The third quarter had been good to Wall Street’s two biggest standalone investment banks.
Yet for all their similarities, Morgan Stanley and Goldman offer very different investment propositions. Goldman remains more geared towards cyclical market activity. Trading and investment banking made up 60 per cent of its revenue during the third quarter, compared to 50 per cent at Morgan Stanley.
Despite Goldman’s recent efforts to diversify away from its Wall Street roots — namely with its push into consumer banking and wealth management — Morgan Stanley is much further along in its transformation.
The group’s wealth management and investment management businesses continued to be steady earners during the pandemic. Both divisions are set to play an even bigger role following the acquisitions of ETrade and fund manager Eaton Vance this year.
This “three-legged stool” approach: bulking up its wealth and money-management businesses while keeping its hold on trading and dealmaking — positions Morgan Stanley to do well in good times and bad. That puts it in a class of its own.
Yet this is not reflected in its valuation. Shares in Morgan Stanley have fallen only 1 per cent since the start of the year, the best performance among the Big Six banks. But on a price-to-book value basis, the stock is trading at just one times. That is the same as Goldman and trails behind JPMorgan’s 1.4 times.
This suggests Morgan Stanley may be undervalued. It is more diversified than Goldman. And unlike JPMorgan, the group has little exposure to consumer credit. This will take on greater importance the longer the pandemic recession drags on. While the feared widespread defaults and loan losses have not yet materialised, it may only be a matter of time. When that happens, Morgan Stanley may just be the place to be.
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