Higher expenses and a plunge in dealmaking hobbled quarterly results for two of Wall Street’s premier investment banks, but shares of Goldman Sachs Group Inc. and Morgan Stanley headed in sharply different directions after the latter beat expectations and offered a more upbeat forecast for M&A.
Goldman’s shares slumped as much as 4.3 percent in New York trading after it reported that investment banking fees dropped by almost half during the last three months of 2022 from a year earlier, and the backlog of new business shrank compared with the third quarter. At the same time costs jumped, driven by compensation, and the New York-based bank earmarked more funds to cover loans that might go sour. That left net income down 69 percent from a year earlier on a 16 percent drop in revenue, the company said in a statement.
Morgan Stanley also posted a steep drop in net income, down almost 40 percent from a year earlier on lower revenue, as non-interest expenses came in higher than expected and trading missed estimates. But overall results at the New York-based bank were higher than analysts expected, with particular strength in wealth management, where Morgan Stanley has benefited from higher net interest income as the Federal Reserve pushed up rates.
Rising Expenses
“Widely expected to be awful, Goldman Sachs’ Q4 results were even more miserable than anticipated,” said Octavio Marenzi, the chief executive at Opimas. “The real problem lies in the fact that operating expenses shot up 11 percent, while revenues tumbled. This strongly suggests more cost cutting and layoffs are going to come.”
“Morgan Stanley, on the other hand, had results very much in line with expectations, with weakness in investment banking, but stable elsewhere,” Marenzi said.
Executives at Morgan Stanley have been preaching confidence heading into 2023 in the hopes that their business model will avoid getting caught up in any consumer-market strain, while a rebound in asset prices and capital-markets activity would prove a boon for the firm.
“We have seen a healthy start to the year,” CFO Sharon Yeshaya said in an interview. “A lot of it hinges on the economic outlook and whether we have seen a peak in inflation and a policy pivot.”
Job Cuts
The bank has been mindful of cost pressures. In December, it started a fresh round of job cuts that affected about 1,600 employees, or roughly 2 percent of its total workforce. While the move represents a much smaller action than at Goldman, it serves as another indicator of Wall Street’s cautious outlook as a possible U.S. recession looms.
Morgan Stanley’s view is “we are not heading into a dark period,” CEO James Gorman told investors during a conference call. Investment banking and deals activity will pick up once the Federal Reserve pauses rate hikes, he said — “I will bet the year on that.”
The bank continues to monitor its expenses and headcount, Gorman said, and it’s been “overdue” for right-sizing the workforce because it hasn’t done much to pull back over a couple of years. That’s no different from peers that are also re-setting compensation packages and streamlining the staff to bring down costs, he said.
Goldman’s Outlook
Goldman’s fourth-quarter compensation costs rose 16 percent from a year earlier, though that gauge dropped on a full-year basis. That indicates the bank’s leadership was too conservative with its compensation set-aside in the first nine months of 2022. Managers will still have to deliver a tough bonus message to its bankers and traders this week.
“Simply said, our quarter was disappointing,” CEO David Solomon said during the firm’s earnings call. The firm has faced a host of headwinds, some the bank never thought it would see, like the war in Ukraine.
Looking forward, there aren’t many signs of widespread distress, but the year remains “uncertain,” and customers want to see more stability before committing to long-term plans and growth, he said.
The investment-banking giant has also poured billions of dollars into its retail effort, which includes the Apple Card and specialty-lending platform GreenSky. That operation has posted $3.8 billion in pretax losses over the past three years.
