Goldman Sachs has achieved its first double-digit return on equity of the past six quarters, as brighter capital-markets conditions allowed the Wall Street bank to benefit from the shakeout of weaker competitors.
Over the past few years the New York-based bank has argued that it was only a matter of time before it would start to see gains from the scaling back of rivals — particularly European banks — in the face of regulatory curbs on risk-taking. That argument has been put to the test, as fears over global growth have weighed on client activity and as capital requirements have ratcheted higher.
But in the third quarter, Goldman saw net income rise 58 per cent to $2.1bn from a relatively weak period a year earlier, thanks in large part to a pick-up in bond trading, rising equity markets and a drop in the CBOE's Vix index, often known as the "fear gauge".
Earnings per share during the period came to $4.88, 68 per cent higher than a year earlier, and much higher than analysts’ forecasts of $3.74.
Harvey Schwartz, chief financial officer, said on a call with analysts that Goldman had been able to charge more in some areas, such as providing credit and other services to hedge funds. The bank was now very well positioned to pick up market share, he said, having cut costs in its core units.
“I think that this quarter, [operating efficiency] gets revealed because we had fewer headwinds,” he later told reporters. “But there are no tailwinds yet. Once we see them, you’ll get a disproportionate benefit to the bottom line.”
The upbeat commentary was consistent with other big US banks such as JPMorgan Chase, Citigroup and Bank of America Merrill Lynch, which all reported better than expected figures from their investment banking divisions, which span trading and advisory activities.
The banks’ core fixed-income, currencies and commodities (FICC) units were particularly strong, as customers traded with more conviction in the wake of the Brexit vote at the end of June, and as the US Federal Reserve inched closer to another interest-rate increase.
Goldman’s FICC revenues were just shy of $2bn, up about 50 per cent after adjusting for an accounting change, in line with other big US banks. At JPMorgan Chase, FICC revenues rose 48 per cent year on year to $4.3bn, while Citigroup and Bank of America also had a rise of at least one-third in their FICC revenues. Morgan Stanley is due to report before the market opens on Wednesday.
Equities trading revenues at Goldman came to $1.78bn, fractionally higher than a year ago, while investment banking dipped slightly to $1.54bn. Assets under supervision in the investment management division rose to a record $1.35tn.
Lloyd Blankfein, chairman and chief executive, said Goldman was “benefiting from the breadth of our offerings to clients”.
The bank’s return on equity — a measure of how well it is using shareholders’ funds to generate profits — came to 11.2 per cent in the period, on an annualised basis.
Goldman has not achieved a double-digit return on equity since the first quarter of last year, averaging about 5.5 per cent.
However, despite the brighter picture during the latest quarter, the longer-term trends for Goldman underline the challenges of the post-crisis regulatory environment. Net income over the first nine months came to $4.9bn, down about 1 per cent from the same period a year earlier. Net revenues were weaker across all four reporting segments, falling 15 per cent in total to $22.4bn.
Goldman’s balance sheet continues to shrink, with total assets falling from $897bn at the end of June to $880bn at the end of September.
But two forces — a lower share count, and some restraint on pay — are pushing shareholder returns higher. During the quarter, Goldman spent $1.3bn buying back 7.8m shares, trimming its share count to a record low of 419m. Pay and benefits over the first nine months came to $9.2bn, down 13 per cent from a year earlier, outpacing a 5 per cent fall in total staff.
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