So, Goldman Sachs, JPMorgan or....Citi? Deep diving Q3
If you're the sort of person who writes about banks' results then today is a harsh kind of day. JPMorgan reported, so did Goldman Sachs, and so did Citi. So too did Wells Fargo, but WF is kind of off the beaten track for wholesale banking even though it's been hiring plenty of people from Deutsche.
If you're looking for a quick but detailed catch-up, this is what you need to know.
Banks are looking shrinky, especially Goldman Sachs
Goldman Sachs is shrinking. In the third quarter, revenues across the bank fell nearly 6% and profits fell nearly 27% versus the same period of 2018. This seems bad. Over the same period, Goldman's prized return on equity went from 13.1% to 9%.
By comparison Citi's institutional clients group (ICG) - its sales and trading business and investment banking banking business specifically - increased profits 2% and revenues 3% year-on-year in the third quarter. And JPMorgan's corporate and investment bank saw revenues increase 6% and profits increase 7%.
So, what went wrong with Goldman in Q3? Blame incentive fees in asset management (down 78%) - a business the firm wants to double down on according to CEO David Solomon. Also blame what seem to be a big loss on Goldman's equity investments in its investing and lending unit (down 40%). And blame an inexplicably large increase in depreciation and amortisation (up 40%) as if Solomon is kitchen-sinking losses on old systems in his first full year as CEO.
The chart below shows the percentage change in revenues and profits for Goldman (whole firm), JPMorgan's CIB and Citi's ICG in the first nine months of 2019 vs. the same period of 2018. No bank has grown strongly over the period, but Goldman Sachs is unquestionably becoming smaller. It wasn't supposed to be like this: the new Marcus consumer business was supposed to be a growth engine. It's not clear what's actually going on with Marcus as Goldman doesn't break it out, but simply includes it in its problematic 'investing and lending' segment...
JPMorgan had an excellent third quarter in fixed income trading, but don't get too excited
After all the suggestions that the third quarter wasn't going so well, it turns out that JPMorgan's fixed income traders had an excellent few months and that Goldman's fixed income traders didn't do so badly either.
As the chart below shows, revenues in JPMorgan's fixed income sales and trading business rose 25% year-on-year in the third quarter thanks to what the bank described as more 'favorable' market conditions. Goldman Sachs' fixed income revenues were up 8% thanks to, 'commodities, credit products, mortgages and interest rate products.' And Citi's fixed income revenues were flat, despite 'better activity with corporate and investor clients and solid performance in rates and currencies.'
None of this should be taken as a signal that fixed income traders are having a great year and will get paid. Over the full nine month period JPMorgan's fixed income revenues are only up 1%. Goldman's are down 7% and Citi's are up 3%.
Goldman Sachs had an excellent third quarter in equities trading, but don't get too excited
There is one place where Goldman Sachs was not shrinking in the third quarter, and that was equities sales and trading, where revenues at the firm rose nearly 5% powered by, 'significantly higher net revenues in cash products.' Again, however, celebrations may be premature: in the first nine months of the year, Goldman's cash equity revenues fell 6%.
Goldman's equities business wasn't the only one shriveling over this full year. JPMorgan's fell 11% over the same period and Citi's were down 13%. It's not a great year to be in equities (Citi's already been making cuts and we now know why) and there may be more redundancies here to come.
Goldman Sachs is seriously cutting pay. JPMorgan is being euphemistic on the subject
Today's results also make it difficult to avoid the conclusion that Goldman Sachs is doing something horrible to pay under David Solomon.
The firm employed 1,500 more people in the third quarter of 2019 than in the third quarter of 2018 but somehow spent less on them. Moreover, this seems to be a trend - in the first nine months of 2019, pay per head at Goldman was down 15% on the previous year, at $246k.
This fall in pay might be because Goldman has been hiring all sorts of graduates (it says it has) or because it's been hiring a lot of retail banking and brokerage types (it acquired United Capital, a retail investment advisor), but it's surely not good news that headcount increased 4% year on year in the third quarter and spending on pay was down nearly 10%. At least, it's not good news if you actually work there: analysts at KBW note that the reduced remuneration could be good for Goldman's shareholders.
While Goldman seems to be cutting pay, JPMorgan might be increasing it. JPM is usually quick to say that it's cutting bonuses, but in the past quarter it said instead that it expenses in the CIB were higher as a result of 'revenue-related expenses,' which might possibly be a euphemism for bonuses.
Citi's M&A bankers are doing good
It was not a great third quarter in M&A, but Citi's bankers can feel ok about themselves. Similarly, JPMorgan's equity capital markets and debt capital markets bankers can give themselves a pat.
Citi might want to think about focusing its next cuts in the Americas
Penultimately, and in the wake of HSBC's revelation that it needed to cut in Europe because this is where it has high costs and low revenues, Citi may want to take a long and hard look at its American institutional clients business.
In Q3, Citi's Americas institutional clients group generated $3.1bn in revenues and $800m in profits. By comparison, Citi's EMEA institutional clients group generated $3.1bn in revenues and $1.1bn in profits. It's a geographical pattern that was repeated over the full nine months of the year. Of course, a higher proportion of central costs may be accrued by Citi's Americas business, but this didn't stop HSBC.
Goldman Sachs is doing fine in Europe, irrespective of Brexit
Lastly, don't let it be said that Brexit is crushing Goldman Sachs revenues in Europe. In the first nine months of 2019 Goldman's European revenues were fairly stable at $4.5bn. By comparison, its Americas revenues were down 8% (to $15.8bn) and its Asian revenues were down 15% to $3.3bn. Maybe Brexit is good for business after all...?