Are Goldman Sachs' traders less capable than Bank of America's?
Goldman Sachs and Bank of America have both released their first quarter results today. They confirm that the first quarter was an unfortunate time to work in M&A or capital markets. If you were at Goldman Sachs, though, it was also a bad time to be in trading.
Goldman said today that its fixed income currencies and commodities (FICC) revenues were driven "significantly lower" in the first quarter by virtue of declines in currencies and commodities trading revenues. Stronger revenues at Goldman in mortgage and credit trading were not enough to offset this. In equities sales and trading, Goldman said net revenues were also "significantly lower" in "both derivatives and cash products."
This was a contrast to the situation in fixed income trading at Bank of America, where commodities trading revenues were up 27% in the first quarter. BofA said that trading mortgage, credit, municipal products also helped to drive its 29% year-on-year increase in fixed income trading revenues in the first three months. In equities sales and trading, however, BofA also said that weaker client activity impacted revenues on both derivatives and cash desks.
Goldman's fixed income sales and trading business still generates higher revenues ($3.9bn) than BofAs ($3.4bn), but Bank of America is catching up.
As the chart above shows, of the banks to report Q1 results so far, Goldman Sachs' fixed income traders have performed by far the worst in revenue terms year-on-year; Bank of America's have done by far the best.
JPMorgan said last week that strength in rates and credit trading in the first quarter was offset by weakness in emerging markets and FX trading. Citi's macro (rates and FX), revenues rose 13% year-on-year; Citi's credit trading revenues declined 24%.
The implication is that Goldman lost ground to BofA year-on-year in commodities and to Citi in macro. Both BofA and Citi have historically been more focused on corporate clients than Goldman.
The comparatively weak year-on-year performance of Goldman's traders comes after the firm cut headcount by 3,100 people in the first quarter, and was circumspect with bonuses in its markets business for 2022.
Bank of America, by comparison, went on a hiring spree in fixed income sales and trading in 2022, with European macro traders an area of particular focus. BofA said today that it had no days of trading losses in the first quarter.
While Goldman's traders look bad year-on-year, however, they look less lackluster compared to Q4. Quarter-on-quarter, Goldman's fixed income traders don't look so bad and it's Goldman's M&A bankers who seem to be in the most trouble. Speaking today, Goldman Sachs CEO David Solomon said Goldman's first quarter was "solid" in fixed income and that the firm underperformed compared to the first quarter of 2022 simply because commodities trading was so strong at Goldman during that quarter, while rivals' revenues stagnated or fell.
In a recent interview with International Financing Review, Ashok Varadhan, Goldman’s co-head of global banking and market, argued that the bank's markets business is a source of non-capital intensive revenues that can be depended upon to increase as clients' assets under management rise. People love wealth management, partly because it’s not capital intensive, but also because the business grows with the accretion of a client’s wealth. In reality, the markets business is not too dissimilar,” said Varadhan, adding that, "there are economies of scale that give you elasticity to the upside that I don’t think the market gives credit for.”
Today's results suggest that Goldman's markets business might not be a platform play after all.