Goldman third quarter commodity revenue down 'significantly' on second quarter

Thu Oct 17, 2013 11:09am EDT

(Reuters) - Goldman Sachs' (GS.N) net revenues in commodities "declined significantly" in the third quarter from the previous three months, the bank said on Thursday, but reiterated its determination to remain in the physical trading business.

Speaking on the bank's third-quarter conference call, Chief Financial Officer Harvey Schwartz said the firm's commodity business had suffered from a difficult trading environment between June and September, a period when the bank came under intense political and regulatory pressure over its role in the natural resources supply chain.

"Commodities declined significantly versus the second quarter under challenging macro conditions and lower client activities," Schwartz said in prepared comments.

Before revealing the quarter-on-quarter decline, the bank earlier said in its earnings release that commodities was one of the few areas in its Fixed Income, Currencies and Commodities (FICC) business where third-quarter results had improved from the same period last year.

The bank's commodity division, J. Aron, faced significant regulatory and political pressure during the third quarter as a series of investigations and lawsuits over the operations of its Metro International metals warehouse business drew widespread attention, amid allegations the firm has purposely created long wait times for metal consumers.

Schwartz, in response to questions from analysts on the call, said the bank remained committed to its commodity business, even as rivals on Wall Street have looked at scaling back or exiting the sector.

"The commodities business for us, we've been in the business for 30 plus years. It's an essential business for our clients," Schwartz said.

"We'll see what happens in the regulatory discussion. It's an important discussion. But it's not distracting us from focusing on our clients."

The Federal Reserve announced in July that it was conducting a review of the position of Wall Street in physical commodities trading, amid concerns in Washington that banks could be taking on unseen financial risks by leasing crude oil tankers and operating power plants.

JPMorgan Chase & Co (JPM.N) has announced that it is selling its physical commodities arm, arguing the risks and the regulatory scrutiny outweigh the returns from the business.

Morgan Stanley (MS.N), traditionally Goldman's biggest and longest-running rival on Wall Street in commodities, has also looked at a possible sale or spin-off of its natural resources trading business.

"We have no intention of selling our (commodities) business," Schwartz said in response to an analyst's question on the importance of the physical commodity arm to Goldman.

"The extent we're involved in the physical business is to the extent our clients needs us in the physical business. It's important from the standpoint of being able to fill the requirements they have. Ultimately, the regulators will come to their own opinion about the business."

Combined FICC net revenues fell to $1.25 billion in the third quarter, down 44 percent from the same period last year as bond trading slowed, Goldman said.

VaR IN COMMODITIES

Like other Wall Street banks, Goldman does not break out its commodity revenues in its quarterly earnings release. They are published later in a more detailed filing with the U.S. Securities and Exchange Commission.

The bank's Value-at-Risk (VaR) in commodities, the only figure most Wall Street firms publish regularly on the sector, slipped to $17 million in the third quarter, down from $19 million in the second quarter and $22 million in the third quarter of 2012.

The bank as a whole reported a 2 percent fall in quarterly profit due to weak revenues from bond trading, its biggest business.

(Reporting by David Sheppard in London; Editing by John Wallace)