(Rewrites throughout on banks' diverging strategies; adds
analyst and investor comments)
By Lauren Tara LaCapra
April 17 A year ago, soon after Morgan Stanley
posted disappointing quarterly earnings, Chairman and
Chief Executive Officer James Gorman told board members the bank
was on the right track and investors who sold shares had made a
On Thursday, Gorman proved himself right, by showing that
his plan to lighten up trading risk and focus on wealth
management is paying off. Morgan Stanley posted a 55 percent
gain in first-quarter profit. The bank's revenue from
fixed-income trading rose 9 percent from the same quarter a year
ago, even as it reduced risky assets by tens of billions of
dollars. Morgan Stanley also showed steady progress in using
deposits from the wealth business to lend more.
Gorman is working to give Morgan Stanley steadier earnings
growth through increasing its reliance on businesses such as
wealth management and underwriting, whose revenues are less
likely to plunge. The shift, started under prior chief executive
John Mack, came after the bank nearly failed during the
Morgan Stanley's fortunes in the quarter sharply diverged
from those of Goldman Sachs Group Inc which has made
fewer strategic shifts since the financial crisis.
Goldman posted an 11 percent decline in profit, and for the
13th time in the past 17 quarters, revenue from its
fixed-income, currency and commodities trading business
declined. Even with that decline, Goldman's businesses of
trading for clients and investing on the bank's own behalf still
accounted for 64 percent of the bank's revenue during the
Goldman executives argue that those figures are misleading
because its trading and investing businesses are tightly
connected to investment banking and asset-management, where the
bank outperformed. And because Goldman was strong enough to
retain trading businesses that rivals have exited since the
crisis, it can reap profits that they will miss as market
Still, many investors and analysts focused on challenges
Goldman will face from higher capital requirements and
restrictions on some trading activities that were its most
profitable in the past.
"Goldman's business looks very similar to what it did
pre-financial crisis," said Devin Ryan, an analyst at JMP
Securities. "For them, it's a matter of those businesses showing
signs of life or recovering."
Ryan has an "outperform" rating on Morgan Stanley shares and
a "market perform" on Goldman Sachs. He thinks Morgan Stanley
shares can rise another 17 percent to $36.
His view is not uncommon among analysts: 13 recommend Morgan
Stanley as a "buy" or "strong buy," compared with six for
Goldman Sachs; only one analyst recommends clients sell Morgan
Stanley shares while three hold that view for Goldman, Starmine
Morgan Stanley shares closed up 2.9 percent on Thursday at
$30.76, while Goldman rose 0.1 percent to $157.44.
One reason analysts may like Morgan Stanley: its shares
trade at less than the accounting value of the bank's assets
minus liabilities, or book value. That is a cheaper valuation
than Goldman's shares, which trade at a premium to book value.
PERMANENT OR CYCLICAL PROBLEMS?
Morgan Stanley's decision to retool itself while Goldman
Sachs refrains from big changes reflect a debate happening
across Wall Street, over whether industry profits are
permanently depressed because of new regulations, or whether
earnings will return once trading volumes and deal activity
Before the financial crisis, Wall Street banks could
generate a return on equity - a measure of how much profit a
bank can wring from shareholders' money - of 30 percent or more.
Today banks including Morgan Stanley are struggling to reach
returns of 10 percent, the bare minimum that some investors
Many top Wall Street executives insist that their revenue
problems are "cyclical," and that results will improve as the
economy picks up.
But opinions at banks are diverging as new regulations are
finalized that dictate how much capital banks need, among other
Over the past week, JPMorgan Chase & Co Chief
Executive Officer Jamie Dimon reiterated his belief that the
change is cyclical, but Citigroup Inc Chief Financial
Officer John Gerspach characterized his bank's share of
fixed-income trading revenue as part of a "shrinking pie."
On Thursday, Goldman Chief Financial Officer Harvey Schwartz
acknowledged that Wall Street profitability may never again
reach pre-crisis heights, but he stopped short of saying Goldman
should reshape itself to reduce its reliance on trading.
"Our clients wake up today and they focus on the same issues
they always have," Schwartz said in response to a question from
Despite declining revenue in its key business of bond
trading, Goldman is already boasting a return-on-equity of
nearly 11 percent. Morgan Stanley this quarter posted a return
on equity of 8.5 percent.
For some investors, the return on equity now is less
important than the strategic directions of the banks.
Christopher Grisanti, who runs Grisanti Capital Management, sold
Goldman shares to buy Morgan Stanley in September 2011. He has
more than doubled his money since then. He believes in Gorman's
plan and is holding on to his shares for now.
"I think we're in the third or fourth inning and the team is
starting to get momentum," said Grisanti. "It would be a real
home run if they continue this evolution to become even more of
an asset manager - more like a T. Rowe Price."
While that would be the "ideal outcome" for him, he added,
"I don't think we'll hold it that long, and I don't think they
go that far down that road."
(Additional reporting by Peter Rudegeair; Editing by Dan
Wilchins, Bernadette Baum and Lisa Shumaker)