Goldman, Morgan Stanley Show Wall Street Charging Ahead
October 16 2018 - 02:31PM
Dow Jones News
By Liz Hoffman
Goldman Sachs Group Inc. and Morgan Stanley on Tuesday reported
sharply higher third-quarter earnings, wrapping up a week of
big-bank reports that reflect the strength of the U.S. economy in
shrugging off geopolitical turmoil.
Profit rose 19% at Goldman and 20% at Morgan Stanley. Both firms
were buoyed by lower taxes, thanks to the December law that slashed
corporate tax rates, as well as strong deal-making revenue. Morgan
Stanley shares rose 5% and Goldman gained 2.5% by midday, though
both are down double-digits on the year.
After Main Street rivals reported strong earnings on the backs
of their consumer businesses, Goldman and Morgan Stanley showed
that the current economic and market climate also works for firms
with deep Wall Street DNA. All six of the largest U.S. banks
reported higher profits from a year ago.
Underwriting revenues surged -- up 20% at Goldman and 33% at
Morgan Stanley - as corporate clients tapped wide-open securities
markets to raise money. Continued consolidation in industries such
as technology, media and health care have pushed merger fees near
all-time highs.
Today's biggest banks are more balanced and less specialized
than they were a decade ago, and so are more apt to rise and fall
together. Morgan Stanley and Goldman have expanded into Main Street
businesses -- Goldman belatedly, but with gusto -- while JPMorgan
Chase & Co. and Bank of America Corp. have become trading
giants in their own right.
Morgan Stanley, run by Chief Executive and Chairman James
Gorman, reported profit of $2.15 billion on $9.87 billion in
revenue, both better than a year ago. Earnings per share of $1.17
exceeded the expectations of analysts polled by Refinitiv, who
predicted $1.01 per share.
At Goldman, earnings per share of $6.28 beat expectations by 90
cents. The firm reported profit of $2.52 billion on revenue of
$8.65 billion, both up from the third quarter of 2017.
At Morgan Stanley, gains came from across the firm. Its wealth
management arm continued to rake in client money, the institutional
businesses of trading and underwriting held up, and Mr. Gorman kept
a lid on expenses.
Once Wall Street's weakling, Morgan Stanley is in the late
innings of a multiyear turnaround under Mr. Gorman, a
matter-of-fact Australian who spent a decade as a McKinsey &
Co. consultant before coming to finance. He has pared its
freewheeling trading and principal-investing operations --
responsible for billions of dollars in crisis-era losses -- and
doubled down on wealth management. His goal is a firm that does
well in boom time and limits losses in busts.
"These strategic choices were designed to ensure that as much as
we can control, the firm does well in its strong market environment
and demonstrates stability" in tougher times, Mr. Gorman said on a
conference call Tuesday morning. "That is exactly how 2018 is
shaping up."
Goldman Sachs, meanwhile, is in the early legs of its own
redesign. The firm is getting into consumer banking and commercial
cash management, remaking itself more in the image of its Main
Street rivals to compensate for steady declines in its
once-formidable trading division.
The quarterly results were the final chapter in the tenure of
Lloyd Blankfein, who stepped down as CEO on Oct. 1. Replacing him
is David Solomon, a former investment banker who inherits a firm
casting about for ways to grow.
Goldman is getting into consumer banking, expanding its
asset-management arm and building a commercial cash-management and
financing business from scratch. Those activities can generate
steadier fees, without the jarring swings that come from its Wall
Street operations of trading and principal investing.
Goldman said its consumer loan book had grown to $4 billion at
quarter end, and that its consumer deposits hit $26 billion in the
U.S. Net interest income -- the difference between what Goldman
pays its creditors and what it takes in from its borrowers -- rose
17% from a year ago, to $856 million.
The firm hopes that steadier, simpler businesses will compensate
for continued trouble in its trading arm. Revenue there was
essentially flat from a year ago, with a rise in equities, which
includes stock trading and securities lending, offsetting a 10%
drop in fixed-income trading.
Dealmaking was strong at both banks, despite the summer season.
At Morgan Stanley, investment banking revenue was 15% higher,
driven mostly by stock underwriting, which offset a decline in
merger fees. It was the division's best third quarter in a decade,
and Chief Financial Officer Jon Pruzan said the firm's pipeline of
unannounced deals was healthy.
Both banks enjoyed a big jump in equity underwriting revenue,
outpacing increases at JPMorgan Chase and Bank of America.
Stock-market investors have turned hungry this year, coaxing
startups to go public and established companies to issue new
shares. Notable IPOs included event-planner Eventbrite Inc.'s
September offering, led by Goldman, and commercial landlord Cushman
& Wakefield PLC's August IPO, led by Morgan Stanley.
--Ben Eisen contributed to this article
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
October 16, 2018 14:16 ET (18:16 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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