Has Goldman Sachs lost it? The omens and their counterpoints

Goldman's first quarter results are out and it's not pretty. Goldman's stock fell 3% on the news that the first quarter hadn't been fancy as widely expected. In fact, it hadn't been fancy at all. Goldman mostly did worse than its rivals (again) and while there were some mitigating factors, it's still worth asking - sotto voce - whether Goldman Sachs is really that special after all.

If you're wondering this too, you might want to run through the issues below. Basically, Goldman's supremacy is no longer clear cut (if it ever was).

1. Goldman seriously underperformed all the other U.S. banks that have reported so far

Analysts at KBW had high hopes for Goldman Sachs before it disclosed its damp quarter. They were predicting a 30% increase in fixed income trading revenues at the firm. In fact, GS' fixed income trading revenues were up a mere 1%. To put this in context, fixed income trading revenues at J.P. Morgan and Citi were up 17% and 19% respectively.

Nor was it only in fixed income trading that Goldman performed worse than rival U.S. banks in the first quarter. As the chart below shows, the same applies to M&A, equity capital markets, debt capital markets (DCM) and equities trading. In every category, revenue growth at Goldman lagged rivals. And this wasn't the first time: Goldman under-performed in everything except DCM in the fourth quarter of 2016. It's starting to look like the firm is suffering from some sort of persistent malaise, the expression of which is a persistent loss of market share.

But... Goldman did achieve a healthy increase in profits

Revenues aren't everything though. As UBS's Andrea Orcel likes to point out, success in banking is also about generating profits and returns.

On these measures, Goldman did a little better in the last quarter. Profits were up 80% - more than at J.P. Morgan's corporate and investment bank, and more than at Citi's Institutional Clients Group, both of which saw a mere 60% increase.

Goldman also nearly doubled its return on equity in the last quarter, to 11.4% from 6.4% a year earlier. This still looks miserable compared to the RoE of 18% at J.P. Morgan's CIB, but at least it's an improvement. (Unfortunately, the WSJ points out that Goldman's RoE was actually only 8.9% last quarter once an accounting charge relating to share-based compensation is factored in.)

2. Goldman's credit trading business is struggling 

A big loss in commodities aside, Goldman's issues in fixed income sales and trading appear to come down to one thing: clients. More specifically, clients in credit.  Goldman Sachs did not have a good first quarter in credit. Bank of America Merrill Lynch, Citi and J.P. Morgan all did.

There's good reason for this. As we noted last month, the new hot jobs in fixed income sales are all about selling to corporates rather than to institutional clients and hedge funds. Corporates trade more consistently than institutions and typically perform simple hedging trades with limited capital requirements. Credit trading with corporates is where banks like Deutsche have decided the growth is.

Unfortunately, Goldman Sachs isn't geared up to trading with corporates. It's all about institutional clients. While BAML therefore said that, "a more favorable market environment in credit-related products," drove, "increased client activity," Goldman simply said that credit revenues were lower (along with commodities and FX revenues). As long as credit trading stays up, Goldman Sachs will stay down (comparatively speaking).

But...Goldman's strong rates business could pick up soon

If the first quarter was strong for credit traders, the second half of the year is expected to be better for macro businesses. KBW's analysts are predicting an uptick in macro trading revenues as U.S. rates continue rising. This should benefit macro-focused businesses like Goldman's soon.

3. It looks like Goldman Sachs felt obliged to increase pay

Despite its comparatively poor quarter, Goldman just hiked pay. Compensation per head was $97k in the first quarter, 32% higher than last year.

It's tempting to read something bad into this. As we reported last week, Goldman's emerging markets trading team in London has been hit by exits. Headhunters say people on Goldman's EM team are quitting in frustration at being paid 40% to 50% below market after bonuses were cut last year. This is just one business, but is the firm being forced to hike compensation to keep people happy?

But...even if Goldman has decided to pay more, it's still paying a lot less than it used to

In retaliation, Goldman would surely point to its 80% increase in first quarter profits. It can afford to increase pay, so why not?

Moreover, even though pay at GS was $97k per head in the first quarter, it was still lower as a proportion of revenues and a lot lower than it was in 2015. New CFO Marty Chavez pointed out that compensation accounted for 41% of revenues at Goldman in the first quarter - the lowest proportion in the firm's history.  Moreover, two years ago, $130k was set aside to pay each Goldman employee in the first three months of the year. In this context, pay doesn't look so generous after all.

4. Goldman Sachs is cutting headcount even after it suggested it wouldn't

Three months ago, Goldman Sachs gave the very distinct impression that it was done with making layoffs. CFO Harvey Schwartz said he was happy with how Goldman was "positioned" and that cost cutting was over. Instead, today's results reveal that Goldman cut 300 people in the first quarter. The firm had 2,400 fewer people at the end of March 2017 than one year earlier. Goldman Sachs is shrinking (except maybe in Bangalore). Worse, there are persistent rumours in London that big cuts are coming as the firm restructures in preparation for Brexit.

But..all banks are cutting staff. Nowhere is safe

In Goldman's defense, the 300 extra cuts are seemingly part of last year's cost savings. CFO Marty Chavez said the bank announced $900m of cuts last year and there are still $400m to come. GS isn't exactly the only bank trimming headcount. J.P. Morgan did it too. - Daniel Pinto extracted removing 748 people from its corporate and investment bank over the past quarter, despite J.P. Morgan being roundly declared the safest place on the street. 

Contact: sbutcher@efinancialcareers.com