NEW YORK - When things went bad for Wall Street at the end of 2018, they went extra bad for Morgan Stanley. The $77 billion banking group run by James Gorman on Thursday reported fourth-quarter earnings of $1.4 billion. That fell well short of what analysts had expected and meant the annualized return on equity for the period dipped to a disappointing 7.1 percent, after stripping out tax-related one-offs. And while there were mitigating factors, Morgan Stanley’s valuation premium to the likes of Goldman Sachs and Citigroup exists partly because such wobbles aren’t its usual style.

Bond-trading revenue fell 30 percent in the quarter from a year earlier – roughly twice the decline at rivals Goldman and Bank of America. Equity traders, whose business makes up a bigger chunk of Morgan Stanley’s sales and trading division than fixed income, didn’t pick up the slack. Their revenue was flat, where Goldman’s increased 17 percent.

The malaise fed through into other bits of the business. Wealth-management revenue slumped 6 percent year-on-year because falling markets hit the value of investments held on behalf of employees, and caused clients to eschew some transactions – even though Morgan Stanley’s wealth managers were as individually productive as they have been all year. Other slips are harder to blame on the markets. Morgan Stanley lost money on loans to companies in the quarter, for example.

Gorman told analysts on Thursday that Morgan Stanley is “not immune to downturns.” That’s true but misses an important nuance: immunity is relative. Gorman’s bank trades at roughly 0.9 times its book value, a premium to Goldman and Citi, partly because it tends to be more stable. Goldman under new boss David Solomon is leaning toward more predictable revenue streams like retail banking and lending. Over the whole of 2018 these accounted for 61 percent of its top line, approaching Morgan Stanley’s usual two-thirds.

A single period can’t tell the whole story. All the same, the theory that Morgan Stanley is a safer way to bet on Wall Street has taken a knock.

CONTEXT NEWS

- Morgan Stanley on Jan. 17 reported fourth-quarter net income applicable to common shareholders of $1.4 billion. At 80 cents per diluted share it fell short of the consensus estimate of sell-side analysts of 95 cents a share, according to Refinitiv data. Revenue of $8.5 billion missed the estimated $9.2 billion.

- Fixed-income trading revenue fell 30 percent in the quarter, compared with a year earlier. Goldman Sachs had reported an 18 percent fall, while Citigroup’s equivalent decline was 21 percent.

- Morgan Stanley’s wealth-management business reported a 6 percent decline in revenue for the quarter, year-on-year, and a 24 percent pre-tax profit margin, compared with 27 percent in the prior three months.

(Editing by Richard Beales and Martin Langfield)

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