Morgan Stanley’s results establish a worrying trend for Goldman Sachs

  • Morgan Stanley beat Wall Street estimates for second quarter earnings, with the sales and trading business posting a strong quarter.
  • The US bank’s $US1.24 billion in fixed income trading revenues topped Goldman Sachs’ performance.
  • That performance is especially impressive, given Morgan Stanley slashed the size of its fixed-income unit in late 2015. The bank has managed to cut costs and staff while boosting revenues.

That makes two quarters in a row.

Morgan Stanley beat Wall Street estimates for second quarter earnings on Wednesday, following the trend set by its peers. Each of the key business lines at the bank posted increased revenues, with revenues more broadly holding remarkably steady.

In particular, the bank posted only a small drop in fixed income trading revenues, dropping 4% year-on-year to $US1.24 billion. Given a sharp decline in fixed income revenues at rival Goldman Sachs, where revenues fell 40% to $US1.16 billion, the results mean that Morgan Stanley bested Goldman Sachs in fixed income for the second quarter in a row.

The bank has delivered $US2.95 billion in first half fixed income revenues, up 36% from the same period a year earlier. In contrast, Goldman Sachs delivered $US2.8 billion in FICC revenue in the first half, down 19% from the same period last year.

In equities sales and trading meanwhile, Morgan Stanley’s $US2.2 billion topped Goldman Sach’s $US1.9 billion in revenues, extending a run that goes back to early 2015. And in equity underwriting, Morgan Stanley’s $US405 million in fees topped Goldman Sachs’ $US260 million.

To be sure, Morgan Stanley’s FICC business is small in comparison to the giant units housed at money center banks like Citigroup, JPMorgan and Bank of America Merrill Lynch. Still, the 4% year-on-year decline also compares well against those banks. Here’s a breakdown:

  • JPMorgan FICC revenue — $US3.2 billion — down 19% year-on-year
  • Citigroup FICC revenue — $US3.4 billion — down 6% year-on-year
  • Bank of America Merrill Lynch FICC revenue — $US2.1 billion — down 14%

Still, the comparison with Goldman Sachs is striking, and encapsulates two very different trends.

The business is proving a challenge for Goldman Sachs. On a call with analysts after Goldman Sachs’ earnings, CFO Marty Chavez said rates revenue was down significantly, while the commodities business had its worst quarter on record. “It was a difficult quarter on all fronts,” Chavez said.

“We didn’t navigate the market as well as we aspire to or as well as we have in the past,” he added.

Morgan Stanley in contrast slashed the size of its fixed-income unit in late 2015, and has delivered improved revenues with lower costs since then. The second quarter performance in fixed income garnered praise from analysts on the bank’s earnings call.

“Morgan Stanley appears to be on a much stronger footing,” Octavio Marenzi, CEO of capital markets management consultancy Opimas, said.

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