The interesting thing to me in the earnings reports of these two major firms is the stress each management gave to different financial measures.
Goldman Sachs Group Inc. (NYSE:GS) stressed its return on equity, which came in at 10.9 percent.
Morgan Stanley (NYSE:MS) stressed what it considered to be the results coming from its new business strategy.
Goldman Sachs has the second highest return on equity of the six largest "banks" in the country, second only to that of Wells Fargo (NYSE:WFC), which earned 14.4 percent in the first quarter. Harvey Schwartz, Chief Financial Officer of Goldman, talked about how well it was positioned in terms of capital adequacy and how difficult it was going to be for other banks to get their return on equity up with new capital requirements. He spoke of the "Herculean task" Goldman's competitors faced in moving from the 8.0 percent to 11.0 percent range.
The net income of Goldman Sachs fell 10.0 percent from a year earlier to $2.0 billion from the same period a year earlier. This did exceed the expectations of stock analysts who reported to have expected only $1.7 billion in net income.
The company did very well in commodities trading, an area that Morgan Stanley is reducing along with JPMorgan Chase (NYSE:JPM) and other major players, and in mergers and acquisitions, which apparently experienced a substantial increase in the advisory business for European deals.
And, like many of the other major banks, trading in fixed income, which dropped to its lowest first quarter level since 2007. In addition, the revenues it earned in equities also fell and came in lower than that received by Morgan Stanley.
Morgan Stanley, on the other hand, reported a gain in net income, an increase of 49.0 percent to $1.5 billion. One should note that its return on equity only rose to 9.2 percent and there are indications that Morgan will need to raise its capital ratio in the near future.
This should not be hard to do given that Morgan Stanley's stock has outperformed its five other big bank rivals over the past 12 months, rising by 37 percent. Furthermore, the bank has been given permission by the Federal Reserve to bump up its dividend payments and engage in a stock repurchase program... a $1.0 billion program already in the works.
The big difference between the two companies, however, seems to be that Morgan Stanley under the leadership of its Chief Executive Officer James Gorman has guided the company along a new path, de-emphasizing fixed income trading and putting more effort into building the wealth management area and keeping up the position it has achieved in investment banking and equities trading.
The investment community seems to like this direction. And one can see why given the results earned by the banking industry over the past year. Gorman wants to get away from the reliance on trading in fixed income, commodities and currencies and similar efforts because of the volatility that comes from working in these areas. Big gains can be posted, but like this quarter, earnings can suffer when trading declines.
To see the difference in just the results from the first quarter, Morgan Stanley earned only 19.0 percent of its revenue from fixed-income trading whereas Goldman Sachs gathered in 31.0 percent of its revenue from fixed-income trading.
Still, Morgan Stanley benefited from its fixed-income trading in the first quarter as revenues rose 13.0 percent in the period. The bank's Chief Financial Officer, Ruth Porat, indicated that the company benefited from the cold weather, which profited from oil trading, an area that it is in the process of selling. But, she also indicated that revenues would have been higher anyway because of the performance in other areas.
Mr. Gorman's interim goal for Morgan Stanley's return on equity is 10.0 percent. He believes that the company is well on the way to achieving that objective.
Following these two companies is going to be an interesting journey. There is no question that the American "banking" system is changing. As we look at the largest six "banks" in the country we see at least four different models evolving: Wells Fargo and its emphasis on consumer banking, JPMorgan Chase and its "commercial banking" model, Goldman Sachs remaining basically as it was due to its relative success in the past in its trading model, and Morgan Stanley emphasizing wealth management and investment advisory. Bank of America (NYSE:BAC) seems to be leaning toward the Wells Fargo model and Citigroup (NYSE:C) hasn't really successfully transmitted its model at this date.
Goldman Sachs and Morgan Stanley do not come from the "depository institution" part of the industry. That is why it will be interesting to follow these two to see what works. Maybe both models will find their own niche.
Still given the regulatory environment it is going to be difficult for either institution to get their return on equity back into the 15.0 percent range. Mr. Schwartz of Goldman specifically referred to the difficulty of achieving such a level with the requirements coming from regulators. He suggested that organizations that were not earning 11.0 percent now might have to resort to riskier positions in order to gain a higher performance, something he said Goldman would not have to do.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.