Morgan Stanley Earnings Stand Apart From Goldman Sachs (MS, GS, AMTD, SCHW, WFC)

January 20, 2011 by Jon C. Ogg

Profits at Morgan Stanley (NYSE: MS) rose 88% in the fourth quarter compared with the same period a year ago. Competitor Goldman Sachs Group Inc. (NYSE: GS) reported yesterday that its profits fell 52%. That difference provides an instructive story.

Goldman’s revenue from its two largest divisions, investment banking and fixed-income, fell by 10%. In the bank’s fixed-income, currencies, and commodities trading business, revenue fell by a stupendous 48% compared with last year. Revenue from its trading and securities services business fell by 31%.

In contrast, Morgan Stanley’s institutional-securities business, including capital markets and investment banking, increased its revenue by 12%, and the global wealth management business posted revenue growth of 7%. Like Goldman, Morgan Stanley’s trading revenue fell by a significant 27% from the fourth quarter a year ago.

For the full year, Goldman posted a drop in profits of 38% and a drop in revenue of 13%. Morgan Stanley posted full-year revenue gain of 35% and profit of $4.5 billion compared with $1.3 billion in 2009.

Morgan Stanley’s institutional securities business, which includes underwriting and M&A activities, jumped in the fourth quarter, reflecting the strong IPO and acquisition activity of the last half of 2010.

Both banks posted declines in trading activity, but the drop hit Goldman Sachs’s bottom line much harder. Goldman’s market-making trading revenue fell by 43% from a year ago. At its proprietary desk, revenue increased by 50%

Goldman noted that it suffered from “lower client activity levels” in its fixed-income, currency, and commodities trading business as worries about European sovereign debt and regulatory reform reduced its clients’ appetite for risk. One might argue that these more sophisticated investors were more cautious than the retail investors who were chasing returns at TD Ameritrade Holding Corp. (NASDAQ: AMTD) and Charles Schwab Corp. (NASDAQ: SCHW).

Morgan Stanley also saw a drop in its fixed-income business, but because it does not rely on that business as much as Goldman, Morgan Stanley’s overall performance experienced a smaller hit from the reduced activity. Other consumer-facing banks, such as Wells Fargo Corp. (NYSE: WFC) and US Bancorp, profited more from US customers who were feeling more optimistic.

Shares in Morgan Stanley are up about 2% in early trading, to $28.30, well within the stock’s 52-week trading range of $22.40-$32.29. Goldman Sachs’s shares are trading up very slightly, at $166.80, in the stock’s 52-week range of $129.50-$186.41.

Paul Ausick