Morgan Stanley and Goldman Sachs are facing the same question - but for different reasons

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Lloyd Blankfein James Gorman Reuters Goldman Sachs CEO Lloyd Blankfein and Morgan Stanley CEO James Gorman.

What's going on in the fixed income, currencies, and commodities business? It's the question that has dominated earnings calls for Morgan Stanley and Goldman Sachs this week, but for very different reasons.

Morgan Stanley reported earnings of $1 a share on revenue of $9.7 billion in the first three months of 2017 on Wednesday, beating analyst estimates by a lot . The beat was driven by a big quarter for the investment-banking unit, with revenue of $5.2 billion, up sharply from $3.7 billion a year earlier. Net income in the unit almost doubled to $1.7 billion.

That performance was in turn driven by a big rebound in fixed-income sales and trading revenue. Morgan Stanley reported fixed-income revenue of $1.7 billion, up from $873 million. The bank said the results reflected a "strong performance across all products and regions on improved market conditions compared with the prior year period."

That performance is especially impressive, given Morgan Stanley slashed the size of its fixed-income unit in late 2015 . The bank has managed to cut costs and staff while boosting revenues.

It also means that Morgan Stanley's first quarter fixed income revenues ($1.714 billion) were ahead of Goldman Sachs' fixed income revenues ($1.685 billion).

"We view these results as solid, particularly in light of GS's disappointing print yesterday, and expect MS shares should perform well on the back of the continued momentum in the business," UBS analyst Brennan Hawken said in a note.

The fixed income performance had Wall Street analysts digging for more information on how Morgan Stanley has pulled it off.

screen shot 2017 01 17 at 24248 pm Morgan Stanley Morgan Stanley said in January that fixed income sales and trading revenues had increased post restructuring. In the first quarter, it posted revenues of $1.7 billion

"We've been very pleased with the performance in that business," Morgan Stanley CFO Jonathan Pruzan said on a call. We're generating "significantly more revenues than before we had that restructuring," he said. "Our market share and momentum in that business has been good ... We feel confident that we will continue to be relevant to our clients."

Pruzan later added that the bank saw strength across all of the FICC components except foreign exchange. The credit business and macro businesses had a strong quarter, while commodities performed well, he said. Meanwhile, the foreign exchange business suffered in a period of low volatility.

Goldman Sachs, on the other hand, was answering questions about its FICC business for a very different reason. Like Morgan Stanley, Goldman Sachs also reported low foreign exchange revenues in the first quarter, but that's where the similarities ended.

On Tuesday, Goldman Sachs reported first-quarter earnings that came up short, missing estimates by a distance. The results sent the stock price plummeting . Fixed income in particular disappointed, with revenue up just 1% from the first quarter of 2016 and down from the final three months of 2016.

The bank faced plenty of questions about why its fixed income performance was so underwhelming.

"Sorry to give you a hard time on your first call," UBS analyst Brennan Hawken told Goldman Sachs' incoming CFO, Marty Chavez. "I'm still confused," he said of fixed income, currencies, and commodities. "I think I have some company."

Chavez, who is now deputy CFO but will step up to the CFO role next month, repeatedly cited low levels of volatility as a reason for the poor performance. Volatility in the currency and commodities markets were at two-year lows, he said, while realized volatility in the equity market was also at a historic low. When volatility is low, client activity is light, he said.

"We underperformed this quarter, and the underperformance was driven by commodities and currencies," Chavez said.

Get the latest Goldman Sachs stock price here.

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