Morgan Stanley overtakes Goldman in commodity risk

By Barani Krishnan

NEW YORK (BestGrowthStock) – Morgan Stanley raised its commodities trading risk in the third quarter, overshooting Goldman Sachs the first time since 2007 and standing apart from major rivals that have pared risk as new regulations loom.

Morgan Stanley posted a surprising $91 million net loss during the quarter, falling further behind Goldman, which beat market expectations with a $1.9 billion profit. Investors were also disappointed to see the largest investment bank after Goldman in the red after encouraging results in the same period from lesser rivals such as Citigroup.

Also unlike Goldman and JP Morgan, which posted estimate-beating results, Morgan Stanley raised its Value-at-Risk (VaR) in commodities and other asset classes during the quarter but had less to show for it.

While the move to ramp up risk in a tough market environment did not immediately pay off for Morgan Stanley, it suggested a reversal in strategy for a bank that had grown more conservative over the past two years and could pay off.

“These guys have proven to be good at taking risks, the financial crisis notwithstanding,” said Cormac Leech, banking analyst at London’s Canaccord Genuity, referring to Morgan Stanley’s traders.

“So as they ramp up their VaR numbers, profits over a couple of quarters should start to come through at a higher level,” Leech said.

VaR is a measure banks use to set the maximum amount of money they are willing to lose a day trading an asset class.

Morgan Stanley’s firm-wide VaR for all assets averaged $142 million a day in the third quarter, up 2 percent from the second quarter and 4 percent from a year ago. Its commodities VaR saw one of the highest growth, rising 17 percent on the quarter and 30 percent from a year ago to average $32 million.

Goldman’s commodities VaR, in comparison, fell 13 percent during the quarter and rose 7 percent from a year ago. JPMorgan’s fell to $13 million, its lowest since the first quarter of 2009, while Bank of America did not disclose its VaR.

The last time Morgan Stanley’s commodities VaR was above Goldman’s was in the fourth quarter of 2007, before the last commodities boom reached its peak.

The two banks are among the few in the world that do both electronic and physical trading of commodities, owning even pipelines and vessels to move oil and other energy products.

In the last two years, the Wall Street rivals have been pursuing opposite trading strategies. Morgan Stanley cut its commodities VaR until it reached $23 million in the fourth quarter of 2009, its lowest level since the start of 2006. Goldman raised its to a peak of $51 million in the third quarter of 2008, just before the financial crisis erupted.

For the just-ended quarter, Morgan Stanley generated $15.90 in net revenue for every $1 of average VaR, down almost half from the year-ago level of $29.60. Goldman kept its trading efficiency at around $32 to $33 of net revenues per $1 of VaR.

Analysts said the coming quarters would show whether Morgan Stanley will stick to a higher VaR to try and raise its game.

“To me, it’s a bit surprising that Morgan Stanley is doing this as it’s traditionally been viewed as one that does not take on as much risk as Goldman,” said Matt McCormick, banking analyst at Bahl & Gaynor in Ohio, Cincinnati.

“Since many are arguing that the commodities rally we’ve seen lately has legs to it, the question is whether this higher VaR we’ve seen at Morgan Stanley is a short-term blip or the beginning of a long-term trend.”

(Editing by Lisa Shumaker)

Morgan Stanley overtakes Goldman in commodity risk