(Bloomberg Opinion) – Goldman Sachs Group Inc. bond traders got stuck.
The bank that is synonymous with Wall Street has made no secret of its efforts in recent years to diversify its business to create longer-lasting income and reduce sensitivity to financial market conditions. But the second quarter was not the time to shy away from its roots, as earnings at JPMorgan Chase & Co. and Citigroup Inc. tested Tuesday by delivering profits even after reserving large sums for credit losses. JPMorgan’s commercial income in fixed income, currencies and commodities increased in the second quarter by a whopping 120%, (1) while Citigroup increased by 89%. In equities JPMorgan posted a 38% increase, while Citigroup had a modest decline.
It goes without saying that 120% is a big hurdle. But Goldman clarified it and more, reporting Wednesday that the FICC’s business revenue soared 149% from the previous year to $ 4.24 billion, the highest in nine years and far exceeding estimates of $ 2, 64 billion. Even in equities, trade increased 46%, the division’s best performance in 11 years. Together, the operators accounted for more than half of the bank’s revenue in the second quarter. That kind of benefit from market volatility, combined with a doubling of income from underwriting stocks and bonds, drove net income higher than the year before, a huge surprise given the global pandemic and economic downturn.
On the other hand, the rapid and sharp change in the financial markets in April and May was also shocking, so perhaps it is only natural that Goldman was in the best position to harness Wall Street’s animal spirit while remaining largely isolated. of Main Street anxiety. Looking ahead to this earnings season, its shares only fell 10% in 2020, compared with falls of more than 30% in Bank of America Corp., Citigroup and JPMorgan (Morgan Stanley was down just 2.6%). On Tuesday, after successful quarters for bond traders at Citigroup and JPMorgan, it was Goldman’s shares that recovered 2.5%, more than any company in the S&P 500 bank index and the second most behind Berkshire Hathaway Inc. in the diversified financial sub-index. . The shares expanded their advancement in pre-market trade.
In one of the most colorful comments on second-quarter earnings so far, Octavio Marenzi, CEO of Opimas, called Goldman’s results “almost indecent” and may provoke a protest by the government to take measures that do not promote directly investment. -Profit banks.
Now, the fact that Goldman’s merchants are clearly still talented in their jobs, and that Wall Street’s commercial businesses are not irreparably breaking down as some feared, does not mean that the bank should be counting on the second quarter to become the rule. The S&P 500 index staged one of its biggest rallies since its March lows, but has since been trading sideways for more than a month. Corporate bond prices have risen higher, while the torrent of new deals has slowed considerably. The Federal Reserve used its power of wonder and surprise to get markets where they are today. There is a good chance it will be hard work in the coming months.
JPMorgan CEO Jamie Dimon effectively said that Tuesday toward the end of a call with analysts. “For commerce, because nobody asked, cut it in half,” he said of the projection of future income based on the results of the second quarter. “Cut it in half, and that will probably be closer to the future than if you say it will still be twice what it normally works for.”
Goldman’s leadership didn’t go that far. “I don’t think any of us is in a position to make such a declarative judgment about the exact direction of business revenue in the second half of the year,” Stephen Scherr, the bank’s chief financial officer, said during the earnings call in response to a question that mentions Dimon’s comments. Previously, he noted that Goldman “went to the market and did not back down and away from the market, and in doing so we picked up market share, which I believe will have a lasting effect, regardless of where the market is going.” Market share is the holy grail of the banking industry, so investors are likely to be encouraged to hear that.
Goldman’s CEO David Solomon also acknowledged during the call that this big windfall probably can’t last. “The activity levels we saw in late March and April were truly extraordinary: we haven’t seen the same level of activity over the past five or six weeks, since the beginning of June. But I would say that activity levels in the last five or six weeks, when looked at compared to activity levels in 2019 or 2018, still look pretty active. “
Solomon said in a statement that “the turmoil we have seen in recent months only reinforces our commitment to the strategy we outlined earlier this year for investors.” That likely refers to initiatives like its new transaction banking business in the United States, which takes deposits and provides custody services, among other things, as well as its consumer bank Marcus and its joint effort with Apple Inc. on the card. Apple Card credit.
Meanwhile, Goldman’s credit loss provision is $ 1.59 billion, a fraction of what his more consumer-oriented competitors have had to set aside. While that number is seven times higher than a year ago, due in part to higher writedowns on private credit and real estate, JPMorgan was nine times higher and Wells Fargo & Co. was almost 20 times. Of course, Goldman has its own unique problems: Provisions for litigation and regulatory proceedings were $ 945 million in the quarter, up from $ 66 million a year ago as it approaches a deal with regulators over its scandal of 1MDB.
To paraphrase the late soccer coach Dennis Green, Goldman and his legion of merchants are who we think they were. The bank demonstrated that it still dominates Wall Street during one of the most tumultuous periods for financial markets in recent memory. Frankly, if it didn’t take out all expectations, it would have been a kind of red flag.
Solomon should not allow a flashy set of numbers to distract the long-term approach to settling into new lines of business. Today he will sing praises for his traders, and with good reason, but he probably knows deep down that he cannot count on a repeated performance.
(Add comments from Goldman Sachs executives in the eighth and ninth paragraphs.)
(1) This excludes the profit from the initial public offering of Tradeweb in the second quarter of 2019.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also the holder of a CFA letter.
For more articles like this, visit us at bloomberg.com/opinion
Subscribe now to stay ahead with the most trusted source of business news.
© 2020 Bloomberg LP
