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Goldman Sachs' and Morgan Stanley's Big Growth Opportunities

By Motley Fool Staff - Updated Dec 14, 2017 at 5:27AM

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Both major investment banks are trying to branch out but in different ways.

Goldman Sachs (GS 0.74%) and Morgan Stanley (MS 0.91%) are both trying to expand their businesses into more traditional areas of consumer banking, such as consumer loans and mortgages. In addition, the banks could be big winners of tax reform if the corporate tax rate is substantially reduced.

A full transcript follows the video.

This video was recorded on Dec. 11, 2017.

Michael Douglass: Let's now turn to the qualitative stuff. We have a pretty clear idea of where the banks are. Now, the question is, where are they going? I think one of the key things that we really need to emphasize here is, in both cases, both banks are looking to become more traditional in a lot of ways. They're both seeking to grow their deposits and they're both seeking to give out more loans.

Matt Frankel: Yeah, and they're both doing it in different ways. We'll start with Goldman. Goldman has gotten into online banking to try to attract low-cost deposits, which are cheaper than debt financing. But they still offer some of the most competitive rates available online. Their online bank is called Marcus. The Marcus platform is actually getting into unsecured personal lending. It launched last October, so a little over a year ago.

Out of all the major unsecured lending platforms -- Lending Club, things like that -- Marcus was the quickest one to get to $1 billion in loan volume. Goldman has the distinct advantage that they have enough capital available that they can grow as quickly as they want to. But they're trying to do it in a different way.

I actually spoke to the head of Marcus not long ago, and he was trying to explain to me how they're trying to grow in the right way, trying to be different than the rest, adapt to consumer preferences and really take a different approach to lending. I can tell you just from speaking to some of their customers that their application process is smoother and quicker than pretty much any of the other guys. The interest rates people have gotten are more competitive than the others, because they can afford to run it at slightly more compressed margins than, say, a Lending Club. So this is really opening up a new revenue stream for Goldman.

In Morgan Stanley's case, they are really emphasizing trying to digitize wealth management to open up their platform to traditional clients, not just the ultra-high-net-worth people. Their robo-advisor -- which, by the way, we did an episode about robo-advisories not long ago. I'm sure Michael will be happy to send the link to anyone who's interested. [laughs]

Douglass: Sure. Send us an email to

Frankel: Morgan Stanley's robo-advisory platform just launched. So that's one way they're trying to branch out into more traditional areas of banking and investing. Morgan Stanley is actually about to launch a digital mortgage platform in the first half of 2018, with their goal of trying to get their own customers to get mortgages through them. They see that as an untapped financial need that they can meet better for their customers, integrating it where they already have their wealth management accounts and other assets. So like you said, both of these banks are trying to branch out, but they're both doing it in pretty different ways.

Douglass: Yes. And it's interesting, because -- and this highlights an overall thing that's happening across banks, where everyone is talking about digital. But what's interesting about Goldman and Morgan is, they both seem to really be living into that. The Marcus platform, the way Goldman executives describe it is, they're saying, "Listen, it's a business that everyone has seen before. Unsecured consumer lending is not a new thing. But we're trying to really build this platform with a consumer focus. We're not trying to grow it to $20 billion tomorrow by taking on a lot of terrible risk." I think they mentioned that their average FICO scores were something around 700. So that's a pretty good and relatively low-risk group of people that they're lending to. Their goal is to differentiate by having more capital than the fintech firms, so they can grow faster, and on the flip side, treating this as a digital and consumer-focused initiative, so they're not trying to combine a lot of other things together into one platform, but really just launch this and make sure that it works, which they view as an advantage over the other institutions.

Frankel: Right. In addition, Morgan Stanley, to mention another growth avenue, Morgan Stanley is really emphasizing wealth management. Their wealth management emphasis is much bigger than Goldman's, I want to say about twice the size. But they're not only trying to grow it, but like you said with the digital theme, they're trying to do it a lot more efficiently. They said the robo-advisory, for clients who want to lower their fees.

Just to throw a couple of figures out there, Morgan Stanley's wealth management business, which is not the highest-margin business, which is why they're not as efficient as Goldman, their wealth management business, they're margin has gone from 9% to 22% since 2010. They've reduced their branch count because of their more enhanced digital capabilities. And they're really trying to, not only grow it, but make it more efficient. Whereas Goldman is trying to remain the king of traditional investment banking, like M&A, where I believe they're still the No. 1 in terms of market share. Equity and debt underwriting, I believe they're also No. 1 in terms of market share.

So these banks are going in slightly different directions. Morgan Stanley estimates that their clients still have about over $2 trillion worth of assets with other asset managers, and they're trying to bring some of that in. So if they're successful, that could be a big game changer for them.

Douglass: And one of the things we should also mention here is some ways in which they are very much the same. One of them is that their assets under management have risen substantially in both cases, of course, because the stock market has been doing so well. Now, this is due to a combination of both strong market performance -- so, if you own a share of X stock that's being managed by Morgan Stanley and that stock doubles in value, then lo and behold, Morgan Stanley has doubled how much, in terms of assets, that they are managing on your behalf. But, the second piece is also net inflows. That's people putting more money into both Goldman and Morgan Stanley and saying, please manage this money too for me. Of course, one of those is much better long-term for the bank than the other.

Frankel: Right. Assets under management for Goldman is about a 2-to-1 mix of market performance and net inflows, meaning that about two-thirds of the game they've seen in their asset management business has just been because the market is doing so well. That's great. But then, when the market falls, your assets under management go down proportionately, whereas net inflows, that's just new money coming in, adding to the pot regardless of what the market's doing. You're going to be better off relatively than you would have been without that money coming in. So net inflows, in my mind, represents real growth in wealth management business.

Douglass: Yeah, absolutely. I think one of the other things that we should mention is, there's some incoming catalysts for the banking sector as a whole, potentially. One of them is that the Fed may be raising rates in a couple of days. We'll know more soon. The other is tax reform as a potential catalyst, because both of these banks have effective tax rates in the 30% range right now.

Frankel: Yeah, definitely. We don't know exactly what tax reform is going to look like right now, but it's pretty certain that if it passes, we're going to get a pretty big corporate tax cut. Twenty percent is the rate that's been floated around. Now, they're saying maybe 22%, 25% to get it done. Even so, this could translate to billions of dollars in additional profit for banks and investment banks in general, because they don't quite get the benefit of the interest rate hikes that more traditional banks do. So this could be a big catalyst going forward, especially if it actually gets down to 20% like they're proposing.

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The Goldman Sachs Group, Inc. Stock Quote
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