Morgan Stanley reported a surprising third-quarter loss, suggesting the bank is losing hard-won ground in the battle with Goldman Sachs for Wall Street supremacy.
The firm's $91 mln loss, on weak volumes during one of the most difficult trading quarters in recent memory, came a day after Goldman overcame those same conditions to beat Street estimates with a $1.9 bln profit.
Morgan Stanley shares fell 3.5% in morning trading.
"Morgan Stanley is a caterpillar in metamorphosis. It's either going to turn into a beautiful butterfly or get eaten by a robin," said Brad Hintz, an analyst with Sanford C. Bernstein.
In 2009, Goldman cashed in on windfall trading opportunities to report a record annual profit, while Morgan Stanley, which scaled back risk, reported a loss.
The leading investment banks have gone in different directions since the financial crisis: Morgan Stanley has rebalanced its business to include the largest retail brokerage, while Goldman has stuck to its banking and trading roots.
Analysts say Morgan Stanley still has more work ahead in that transition — and it will never beat Goldman on traditional trading.
Morgan Stanley knows it has work to do to catch up to Goldman in fixed income trading, which powered the banking industry's rebound from the financial crisis.
Its Chief Financial Officer Ruth Porat said the bank's efforts to rebuild its fixed income trading ranks have further to go, and it remains outnumbered by its peers.
Third-quarter fixed income net revenue was down by more than half from a year earlier.
"We have repeatedly said that fixed income is the area we need to build up," Porat told Reuters in an interview.
She said third-quarter results were hurt by the accounting ramifications of improvements in the bank's debt prices, but added that the trading results "were nothing to be proud about."
WEALTH BET
Under Chief Executive James Gorman, who took over on January 1, Morgan Stanley has been focused on building the Morgan Stanley Smith Barney joint venture, the largest retail brokerage.
The bank's global wealth management business did not offer much relief from the trading woes in the third quarter, reporting net revenues of $3.1 bln, up just 1% from a year earlier. Porat said Morgan Stanley is still confident the wealth business will help balance the firm's operations.
The bank also announced on Wednesday that it was restructuring its ownership of FrontPoint Partners LLC, its hedge fund unit. Morgan Stanley will retain a minority ownership in FrontPoint.
The move, which had been expected, comes after the "Volcker rule" in the new financial reform law restricted the amount of ownership banks can have in hedge fund assets.
