By Lauren Tara LaCapra and David Henry
Jan 16 Goldman Sachs Group Inc and
Citigroup Inc suffered a steep drop in bond trading
revenue 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.
"You have to be nimble to trade the debt markets these days.
If you make a bad bet, it will show up in results, and profits
will be harder to earn in 2014," said Matt McCormick, a
portfolio manager and banking analyst at Bahl & Gaynor
Investment Counsel, which manages about $11 billion.
Goldman's profit fell 21 percent, as revenue from bond
trading dropped 11 percent after adjusting for an accounting
charge, it reported on Thursday. The bank's
shares closed down 2 percent at $175.17.
Citigroup, which also reported on Thursday, said bond
trading revenue slid 15 percent in the fourth quarter to $2.33
billion in what it called a "challenging trading environment."
Its shares fell 4.3 percent to $52.60.
Trading results for the two banks contrasted with JPMorgan
Chase & Co's, whose bond trading revenue rose 1 percent,
and Bank of America Corp's, where it jumped 16 percent.
To be sure, a bank's declining bond trading revenue can be a
sign of discipline if markets are mispricing assets.
When an analyst on a Goldman Sachs conference call asked
about other banks evidently gaining ground in bond trading,
Chief Financial Officer Harvey Schwartz said, "(W)e're always
going to prioritize the risk management over things like market
Citigroup Chief Executive Michael Corbat noted that the bank
had decided to take less risk in emerging markets as the Federal
Reserve starts scaling back its bond buying stimulus.
"Our desks decided in latter parts of the year to de-risk,"
Still, 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 in areas
including fixed income, currency, and commodities. 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
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.
"VERY COMFORTABLE" WITH FIXED INCOME
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
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
Some banks see those declines as reason to make big changes
to their fixed income businesses. 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 fixed income, while Credit
Suisse has consolidated and exited operations to bring the
number of product areas in its bond sales and trading unit to 80
Others, such as Morgan Stanley, are relying more
heavily on units such as wealth management for growth and as a
source of steady revenues. That business 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 refraining from cutting their trading operations. They are
waiting to see which rivals scale back. For those that stay,
they hope less competition makes bond trading profitable.
Goldman CFO Schwartz said on the conference call that the
bank was "very comfortable" in fixed income, and hopes to
benefit as competitors exit.
Bond markets may be going through a soft patch, but they are
hardly going away. Investors will demand fixed-income products
for years to take care of a wide range of needs, including
income for insurance companies and retirees, said Larry Fink,
Chairman and Chief Executive of asset manager BlackRock Inc
on a conference call Thursday.
As fixed income trading comes under sustained pressure,
other operations such as equities trading, and asset and wealth
management, are helping to counter 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
The bank's overall profit rose 21 percent, after adjusting
for items, as it cut costs and 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.
Separately, BlackRock reported a higher-than-expected
quarterly profit, benefiting from strong markets and a flow of
new money into exchange-traded funds and its retail business.