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Morgan Stanley maintains lead over Goldman Sachs on rising wealth unit

Falling profits at Wall Street’s two main investment banks drew mixed reactions from investors, who chastised Goldman Sachs for a sharp drop in investment banking fees while rewarding Morgan Stanley’s push for a more stable business.

The earnings further underscored the benefits of Morgan Stanley’s expansion into wealth and asset management under Chief Executive James Gorman. Goldman, however, still relies heavily on dealmaking and trading for its profits, businesses that investors value less because of unpredictable revenues.

Both Goldman and Morgan Stanley saw their investment banking commissions fall by nearly 50 percent, due to a lack of mergers and new listings. However, record revenues from wealth management at Morgan Stanley helped partially offset the decline.

That allowed Morgan Stanley to post fourth-quarter net income of $2.2 billion, beating analysts’ estimates, while Goldman missed forecasts by $1.3 billion, which CEO David Solomon admitted was “disappointing ” performance.

Jason Goldberg, banking analyst at Barclays, said: “It is clear that Morgan Stanley has benefited from the ballast provided by both its wealth management and investment management businesses.”

Morgan Stanley shares fell nearly 6 percent in New York, while Goldman shares fell 6.4 percent. The S&P 500 was virtually unchanged.

Morgan Stanley’s price-to-book ratio, which compares the bank’s share price to the value of its assets, is currently about 1.7 times, compared with 1.04 times for Goldman, according to Morningstar.

“It’s fair to say our business model has been tested this year,” Gorman said on a call with analysts. “We focus on the markets we know best.”

Line chart of market cap in billions of dollars showing that Morgan Stanley has surpassed Goldman Sachs in market cap

While Morgan Stanley focused on acquisitions that strengthened its wealth management and asset management, one of the critical pillars of Goldman’s efforts to diversify was its consumer banking business. But Solomon is now scaling back that effort after years of losses and investor discomfort.

Solomon acknowledged that Goldman “tried to do too fast” in retail banking after its first foray into the business in 2016 under previous CEO Lloyd Blankfein.

Part of Goldman’s consumer business is being transferred to the newly formed Platform Solutions division, which suffered a fourth-quarter pretax loss of $778 million, largely due to provisions to cover potential losses on Goldman’s consumer loans.

In what some analysts took as a reference to Goldman, Morgan Stanley’s earnings presentation listed unsecured consumer loans on a list of “things we don’t like to own.”

“It’s very clear that Morgan Stanley simply has a lot more staying power in its model,” said Christian Boll, research analyst at Autonomous Research. “That’s something that Goldman is striving for, but they obviously haven’t gotten there yet.”

Goldman is now doubling down on its asset and wealth management business in the hope that it can replicate the kind of earnings that Morgan Stanley is generating.

“Our number one priority for asset and wealth management is to increase our management fees. It’s durability, it’s predictability,” Goldman CFO Dennis Coleman told the Financial Times.

Part of that will be achieved by reducing Goldman’s so-called balance sheet investments, remnants of an era when the bank bet its own capital on investments. That business can generate lucrative profits in good years, but it can also force the bank into painful losses, such as a $660 million loss on stock market investments in the fourth quarter.

Goldman is working to sell these investments on its balance sheet while also raising outside funds to invest.

A disappointing few months for Goldman are being felt across the bank, with the company earlier this month laying off about 3,200 employees, roughly 6 percent of its workforce, as well as embarking on a broad cost-cutting program. By contrast, Morgan Stanley cut 1,800 jobs in December and plans no more layoffs, the bank said Tuesday.

Morgan Stanley holds additional capital above regulatory requirements that would allow it to make further investments if the right opportunity arose, Gorman said.

“We don’t think we’re going into a dark period,” Gorman added. “We want to make sure we’re positioned for growth.” This thing is going to turn around, M&A [and] the insurance will come back, i’m sure of it. So we want to be well positioned for that.”

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