Goldman slams into unwelcome sort of volatility

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NEW YORK, Jan 17 (Reuters Breakingviews) – The similarities between Goldman Sachs (GS.N) and Morgan Stanley (MS.N) are drawing attention to what makes them different. It’s a problem for Goldman Chief Executive David Solomon.

Both Wall Street giants on Tuesday reported a slump in fourth-quarter earnings. Investment banking fees halved year-on-year for each, though Goldman generated roughly 50% more from deal advice and underwriting stocks and bonds than its archrival. Goldman’s trading revenue also increased nearly one-fifth from the last three months of 2021, while Morgan Stanley’s fell 12%.

When investment banking activity wilts, investors scrutinize the other businesses. Whereas Morgan Stanley boss James Gorman has successfully poured energy and capital into wealth management, which delivered an 18% return on equity, Solomon for years promised growth would come from consumer lending initiatives such as its credit card with Apple (AAPL.O). It hasn’t, yet. The division Goldman now calls “platform solutions” generated a negative 65% return in the fourth quarter.

The problem is that while Main Street banking was meant to add predictability to Goldman’s earnings, it has done the opposite. It lost nearly $4 billion over the past three years before tax, recent filings show. Back in 2019, Solomon told shareholders the consumer push had eaten up around $1 billion, suggesting the cumulative number is now somewhere around $5 billion.

Some of that is just bad luck: Banks must now take bad-debt charges when loans are made, which wasn’t the case when Goldman embarked on the strategy. Solomon concedes there are other problems, too, from personnel to plain-old overreaching. By waiting years to detail losses in a business once touted as “game-changing,” Goldman has lost some credibility. Meanwhile, Morgan Stanley has stolen a march: Half its revenue is now from wealth management, and on Tuesday Gorman reaffirmed a longer-term goal of accumulating $10 trillion of assets, more than fund colossus BlackRock (BLK.N) has today.

It leaves Goldman on the back foot, and Solomon with something to prove, at the firm’s investor presentation next month. During the decade before he took over, Goldman traded at a premium to Morgan Stanley. Now investors value a dollar of Morgan Stanley’s net assets as if it was worth 40% more than the same dollar at Goldman, according to Refinitiv data. While the idea may be to stop investors from comparing the two, the discrepancies make it hard for them not to.

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Reuters Graphics
Reuters Graphics


Goldman Sachs said on Jan. 17 that it generated earnings per share of $3.32 for the fourth quarter of 2022, a 69% decline from a year earlier and 40% below what analysts had estimated, according to Refinitiv.

Separately, rival Morgan Stanley reported earnings per share of $1.26 for the same three-month period, 37% less than for the same span in 2021, and slightly higher than analysts’ forecasts, according to Refinitiv.

Goldman reported a $2 billion full-year loss for its new “platform solutions” division, which includes the credit card it offers alongside iPhone maker Apple. The loss is roughly double that of 2021, based on restated earnings published on Jan. 13.

The investment bank’s revenue from trading securities increased almost one-fifth to $4.8 billion while fees from advising on mergers and acquisitions and underwriting stock and bond issues roughly halved year-on-year. JPMorgan, Bank of America and Citigroup on Jan. 13 reported similar plunges in deal-related fees.

Editing by Jeffrey Goldfarb and Sharon Lam

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