The two largest US investment banks, Goldman Sachs Group Inc and Morgan Stanley, reported lower quarterly profits, but beat expectations on Tuesday even as the worst market slump in decades rattled Wall Street.
Goldman Sachs, the largest securities firm, said third quarter earnings fell 70 percent on weaker-than-expected revenues, knocking its shares to nearly three-year lows.
Later, No 2 Morgan Stanley, which reported a day ahead of schedule after US markets closed, trounced expectations paced by one-time gains, robust equity and commodities trading results and record prime brokerage fees.
Morgan's earnings fell 3 percent even as the year-old credit crunch slowed deal activity and created one of the toughest trading environments in decades. Its shares fell 11 percent on Tuesday in regular trading, though they pared most of those losses in electronic trading after New York markets closed.
Goldman shares also climbed after the bell, up 4 percent.
"Between Goldman Sachs and Morgan Stanley, we are getting some modest positive news in what has been an otherwise dark five-day period," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management.
Tough Times
The results come a day after No 4 investment bank Lehman Brothers Holdings Inc filed for bankruptcy, swamped by mortgage losses. No 3 broker Merrill Lynch & Co Inc meanwhile rushed into the arms of Bank of America Corp to avoid a similar fate.
These moves had prompted questions about the viability of investment banks. Several analysts predicted these firms would merge with commercial banks, which can tap pools of deposits.
Yet Morgan Stanley and Goldman dismissed those concerns.
"It's not the business model. It's performance that matters," said Goldman chief financial officer David Viniar. "We've been able to compete just fine."
Morgan Stanley CFO Colm Kelleher also played down the need to merge with a deposit-taking bank: "I'm very confident about the business model, said in a phone interview.
Goldman
Goldman's quarter was marked by sharply lower banking, trading and investment results. It was the investment bank's biggest earnings decline since it went public in 1999.
Still it beat expectations, despite USD 1.1 billion in write-downs and losses from principal investments. Some investors said Goldman deserved credit for reporting any profit at all when rivals go bust or bleed red ink.
"For them to perform in this manner, in this environment, is nothing short of heroic," said Holland & Co Chairman Michael Holland.
Goldman's investment banking revenue dropped 40 percent amid a dearth of deals. Debt trading revenue fell by two-thirds, primarily on weak credit and mortgage markets, while equities trading revenue fell by one-half.
The latest quarter included USD 1.1 billion in losses on corporate loans, residential and commercial mortgages, and USD 453 million of principal investment losses, showing the downside of making aggressive bets with house money. Asset management revenue fell 6 percent as clients withdrew a net USD 7 billion.
"People were hoping for some good news in a sea of gloom and I don't think they got it," said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel.
Analysts said Goldman beat expectations because it paid unusually low taxes, an effective rate of 12 percent compared with 34 percent last year.
Morgan Results
Morgan easily out-earned its archrival and generated a higher return on equity.
"This is great news for the whole financial sector," said Marshall Front, chairman at Front Barnett Associates. "I think the key to this whole thing was that they looked better than Goldman Sachs' earnings earlier in the day."
The results included a USD 745 million one-time gain from its sales of MSCI Inc stock and USD 1.4 billion of gains recorded because the credit spreads on its own debt widened.
And while the banking and trading division posted strong results, wealth management results and asset management results both fell. The ranks of brokers grew, rising 2 percent to 8,500.
Morgan also absorbed nearly USD 1.1 billion of losses and charges from mortgage trades, investments, leveraged buyout loans and repurchase of illiquid auction rate securities.
Over the past year banks and brokers have recorded more than USD 500 billion in write-downs as the mortgage crunch expanded into a sprawling crisis that continues to claim new and larger victims.
Goldman acknowledged its earnings follow the global economy and that conditions will remain challenging. The company said it is increasing capital and cash while shedding risky assets.
"We've become even more cautious in our approach," Viniar told reporters. "There's a lot of fear in the marketplace."
Goldman Sachs, the largest securities firm, said third quarter earnings fell 70 percent on weaker-than-expected revenues, knocking its shares to nearly three-year lows.
Later, No 2 Morgan Stanley, which reported a day ahead of schedule after US markets closed, trounced expectations paced by one-time gains, robust equity and commodities trading results and record prime brokerage fees.
Morgan's earnings fell 3 percent even as the year-old credit crunch slowed deal activity and created one of the toughest trading environments in decades. Its shares fell 11 percent on Tuesday in regular trading, though they pared most of those losses in electronic trading after New York markets closed.
Goldman shares also climbed after the bell, up 4 percent.
"Between Goldman Sachs and Morgan Stanley, we are getting some modest positive news in what has been an otherwise dark five-day period," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management.
Tough Times
The results come a day after No 4 investment bank Lehman Brothers Holdings Inc filed for bankruptcy, swamped by mortgage losses. No 3 broker Merrill Lynch & Co Inc meanwhile rushed into the arms of Bank of America Corp to avoid a similar fate.
These moves had prompted questions about the viability of investment banks. Several analysts predicted these firms would merge with commercial banks, which can tap pools of deposits.
Yet Morgan Stanley and Goldman dismissed those concerns.
"It's not the business model. It's performance that matters," said Goldman chief financial officer David Viniar. "We've been able to compete just fine."
Morgan Stanley CFO Colm Kelleher also played down the need to merge with a deposit-taking bank: "I'm very confident about the business model, said in a phone interview.
Goldman
Goldman's quarter was marked by sharply lower banking, trading and investment results. It was the investment bank's biggest earnings decline since it went public in 1999.
Still it beat expectations, despite USD 1.1 billion in write-downs and losses from principal investments. Some investors said Goldman deserved credit for reporting any profit at all when rivals go bust or bleed red ink.
"For them to perform in this manner, in this environment, is nothing short of heroic," said Holland & Co Chairman Michael Holland.
Goldman's investment banking revenue dropped 40 percent amid a dearth of deals. Debt trading revenue fell by two-thirds, primarily on weak credit and mortgage markets, while equities trading revenue fell by one-half.
The latest quarter included USD 1.1 billion in losses on corporate loans, residential and commercial mortgages, and USD 453 million of principal investment losses, showing the downside of making aggressive bets with house money. Asset management revenue fell 6 percent as clients withdrew a net USD 7 billion.
"People were hoping for some good news in a sea of gloom and I don't think they got it," said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel.
Analysts said Goldman beat expectations because it paid unusually low taxes, an effective rate of 12 percent compared with 34 percent last year.
Morgan Results
Morgan easily out-earned its archrival and generated a higher return on equity.
"This is great news for the whole financial sector," said Marshall Front, chairman at Front Barnett Associates. "I think the key to this whole thing was that they looked better than Goldman Sachs' earnings earlier in the day."
The results included a USD 745 million one-time gain from its sales of MSCI Inc stock and USD 1.4 billion of gains recorded because the credit spreads on its own debt widened.
And while the banking and trading division posted strong results, wealth management results and asset management results both fell. The ranks of brokers grew, rising 2 percent to 8,500.
Morgan also absorbed nearly USD 1.1 billion of losses and charges from mortgage trades, investments, leveraged buyout loans and repurchase of illiquid auction rate securities.
Over the past year banks and brokers have recorded more than USD 500 billion in write-downs as the mortgage crunch expanded into a sprawling crisis that continues to claim new and larger victims.
Goldman acknowledged its earnings follow the global economy and that conditions will remain challenging. The company said it is increasing capital and cash while shedding risky assets.
"We've become even more cautious in our approach," Viniar told reporters. "There's a lot of fear in the marketplace."
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