Last updated: October 17, 2013 6:21 pm

Goldman fixed income trading worst in class

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Goldman Sachs reported a worse plunge in fixed-income trading than any other large Wall Street bank but protected its profits by slashing the amount of money set aside for year-end bonuses.

Third-quarter net income was flat at $1.5bn, exceeding analysts’ estimates, but revenue fell short, down from $8.4bn a year earlier to $6.7bn.

Core revenues in fixed income, currency and commodities fell 47 per cent to $1.3bn. It is the sharpest slide in a third-quarter earnings season marked by a deterioration in the business segment. Citigroup’s fixed income revenues fell 26 per cent, Bank of America’s fell 20 per cent and JPMorgan Chase’s fell 8 per cent.

Shares in Goldman fell 2.4 per cent to $158.32.

“Clearly a difficult environment with FICC and we’re not happy with the result,” said Harvey Schwartz, chief financial officer. He said the bank had positioned itself badly in currency trading in particular.

Goldman cut remuneration costs sharply from $3.7bn to $2.4bn, for a ratio of pay to revenue of about 35 per cent, down from 43 per cent in the second quarter. Analysts noted that breaks the bank’s usual pattern of keeping the payout ratio flat until adjusting it in the final quarter when bonuses are paid.

Mr Schwartz said part of the reason for the underperformance in fixed income came from its client mix: a higher proportion of institutional asset managers than some rivals, who were more deterred than hedge funds from trading in uncertain markets. “I don’t want to sound defensive,” he added, “not a good quarter from us in FICC.” But he added: “It’s just one quarter.”

“The third quarter’s results reflected a period of slow client activity,” said Lloyd Blankfein, chief executive. “Still, we saw various signs that our clients are prepared to act on significant transactions and we believe that the firm is well positioned to help our clients accomplish their objectives. As longer-term US budget issues are resolved, we could see an improvement in corporate and investor sentiment that would help lay the basis for a more sustained recovery.”

Other banks have complained that the poisonous political climate in the US, including a partial government shutdown for a fortnight, and uncertainty over the Federal Reserve’s interest rate policy caused a lull in trading.

Earnings per share were $2.88, compared with $2.85 a year earlier and better than analysts’ estimates of $2.45. Net income was flat at $1.5bn. Goldman was able to increase its quarterly dividend by 10 per cent to 55 cents a share.

Goldman protected the bottom line in spite of a worse deterioration in the top line than analysts had expected. Revenues fell to $6.7bn from $8.4bn a year earlier. Analysts polled by Bloomberg had expected revenue of about $7.4bn.

As longer term US budget issues are resolved, we could see an improvement in corporate and investor sentiment that would help lay the basis for a more sustained recovery

- Lloyd Blankfein, chief executive

The bank’s return on equity – a central measure of its ability to generate profits for its shareholders – was 8.1 per cent in the third quarter. This was lower than its cost of capital and down from the last three quarters, though unchanged year on year.

While fixed income trading was a serious drag, investment banking fared better, with revenues flat at $1.2bn. The investment bank was powered by a better performance in equity underwriting, which offset a fall in fees from mergers and acquisitions, and flat revenue from debt underwriting.

Goldman missed out on some of the biggest debt underwriting deals – such as Verizon’s $49bn bond sale. “Some quarters we’ll be a big dominant participant and in other quarters less,” Mr Schwartz said.

Goldman’s revenues from its portfolio of investments and loans fell from $1.8bn to $1.5bn. Proprietary trading, or trading on a bank’s own account, is banned under the proposed Volcker rule, though companies are still allowed to make longer-term investments. Investment management revenues were 2 per cent higher at $1.2bn.

Mr Schwartz said Goldman had 9.8 per cent equity to risk-weighted assets under the new Basel III capital standards, meeting expectations. He also said Goldman was on target to meet a new leverage ratio standard, which measures equity against total, rather than risk-weighted, assets. Last quarter Goldman was one of the few banks to refuse to disclose its position.

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