A decline in Merger and Acquisition deals resulted in lower fees earnings for the two Wall Street banks, Morgan Stanley and Goldman Sachs Group Inc. Quarterly results were also affected by higher expenses. The two giants moved in the opposite direction as Morgan Stanley exceeded expectations and offered more positive M&A forecasts.
Goldman Sachs shares slumped 4.3% in trading after the bank results showed its investment banking fees dropped almost half during the last quarter of 2022 compared to the previous year. The new business backlog also shrank compared to the earlier quarter. Higher provision for potential bad loans and costs driven by annual compensation jumped in the last quarter. The net income was down by 695 from the previous year on a 16% decline in revenue.
Morgan Stanley posted a steep drop too. The net income was down 40% on lower revenue and non-interest expenses increased, and trading fell short of estimates.
However, the overall results of the two banks were better than analysts’ expectations, with a particular focus on wealth management. After the federal bank hiked interest rates, Morgan Stanley benefitted from higher interest income. Morgan Stanley shares rose 6.5% Tuesday.
Rising Expenses affect Bottom-Line
Octavio Marenzi, CEO of Opimas said Goldman Sachs’s result was worse than expected. The problem was the operating expenses which shot up by $11 while revenues came down. This suggests more layoffs and cuts are coming soon. He said Morgan Stanley’s result was in line with the analyst’s estimates though there was weakness in investment banking.
Morgan Stanley executives are confident that 2023 will be better as their business model will not be much affected by strain in the retail consumer market, while any rebound in capital markets and asset prices will be a boon for the bank.
Job Cuts Scenario on Wall Street
Morgan Stanley’s cost pressures resulted in fresh layoffs of about 1600 employees and about 2 % of the workforce in December. Though this number was lower than Goldman Sachs, it indicates that banks on Wall Street are cautious about the possible recession.
According to CEO James Gorman, Morgan Stanley M&A and investment banking deals are expected to pick up once the Federal Reserve pauses interest rate hikes. In the meantime, the bank is continuing to monitor headcount and expenses. Gorman says that the right sizing of the workforce was overdue, and they are in the same position regarding resetting compensation packages and staff streamlining by peers.
Goldman Sachs’s final quarter compensation cost increased 16% in 2022 compared to a year earlier, it fell compared to the first nine months. This reflected the bank’s conservative approach to compensation set aside and indicated a tough bonus message to the traders and bankers.
David Solomon, CEO of Goldman, said the last quarter was disappointing, with the bank facing headwinds such as the unexpected Ukraine war. The year ahead looks uncertain though there is no widespread distress.
Goldman poured billions of dollars into its retail business, including GreenSky, a specialty lending platform, and Apple Card. This operation resulted in a pre-tax loss of $3.8 billion over three years.
