Goldman Underwriting Helping Fuel Recovery in Q2

Investment banks have suffered a great deal over the past two quarters. And while things are still far from the euphoric run they enjoyed across their operating divisions just before the economic downturn of 2008, a report indicates that it sure is beginning to look brighter. ^[1]

Notably, trading operations – the most profitable business for most banks – are getting back on track as the equity and bond markets globally have shown a marked recovery over the quarter. The demand for debt underwriting services is also on the rise. But equity underwriting has not seen much traction, and the weak M&A environment is expected to keep advisory revenues depressed. With less than a fortnight to go in this quarter, industry big-wigs including Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM) and Morgan Stanley (NYSE:MS) are set to put their dismal Q3-Q4 2011 figures behind them.

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FICC trading forms the most valuable division for Goldman Sachs and Morgan Stanley, contributing nearly a third of either company’s value. This more or less sums up the importance of debt trading for the global investment banks. The extremely volatile conditions over the second half of 2011 hurt these banks largely because of their inability to generate trading revenues, evident from the debt trading yield for Goldman Sachs shown below.

But Goldman’s trading fortunes seem to have turned in Q1 2012, with the numbers expected to be better for the period. Another key business that has shown a sign of revival is debt underwriting. Global debt origination volumes have boomed during this quarter, and will surely drive underwriting revenues for the bank higher.

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1. Investment Bank Performance Gap Widens, Forbes, Mar 19, 2012 [↩]