Morgan Stanley and Goldman Sachs had not reported earnings on the same day since the darkest phase of the financial crisis in 2008, but they did so again on Thursday.
Morgan Stanley probably enjoyed the coincidence more.
Bucking a bearish start to the year on Wall Street, Morgan Stanley’s first-quarter adjusted income of $1.39 billion was an 18 percent increase compared with results in the period a year earlier.
In contrast, Goldman’s $2.03 billion of net income was a 10 percent drop. Morgan Stanley’s shares, which have soared over the last year, climbed an additional 2.9 percent on Thursday, while Goldman’s edged 0.14 percent higher.
More than bankers’ bragging rights is at stake, though.
The firms’ divergent first-quarter results provide important clues to assess the degree to which Wall Street is changing in the face of an onslaught of new regulations since the crisis. To some analysts, Morgan Stanley’s solid first quarter provides further evidence that it has adapted better than its rivals to a regulatory environment in which banks are less able to swing for the fences.
Morgan Stanley still does a lot of trading, and that business contributed considerably to its first-quarter performance.
But since the crisis, it has placed much more emphasis on wealth management, a business that, if managed properly, tends to have fewer costly surprises.
“I think Morgan Stanley got the memo early to reposition its business model for the post-crisis era,†said Mike Mayo, a bank analyst at CLSA. “They acted more quickly.â€
One of the big challenges for Wall Street firms is knowing what to do with operations that trade bonds, commodities and derivatives linked to interest rates. Known as fixed income, this business has typically been a huge earner for banks, but it has also been the source of some of their biggest losses. In the run-up to the crisis, Morgan Stanley traders made a huge bet on mortgages that backfired terribly, saddling it with billions of dollars in losses.
A number of new regulations have since been introduced to make fixed income safer, and they seem to have caused banks to cut back in this business in recent years. Morgan Stanley’s fixed-income performance has been uneven in the last few years, which has helped prompt management to restrain its size.
Goldman, however, has had more consistently positive results from its fixed-income division in recent years and has continued to treat it as a dominant part of its operations.
In the first quarter, 31 percent of Goldman’s revenue came from fixed-income trading. At Morgan Stanley, that figure was 19 percent. “The most volatile part of the firm is now a relatively small part of the firm,†James P. Gorman, chief executive of Morgan Stanley, said to CNBC on Thursday.
Morgan Stanley’s fixed-income business was actually a bright spot in the quarter, with revenue rising 9 percent, to $1.65 billion. Morgan Stanley’s revenue from equities trading also rose â€" and was higher than Goldman’s in the first quarter. The bank said that much of that strength came from its prime brokerage business, which lends to hedge funds and handles their trades.
“The deeper we go with clients, the deeper they go with us,†Ruth Porat, chief financial officer at Morgan Stanley, said in an interview.
As the trading revenue ramped up, Morgan Stanley’s wealth management unit continued to do well, reporting first-quarter pretax income of $691 million, a 16 percent rise from $597 million in the same period of 2013.
Looking back, Mr. Mayo gave some credit to Mr. Gorman, a former consultant with McKinsey, for the strategic plan that appeared to help achieve these results.
“People have had concerns about the C.E.O. They said he was not a trader or a banker,†Mr. Mayo said. “But investors are coming round to the idea of having a strategic thinker at the top of the organization.â€
Still, it might be too early to hail Morgan Stanley as a standard-bearer for a new Wall Street. It still greatly lags behind Goldman in a crucial measure of profitability. Morgan Stanley’s return on equity â€" a yardstick that tries to measure the profit shareholders are earning on a bank’s equity â€" was 8.9 percent in the first quarter. That was substantially below the 10.9 percent return on equity that Goldman posted for the period.
Morgan Stanley may find it hard to catch up. In a conference call with reporters, Harvey M. Schwartz, chief financial officer at Goldman, said that the industry would find it a “herculean task†to substantially increase return on equity from current levels.
And Morgan Stanley may need to further increase its capital to comply with new regulations, an exercise that could make it even harder to improve its return on equity.
Morgan Stanley’s fixed-income operations could also disappoint again.
The bank attributed some of the unit’s improved performance to trading in commodities, an area in which Wall Street firms have recently found it hard to make money.
But it is not clear whether commodities will continue to bolster Morgan Stanley’s results. Bad weather during the first quarter prompted higher activity in commodities trading, and Morgan Stanley is also selling some physical oil operations that helped lift the quarterly results.
Ms. Porat, Morgan Stanley’s chief financial officer, said that fixed-income revenue would still have been up in the first quarter without the physical oil operations. She added that trading in mortgage, municipal and corporate bonds performed well, and noted that “rates†trading, which focuses on government bonds and interest-rate swaps, was weaker.
Net revenue at Goldman’s struggling fixed-income unit fell 11 percent, to $2.85 billion. The firm attributed the decline to “significantly lower†revenue from interest rate products, currencies and mortgages.
Over all, Morgan Stanley, on an adjusted basis, earned 68 cents a share in the first quarter, an increase from 60 cents a share in the period a year earlier. Analysts had expected the firm to make 60 cents a share, according to data from Bloomberg. Adjusted revenue rose to $8.8 billion from $8.48 billion.
Goldman posted earnings of $4.02 a share in the first quarter after payment of preferred dividends, down from $2.26 billion, or $4.29 a share, in the period a year earlier. Wall Street analysts had been expecting profit of $3.44 a share, according to data from Thomson Reuters. The bank generated $9.33 billion in net revenue, down from $10.09 billion in the period a year earlier.
Goldman’s investment banking unit benefited from an industrywide surge in mergers and acquisitions. That division generated net revenue of $1.78 billion, the highest quarterly figure since 2007 and an increase from $1.57 billion in the first quarter of 2013.
“We are generally pleased with our performance for the quarter given the operating environment,†Lloyd C. Blankfein, chief executive of Goldman, said in a statement.
