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Morgan Stanley's Wealth Management Unit Makes it Safer Bet than Goldman Sachs


Morgan Stanley ( MS ) 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 ( GS ), Citigroup ( C ), UBS ( UBS ) and Credit Suisse ( CS ).

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 stock , 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 basis.


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.