Economy

Wall Street banks look beyond trading to drive profits

Goldman Sachs and Morgan Stanley top forecasts despite industry decline in bond trading

A trader works at the Goldman Sachs stall on the floor of the New York Stock Exchange. Goldman Sachs and Morgan Stanley both topped analyst expectations in third quarter results on Tuesday. Photograph: Brendan McDermid/Reuters

Tue Oct 17 2017 - 18:59

Wall Street rivals Goldman Sachs and Morgan Stanley topped analyst expectations on Tuesday, reporting third-quarter earnings gains from a range of products and services despite an industry-wide decline in bond trading.

Goldman’s private equity investments helped fuel its earnings beat, while Morgan Stanley’s wealth management unit delivered record revenue and profit margins. Both reported higher investment banking revenue than the year-ago period and kept a lid on expenses relative to revenue.

Executives at the biggest banks have argued that diverse business lines can offset temporary weakness in one area and that controlling costs can further pad the bottom line.

"This is the goal: that we're not as reliant on sales and trading businesses," Morgan Stanley chief financial officer Jonathan Pruzan said. "In a subdued trading environment, we can maintain our [market] share, yet when the market flexes up, we have capacity to participate in this growth."

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Shares of Morgan Stanley, which reported a better-than-expected 11 per cent profit rise and topped several of chief executive James Gorman’s financial targets, were 1.6 per cent higher at $49.81.

Volatility

At a conference last month, bank executives cautioned that third-quarter trading results would be weaker because of low bond market volatility and a strong year-ago quarter. That prepared investors and led analysts to revise earnings forecasts lower.

Goldman’s bond trading results were under particular scrutiny from investors, since the fifth-largest US bank is more reliant on trading than competitors and does not have a significant retail operation to offset recent declines.

JPMorgan Chase, Bank of America and Citigroup, which beat expectations when reporting results last week, have major consumer operations, while Morgan Stanley has a huge retail brokerage arm that has been expanding into lending.

Goldman’s 26 per cent fall in third-quarter bond trading was within the 16 per cent to 27 per cent declines that Wall Street rivals had reported, but far less than the 40 per cent drop some analysts had been expecting.

Overall, the bank reported a 3 per cent profit decline that beat Wall Street estimates. – Reuters

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