1 billion per quarter.

If this quarter is any indication, the low volatility that has afflicted fixed-income desks may persist.

“People are waiting for tax reform, people are waiting for inflation, changes in the regulatory landscape,” Pruzan said. “So there are catalysts out there, but whether or not they’re realized this quarter or not, there’s a lot of speculation.”

— With assistance by Laura J Keller

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