First week of earnings season wraps up; Financial risks from climate change

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The results are in

Morgan Stanley, the last of the big five American banks to report third quarter earnings, said its profit for the period rose 3% from a year ago to $2.17 billion, easily beating expectations of $1.83 billion, as revenue climbed to $10.03 billion. Profits were helped by a one-time tax benefit.

The results among the big five were mixed, the Wall Street Journal says. “JPMorgan Chase and Citigroup sailed through on the backs of their big consumer banks. One-time charges muddied the results at Bank of America and Wells Fargo. Goldman Sachs’s expensive pivot into Main Street banking ate into profits.”

Morgan Stanley’s revenues “hit their highest level in a decade after the U.S. bank was boosted by bond trading and investment banking fees, highlighting the widening gulf with its closest rival Goldman Sachs,” the Financial Times says. “The results, which were rewarded with an early 3.6% rise in Morgan Stanley’s share price, contrasted starkly with Goldman, which this week blamed a 27% fall in third-quarter profits on investment losses.”

Actually, “Wall Street’s two biggest stand-alone investment banks are starting to look more and more alike,” the Journal says. “But under the surface they offer some fairly different risks and opportunities for investors.”

“For one, Morgan Stanley is in the later stages of its transformation from a markets-sensitive business into a more diversified banking and wealth-management company. This shift brings more stability to the bank’s earnings, as evidenced by the third quarter, when Morgan Stanley’s solid results were more in line with its big-bank peers. By contrast, Goldman Sachs is in the earlier innings of its own strategic shift, with a new chief executive and some brand-new businesses, such as the Apple credit card and a nascent transaction banking unit. It is far from clear how those will moves work out, but they do have outsize potential if successful.”

Goldman Sachs, which has “watched its annual trading profits fall 84%” since the financial crisis, is hoping it has “figured out the key to a turnaround: asking traders to be more like investment bankers,” Reuters reports. “Salespeople in the trading division, who used to primarily focus on hedge funds, are trying to make inroads with corporate treasurers, as well as portfolio managers at mutual-fund firms and algorithmic trading houses.”

“Trading staffers must often partner with Goldman Sachs dealmakers to forge those relationships. And, like bankers, they are now being judged by how many meetings they get and how much new business they can deliver with targeted clients. The changes bring a sales culture to the fore, but executives say it is not at the expense of the central risk trading approach that made Goldman traders famous.”

Wall Street Journal

Fintech incubator

Barclays and venture capital firm Anthemis Group have created a “Female Innovators Lab” to connect women entrepreneurs “with ideas for financial-technology startups, hoping some of them can start businesses that can eventually sell the London-based bank new software or other products. Once they have a business model, they will be able to move into Barclays’s 64,000-square-foot workspace for startups in Manhattan.”

Financial Times

Ahead of its time?

“It would be a shame” if Facebook’s early blunders in trying to create Libra, its planned cryptocurrency, “cut short further deliberation,” the paper laments. “When companies are threatened with retaliation by powerful politicians merely for exploring a radical new business idea, it doesn’t bode well for innovation. If this results in the premature destruction of an idea that tries to push the boundaries of finance in important ways, so much the worse. A decade after the financial crisis, the financial system is still overly dependent on too-big-to-fail banks. At its core, it has also been impervious to innovation, despite the flowering of ‘fintech’ at the edges. There are plenty of substantive issues that need to be aired — even if Libra proves to be a dead end.”

Sen. Mike Rounds, R-S.D., also expressed concerned that Congress' reaction "may put a chill on innovation in the long run," America Banker reports. In a letter to Nathan McCauley, president of Anchorage Trust Co., a member of the Libra Association that is based in South Dakota, the senator said, “I believe that there is promise in cryptocurrencies and digital payments, but regardless of how one views such technologies, it is clear that the United States is falling behind in this space.”

New York Times

Speaking out

“The Federal Reserve has been slow to talk about climate risks compared with central banks in other countries. That could be partly because the topic is more politically polarized in the United States than many other places, so talking about it exposes the Fed — which is meant to be politically independent — to accusations that it is straying into partisan territory.”

But the Fed “has recently started speaking up on global warming and the dangers it poses to the financial system.” On Thursday the San Francisco Fed published a collection of 18 papers on the “financial risks of climate change” that “amounts to one of the most specific and dire accountings of the dangers posed to businesses and communities in the United States — a threat so significant that the nation’s central bank seems increasingly compelled to address it.”

Quotable

“They are two companies that are in different stages of transforming themselves for a new world. This is the before and after picture.” — UBS banking analyst Brennan Hawken, comparing the respective third quarter earnings reports from Morgan Stanley and Goldman Sachs