When it comes to investment banks, two names stand out: Morgan Stanley (MS) and Goldman Sachs (GS). Both companies are leaders in underwriting and advisory services. However, with the challenging operating environment for investment banks, both MS and GS have been facing profitability struggles since last year.
This is evident from the bearish investor sentiment towards MS and GS stocks. Year-to-date, Morgan Stanley shares have lost 19.4% and Goldman Sachs shares have lost 18.9%.
Image Source: Zacks Investment Research
Headwinds such as persistently high inflation, global aggressive monetary policy tightening, expectations of an economic slowdown, and geopolitical tensions have resulted in a significant decline in underwriting and advisory business. Although this year has shown slight improvement, the situation is far from normal.
Given the tough operating environment, let’s analyze which company, Morgan Stanley or Goldman Sachs, is better positioned to navigate these challenges. Currently, both companies have a Zacks Rank #3 (Hold).
In terms of financial performance in the first half of 2023, Morgan Stanley reported a 16% decline in net income, while Goldman Sachs saw a 37% plunge. On the revenue front, Morgan Stanley’s top-line growth remained stable, while Goldman Sachs recorded a 7% fall.
Diversified Revenue Sources
A closer look at the revenue details reveals that Morgan Stanley’s Institutional Services business, which includes investment banking, experienced a 10% decrease in net revenues in the first half of 2023. This business accounts for 45% of the company’s net revenues.
Goldman Sachs’ Global Banking and Markets business, which accounts for almost 68% of the firm’s total net revenues, saw a 15% decline in total net revenues.
It is important to note that Morgan Stanley is less reliant on investment banking compared to Goldman Sachs. Investment banking is not the primary revenue contributor for Morgan Stanley. In the first half of the year, the company’s Wealth Management business accounted for 47% of total net revenues.
Therefore, Morgan Stanley has a more diversified revenue mix, with a focus on both investment banking and wealth management businesses. This balance helps the company maintain profitability even when investment banking faces challenges.
On the other hand, Goldman Sachs is currently streamlining its business, with a refocus on its core strengths of investment banking and trading while reducing its retail footprint. As part of this strategy, the company has announced the divestiture of its Personal Financial Management unit and is actively seeking buyers for its consumer lending platform, GreenSky. These efforts may result in some one-time charges, which can hinder growth in the near term.
Considering the analysis, investors may want to keep Morgan Stanley on their radar. The company’s balanced revenue mix, with a focus on investment banking and wealth management, positions it well for sustainable profitability. With signs of improvement in investment banking and positive market projections for the future, Morgan Stanley stands to benefit from its diversified revenue streams.
Disclaimer: The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.