Wall Street Titans Reboot

In the darkest days of the financial crisis, Goldman Sachs and Morgan Stanley became bank-holding companies to shore up confidence and gain the implicit backing of the Federal Reserve.

But few believed the Wall Street powerhouses would fundamentally change -- that they would don the banking cloak until their trading and investment-banking businesses came roaring back.

Things haven't played out that way: Trading revenues globally have shrunk, more stringent regulation has forced the firms out of once-lucrative businesses, and higher capital requirements have kept returns in check. Goldman's 2015 return on equity was 7.4%, while at Morgan Stanley it was 8.5%. That is below the firms' theoretical 10% cost of capital and a far cry from precrisis peaks of 32.8% and 23.6%, respectively.

In response, both firms have turned to more basic banking businesses, betting that the cachet of their brand names can overcome relative lack of experience in dealing with the deposits and loans of middle-class Americans.

The moves have surprised many and suggest capital-markets businesses have reached a turning point. "I would never have thought years ago that they would ever be doing this," says Richard Kovacevich, Wells Fargo & Co.'s former chairman and chief executive. But as regulation and muted client activity hammers trading revenue, "you either shrink, or you try to replace" lost profits.

In embracing banking, the two firms are trying the latter, albeit in different ways. Morgan Stanley, which already had made wealth management a key part of its business, is looking to squeeze more revenue from its existing pool of generally well-off clients. Goldman is casting a wider net, hanging out an internet shingle in hopes of attracting deposits from and making loans to Main Street America -- opening the door wide to less-wealthy clients it once shunned.

The moves are being closely watched by shareholders who have had to deal with subpar valuations for both firms: Shares of Goldman and Morgan both currently trade at a discount to their book value, or net worth. Earlier this month, activist investor ValueAct Capital Management announced that it had taken a 2% stake in MorganStanley, mainly because it liked CEO James Gorman's push into retail wealth management.

In one regard, the move into banking could be well timed. Investors now sniffing around downtrodden bank stocks expect they will do well if interest rates rise.

As it stands, Goldman and Morgan Stanley aren't big lenders and so would benefit less than rivals. A one-percentage-point rise in interest rates would increase earnings by 11% at the average large U.S. bank, but just 4% at Goldman Sachs and 8% at Morgan Stanley, according to Nomura Securities .

To keep from being left behind, both have been growing deposits and loans the past few years. Morgan Stanley's lending book has more than tripled since 2012 to $93 billion. Goldman's has risen from $25 billion to $64 billion over the same period.

But they have far to go: As of June 30, the firms' combined $276 billion in outstanding deposits were about one-fifth of J.P. Morgan Chase. The combined lending also stands at about 20% of that at J.P. Morgan, the largest U.S. bank by assets.

Deposits are popular with regulators since they are a cheap source of the funding needed to guard against another meltdown. They also can be redeployed into loans.

Goldman is using the internet for both sides. After a few postcrisis years sticking to its guns in trading, it now has opened the door wide to less wealthy clients it once shunned. The firm began taking consumer deposits online in April after acquiring General Electric Co.'s online-savings platform, which came with $16 billion of deposits and a call center in Cedar Rapids, Iowa. Basically anyone can open an account with as little as $1, versus the previous minimum of about $10 million in assets.

This fall, Goldman also will start lending through a Web offshoot called Marcus, an homage to Marcus Goldman, who founded the firm in the 19th century. The platform will start offering personal loans, targeting borrowers with existing credit-card debt and consolidating it at lower rates, according to people familiar with the plans.

The consumer-lending push is likely to be a small part of Goldman's broader lending efforts. It has been writing bigger checks for mergers its bankers are arranging and has boosted lending to its ultrawealthy private-banking clients.

Meanwhile, Morgan Stanley last month began offering clients new perks to move outside cash into their brokerage accounts, including reimbursing ATM fees and offering free identity-theft protection. It soon will begin offering a savings account that pays about 0.45 percentage points a year, according to a person familiar with the plan. That is 30 times what existing Morgan Stanley clients make on their deposits, but about half what Goldman is paying in its new savings accounts.

Morgan Stanley set its retail strategy in place seven years ago. It suffered deeper losses than Goldman during the crisis and viewed a change in course as imperative. In early 2009, it inked a multiyear purchase of Citigroup Inc.'s Smith Barney retail brokerage, adding it to the old Dean Witter business it had brought in during the 1990s.

But Mr. Gorman said in June that Morgan Stanley is "nowhere near capacity in terms of what we can do on the lending side," and the bank's army of financial advisers are being encouraged to promote home mortgages and securities-backed loans to clients.

That business can be profitable for Morgan -- revenue generated through loans typically isn't shared as generously with individual brokers as revenue generated through trading commissions and account fees.

Still, some remain skeptical that Goldman and Morgan Stanley really can embrace banking. "They're superstars," but in a different sport, Mr. Kovacevich says. "It's like having basketball players in the NFL."

--Emily Glazer contributed to this article.

Write to Liz Hoffman at liz.hoffman@wsj.com