Quarterly results at investment banks revealed a surprising development this quarter.
Morgan Stanley (MS) was a lone standout among banks and brokers as the firm increases its trading revenue, significantly boosting its bottom line in the process.
Fixed income and commodities trading is an area that has been problematic for rivals like Goldman Sachs (GS) and JPMorgan Chase (JPM). Goldman relies on fixed income for a quarter of its income, so the sharp drop in trading hurt the bank, despite a reduction in costs.
Bucking the trend, Morgan Stanley attributed its boost in the commodities business to the extreme weather.
However, Matt O’Connor, a Deutsche Bank analyst, is leery of the results:
“It’s unclear how sustainable, better fixed income and commodities trading are in our view, given first quarter results were likely boosted by unusually cold weather and part of the commodities business may be sold.”
But Morgan Stanley’s doubling of profits wasn’t solely due to trading. The firm grew its wealth management assets to a record level and had a solid quarter in merger & acquisition advisory as well as securities underwriting.
So, it seems as though Morgan Stanley is gaining on its rivals… But is its stock investable?
The market certainly seems to think so – at least in the short term. MS shot up nearly 3% the day of the earnings announcement, compared with GS’ gain of only 0.13%.
But there are reasons to be skeptical…
Morgan Stanley may be doubling its dividend, but it still only has a 1.3% yield. GS’ dividend yield of 1.4% leaves much to be desired, as well.
The long-term performance of both of these investment banks is eye opening, to say the least.
Over the past five years, the S&P 500 has had a total return (dividends reinvested) of 139%.
Surely the companies that employ the “best and the brightest” have outperformed, right? Wrong.
MS has had a total return of just 46% and GS is even worse at 38% in a five year time frame.
In the end, it seems as though these firms are really oriented at enriching their highly-paid executives and employees, and not the shareholders.
Despite Morgan Stanley’s improved results, there’s nothing to indicate that this will change any time soon.