On the face of it, Goldman Sachs has joined the Q3 revenue party that has led to a renewed sense of optimism on U.S. investment banks. But while J.P. Morgan throws some wild shapes on the dancefloor, Goldman is quietly sipping a drink in the corner, trying not to attract too much attention.
Goldman Sachs is actually lagging the pack, here’s why.
1. Goldman’s FICC division is down so far this year, and is coming off a bad Q3 in 2015
Goldman’s FICC traders have posted similar results to its U.S. peers in Q3. Revenues were up 34% year-on-year to $1.9bn thanks to increased revenues in rates and a recovery in credit trading. But while J.P. Morgan’s FICC traders were “firing on all cylinders” and posted positive results in every fixed income asset class, Goldman’s currencies and commodities trading revenues were down.
This time last year, Goldman’s FICC revenues were down by 33% in the third quarter. It had already started cutting FICC staff at that point and has continued to chip at employees at the top of the tree throughout 2016. This is having an effect – while all U.S. investment banks have posted double digit increases in their fixed income team for the first nine months of this year, Goldman is down by 10% to $5.5bn.
Let’s not forget that Goldman’s fixed income division was down 47% in the first quarter too.
“Within FICC all these business are very different – some of them have enormous balance sheets, some are very big in emerging markets and some are not,” said Harvey Schwartz, Goldman’s CFO during the call. The point, he said, was that Q3 wasn’t great for every business in every region and Goldman wasn’t “firing on all cylinders” everywhere. “It feels good for us at the moment, the momentum feels good,” he added.
2. Its equities traders are particularly struggling
Again, looking at the third quarter, Goldman Sachs did pretty well in equities. Year on year, there was a 2% uptick in revenues, which it puts down to a significant increase in derivative revenues – offset by much lower revenues in cash equities. This is no surprise, most investment banks have struggled to generate profits in relatively inactive equity markets and are generally down year on year. But, again, if you look at the story so far in 2016, Goldman is faring particularly badly – revenues were down 30% for the first nine months, compared to a 1% decline at J.P. Morgan, -14% at Citi and -11.7% at Bank of America.
3. Goldman Sachs is a victim of its own success in M&A
M&A volumes are down by 22% globally for the first nine months of this year, according to stats from Dealogic, and Goldman Sachs is number one globally, in the U.S, Europe and Asia-Pacific in terms of announced deals so far this year. Q3 2015 was particularly strong for Goldman, so a 19% decline year on year may not be as bad as it seems. But revenues are down 14% for the first nine months of this year, compared to a 5% increase at J.P. Morgan – which slipped one place down the global rankings, to 3rd. Goldman may, therefore, simply be reeling from an industry-wide slowdown.
Schwartz said that the M&A team were optimistic about the ever-important M&A pipeline. “Regionally, the U.S feels more active than Europe, and Asia feels more active than Europe,” he said.
Goldman Sachs is performing better than its peers in debt capital markets (DCM), however. DCM revenues are up by 20% so far this year, compared to a 5% uptick at Citi and an 8% decline at J.P. Morgan.
4. Goldman Sachs is quick to pay for performance
As we’ve pointed out, it seems unlikely that even a prolonged uptick in FICC revenues is likely to result in an increase in bonuses for 2016. At Goldman, compensation is down 13% year on year for the first nine months. This works out as an average of $263.6k accrued to 31 September compared to $287.7k in 2015 – or a 8.3% decline.
But in the third quarter compensation costs increased by 36% “reflecting an increase in net revenues”. In other words, Goldman has been quick to increase pay for its traders now that the tide has turned.
5. Goldman’s cuts have been deeper
Goldman Sachs has 2,000 fewer people now than it did at the end of Q3 2015. Proportionately, this seems light – Goldman’s ongoing lay offs in 2016 have suggested deeper than usual cuts, but headcount is down just 5% year on year. J.P. Morgan, by comparison, has kept headcount flat year on year
Goldman said that headcount in Q3 was flat compared to the previous quarter – in fact, 200 people have joined. Q3 is when the analyst classes come on board – Goldman hasn’t broken this out in 2016, but historically it’s taken on around 1,900 analysts a year globally suggesting that those further up the ranks have been departing.
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