When James Gorman became the CEO of Morgan Stanley in January 2010, traders who were still left at the firm likely didn’t break out into applause. With a background in wealth management and consulting, Gorman is one of the most conservative CEOs on Wall Street and a lover of sustainable, predictable revenue. He proved that again this week during the firm’s first quarter earnings call, practically going out of his way to not compliment the firm’s securities business despite it having its best quarter since before the financial crisis.
Trading revenue at Morgan Stanley reached $4.4 billion in Q1, up 26% year-over-year. Equities and fixed traders outpaced their rivals at Goldman Sachs, despite Goldman reporting terrific trading results itself. But the message each bank delivered about their recent trading performances created two completely different narratives.
When asked about the effect seasonality had on one aspect of Morgan Stanley’s epic trading quarter, Gorman responded by talking up nearly all of the bank’s other business lines. He pointed to the fact that “every quarter kind of begins with roughly $7.5 billion,” referring to the bank’s more sustainable wealth management and investment banking revenues. He called the total number “a worst-case scenario,” which wasn’t the case when he started.
Meanwhile, Gorman suggested that the bank’s trading unit, particularly in fixed income, is viewed as more as a cherry-on-top rather than a core business. “It won’t have the huge ups that we had in 2006 and ’07, most of which we gave back by the way, but…it’s unlikely to have the kinds of downs that we had before,” he said about the bank’s fixed income business.
“If Morgan Stanley’s strategy could be defined simply, it would be that we will do fine when the markets are tough and we would do well when the markets are good,” Gorman said. “There are others who might do better when the markets are good, that’s fine. What I care about is how we do when the markets are tough.”
Gorman seemed to pin the success of Morgan Stanley’s securities unit to seasonality – tax cuts, market volatility and other non-sustainable market forces – rather than to give credit for strong execution. Of course, he may be correct. But other banks like Goldman Sachs were quick to pat their trading units on the back, disagreeing that the shifting winds of the market were the key driver of revenue. Rather, it was the bank’s performance.
“Client activity was the major driver and it would have been a strong quarter without the long volatility benefits,” Goldman Sachs CFO Martin Chavez said during the bank’s earnings call in response to a question about the sustainability of trading revenue.
Comparing the quarter to the first three months of 2015, the last time Goldman truly crushed expectations in FICC and equities trading revenues, Chavez said the drivers were “quite different” and “more durable.”
“While it’s impossible to predict the future, we remain cautiously optimistic that many of the broader drivers underpinning the solid start to the year…can remain in place,” he said. Consider Morgan Stanley to be cautiously pessimistic.
Gorman, meanwhile, went on to support a regulation that traders uniformly despise. “I do not expect the Volcker rule to be removed…because I am not sure banks should point large parts of their capital at risk in proprietary trading,” he said.
Morgan Stanley CFO Jonathan Pruzan did however tout one aspect of the firm’s securities business: electronic trading. “There is clearly pressure on the voice trading part of the business,” he added.
If most traders at Morgan Stanley are the cherry on top rather than actual bun, Morgan Stanley's voice traders are even further from the core.
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