Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) on Tuesday reported sharply higher third-quarter earnings, wrapping up a week of big-bank reports that reflect the strength of the U.S. economy in shrugging off geopolitical turmoil.
Profit rose 19% at Goldman and 20% at Morgan Stanley. Both firms were buoyed by lower taxes, thanks to the December law that slashed corporate tax rates, as well as strong deal-making revenue. Morgan Stanley shares rose more than 5%, and Goldman gained 3%, though both are down double-digits on the year. For Morgan Stanley, it was the biggest single-day gain since Donald Trump won the presidency.
After Main Street rivals reported strong earnings on the backs of their consumer businesses, Goldman and Morgan Stanley showed that the current economic and market climate also works for firms with deep Wall Street DNA. All six of the largest U.S. banks reported higher profits from a year ago.
Underwriting revenues surged — up 20% at Goldman and 33% at Morgan Stanley - as corporate clients tapped wide-open securities markets to raise money. Continued consolidation in industries such as technology, media and health care have pushed merger fees near all-time highs.
Today’s biggest banks are more balanced and less specialized than they were a decade ago, and so are more apt to rise and fall together. Morgan Stanley and Goldman have expanded into Main Street businesses — Goldman belatedly, but with gusto — while JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) have become trading giants in their own right.
Morgan Stanley, run by Chief Executive and Chairman James Gorman, reported profit of $2.15 billion on $9.87 billion in revenue, both better than a year ago. Earnings per share of $1.17 exceeded the expectations of analysts polled by Refinitiv, who predicted $1.01 per share.
At Goldman, earnings per share of $6.28 beat expectations by 90 cents. The firm reported profit of $2.52 billion on revenue of $8.65 billion, both up from the third quarter of 2017.
At Morgan Stanley, gains came from across the firm. Its wealth management arm continued to rake in client money, the institutional businesses of trading and underwriting held up, and Mr. Gorman kept a lid on expenses.
Once Wall Street’s weakling, Morgan Stanley is in the late innings of a multiyear turnaround under Mr. Gorman, a matter-of-fact Australian who spent a decade as a McKinsey & Co. consultant before coming to finance. He has pared its freewheeling trading and principal-investing operations—responsible for billions of dollars in crisis-era losses—and doubled down on wealth management. His goal is a firm that does well in boom times and limits losses in busts.
“These strategic choices were designed to ensure that as much as we can control, the firm does well in its strong market environment and demonstrates stability” in tougher times, Mr. Gorman said on a conference call Tuesday morning. “That is exactly how 2018 is shaping up.”
Goldman Sachs, meanwhile, is in the early legs of its own redesign. The firm is getting into consumer banking and commercial cash management, remaking itself more in the image of its Main Street rivals to compensate for steady declines in its once-formidable trading division.
The quarterly results were the final chapter in the tenure of Lloyd Blankfein, who stepped down as CEO on Oct. 1. Replacing him is David Solomon, a former investment banker who inherits a firm casting about for ways to grow.
Goldman is getting into consumer banking, expanding its asset-management arm and building a commercial cash-management and financing business from scratch. Those activities can generate steadier fees, without the jarring swings that come from its Wall Street operations of trading and principal investing.
Goldman said its consumer loan book had grown to $4 billion at quarter end, and that its consumer deposits hit $26 billion in the U.S. Net interest income — the difference between what Goldman pays its creditors and what it takes in from its borrowers — rose 17% from a year ago, to $856 million.
The firm hopes that steadier, simpler businesses will compensate for continued trouble in its trading arm. Revenue there was essentially flat from a year ago, with a rise in equities, which includes stock trading and securities lending, offsetting a 10% drop in fixed-income trading.
Dealmaking was strong at both banks, despite the summer season. At Morgan Stanley, investment banking revenue was 15% higher, driven mostly by stock underwriting, which offset a decline in merger fees. It was the division’s best third quarter in a decade, and Chief Financial Officer Jon Pruzan said the firm’s pipeline of unannounced deals was healthy.
Both banks enjoyed a big jump in equity underwriting revenue, outpacing increases at JPMorgan Chase and Bank of America. Stock-market investors have turned hungry this year, coaxing startups to go public and established companies to issue new shares. Notable IPOs included event-planner Eventbrite Inc.’s September offering, led by Goldman, and commercial landlord Cushman & Wakefield PLC’s August IPO, led by Morgan Stanley.
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