Forget the fact that Goldman Sachs' fixed income results are down 10% year-to-date while J.P. Morgan's are up 20%. Forget the fact that Goldman's equities trading revenues are down 30% year-on-year while J.P. Morgan's are down 1%. Forget too that Goldman's M&A bankers have seen a 14% decline in year-to-date fee revenues while J.P. Morgan's are up 5%. Also, overlook research firm Coalition's suggestion that J.P. Morgan is more of a tier one investment bank than Goldman Sachs will ever be... J.P. Morgan thinks Goldman Sachs is great.
Or at least J.P. Morgan's banking analysts do.
In a note out today, they confirm that Goldman Sachs is their most favourite global investment bank.
This is why:
Unlike European investment banks, J.P. Morgan says Goldman Sachs is doing ok in terms of its capital ratio (the ratio of ‘core’ capital to ‘at risk’ or risk-weighted assets) and ok in terms of its leverage ratio (the ratio of capital to total assets).
As the chart below (from Bernstein Research) shows, Goldman has a lower leverage ratio (4.6%) than its US rivals, but a far higher leverage ratio than the likes of Credit Suissse, Deutsche, Barclays and UBS.
J.P. Morgan notes that Goldman's "supplementary leverage ratio" (it's tier one capital over its total leverage exposure) is well within regulatory limits at 6.3%, while its Basel 2 core equity tier one capital ratio is a handsome 11.9%.
This matters. Global regulators are focusing more intently on leverage ratios, which are currently set at a minimum test rate of 3%, but could be increased to 4% or 5%. Banks with low leverage ratios will need to sell assets (deleverage) or raise capital, and the latter has the potential to damage businesses which require balance sheet (fixed income trading). Goldman Sachs does not have this problem.
Secondly, J.P. Morgan points out that Goldman is done with fines related to U.S. residential mortgage backed securities. While Deutsche Bank is wilting under the D.O.J's threatened $14bn fine, Goldman already settled for $5bn and can get on with life.
This isn't so great if you work there, but it's very good if you're looking at how well a bank can adapt to changing market conditions.
J.P. Morgan's analysts note that Goldman's revenues are down 15% this year and that Goldman's pay is down 13%. When revenue falls, pay falls. Unlike elsewhere.
Lastly, while GS might not have done well on a year-to-date basis, its third quarter was very fine, especially in fixed income trading. Here, year-on-year revenues were up 49%, which was pretty good compared to the rest of the market (and slightly better than JPM itself). Only Morgan Stanley - whose results are out today - did better, and this was just because Morgan Stanley's third quarter last year was exceptionally bad.
So, what's not to like at Goldman Sachs? J.P. Morgan doesn't say so, but there's always Goldman's return on equity (RoE). JPM's report contains the following chart, which is not so pretty.
Goldman Sachs' return on equity:
Source: J.P. Morgan
Such things have not gone unnoticed.
Ditto Goldman Sachs: ROE so far this year of 8.7% is slightly lower than 8.8% over the same period in 2015 (and both flattered by DVA) https://t.co/Y73ahfaOwy
— William Wright (@Williamw1) October 19, 2016