January 16, 2014 10:02 pm

Goldman and Citi wreck Wall St hopes of escaping crisis doldrums

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Wall Street’s earnings season has dashed hopes the sector would bounce back from its post-crisis doldrums, with Goldman Sachs posting weak results in fixed income trading and Citigroup missing analysts’ forecasts for the second consecutive quarter.

Financial stocks suffered a significant sell-off. Citi fell more than 4 per cent and Goldman more than 2 per cent, after the two banks reported lacklustre fourth-quarter and full-year results. JPMorgan Chase and Bank of America reported mediocre results earlier in the week.

Trading in bonds, currencies and commodities – Wall Street’s driving force for three decades – continues to struggle. Citi and Goldman suffered the worst year-on-year declines, both down 15 per cent, while Goldman’s full-year revenues in bond trading were the worst since 2005. Morgan Stanley, the last big securities firm to report, reports on Friday.

Investors are failing to take comfort from a far stronger performance in investment banking, particularly equity underwriting – where initial public offerings such as Twitter’s have boosted banks’ fee income.

Goldman’s revenues for underwriting equity and debt and advising on mergers and acquisitions hit their highest level since 2008 and Harvey Schwartz, chief financial officer, said the deal pipeline had “increased significantly” from a year earlier and was at its healthiest in five years.

A recent flurry of deal activity including Suntory’s $16bn takeover of US spirit maker Beam, Charter, the US cable operator, announcing a $61bn bid for rival Time Warner Cable, and smaller acquisitions featuring Google and Chuck E. Cheese have boosted confidence among investment bankers that 2014 – after several years of false dawns – is going to be a bumper time for M&A.

However, some investors are urging caution. “The optimism is all hope more than concrete evidence that backs it up,” said Mike Mayo, analyst at CLSA. “What you’re seeing is higher stock markets can be a driver for more activity. You see it in equity underwriting, you see it in mergers. It’s the usual cycle of hope and investors ‘go long’ hope and a couple of quarters from now we’ll see whether it pans out or not.”

There is still little confidence that trading revenues will return to previous levels. To try to prop up return on equity, a favourite gauge of profitability in the sector, banks are cutting bonuses. Goldman reduced its ratio of pay to revenue to 36.9 per cent, a percentage point lower than last year.

Returns are being limited by regulatory action, particularly new requirements to hold more capital. In the latest move, the Office of the Comptroller of the Currency said on Thursday it was raising the standards it expected for risk management at the largest banks.

Goldman’s fourth-quarter net income was $2.3bn, down 19 per cent, while Citi’s net income rose from $1.2bn to $2.7bn, or $0.82 a share, short of analysts’ estimates of $0.95 a share.

“Being pleased with our progress doesn’t make us satisfied and I know our shareholders aren’t either,” said Mike Corbat, Citi’s chief executive.

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