There’s always a familiar flavour to the quarterly earnings analyst calls with the big beasts of the US banks: Jamie has the best lines; Mike takes a trip around his global network – often the most exciting thing about his firm, apart from the times when he can say “digital”; Brian is all branches and ATMs; Lloyd leaves it to others to explain why there is little point explaining exactly how Goldman manages to be the best at everything it does. And James is the ruminating adult in the room, casting around the industry, its regulators and its analysts for his next target.
But what’s this? A tweak to the script this quarter? Not only did Goldman offer an admission that it had, in fact, performed rather below par in certain areas, but Citi had the pleasant experience of looking like a firm that is hitting its stride. After all, you don’t announce your first investor day for almost 10 years unless you think you’ve turned a corner.
The puzzle for analysts was Goldman’s fixed income sales and trading division, where the firm posted a 40% decline in revenues. It’s not like anyone else had a great quarter – all of the five were down from the second quarter of 2016, which saw more volatility and client activity amid positioning for events like the Brexit referendum. But the year-on-year falls at Morgan Stanley and Citi were single digits. The next worst after Goldman was JPMorgan, which was down by (only) 20%.
Here’s what the others said about their quarters. JPMorgan reckoned its drop was a decent performance, coming as it did off a very strong second quarter in 2016. Jamie Dimon told journalists that they shouldn’t be interested in fixed income trading at this time of year. He doesn’t know why anyone would write about it rather than all the big stuff that isn’t getting done, like bridges and airports.
Over at Morgan Stanley, James Gorman is very familiar with questions about fixed income, and sometimes sounds like he wants to prove that familiarity really does breed contempt. He’s been knocking back the critics ever since his firm took the axe to fixed income in late 2015, reducing headcount by 25%. He’s had the last laugh, though. That division is roaring now, often outstripping its $1 billion quarterly run rate target, as it did in both quarters this year.
CFO Jonathan Pruzan, like everyone else, points to lower volatility and a lack of market events for the tougher conditions. A paucity of big transactions hit the bank’s securitized products business. Commodities – a much smaller business now than it once was at Morgan Stanley – was hurt by fewer structured deals. But, as at JPM, emerging markets partly offset all that, particularly in FX. Overall, the business was gelling well after its restructuring.
Citi pointed to lower G10 currencies revenue. G10 rates was stable; local markets rates and currencies were stable. All in all, it was a normal seasonal decline, with a bit of a Brexit boost last year. BAML cited weaker results in rates and emerging markets as the prime reasons for its decline in FICC. And then there was Goldman.
Analysts wondered what it was that made the firm apparently so much more vol-dependent than peers. But volatility is not the whole story: it’s more to do with some of the key characteristics of the Goldman FICC franchise and its business mix.
Commodities is a bigger chunk of Goldman’s FICC business than at peers. Every one of Goldman’s FICC business lines fell, but commodities saw its worst quarter on record.
“We didn’t navigate the market as well as we aspire to or as well as we have in the past,” said CFO Marty Chavez. That’s a big admission – and bigger because it’s Goldman. Navigating tough markets is what Goldman is all about. Take that away and you have, well, a fair portion of a 40% decline in a FICC franchise: not a good look.
The firm also prides itself on its derivatives expertise and its commitment to market making, providing liquidity to active asset managers. Lower volatility, tighter spreads and much lower client activity hurt it harder than others. Fair enough, but what has clearly been seized on internally is the fact that the firm’s business mix is partly to blame.
Competitors have bigger corporate franchises and bigger financing franchises. And Goldman is more weighted towards derivatives than some. “It isn’t just a matter of just focusing on active asset managers and having a leading active manager franchise”, said Chavez, “it’s also a question of how we can deepen our impact with clients and have a leading cash offering as well.”
Expect a new profile for this business pretty soon.