Morgan Stanley (NYSE:MS) was the clear winner over Goldman Sachs (NYSE:GS) Group Inc. as the two investment banking titans went head to head unveiling quarter-four results yesterday.
Shares in Goldman plunged 6.4% whilst its rival Morgan Stanley (NYSE:MS) soared 7.6% and it was evident in the tone of remarks from company bosses who was feeling more upbeat.
“Simply said, our quarter was disappointing,” Goldman Sachs (NYSE:GS) chief executive officer David Solomon said during the firm’s fourth-quarter earnings conference call.
In contrast, Morgan Stanley (NYSE:MS)’s view was “we are not heading into a dark period”.
They were the words of CEO James Gorman who also predicted that investment banking and deals activity will pick up once the Federal Reserve pauses rate hikes.
“I will bet the year on that,” he commented.
The numbers – deal or no deal
Both banks reported substantial drops in revenue and profit largely due to the dearth of merger activity and initial public offerings in the final three months of the year, but Goldman’s marked shortfall was in contrast to broadly in line numbers from its rival.
Goldman’s profits were hit by the impact of falling revenues, increased expenses and rising loan provisions which saw the bank post EPS of $3.32 per share, way below the market consensus of $5.48, and 69% lower year-on-year.
Fewer deals meant reduced activity in two of its main divisions, Asset & Wealth Management and Global Banking & Markets, with the revenue shortfall exacerbated by an 11% jump in operating expenses.
On the flip side, Morgan Stanley saw earnings decline by only 14% to an in-line $1.26/share driven by 6% growth in its wealth management division, although revenues fell in investment banking by 49% with equity net revenue down 24%.
“Widely expected to be awful, Goldman Sachs (NYSE:GS)’ Q4 results were even more miserable than anticipated,” said Octavio Marenzi, the chief executive at Opimas.
“The real problem lies in the fact that operating expenses shot up 11%, while revenues tumbled. This strongly suggests more cost cutting and layoffs are going to come.”
“Morgan Stanley, on the other hand, had results very much in line with expectations, with weakness in investment banking, but stable elsewhere,” Marenzi said.
So why the difference?
The mixed fortunes have their roots in strategic calls made by both banks in recent years which have supported growth at Morgan Stanley’s asset-management business while Goldman appears to have suffered from a muddled approach to revenue growth as seen in its botched attempt to enter consumer finance.
Goldman has since abandoned these mass-market consumer banking ambitions and restructured its divisions alongside its third-quarter results in October but these moves came at a cost – a loss of $1.99bn for the Platform Solutions arm in 2022 was reported.
Over at Morgan Stanley, the focus has been to search for revenue stability and adding Eaton Vance (NYSE:EV) and E*Trade has helped.
Since 2017, the bank has increased revenue from investment-management fees and net interest income to 54% from 40% while at Goldman, asset-management fees and interest have risen from nearly 27% to 35%, so progress, but not in the same league as its industry peer.
Soaring costs - more jobs cuts to come?
The issue of cost control also appears to be an issue at Goldman, which disappointed the Street by recording its highest ever end-of-year staffing bill of $3.76bn, the highest proportion of revenue in a decade.
Goldman has already announced a raft of job cuts, but they may not be the last.
As Danni Hewson at AJ Bell pointed out: “In prioritising the procurement of new talent during a tight labour market, Goldman’s operating expenses have shot up.”
“That wouldn’t be an issue if its revenues had gone the same way, but times are tough, and investors must be expecting bosses to take out the red pen and slash costs even further going forward.”
Where now – taxi for Solomon?
The problem for Goldman is things may not get better anytime soon. Citing an uncertain outlook for 2023, Goldman set aside $1bn to cover unforeseen losses in the new year, while Morgan set aside only $87mln.
The macro environment is uncertain, deal making remains becalmed so it may be another tought year for investment banks.
This could heap further pressure on Goldman CEO, David Solomon.
When he took over in 2018, Goldman’s market value was about $88bn, compared with $81bn for Morgan Stanley.
While Goldman’s value has since climbed to $124bn, its rival has surged to $164bn.
Solomon, pressed by an analyst on the earnings call yesterday, was comically understated: "Everything has not gone perfectly.”
It hasn’t and it may not for some time.