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 The two banks performed worse in fixed income than rivals JPMorgan
Chase & Co and Bank of America Corp, showing that even as bond
market trading volume suffers from falling prices, some banks will
endure more pain than others.
"You have to be nimble to trade the debt markets these days. If you
make a bad bet, it will show up in results, and profits will be
harder to earn in 2014," said Matt McCormick, a portfolio manager
and banking analyst at Bahl & Gaynor Investment Counsel, which
manages about $11 billion.
Goldman's profit fell 21 percent, as revenue from bond trading
dropped 11 percent after adjusting for an accounting charge, it
reported on Thursday. The bank's shares closed down 2 percent at
$175.17.
Citigroup, which also reported on Thursday, said bond trading
revenue slid 15 percent in the fourth quarter to $2.33 billion in
what it called a "challenging trading environment." Its shares fell
4.3 percent to $52.60.
Trading results for the two banks contrasted with JPMorgan Chase &
Co's, whose bond trading revenue rose 1 percent, and Bank of America
Corp's, where it jumped 16 percent.
To be sure, a bank's declining bond trading revenue can be a sign of
discipline if markets are mispricing assets.
When an analyst on a Goldman Sachs conference call asked about other
banks evidently gaining ground in bond trading, Chief Financial
Officer Harvey Schwartz said, "(W)e're always going to prioritize
the risk management over things like market share."
Citigroup Chief Executive Michael Corbat noted that the bank had
decided to take less risk in emerging markets as the Federal Reserve
starts scaling back its bond buying stimulus.
"Our desks decided in latter parts of the year to de-risk," Corbat
said.
Still, the weak results in the fourth quarter could raise questions
about why banks such as Goldman and Citigroup are not moving faster
to prune their bond trading operations in areas including fixed
income, currency, and commodities. The business is the target of
many of the new regulations put in place after the financial crisis,
including the Dodd-Frank financial reform law in the United States
and Basel III global rules on capital and leverage.
The moves are designed to make markets safer after Wall Street's
excesses helped bring the financial system to the brink of collapse
in 2007 and 2008. But they also cut into profits.
"VERY COMFORTABLE" WITH FIXED INCOME
Many fixed-income, currency and commodity trading businesses are
complex and rely on large amounts of capital. For years, the
operations supercharged Wall Street's profits as banks borrowed
extensively and minimized the capital they had locked up in the
business.
At its peak in 2009, for example, fixed income trading revenue
accounted for 48 percent of Goldman's total revenue. In the fourth
quarter of 2013, it was 25.3 percent, including accounting charges.
Some banks see those declines as reason to make big changes to their
fixed income businesses. Swiss banks UBS AG and Credit Suisse Group
AG, under more pressure by their regulators, have taken the lead in
paring down. UBS largely exited fixed income, while Credit Suisse
has consolidated and exited operations to bring the number of
product areas in its bond sales and trading unit to 80 from 120.
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Others, such as Morgan Stanley, are relying more heavily on units
such as wealth management for growth and as a source of steady
revenues. That business is expected to be a bright spot for Morgan
Stanley, when it reports fourth-quarter results on Friday.
But consultants and bankers said many on Wall Street are still
refraining from cutting their trading operations. They are waiting
to see which rivals scale back. For those that stay, they hope less
competition makes bond trading profitable.
Goldman CFO Schwartz said on the conference call that the bank was
"very comfortable" in fixed income, and hopes to benefit as
competitors exit.
Bond markets may be going through a soft patch, but they are hardly
going away. Investors will demand fixed-income products for years to
take care of a wide range of needs, including income for insurance
companies and retirees, said Larry Fink, Chairman and Chief
Executive of asset manager BlackRock Inc on a conference call
Thursday.
BRIGHT SPOTS
As fixed income trading comes under sustained pressure, other
operations such as equities trading, and asset and wealth
management, are helping to counter the headwinds.
In its equities business, Goldman's revenue from client stock
trading fell 22 percent to $598 million, even as stocks hit new
highs. But equity underwriting revenue doubled to $622 million as
more companies tapped the market for capital. Revenue from its own
equity investments jumped 25 percent to $1.4 billion.
The stock market resurgence also helped Goldman's investment
management business, which provides advisory services to wealthy
clients and manages money through funds. Revenue increased 5 percent
to $1.60 billion in the quarter.
At Citigroup, equity underwriting revenue rose 73 percent to $282
million, and merger advisory revenue rose 29 percent to $266
million.
The bank's overall profit rose 21 percent, after adjusting for
items, as it cut costs and dipped into funds set aside for bad
loans, but the results missed analysts' estimates in large part
because of weakness in the bond trading business.
Separately, BlackRock reported a higher-than-expected quarterly
profit, benefiting from strong markets and a flow of new money into
exchange-traded funds and its retail business.
(Writing by Paritosh Bansal; editing by
Dan Wilchins, Jeffrey Benkoe and Nick Zieminski)
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