Jan 16 Goldman Sachs Group Inc and
Citigroup Inc were hit hard by a sharp fall in bond
trading revenues in the fourth quarter, a stinging blow for two
banks long seen as stalwarts of fixed income markets.
The two banks performed worse in fixed income than rivals
JPMorgan Chase & Co and Bank of America Corp,
showing that even as bond market trading volume suffers from
falling prices, some banks will endure more pain than others.
Softer markets are only the beginning of the trouble with
trading bonds, which include fixed income, currency, and
commodities products, at investment banks. Regulators are
boosting capital requirements and making many derivatives
markets more transparent for investors.
The moves are designed to make markets safer after Wall
Street's excesses helped bring the financial system to the brink
of collapse in 2007 and 2008. But they also cut into profits.
Goldman's profit fell 21 percent, as revenue from fixed
income trading dropped 11 percent after adjusting for an
accounting charge, it reported on Thursday.
Citigroup, which also reported on Thursday, said fixed
income revenue slid 15 percent to $2.33 billion in what it
called a "challenging trading environment."
Profit at Citi, the third-largest U.S. bank, rose 21
percent, after adjusting for items, as it cut costs and released
dipped into funds set aside for bad loans, but the results
missed analysts' estimates in large part because of weakness in
the bond trading business.
At rival JPMorgan Chase & Co bond trading revenue
rose 1 percent, while at Bank of America Corp, it jumped
Goldman shares fell 2.3 percent to $174.65, while Citi was
off 4.2 percent to $52.68.
Many fixed-income, currency and commodity trading businesses
are complex and rely on large amounts of capital. For years, the
operations supercharged Wall Street's profits as banks borrowed
extensively and minimized the capital they had locked up in the
The weak results in the fourth quarter could raise questions
about why banks such as Goldman and Citigroup are not moving
faster to prune their bond trading operations. The business is
the target of many of the new regulations put in place after the
financial crisis, including the Dodd-Frank financial reform law
in the United States and Basel III global rules on capital and
"VERY COMFORTABLE" WITH FIXED INCOME
At its peak in 2009, for example, fixed income trading
revenue accounted for 48 percent of Goldman's total revenue. In
the fourth quarter of 2013, it was 25.3 percent, including
At the same time, Goldman's overall return on equity, which
measures how much profit it wrung out of its balance sheet, was
11 percent for 2013, well below the 30 percent returns that the
bank generated before the crisis despite some improvements.
Some banks are making big changes to fixed income. Swiss
banks UBS AG and Credit Suisse Group AG
, under more pressure by their regulators, have
taken the lead in paring down. UBS largely exited the fixed
income business, while Credit Suisse has consolidated and exited
operations to bring the number of product areas in its bond
sales and trading unit to 80 from 120.
Others such as Morgan Stanley are relying more
heavily on businesses such as wealth management for growth and
as a source of steady revenues. The unit is expected to be a
bright spot for Morgan Stanley, when it reports fourth-quarter
results on Friday.
But consultants and bankers said many on Wall Street are
still holding out on cutting their fixed income businesses. They
are waiting to see which rivals scale back. For those that stay,
they hope less competition makes bond trading profitable.
On a conference call with analysts, Goldman Chief Financial
Officer Harvey Schwartz said the bank was "very comfortable" in
fixed income, and hopes to benefit as competitors exit.
As fixed income trading comes under sustained pressure,
other operations such as equities trading, and asset and wealth
management, are helping counter some of the headwinds.
In its equities business, Goldman's revenue from client
stock trading fell 22 percent to $598 million, even as stocks
hit new highs. But equity underwriting revenue doubled to $622
million as more companies tapped the market for capital. Revenue
from its own equity investments jumped 25 percent to $1.4
The stock market resurgence also helped Goldman's investment
management business, which provides advisory services to wealthy
clients and manages money through funds. Revenue increased 5
percent to $1.60 billion in the quarter.
At Citigroup, equity underwriting revenue rose 73 percent to
$282 million, and merger advisory revenue rose 29 percent to
Separately, BlackRock Inc, the world's largest money
manager, reported a higher-than-expected quarterly profit,
benefiting from strong markets and a flow of new money into its
exchange-traded funds and retail business.
(Writing by Paritosh Bansal, Editing by Dan Wilchins and