Wall Street giants Goldman Sachs and Morgan Stanley beat analyst expectations for first quarter earnings. The rivals posted better-than-expected net income by maintaining a steady wave of highly profitable corporate deal making. This helped bolster revenue in their traditional merger-advice and securities-underwriting businesses. As a result, they are now relying less on the trading desks that once dominated their performances.
Showing some positive signs for the future of investment banking, Goldman recorded its best quarter for investment banking revenue since before the financial crisis. In general, the combined value of all investment banking transactions announced during the first three months of the year was the highest of any first quarter since 2007. Harsher rules on capital and investors’ aversion to taking risks have shifted the focus away from trading and on to less-risky business such as advising companies on deals and managing money for wealthy clients.
Morgan Stanley has pulled back more heavily from trading than Goldman has since the financial crisis, when MS was wavering on the brink of collapse. Revenue from trading in fixed income, commodities and currencies (FICC) accounted for just 19% of the company’s overall revenue, compared with 37% in the same quarter in 2012. Yet Morgan Stanley was the only big U.S. bank to report higher FICC trading revenue for the first quarter from a year earlier. Goldman’s FICC revenue fell 13%, JPMorgan’s 21%, Citigroup’s 18% and Bank of America’s 15%.
But while Morgan Stanley won the quarterly battle in trading performance, Goldman’s return on equity of 10.9% was better than MS’s 8.3%. Goldman’s higher returns have helped the firm remain in businesses even as new capital rules have forced some peers to make tough choices on where to compete.
Overall, the two banks had a stellar financial quarter. Morgan Stanley’s revenue of $8.8 billion and earnings per share of 68 cents beat analysts’ expectations of $8.52 billion and 59 cents. On the other hand, Goldman’s revenue of $9.33 billion and earnings per share of $4.02 topped analysts’ expectations of $8.7 billion and $3.45.