By Liz Hoffman
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 20, 2017).
Morgan Stanley in 2009 was worth $50 billion less than its
longtime rival, Goldman Sachs Group Inc. After reporting strong
earnings on Wednesday, Morgan Stanley has nearly closed that
gap.
The surprising turnabout between the two rivals shows just how
much has changed on Wall Street since the financial crisis: Boring
is beating swashbuckling.
Goldman's strengths -- making market bets and serving hedge
funds -- have been zapped by new regulations and investors'
aversion to risk. Morgan Stanley, meanwhile, has cut traders and
trained those who remain to take fewer risks, while adding to
businesses that make money reliably and aren't penalized by capital
rules.
The quarter was challenging for the industry as trading
sputtered and loan growth stalled in spots. All six of the big
banks beat analysts' earnings expectations, but they sometimes
required the help of noncore businesses such as private investing.
Shares of Bank of America Corp. fell after its earnings release on
Tuesday as investors fretted about net interest income falling from
the first quarter due in part to lower long-term bond yields. And
J.P. Morgan Chase & Co., while reporting record profit, trimmed
its outlook for the second half.
Morgan Stanley's results had no such caveats, with contributions
spread evenly among its traders, investment bankers and
stockbrokers.
It has been a remarkable run for the bank and its chief
executive, James Gorman, who in 2010 took the reins of a firm
humbled by the financial crisis and strategically adrift. His
decision to de-emphasize trading and embrace wealth management -- a
business he once ran for Morgan Stanley -- has paid off, producing
steady growth and winning over investors who had stayed away after
repeated burns.
"These changes don't happen quickly, they happen over many
years," Mr. Gorman said Wednesday in an interview. "Much of it came
together in this quarter. I wouldn't run a victory lap around it
yet, but this is proof of the model."
Morgan Stanley's shares rose 3.3%, bringing the firm's market
value to $86.2 billion, compared with Goldman's $87.7 billion. Also
contributing to the narrowing gap this week was a sharp drop in
trading reported by Goldman on Tuesday.
In some ways, both firms aren't the top players they once were.
The two are now eclipsed in trading revenue by J.P. Morgan,
Citigroup Inc. and Bank of America, which have used their sheer
size to dominate the new high-volume, low-margin trading
landscape.
But Goldman and Morgan Stanley are old rivals. They spent
decades dueling as private partnerships and came through the
financial crisis as the only two large stand-alone investment banks
to survive. But Goldman emerged stronger and stuck to the strategy
that made it the most envied trader on Wall Street, even while
peers like J.P. Morgan and Bank of America bulked up.
Morgan Stanley decided it had to evolve, buying Citigroup Inc.'s
Smith Barney brokerage and slashing trading businesses. The firm
didn't catch up to Goldman quickly, slowly closing the gap first in
revenue and then in profitability.
For the quarter, Morgan Stanley reported a profit of $1.8
billion on revenue of $9.5 billion, both up from the year-earlier
period and better than analysts had expected.
While the second half of the year may prove tougher, the first
half has been a validation of Mr. Gorman's reshaping of a firm he
joined relatively late in his career. A former management
consultant brought over from Merrill Lynch in 2006 to run wealth
management, he ascended to the corner office after the crisis
humbled Morgan Stanley's trading desks, and then-CEO John Mack, a
former bond salesman, retired.
In 2009, Mr. Mack and Mr. Gorman struck the deal to buy Smith
Barney. The purchase added heft to Morgan Stanley's
wealth-management business, which remained hobbled after a
tumultuous 1997 merger with Dean Witter. In 2009, the business made
a profit of about $380 million. This year, it is on track for $4
billion, with remarkably steady revenue. On 98% of trading days in
2015, the unit brought in between $50 million and $70 million.
That predictability is an antidote to more-volatile trading
business, which the firm has been shrinking. Last year, Mr. Gorman
and top lieutenant Colm Kelleher, a former trading chief, fired 25%
of fixed-income traders and slashed the capital available to the
unit for bets.
Still, that division -- which trades everything from corporate
bonds to oil to interest-rate swaps -- has kept revenue from
falling sharply. It has made more than $1 billion in revenue for
five straight quarters, hitting a goal Mr. Gorman set last
year.
On Wednesday, Morgan Stanley reported $1.2 billion in revenue
from the division, outperforming Goldman for the second straight
quarter thanks to strong trading in currencies and corporate
debt.
Including Morgan Stanley's stock traders, the firm reported
trading revenue for the quarter of $3.2 billion compared with
Goldman's $3.1 billion.
During the first half, Morgan Stanley's overall trading revenue
surpassed Goldman's for the first time since at least the financial
crisis.
Part of the story is that Goldman has stumbled. Its traders,
once dominant on Wall Street, are struggling to find their footing
amid sweeping market changes since the crisis. Trillions of dollars
have shifted to passive funds, and then came a down spell for hedge
funds as well as a long stretch of calm in the markets -- all of
which have reduced demand for the complex products that are
Goldman's signature.
On Tuesday, Goldman reported trading revenue that fell 17% from
a year earlier, the worst start to a year in CEO Lloyd Blankfein's
11-year tenure. Fixed-income revenue fell 40%. Shares tumbled 2.6%
on Tuesday and another 0.2% Wednesday.
Goldman has acknowledged challenges in its trading business,
with its Chief Financial Officer R. Martin Chavez saying in a
conference call that the firm "didn't navigate the market as well
as we want to," over the past year or so. It has added new clients
and businesses to be more resilient in different market
conditions.
Morgan Stanley, though, has tried to avoid trading mistakes
while leaning heavily on its wealth-management business. That unit
reported a record $4.2 billion in revenue and hit a 25%
profit-margin target, the high end of a range set by Mr.
Gorman.
"There were plenty of skeptics" on Morgan Stanley, said Devin
Ryan, an analyst with JMP Securities. "They've been proving
naysayers wrong."
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
July 20, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
Bank of America (NYSE:BAC)
Historical Stock Chart
From Aug 2024 to Sep 2024
Bank of America (NYSE:BAC)
Historical Stock Chart
From Sep 2023 to Sep 2024