10 reasons to join Goldman Sachs as it rebuilds in FICC, by Harvey Schwartz

Today's the day. After a succession of miserable quarters in fixed income sales and trading which Goldman Sachs was "not satisfied with", ex-CFO and current COO Harvey Schwartz made his presentation explaining what Goldman plans to do about it and why the bank's fixed income currencies and commodities (FICC) business is still a good bet - not withstanding the fact that he also described the environment for the bank's FICC business in the third quarter as, "pretty challenging".

Schwartz's points are outlined below. Basically Goldman is hiring in fixed income and thinks it's got a growth plan. Whether this is really the case remains to be seen. - Analysts at KBW note that the firm's overall strategy is focused on penetrating markets Goldman hasn't been in historically and that this could be harder than it seems.  This might be why Goldman's share price rose 1.8% on opening after Schwartz's presentation, but has since fallen back again.

1. Goldman's got a three year revenue growth plan and it doesn't care if the market remains challenging

Goldman's got a growth plan, outlined in the chart below. Schwartz was at pains to stress that this isn't a set of targets - it's just a "comprehensive plan" and a look at "what's happening under the hood" already at Goldman.

Fundamentally, the firm intends to raise revenues by $5bn+ over the next three years and $1bn of this is expected to come from FICC. Schwartz said these FICC revenues should come through even if the market remains weak. If the market gets better, if the yield curve steepens, if volatility makes a comeback, there will be "additional upside". Goldman is "intensely focused" on the recent weak performance in FICC, Schwartz added.

Source: Goldman Sachs

2. Goldman plans to grow in fixed income, currencies and commodities trading by pushing into the areas where it's under-represented...

So, how does Goldman plan to grow its FICC revenues by $1bn in three years? Fundamentally, by targeting the areas where it's under-represented. As the chart below shows, around half of Goldman's fixed income clients now are hedge funds and asset managers. It has a significant opportunity to increase its penetration with corporate clients.

Source: Goldman Sachs

3. And it's already had some success in this....

In the first half of 2017, Goldman increased sales credits from its asset management clients by 6% year-on-year. Meanwhile, the firm seems to be deliberately jettisoning hedge fund clients and banks and brokers (even though it says it wants to drill down into the banking sector and become a top three liquidity provider for more banks, as per point eight below).

Source: Goldman Sachs

4. Goldman's been doing some big fixed income hiring, especially in sales...

As Goldman goes for $333bn a year of extra revenues in FICC, it's going to be hiring. In fact, it's been hiring already. As the chart below shows, Goldman's already hired twice as many people into its fixed income business this year as last year, with a focus on sales and less on strats and market making (trading).

Source: Goldman Sachs

5. ...And especially in Europe... 

Moreover, Goldman has particularly focused this year's hires on Europe, with over half coming in EMEA. For the moment, this means London. Soon, it might mean Frankfurt.

Source: Goldman Sachs

6... And especially of people who can help build its relationships with banks and asset managers

Schwartz said Goldman is "not happy" at failing to rank as the top three liquidity provider with a large proportion of clients in the asset management and banking sector. Doing so will be the firm's focus. For this reason, we suppose that Goldman's new sales hires are likely to be people who can help facilitate this aim.

Source: Goldman Sachs

7. It's not just about revenues - Goldman has created "massive operating leverage" (and is now in a position to grow again)

Schwartz said Goldman can go for growth again because of all the hard work it's put into cutting costs and risk weighted assets in the past. The charts below refer to the firm as a whole (rather than FICC) in particular, but illustrate Goldman's healthy metrics when you look beyond revenues.

Source: Goldman Sachs

8. But maybe Goldman cut a little too zealously in credit (and now needs to build up again)....?

Schwartz also released the charts below showing the extent to which Goldman cut headcount and risk weighted assets (RWAs) in its FICC business over the past four years.

They reveal that the biggest cuts came in the micro (credit) business, with the macro business suffering far less. Schwartz didn't say so, but this might be why Goldman is now busy building its flow credit trading business back up again.

Source: Goldman Sachs

9. Goldman's declining fixed income market share was just a reversion to the norm. Now it's ready to grow again

Schwartz also suggested there's no need to worry too much about Goldman's recent poor performance in fixed income.

As illustrated by the chart below, he said GS substantially increased its FICC share between 2005 and 2009 as it was one of the only "dependable liquidity providers to clients during a period of extreme stress." Since then, Goldman's share has dropped back again - but it's still bigger than in 2005.

Source: Goldman Sachs

10. Yes, Goldman cut average fixed income pay, but this was partly because it dumped senior staff. It's been a fine time for juniors 

Lastly, Schwartz said Goldman cut its spending on pay in fixed income by 30% between 2012 and 2016. This was partly because it cut headcount by 20% (see point eight), but it was also a function of "juniorization."  Schwartz also noted that Goldman increased the number of analysts and associates (across the form) by 13% between 2012 and 2017, while the number partners and MDs fell by a similar proportion. It's a been great time to be a Goldman junior, less so if you'd already climbed the pole.

Source: Goldman Sachs

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