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Morgan Stanley retains edge over Goldman Sachs thanks to booming wealth unit

Falling profits at Wall Street’s top two investment banks prompted mixed reactions from investors, who punished Goldman Sachs for a sharp drop in investment banking fees while rewarding Morgan Stanley’s push for higher prices. more stable businesses.

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 trading and trading for its profits, companies that are less popular with investors due to unpredictable earnings.

Goldman and Morgan Stanley have both seen their investment banking fees plummet by nearly 50%, amid a dearth of mergers and new stock market listings. However, record revenue from Morgan Stanley’s wealth management helped partially offset the declines.

That helped Morgan Stanley post net profit of $2.2 billion in the fourth quarter, beating analysts’ estimates, while Goldman fell short of forecasts with $1.3 billion in what the director General David Solomon acknowledged it as a “disappointing” performance.

Jason Goldberg, banking analyst at Barclays, said: “It is clear that Morgan Stanley has benefited from the ballast provided by its wealth management and investment management business units.”

Morgan Stanley stock price closed up nearly 6% in New York, while Goldman stock fell 6.4%. The S&P 500 was effectively unchanged.

Morgan Stanley’s price-to-book ratio, which compares a bank’s stock price to the value of its assets, is currently around 1.7 times, compared to Goldman’s 1.04 times, according to Morningstar.

“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.”

Line chart of market capitalization in billions of dollars showing jumps in market capitalization of Morgan Stanley Goldman Sachs

While Morgan Stanley has focused on acquisitions that have bolstered its wealth and asset management, a key pillar of Goldman’s diversification efforts has been its consumer banking business. But Solomon is now scaling back that effort after years of losses and investor unease.

Solomon admitted Goldman had “tried to do too much too fast” in retail banking after its first foray into the business in 2016 under former chief executive Lloyd Blankfein.

Part of Goldman’s consumer business is folded into a new “Platform Solutions” division that suffered a pretax loss of $778 million in the fourth quarter, largely due to provisions to cover potential losses on loans that Goldman made to consumers.

In what some analysts considered a reference to Goldman, Morgan Stanley’s earnings presentation listed unsecured consumer credit on a list of “what we don’t like to own.”

“It’s very clear that Morgan Stanley just has a lot more sustainability in their model,” said Christian Bolu, research analyst at Autonomous Research. “It’s something Goldman aspires to, but they clearly haven’t got there yet.”

Goldman is now doubling down on its asset and wealth management business in hopes it can replicate the kind of recurring revenue generated by Morgan Stanley.

“Our number one priority for asset and wealth management is to increase our management fees. It’s sustainability, it’s predictability,” Goldman chief financial officer Denis Coleman told the Financial Times.

Part of that will be achieved by reducing so-called investments on Goldman’s balance sheet, a holdover from the days when the bank bet its own capital for investments. This activity can generate lucrative profits in good years, but can also force the bank to suffer painful losses, such as $660 million in losses on stock market investments in the fourth quarter.

Goldman is working to sell these investments on the balance sheet while raising outside funds to invest.

The disappointing few months for Goldman are being felt across the bank, with the company earlier this month cutting around 3,200 employees, or around 6% of its workforce, and embarking on a massive cost-cutting program. By contrast, Morgan Stanley cut its workforce by 1,800 in December and does not anticipate further layoffs, the bank said Tuesday.

Morgan Stanley holds additional capital above regulatory requirements that would allow it to make new investments if the right opportunity arises, Gorman said.

“We don’t believe we’re heading into a dark period,” Gorman added. “We want to make sure we are positioned for growth. This thing will spin, M&A [and] the subscription will come back, I’m sure. So we want to be well positioned for that.

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