Editor's note: as of Monday's close, Morgan Stanley's market capitalization was $86.403 billion, 0.6% higher than Goldman Sachs Group's $85.882 billion, surpassing Goldman Sachs Group for the first time in more than a decade, according to Reuters data. On the same day, Morgan Stanley's share price closed up 0.26%, while Goldman Sachs Group closed down 0.97%.
Tencent Securities News according to Investopedia reports, for many years, Goldman Sachs Group has been the target of Wall Street companies, but Morgan Stanley is not. According to the Wall Street Journal, Goldman Sachs Group's market capitalization was about $50 billion more than Morgan Stanley's in 2009, indicating a wide gap between the two investment banks. Since then, however, the wealth of Goldman Sachs Group and Morgan Stanley has been greatly reversed. From the beginning of this year to July 21, Goldman Sachs Group's share price has fallen 6.7 per cent, while Morgan Stanley's share price has risen 13.3 per cent. In the past 12 months, Goldman Sachs Group's share price has risen 40.5%, and Morgan Stanley's share price has risen 69.4%. At the same time, Goldman Sachs Group's lead in market capitalization has shrunk to less than $6 billion.
Morgan Stanley, whose performance exceeded expectations
Morgan Stanley earned 87 cents a share in the second quarter, far exceeding analysts' expectations of 76 cents, according to data released by Barron Weekly. In the same period last year, the bank earned 75 cents a share. Barron Weekly added that Morgan Stanley's revenue in the second quarter was $9.5 billion, while analysts expected it to be $9.09 billion, compared with $8.91 billion in the same period last year. Barron Weekly pointed out that Morgan Stanley's performance improvement has a broad basis: investment banking revenue growth, stock trading and wealth management business is also showing growth. Under the strong improvement, Morgan Stanley's performance ushered in the best performance ever. With strong results, Morgan Stanley announced a 25% increase in dividend after the second quarter and promised a $5 billion share buyback.
Goldman Sachs Group, who was hit hard and stumbled.
At the same time, Goldman Sachs Group was hit hard by the transfer of trillions of dollars to passive mutual funds and ETF. The Wall Street Journal reported that such a large-scale capital loss depressed Goldman Sachs Group's trading volume. Goldman Sachs Group also encountered other problems, such as reduced orders from hedge funds and low market liquidity that undermined investor demand for some complex derivatives, the media added. For Goldman Sachs Group, these derivatives are important profit-generating tools. Goldman Sachs Group's overall trading revenue fell 17 per cent in the second quarter from a year earlier, while fixed income revenue fell 40 per cent year-on-year, according to the Wall Street Journal.
The blessings and disasters brought about by the new regulatory rules
Traditionally, Goldman Sachs Group mainly serves professional traders with strong risk tolerance, and proprietary trading is Goldman Sachs Group's important source of profit. In addition, providing services to high-risk hedge funds is another major business of Goldman Sachs Group. In the wake of the financial crisis, however, increasingly risk-averse US regulators pushed for the implementation of the Volcker Rule rule, limiting banks' freedom to make profits through proprietary trading. Lisa Abramowicz, a columnist for Bloomberg News, pointed out that in theory, the move poses a major obstacle for Goldman Sachs Group, and even if they can make full use of the new regulatory rules to maximize benefits, it is far less than their previous achievements.
(editor's note: proprietary trading refers to a business in which investment banks use their own funds and integrated funds to directly participate in securities market transactions and bear risks. )
By contrast, Morgan Stanley has eliminated 25 per cent of fixed income traders, forcing the rest to become more conservative and expanding business units that generate stable profits with minimum capital requirements, according to the Wall Street Journal. Wealth management is particularly worth mentioning. In fact, Morgan Stanley appears to have taken a more conservative approach, limiting traders' exposure to the minimum positions required for customer service orders in order to meet the bank's responsibilities as a market maker. It may be because of this conservative way of doing business that Morgan Stanley's total trading revenue in the first half of this year surpassed Goldman Sachs Group for at least the first time since the financial crisis, according to the Wall Street Journal.
Morgan Stanley's huge customer assets
Goldman Sachs Group is still largely an investment bank and securities trading company, and the revenue of its business is still very volatile. In contrast, financial revenue is more stable and will earn higher returns as customers switch to fee-based account business. At the same time, the old revenue model of securities trading commissions has weakened.
For Morgan Stanley, the 2009 acquisition of Citigroup Inc's Smith Barney trading intermediary and wealth management unit was an important turning point. The deal gives Morgan Stanley a leading position in the trading intermediary and wealth management section of the financial industry. At present, there are 15777 financial representatives, also known as financial advisers, in Morgan Stanley's 601 retail offices.
According to a supplement to Morgan Stanley's second-quarter finances, these financial representatives amassed client assets worth $2.239 trillion. In addition, the bank's asset management division manages another $435 billion in assets. The two add up to 2.674 trillion dollars. According to Goldman Sachs Group's second-quarter results, the bank's investment management unit managed only $1.41 trillion.
Huge customer assets create higher profit margins
Taken together, Morgan Stanley's wealth management and asset management departments will have pre-tax profits of $4.6 billion this year (twice the pre-tax profits of the two departments in the first half of this year). According to the annual report released by Goldman Sachs Group, the bank's investment management department generated a total pre-tax profit of $1.1 billion in 2016, while assets under management at the end of the year were $1.379 trillion. Goldman Sachs Group's quarterly report this year did not release pre-tax profit figures for the investment management department.
Morgan Stanley's pre-tax profit is more than four times higher than Goldman Sachs Group's pre-tax profit from customer asset management, mainly for two reasons. First, Morgan Stanley's asset base is twice as large as Goldman Sachs Group's. Second, the profit margin of the assets managed by Morgan Stanley is twice as high as that of Goldman Sachs Group. Morgan Stanley chose to pursue mass customers through the wealth management department, while Goldman Sachs Group limited himself to institutional customers and high net worth retail investors.
According to Morgan Stanley's financial supplement, the bank's wealth management and asset management departments had a pre-tax profit margin of 24 per cent in the first half of this year, contributing 49 per cent to the bank's overall revenue and 42 per cent to profits. According to Goldman Sachs Group's second-quarter results, the bank's investment management contributed only 19 per cent of the bank's overall revenue in the first half of this year. With the great influence of the stabilization of public finance and asset management business, Morgan Stanley seems to be able to weather future market fluctuations more easily than Goldman Sachs Group. (compiled by Mina / revised by Zhu Yi)