Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Goldman Sachs Group Inc (GS), Morgan Stanley (MS): Should You Invest in the Investment Bank Survivors?

Goldman Sachs (GS)The financial crisis irrevocably changed the investment banking landscape, leading to the demise of Lehman Brothers and the acquisition of Bear Stearns and Merrill Lynch by commercial banks. The two major survivors, Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS), were able to maintain their independence thanks to federal liquidity programs and timely conversions to bank holding companies in 2008. However, the devil is in the details, as the companies’ bank status limits their future profit making activities. So, should investors place a bet on the sector’s leaders?

The vampire squid

Rolling Stone magazine famously called Goldman Sachs Group Inc (NYSE:GS) a vampire squid, which brought notoriety but not too much damage to its overall business. The company continues to be a league leader in securities underwriting and is one of the few competitors that is expanding offices globally. Warren Buffett has maintained a large stake in the firm, as part of his 2008 strategic investment, adding further credence to Goldman Sachs Group Inc (NYSE:GS)’s story.

In its latest fiscal year, Goldman posted solid financial results, with increases in revenues and operating income of 18.6% and 81.7%, respectively, versus the prior year. While its revenue growth was affected by one-time asset sales, Goldman Sachs Group Inc (NYSE:GS) generated revenue increases in all of its business segments, including its all-important institutional client services unit. More importantly, Goldman’s operating margin increased significantly, due to its renewed focus on effectively managing its compensation costs, an area of intense media scrutiny during the financial crisis.

Morgan’s legacy

Meanwhile, Morgan Stanley (NYSE:MS) has also benefited from the multi-year rebound in equity markets, despite still working through its past issues. The company has sold off non-core businesses over the past few years, like its Van Kampen mutual fund and Saxon mortgage servicing units, while further investing in its wealth management joint venture with Citigroup. In addition, Morgan Stanley (NYSE:MS) continues to try to reduce its loss exposure to legacy residential mortgage backed securities, with roughly $20 billion in remaining exposure as of December 2012.

In its latest fiscal year, Morgan Stanley (NYSE:MS)’s reported results showed substantial year-over-year declines, due to debt valuation adjustment charges in its securities businesses. However, its adjusted performance painted a better picture, as principal trading revenues rose and assets in its large wealth management venture reached $1.9 trillion. Like Goldman Sachs Group Inc (NYSE:GS), Morgan Stanley (NYSE:MS) is revamping its compensation practices, its largest cost center, which should lead to more rational pay rates and a more profitable company.

The industry’s future

All is not rosy for the investment banking giants, though, as more stringent restrictions on the companies’ activities are still being phased in over time. Specifically, the federal Dodd-Frank Act’s requirement to eliminate proprietary trading and to move over-the-counter derivative markets onto regulated exchanges will undoubtedly eliminate profit centers for both Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS). In addition, the companies’ recent results show continued deterioration in commission revenue, as a portion of their customer base opt for cheaper trading platforms.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.