Goldman and Morgan Stanley seek profit elsewhere as trading slumps

Bloomberg

If you’re the chief executive of a Wall Street firm whose fortunes have been tied to fickle trading markets, it helps to have a Plan B.
For James Gorman, that’s Morgan Stanley’s wealth-management division, which produced nearly half of the firm’s revenue in the third quarter, the most in six reporting periods. For Lloyd Blankfein at rival Goldman Sachs Group Inc., it was the investment and lending segment, an opaque unit that has held private-equity style stakes in firms ranging from insurer Global Atlantic Financial Group Ltd. to Danish utility Dong Energy A/S.
While both banks reported better-than-expected profit because of these businesses, investors showed a preference for Morgan Stanley’s results. The firm’s shares climbed 0.9 percent in New York, while Goldman slumped 1.6 percent.
The business of managing money always promised to insulate Morgan Stanley from swings in trading revenue tied to the whims of hedge-fund clients. The rationale for the bank’s crisis-era acquisition of Citigroup Inc.’s Smith Barney brokerage has never been stronger than in the last six months, when volatility hit new lows and stock markets touched record highs.
Investing Unit
At Goldman Sachs, gains from investing in other companies increased 51 percent in the quarter to the highest in almost four years as share indexes hit records. Goldman Sachs is one of the few Wall Street firms still taking large stakes in other companies, using a merchant-banking model that dates back decades. While revenue from trading equities, fixed-income and commodities slipped from a year earlier, the firm’s smaller investing and lending unit topped every estimate of analysts surveyed by Bloomberg.
The unit has the reputation of being one of the hardest to model, making it difficult for analysts to accurately predict results. It’s also volatile: While the business generated almost one-quarter of the bank’s revenue in the third quarter, it produced less than 2% of firmwide revenue in the first three months of 2016.
Goldman Sachs has said its working on building a more predicable lending business. Last month, it laid out a series of initiatives to boost revenue by
$5 billion even if the trading
environment doesn’t improve.
At Morgan Stanley, wealth-management revenue advanced 9% to $4.22 billion, compared with the $4.1 billion prediction of KBW Inc. Pretax profit from that business rose 24% to $1.12 billion. Trading contributes a bigger share of overall revenue at Morgan Stanley and Goldman Sachs than other Wall Street firms. Goldman Sachs’ fixed-income revenue declined 26% to $1.45 billion — worse than the 22% average decline of the five biggest US investment banks. And the company is on track for its weakest annual commodity performance on record, Chavez said on the call. Morgan Stanley’s bond-trading revenue fell 21 percent to $1.17 billion, but still met Gorman’s target of earning at least $1 billion per quarter.