Banking Giants Beat Street on Austerity, Speculation and Politics: Goldman Sachs Group, Inc. (GS), Morgan Stanley (MS)

Recent earnings releases by investment banks Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS) continue to reveal the relative directions of both firms. For Goldman, Q4 saw its profits triple from $1.01 billion in the final quarter of 2011 to $2.89 billion in Q4 2012: quarterly earnings per share of $5.60, far above than any estimate. Net revenues increased by 53% from $6.05 billion to $9.24 billion; 15.7% of which came from the sale of a hedge fund. Revenues in underwriting (equity and debt) increased by 132% to $897 million whereas revenues from investment banking and financial advice increased by 64% and 8% to $1.41 billion and $508 million respectively. If that wasn’t enough, market making recorded the biggest jump in quarterly revenues of any of Goldman’s units. Revenues there climbed by 109% from last year to $2.7 billion, making it the biggest source of the company’s revenues. In short it was a great quarter for Goldman.

Meanwhile, Morgan Stanley, who has struggled mightily in the past few years, increased its revenues by 32% sequentially and 23% year over year to $6.97 billion ($0.45 per share), which, like Goldman, blew away analysts’ expectations. Morgan’s net income of $507 million shows that Chairman and CEO James Gorman’s turnaround strategy appears to be working. Pressure from activist investor Daniel Loeb of Third Point LLC may have had some effect on the overall plan.  The company’s brokerage unit earned pre-tax margin of $581 million on revenues of $3.46 billion in the quarter, which takes pre-tax margins to 16.8%, meaning Gorman has fulfilled his promise to take the unit’s margin back to 15% nine months before the deadline.  But, Morgan is bringing these results in from a much humbler place than Goldman.

Morgan Stanley’s shares have been struggling in the past three years due to the prevailing financial crisis and the disappointing performance of the company. The bank has been heavily exposed to the European debt crisis while the trading environment remained volatile throughout the past couple of years. Moreover, the bank has been relying on short term borrowing to finance its operations, which made the investors increasingly nervous. Following the collapse of Lehman Brothers, it took roughly $1.3 million to insure $10 million of Morgan Stanley bonds for a year. By mid-2011, this expenditure slipped to $449,000 a year, which was still at the high end of the market. Since the beginning of 2009 till the end of 2012, Morgan’s shares have been up 23.75% while those of its rivals such as Goldman Sachs and JPMorgan Chase & Co. (NYSE:JPM) have risen by 65.2% and 45.0% respectively. Morgan Stanley is now going on an aggressive cost cutting drive, has eliminated 1,600 jobs and has deferred cash bonuses for employees making more than $350,000.

Morgan Stanley also aims to reduce its risk-weighted-average assets of fixed income units to $235 billion by 2014 and below $200 billion by 2016.  Last year, Morgan Stanley’s CFO Ruth Porat revealed, for the first time, that the company had $500 billion of risk weighted average assets, including $320 billion in fixed-income and commodities.