Goldman’s Q2 Reinforces View That FICC Trading Has Changed Completely In The Last Decade

by Trefis Team
Goldman Sachs
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The second quarter of 2017 was a fairly bad quarter for investment banks in terms of FICC (fixed income, currencies and commodities) trading revenues, with the five largest banks making less than $11.1 billion in total FICC trading revenues for the period – the lowest figure since Q4 2015. This was largely expected, though, as the industry as a whole witnessed a sharp reduction in trading activity for the period. What wasn’t expected, however, was for Goldman Sachs to report a sharp 40% y-o-y decline in these revenues. This compares with an average decline of around 11% for the other four large banks. More importantly, this marks a second consecutive subpar performance by Goldman’s FICC trading desk, with the bank falling to the #5 position among these banks in Q1 2017 as well as Q2 2017. This is a very clear reversal of fortunes for Goldman, as it ranked #1 among all banks globally in the FICC trading industry nearly every quarter before mid-2008.

Goldman’s poor performance over the last two quarters has been largely a result of bad commodities trading bets – with the bank acknowledging that Q2 2017 was the “worst quarter on record” for its commodities unit. It would appear that Goldman is waging a losing war against what are clearly secular changes in the global FICC trading industry. Stricter regulations have had a fundamental impact on the level of activity in the industry, and Goldman should seriously consider streamlining its FICC trading desk in the near future.

The chart above captures changes in FICC trading revenues for each of the five largest U.S. investment banks over the last five quarters. As seen here, Morgan Stanley was content with remaining at the #5 position among these banks due to its conscious decision to shrink FICC trading operations. In fact, Morgan Stanley has reported the lowest revenues from these operations in all but three quarters between Q1 2009 and Q4 2016. While Bank of America has fared the worst on two occasions (Q2 2010 and Q3 2011), Goldman suffered this fate once before due to an extremely poor showing six years ago in Q2 2011. But Goldman’s current spell is the worst in more than a decade, as the bank’s total FICC trading revenues for the first half of 2017 ($2.8 billion) was significantly below what the bank made over the first half of 2005 ($4 billion).

You can see how changes in Goldman’s FICC trading yield impacts our price estimate for the bank by modifying the chart below.

See the links below for more information and analysis about the 5 largest U.S. investment banks:

See full Trefis analysis for Goldman SachsJPMorganMorgan StanleyBank of America | Citigroup

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