Goldman asks for time to improve its trading business

January 17, 2018

It was fitting that Goldman Sachs should have announced a push into home improvement loans, a day before presenting its fourth-quarter profits. There was a lot of rubble and dust in Wednesday’s numbers, caused mainly by tax reform. But the bank remains a fixer-upper.

Parts of Goldman are in decent shape. In mergers and acquisitions, the bank continues to pull away from the competition, showing the benefits of a recent push into acting for buyers as well as sellers of assets. Equity and debt underwriting were “super strong” too, noted Glenn Schorr, analyst at Evercore ISI. The investing and lending segment — an opaque book of bets with the bank’s own money — also delivered a solid result, even with a $130m loss connected to the collapse of Steinhoff, the South African retailer.

But the core fixed-income, currency, and commodities (FICC) operation still looks rickety. Fourth-quarter revenues there dropped 50 per cent from the same period last year, and the figure for 2017 as a whole showed a 30 per cent drop over 2016. Commodities was the main culprit, but the weakness was broad-based, across credit, interest rates and foreign exchange. Only in mortgages did the bank do better.

“A brutal beating,” said Octavio Marenzi, chief executive of Opimas, a capital markets management consultancy.

Goldman has known for a while that it has a problem in FICC. Like most banks, it has been assailed by forces beyond its control: a shift from voice to electronic trading; a lack of activity among investors as markets keep drifting upwards; and new rules curbing risk-taking at the biggest regulated banks.

The mix we have is a consequence of choices we’ve made over time, and we need to do better

According to estimates from Coalition, a London-based consultancy, FICC revenues among the top dozen investment banks probably came to about $69.6bn last year, down one-third from a peak in 2012. Even JPMorgan Chase, which boasts of having a bulletproof FICC franchise able to thrive in any kind of environment, posted FICC revenues down 16 per cent last year to $12.8bn.

Marianne Lake, chief financial officer at JPMorgan, put a positive gloss on the numbers, saying the FICC unit was “meaningfully” covering its cost of capital, even with one-off hits connected to tax reform. But she said she hoped volumes would come back soon.

“I don't have a crystal ball; I can't tell you when there will be a catalyst for change,” she said. “Obviously, that's always an emotional discussion. But it will happen.”

But some of Goldman’s FICC troubles are peculiar to Goldman. The bank’s mix of clients is too heavily weighted towards hedge funds, which have found opportunities hard to come by in listless bond markets dominated by central banks. It lacks the “flow” business associated with big companies — an interest-rate swap, say, or a currency hedging programme — so has been asking its bankers to call in on CFOs and treasurers when they do their rounds.

During the call with analysts, Mike Mayo of Wells Fargo asked Goldman executives why progress in gaining business from corporate clients had been so slow, given the bank’s penetration into boardrooms through its advisory business.

Goldman CFO Martin Chavez did not really have an answer. “We absolutely acknowledge that the mix we have is a consequence of choices we’ve made over time, and we need to do better,” he said. “But to translate that into printed revenues, we need activity.”

The year ahead should offer some tailwinds. Regulators seem keen to loosen some post-crisis restraints on proprietary trading, which could “help Goldman enormously”, says Michael Farr, president of Farr, Miller & Washington, a money manager with about $1.4bn in assets.

Others note that the bank has never been shy about pushing its interests on Capitol Hill, often via Goldman alumni. “I don’t think anyone does that better than they do,” says Ken Fisher, executive chairman and co-chief investment officer of Fisher Investments, a Woodside, California-based firm with $89bn under management.

But for now, the wait is increasingly anxious. Goldman’s shares were off about 3 per cent by mid-morning on Wednesday. Last year they were up just 7 per cent, bottom of the class on Wall Street.

“Goldman’s an interesting one,” says one finance chief at a rival bank. “They know what they need to do, but how much time do they need?”