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For Goldman Sachs and Morgan Stanley, boring is beautiful

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[April 18, 2014]  By Lauren Tara LaCapra

(Reuters) — Investment banks Morgan Stanley and Goldman Sachs Group Inc posted better-than-expected quarterly earnings on Thursday, helped by gains in merger advisory and stock underwriting.

The results underscored how businesses viewed as stodgy before the financial crisis are becoming critical drivers of earnings for investment banks now. Goldman's investment management, stock underwriting and merger advisory businesses logged big gains. Morgan Stanley did well in those areas, as well as in wealth management and bond underwriting.

Across Wall Street, merger advisory fees grew 4.8 percent in the first quarter over the same quarter last year, while stock underwriting revenue surged 18.8 percent, Thomson Reuters Deals Business Intelligence data show. Growth in initial public offerings, where fees are often highest, was particularly robust.

Morgan Stanley was the biggest stock underwriter globally in the first quarter, while Goldman earned the most fees from merger advisory, Thomson Reuters data show.

Both banks benefited from these businesses, but Morgan Stanley got far more of a boost than Goldman did. Morgan Stanley, which has made a conscious effort to focus on slower-growing businesses like wealth management after nearly failing during the financial crisis, posted a 55 percent gain in shareholder earnings, and its shares rose 3.6 percent to $30.96.


Goldman Sachs posted its best investment banking revenues since 2007 and performed better than analysts had forecast. But the bank, which has made fewer strategic changes than Morgan Stanley since the crisis, posted an 8 percent decline in revenue and its profit for shareholders fell 11 percent. It shares rose 0.4 percent $157.80 in early afternoon trading.

"Morgan Stanley's management has made some excellent moves over the last three or four years, and you're seeing the results now," said Robert Lutts, chief investment officer at Cabot Money Management in Salem, Massachusetts.

Devin Ryan, an analyst at JMP Securities, noted that with these changes Morgan Stanley is positioned to perform well in the coming years. He has an "outperform" rating on Morgan Stanley, and a "market perform" rating on Goldman.

In 2009, John Mack, then chief executive of Morgan Stanley, agreed to buy Citigroup's Smith Barney retail brokerage business over time, a deal that closed in the middle of 2013. With that purchase, about half of Morgan Stanley's annual revenue comes from wealth and investment management, which tends to fluctuate less than trading revenue.

Goldman Sachs, on the other hand, still relies heavily on trading — typically more than 60 percent of its revenue in a quarter comes from stock and bond trading, both for itself and for customers.

Bond trading volume has dropped since the financial crisis, as regulators have clamped down on banks making speculative bets in markets.

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In response to a question from Reuters on a conference call, Goldman Chief Financial Officer Harvey Schwartz acknowledged that the return potential for Wall Street banks may never again reach pre-crisis heights, due to higher capital requirements.

But he stopped short of saying that the bank should reshape itself to reduce its reliance on trading stocks and bonds. "Our clients wake up today and they focus on the same issues they always have," Schwartz said.

OUTLOOK CLOUDY

Indeed, the outlook for investment banking businesses is cloudy. Goldman Sachs Group Inc said its backlog of investment banking business, including underwriting and merger advisory, decreased.

But speaking on separate conference calls with analysts, executives from both banks said the outlook for the merger advisory business was good. Goldman's Schwartz also said that the bank's backlog of business is stronger now than it was a year ago.

Morgan Stanley posted net income applicable to common shareholders of $1.45 billion, or 74 cents a share, compared with $936 million, or 48 cents a share, a year earlier.

Analysts, on average, expected the bank to earn 59 cents a share, according to ThomsonReuters I/B/E/S. It was not immediately clear how the estimates compare to the actual results, but several analysts said the bank beat consensus.

Goldman Sachs, meanwhile, posted first-quarter earnings of $1.95 billion, or $4.02 a share, down from $2.19 billion, or $4.29 a share, in the same quarter last year.

Analysts, on average, had expected earnings of $3.45 per share, according to Thomson Reuters I/B/E/S.

That decline came largely from its revenue in institutional client trading, which fell 13 percent to $4.45 billion, and investing and lending for its own account, which fell 26 percent to $1.53 billion.


(Reporting by Lauren Tara LaCapra in New York; additional reporting by Peter Rudegeair; editing by Dan Wilchins and Bernadette Baum)

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