Morgan Stanley (
) is a global financial services firm that is engaged in four
distinct business areas: investment banking, sales & trading,
wealth management for high net worth individuals and asset
management. It competes with other global financial services firms
like Goldman Sachs (
), Citigroup (
), UBS (
) and Credit Suisse (
We believe that sales & trading is the largest driver of
value for Morgan Stanley and estimate that bonds, currencies &
commodities trading constitutes around 23% of
our $32.02 price estimate for Morgan Stanley's
, with equities trading contributing around 20%. Wealth Management
is also a major driver, constituting around 19%. Our price estimate
is around 8% higher than the current market price.
If we combine the Fixed Income, Commodities and Currencies and
Equity units for Goldman, sales & trading accounts for around
55% of our
$167 price estimate,
which is around the current market price. You can see the
full breakdown in the slideshow below.
Looking at Recent Earnings
Both Morgan Stanley and Goldman Sachs reported 4Q 2010 and full
year results earlier this month. Goldman reported fiscal 2010 net
revenues of $39.2 billon, an annual decrease of around 13% and
pre-tax earnings of $12.9 billion, an annual decrease of 35%. On
the other hand, Morgan Stanley reported fiscal 2010 revenues of
$31.6 billion, an annual increase of 35% and pre-tax earnings of
$6.2 billion, an annual increase of over 5 times from last year,
when its pretax earnings were below $1 billion.
The increase in revenues for Morgan Stanley was in part driven
by improvement in sales & trading revenues. The revenues from
Fixed Income, Currencies & Commodities trading (our Bonds,
Currencies & Commodities division) was nearly $6 billion, an
annual increase of around 20%. Equities trading revenues was $ 4.8
billion, an annual increase of around 30%.
Morgan Stanley's strong fiscal 2010 results were also driven by
its wealth management business. Its wealth management revenues was
around $12.6 billion, an annual increase of 35%, and asset
management revenues was around $2.7 billion, an annual increase of
just over 100%..
For Goldman, this compares to fiscal 2010 FICC revenues of
around $18 billion, an annual decrease of around 25%. Equities
revenues were nearly $6 billion, an annual increase of around 28%.
Its net revenues from Investment Management, which includes both
asset and wealth management, was around $5 billion, a modest
increase of 10%.
2010 has been a more difficult year for investment banks than
anticipated. The above results indicate how the difference in the
nature of operations of Morgan Stanley and Goldman impact their
respective results. Though the absolute numbers for Goldman is
higher, Morgan Stanley has done much better on a year-on-year
Comparing the Two Banks
Goldman focuses intensively on its trading business,
specifically FICC trading. As a result, this leads to large swings
in Goldman's revenues during volatile trading conditions,
which largely occur during weak macro
economic environments. On the other hand, though Morgan
Stanley also focuses on trading, its business is more diversified
and appears more focused on growing the size of its wealth
management and asset management businesses significantly.
Though revenues from these businesses are also impacted by weak
economic conditions, the swings are much less severe than in
trading. Hence, these businesses are more stable and can act as a
hedge for banks that have large exposure to trading. Going
forward, the Volcker regulation is expected to have a large impact
on the trading business of banks and there can be a downside to
Goldman's future results unless it diversifies its operations by
expanding its asset and wealth management businesses.
Morgan Stanley in particular has been scaling up its wealth
management operations, expanding its business significantly and
entering into a joint venture with Citi's Smith Barney, which
should help in further growth of this business.
In the slideshows for each bank you can see how asset management
for Goldman accounts for around 10% of the stock value and wealth
and asset management account for nearly 30% for Morgan Stanley.
Going forward, we expect Morgan Stanley's Wealth Management
Assets to increase to around $1.9 trillion by the end of our
forecast period. In addition to economic recovery stimulating
investments, we expect penetration into Asia Pacific and increasing
popularity of alternative investment vehicles among HNIs to drive
growth. If Morgan Stanley's Wealth Management Assets increase to
around $2.3 trillion by the end of our forecast period, it would
mean an upside of around 5% to our current price estimate.
See our full estimates for for Morgan
See our full estimates for Goldman Sachs.