Fixed-income business drops 40%, leaving storied bank at back of
Wall Street's pack
By Liz Hoffman
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 19, 2017).
Goldman Sachs Group Inc.'s once-vaunted bond-trading unit posted
a poor performance for the second straight quarter, fueling a
selloff in the firm's shares and deepening questions about the
bank's strategy.
Goldman, once the fiercest trading shop on Wall Street, reported
a 40% decline in its fixed-income trading business that lands it at
the back of the pack among big U.S. banks to report quarterly
results.
The results will likely amplify criticism that Goldman hasn't
responded quickly enough to dramatic changes in trading trends and
market conditions. A rejiggering of the division's leadership last
fall failed to jolt the desk from its malaise, which culminated in
having its revenue surpassed in the first quarter by Morgan
Stanley, Goldman's rival historically weaker in debt trading.
Morgan Stanley reports its earnings Wednesday.
The poor showing drowned out a surprise earnings beat, which
Goldman owed to gains in its portfolio of private-equity stakes.
Shares fell 2% as investors looked through to shakiness at
Goldman's core, tumbling as Chief Financial Officer R. Martin
Chavez addressed concerns on a conference call.
"We didn't navigate the market as well as we want to," he said,
echoing nearly verbatim comments he made three months ago.
"Everyone in our business is intently focused on this topic and at
a granular, molecular level are working on it, as are all of us in
the leadership team."
The firm, run by Chief Executive Lloyd Blankfein, reported
earnings of $3.95 a share on revenue of $7.89 billion, both better
than analysts had forecast.
Still, Goldman's traders have struggled to find their footing as
markets churn quietly higher and trillions of dollars shift from
human portfolio managers to algorithms and index funds that don't
try to beat the market, but simply match it. Meanwhile, many among
Goldman's stable of hedge-fund clients are grappling with poor
performance and outflows.
That has led to less demand for Goldman's specialty: exotic
trading products that allow investors to make one-of-a-kind bets on
asset prices. Overall, the firm's trading revenue fell 17% from a
year ago, capping a six-month run that is the worst start of a year
in Mr. Blankfein's 11-year tenure.
"The demand side of the equation has dried up for" Goldman, said
James Mitchell of Buckingham Research Group. "The market has moved
to plain-vanilla."
Goldman cited weakness in nearly every major fixed-income
product it sells, from interest-rate derivatives to credit
instruments.
Goldman's trading business is more reliant on swashbuckling
stock pickers than peers, a strategy that paid off in years past
but now puts the bank on the wrong side of shifts in the
money-management industry. As more assets move from actively
managed funds to passive ones, trillion-dollar pools trade less
frequently and generally need fewer services.
Goldman has pushed over the past year or so to win more business
from corporate treasurers and passive managers, and worked to
better track where top clients are spending their trading
commissions and fees.
So far, it hasn't worked. Goldman's six-month trading revenue
fell 10% from last year. Commodities trading, a business Mr.
Blankfein once ran, had its worst quarter in Goldman's 17 years as
a public company as the firm struggled to adequately hedge its
inventory.
Goldman has also seen a stream of departures among rank-and-file
fixed-income salespeople and traders in recent months. Continued
woes in the division are likely to ramp up pressure for another
shake-up.
"Goldman was the unbeatable firm, the smartest guys on the
block," Octavio Marenzi, CEO of capital markets consultancy Opimas,
said of the business's results. "They've lost that luster."
The story was better in stock-trading, which posted its best
quarter in two years. Goldman lost the equities crown in 2014 to
Morgan Stanley, a jolt that spurred it to revamp its trading
technology through investments that are now beginning to pay
off.
Rescuing the quarter was its portfolio of private company
stakes, which rose 88%. Goldman has held on more tightly to
merchant banking than rivals, and rising markets push up the prices
for the shares it holds in everything from a publicly traded credit
bureau to private technology startups.
But investors tend to discount the lumpy revenues in the unit.
Charles Peabody of research firm Compass Point called Goldman's
results a "low quality beat...aided by gains that the marketplaces
won't pay up for."
Investment-banking reported a 3% decline in revenue from a year
ago, with merger fees down 6% and stock and debt underwriting
basically flat.
Goldman has leaned hard on investment banking in recent years,
though there are signs that it also may be slowing. A record deal
boom in 2015 and 2016 is cooling, and some companies have been
postponing deals as they wait to see if the Trump administration
can achieve promised tax and regulatory changes.
Goldman's investment-management division reported a 13% rise in
revenue and net inflows of $25 billion, though nearly all of that
came from the acquisition of a business that courts big pension
funds.
Goldman's return on equity, a key measure of profitability,
stood at 8.7% in the quarter. Goldman is one of few banks that has
reliably exceeded 10% -- a level typically demanded by investors --
since the crisis. But in recent quarters, Goldman's ROE has slipped
and in the second quarter, stalled in the same place it was year
ago.
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
July 19, 2017 02:48 ET (06:48 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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