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Reasons not to get TOO excited about the FICC recovery at Goldman Sachs

Goldman Sachs' fixed income currencies and commodities (FICC) business seems to be growing faster than expected. Only last September, the firm outlined plans to add an extra $1bn in FICC revenues in the next three years.  Just ten months on, and Goldman's FICC revenues are up $900m on 2017 in the first half of 2018 alone. How about that.

Goldman's fixed income performance is certainly impressive - particularly compared to the other U.S. banks to report so far, whose revenues in the business were far less dynamic. While Goldman's FICC revenues rose 45% year-on-year in Q2 (after increasing 23% in Q1), the comparable revenue increases at J.P. Morgan and BofA were 7% and 2% respectively, while Citi's fixed income sales and trading revenues actually fell 6% year-on-year in the quarter.

In today's release, Goldman attributes its fine performance in FICC to what it describes as, "higher net revenues across all major businesses, including significant increases in commodities, interest rate products and credit products." That's pretty fancy, particularly given Citi's comparatively poor performance in the same markets. However, there are also reasons to check your excitement.

1. Goldman's FICC recovery is just a reversion to the norm

As the chart below shows, it's not so much that Goldman's recent second quarter performance was outstanding, as that its second quarter performance in 2017 was abysmal by the bank's own historical standards. The recent bounce-back is therefore to be expected.  In any case, Goldman is still way below its historic trend.

2. As Goldman's performance recovers across the bank, employees aren't entirely benefiting 

As Goldman's revenues increase, it's standard practice for the bank to pay more to its staff.

Not this time.

In the most recent quarter, Goldman has taken advantage of its revenue increase to allocate less money proportionately to compensation and benefits - last year Goldman accrued 41% of its second quarter revenues to compensation and benefits; this year it's only accrued 37%. This is across the firm as a whole and not specific to FICC, but it's still worth noting given complaints about last year's FICC bonuses and the exit of valuable traders like Sam Berberian to Citi.  

Even though Goldman staff aren't fully benefiting from their performance in 2018, the good news is that Goldman has slightly hiked pay per head across the firm: it's up 5% to an average of $199.5k in the first half.

3. The cost of doing business is still rising 

There's a reason Goldman's traders are unlikely to receive the full benefits of their improved performance: non-human costs are rising. Non-compensation costs rose 24% year-on-year at Goldman in the second quarter, driven by the likes of investment in technology and something called "market development" (up 30%). By comparison, spending on compensation rose only 7%, despite the addition of nearly 4,000 extra staff across the business (a 7% rise).

Goldman's higher technology and market development costs are presumably a particular affliction in sales and trading, where the bank is deemed to have fallen behind in electronic trading and has been working frantically to amend things. If you work in Goldman's fixed income sales and trading division, you may therefore still need to sacrifice some pay for the sake of getting the firm back up to speed.

4. Goldman's FICC performance was nothing compared to the performance of its ECM bankers

Goldman's FICC traders may also need to tone down their compensation expectations given the far superior performance of their equity capital markets colleagues. As the chart below shows, it was the ECM business that genuinely had an excellent second quarter at GS.  Thanks to its contribution, the firm achieved its third highest investment banking revenues ever for a single quarter. By comparison, Goldman's FICC bankers did well - but not that well: revenues in the division are still 31% lower than they were five years ago.

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AUTHORSarah Butcher Global Editor
  • Ja
    Jack hammer
    18 July 2018

    This statement on your second point is wrong: “last year Goldman accrued 41% of its second quarter revenues to compensation and benefits; this year it's only accrued 39%”

    It’s actually worse than that. The 2nd Q they set aside just 37%, making the first half average 39%.. a full $400m hit to the comp pool.

    The narrative for so long has been: ‘stick with us + ignore those offers from JPM and MS.. once markets turn, the pay will bounce back accordingly’.. and here we are.. we finally have a good half and they cut the comp pool! People were willing to buy in when markets were bad.. this might be the last straw.

    This is the second questionable call Marty has made in his new role as CFO (the other was stopping buy backs after Q1, causing the stock to underperform the street by a wide margin). He’s a big believer his tech background + our tech investment will drive down the cost of compensation.. under his watch though, it looks like everyone will leave before his vision is realized

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