It’s Goldman Sachs time again, which means more about fixed income, currencies and commodities (FICC).
This week it was the turn of none other than CEO Lloyd Blankfein to weigh into the continuing debate about his firm’s FICC franchise at a Credit Suisse financial services conference in Florida.
Lloyd certainly knows how to warm up a first-session conference crowd: he recognised a lot of faces that were, in his words, if not friendly then at least familiar.
Then he was down to business – and keen to set the record straight. There had been attention paid to Goldman’s FICC unit over the last year, and this was appropriate given its performance.
But there were two issues that he thought were often conflated. He wanted to untangle them – although, given his conclusion, it wasn’t terribly clear why.
The first was the scale of resources that Goldman commits to its FICC franchise. The second was the performance of that franchise in the context of that commitment. It seemed very important to him that these were two distinct things.
In short, Goldman had cut hugely the resource allocated to that business over the past five years, and the fall in revenues needed to be looked at in the context of that. At the same time, Goldman’s FICC performance had indeed been weak, even in the context of that reduced commitment.
I’m not sure these issues have been confused quite as often as he thinks – or whether it really matters if they have, given that the result looks much the same. Goldman makes less money in FICC these days partly because the overall business has shrunk, partly because Goldman has shrunk its own business and partly because it hasn’t adapted as well as it might have done to both of those things.
What Blankfein highlighted is what Euromoney has recognised before: Goldman cut FICC market and credit risk-weighted assets (RWAs) by half from mid-2013 to mid-2017, and cut headcount in that business by 20% since 2012. Goldman’s FICC business posted a little more than $10 billion of revenues in 2012. In 2017 it was $5.3 billion, just over half – about the same drop as industry-wide revenues over that time.
As Blankfein points out, had the resources committed to FICC remained static, the firm would not have posted a return on equity of 10.8% in 2017 – excluding the impact of the recent US tax reforms – or double digit returns in five of the last six years.
He joked that while Goldman didn’t have some sort of contract to deliver double-digit returns – imagine that! – the firm’s management was very focused on it. And he sensibly didn’t trouble the audience with the arcane details of his ROE-based bonus scheme, which you can read all about here.
Must do better
Anyway, with Blankfein – and CFO Marty Chavez repeatedly in the past – also noting that Goldman’s performance was weak even in the context of the cut in resources committed, there doesn’t exactly appear to be a gulf between his assessment of Goldman’s FICC business and the market’s view. Which is: must do better.
And it will, in Blankfein’s opinion, for a couple of reasons.
One is that the bank is getting better at doing the stuff he thought it had been weak at in the past – with some of those improvements falling within Goldman’s magic $5 billion revenue growth plan it unveiled in September, a plan that in typical fashion is Not Predicated On An Improvement In Market Conditions.
The firm was underinvested in flow product, meaning that its penetration with certain kinds of investors and banks was low. Closing those market-share gaps is forecast to account for about $600 million of the $5 billion growth – and there were early signs of success, he said. The firm had already increased its score in 18 of 21 observable FICC market-share metrics during the past year.
A historic focus on active investors had come at the cost of a strong presence with corporate clients.
In particular, Blankfein thought the firm had underused the power of its investment banking franchise to service clients with risk management and liquidity provision – a point raised by Wells Fargo analyst Mike Mayo in Goldman’s most recent results call. Fixing that is supposed to add $250 million of revenues.
Commodities had been particularly weak, but a new joint venture formed last year between FICC and investment banking had already produced 16 new commodity-related transactions.
And there had not been enough accountability – Goldman is going to be holding its people to tougher objectives in FICC, including top three client rankings.
The second reason was those resources again. Volatility is picking up, and client activity alongside it. The great thing about non-static resource commitments is that they are not static, “and that can be in both directions”, Blankfein reminded his audience – in case they hadn’t twigged that while Goldman was clever to have cut when it did, it was equally clever about when to get back in.
Goldman is already putting some of those RWAs it slashed back into FICC again.
There’s also a lot of engineering going on – across the entire business. Blankfein said that some 25% of FICC headcount are now engineers. About 100 people were hired in equities in 2017, with more than 70 of them engineers. In investment banking, engineering is being used to “enhance client engagement”, whatever that means.
Goldman is drip-feeding more glimpses of what it is up to, but the themes mostly stay the same: closing market-share gaps that used not to matter but increasingly do; finding ways of plugging its well-connected investment bank into other bits of the business; and ramping up its tech to support all that.
That Blankfein sounded cheery about the future is enough to worry peers. But more worrying still will be the fact that initiatives that Goldman put in place to give it more firepower in areas where it was weaker are coming on stream just as conditions start to return to what always suited it best anyway.
That $5 billion might not be so far away.