Banks' trading desks ended 2018 with a whimper – and nowhere as much as at Morgan Stanley.
The New York-based firm had the worst bond trading performance among the big five Wall Street investment banks, a precipitous 30 percent decline to $564 million. It was one of the most meager hauls since Morgan Stanley revamped the struggling business at the end of 2015, prompting a flurry of questions from analysts.
"I'm struggling with the quarter understanding exactly what happened," Mike Mayo, a veteran bank analyst at Wells Fargo, said Thursday during the call. "On the one hand, we could say, 'Oh, this is Morgan Stanley acting conservatively, scrubbing the balance sheet, etc. On the other hand, it could be the Morgan Stanley of old where you had hiccups in fixed income like the second half of 2015 or 2013 or during the financial crisis."
After the 2008 crisis reordered the banking world, Wall Street firms sought to reduce the volatility of results across trading and advisory businesses. Goldman Sachs and Morgan Stanley, where trading still makes up a bigger slice of revenue than peers, have sought new sources of revenue in consumer banking or wealth management.
But the sharp declines in December showed that, while they've made progress, banks are still exposed to the whims of the market.
"They fell short of even our lowered expectations for the quarter," James Shanahan, an Edward Jones analyst, said of Morgan Stanley. "Among the biggest U.S. banks, generally the ones with the biggest revenue shortfalls have the most sensitivity to markets. Morgan Stanley's institutional securities and wealth management divisions are exposed to global financial market volatility."
Morgan Stanley's equities desk – Wall Street's biggest stock trading shop – was also the only firm not to show double-digit revenue gains in the quarter, with competitors registering gains of at least 11 percent. But that probably had to do with the other four banks booking losses tied to South African retailer Steinhoff a year ago, which made their recent quarters' performance look better by comparison.
"2018 was a great year that finished on a disappointing note," Morgan Stanley CEO James Gorman said ruefully. "The last six weeks of the year in particular were obviously difficult."
Meanwhile, Bank of America, where trading makes up a smaller share of revenue than its more Wall Street-centric peers, this week posted profit and revenue that beat analysts' expectations on the strength of its Main Street lending operations. Profits in the firm's consumer banking business surged 52 percent to $3.3 billion.
At Goldman Sachs, lower-than-expected trading revenue was more than offset by gains in the bank's investing and lending division, which produced $1.91 billion in revenue, about $550 million in excess of analysts' estimate.