Investment banks face a host of difficulties in the current, distressed environment for the financial-services industry. New regulations have forced the investment banks to cut back on their proprietary-trading, private-equity, and hedge-fund activity.
And those were major sources of revenue for firms like Goldman Sachs (GS) and Morgan Stanley (MS). They still haven’t fully rebounded from the financial crisis, so now may be the time to stay away from their stocks.
Goldman, long viewed as the country’s top investment bank, reported that net income dropped 21 percent to $2.74 billion in the first quarter from a year earlier. Revenue slid 7 percent to $11.9 billion.
Goldman’s trading and investment of its own money accounted for 79 percent of the company’s revenue in the quarter. But that is an area that is notoriously volatile and will be curbed by the new financial-reform law in any case.
Revenue from trading for customers dropped 22 percent in the quarter. If that area doesn’t recover, Goldman says it may have to dump some of its traders. The numbers for investment banking and asset management also showed weakness.
Rochdale Securities analyst Richard Bove cut his rating on Goldman to neutral from buy after the recent earnings report. “Particularly disappointing were the advisory results,” he wrote.
Morgan Stanley, generally seen as the No. 2 U.S. investment bank, saw its profit plunge 45 percent to $968 million in the first quarter, down from $1.78 billion a year earlier. Revenue dropped to 16 percent to $7.64 billion from $9.07 billion a year earlier.
Morgan Stanley's revenue for trading in stocks rose 20 percent, to $1.7 billion, from a year earlier. But revenue for its fixed-income and commodities sales and trading unit fell by 35 percent to $1.77 billion.
In addition, the company suffered a 26-cent-per share loss from its joint venture in Japan with Mitsubishi UFJ Financial Group. The business, Mitsubishi UFJ Morgan Stanley Securities, has decided to raise capital and shed workers.
Of 13 research firms listed by Fidelity Investments, only two have a buy or favorable recommendation on Morgan Stanley shares.
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