Now that Goldman Sachs and Morgan Stanley have reported their third quarter results, we have a pretty good idea of what went on across U.S. investment banks in the three months to the end of September and with it, what went on in the first nine months of this year.
The answer, in the last three months alone, is clearly a continuing collapse in fixed income sales and trading revenues. The answer, for the first nine months is a concerted industry-wide effort to squeeze more profits from revenues. But there are also nuances. And while Goldman Sachs or J.P.Morgan used to be considered the best U.S. investment bank to work for, banks’ results for 2017 suggest things have become a little less clear cut.
1. Life was bad everywhere in fixed income in the third quarter. Morgan Stanley included
As expected, fixed income currencies and commodities (FICC) salespeople and traders had a bad third quarter at Goldman Sachs – although not as bad as predicted. While KBW’s banking analysts predicted a 40% decline in Goldman’s FICC revenues year-on-year, the actual decline was “just” 26% (marginally less than J.P. Morgan.) Goldman blamed this on: “significantly lower net revenues in commodities, interest rate products and credit products and lower net revenues in currencies, partially offset by higher net revenues in mortgages.”
Morgan Stanley’s fixed income sales and trading business also succumbed to the slump. After an excellent start to the year, they were down 21% in the third quarter. The best performer in fixed income, relative to 2016, in the three months to October, was therefore Citi – where revenues fell 16%.
As the chart below shows, both Morgan Stanley and Citi benefited from the relative strength of their capital markets origination businesses in the third quarter. At Morgan Stanley, both equity capital markets (ECM) and debt capital markets (DCM) grew. At Citi, the growth was all in ECM.
2. Morgan Stanley’s equities business has had an excellent year so far, as has its capital markets business
Morgan Stanley’s investment bank has gained market share in several business areas in the first nine months of 2017. Goldman Sachs’, has not.
As the chart below shows, Morgan Stanley’s equities sales and trading and debt capital markets businesses have grown faster than the rest. And Morgan Stanley’s fixed income sales and trading business is flat year-on-year, while its U.S. rivals have seen revenues shrink.
Goldman Sachs, by comparison, has been the big loser in fixed income sales and trading market share (followed by J.P. Morgan) and hasn’t compensated for this with gains in other areas.
3. But the biggest and best investment bank in the third quarter of 2017 was still Citi’s
Nonetheless, the best investment bank to work for in the third quarter was still Citi’s. Revenues in Citi’s institutional clients group were up 8% year-on-year in Q3; profits were up 15%. At Morgan Stanley, revenues were down 4% and profits were up 1%. At Goldman Sachs, revenues were up 2% and profits were down 3%.
As the chart below reflects, Goldman Sachs’ and Morgan Stanley’s investment banks are also pretty small compared to Citi’s.
4. Morgan Stanley has, however, outgunned Citi in terms of investment banking revenue and profit growth for the year to date
Although Citi’s investment bank is a lot bigger than Morgan Stanley’s and did better in the third quarter, Morgan Stanley’s investment bank has been the fastest “grower” in the first nine months of the year. Revenues are up 16% at Morgan Stanley’s institutional securities unit this year; profits are up 25%. At Goldman Sachs the comparable figures are just 8% and 18%.
5. But you’ll eat more of what you kill at Goldman Sachs
The only good news for Goldman Sachs bankers is that something curious is happening to pay. The firm added 900 people to its headcount in the past year. This was almost certainly related to its retail banking venture “Marcus” and to growth in low cost locations like Bangalore. Even so, average accrued compensation per head at Goldman was actually up in the first nine months of 2017, at $271k vs. $264k a year earlier. Given that many of the new hires are likely to be paid less, this may imply that key existing employees at Goldman’s investment bank will be paid generous retention-style packages for 2017.
Goldman Sachs now pays 40% of its revenues in terms of compensation (down from 41% in the first nine months of 2016). At Morgan Stanley’s institutional securities unit, just 35% of revenues (down from 36%) are diverted to its hard working employees.
6. J.P. Morgan’s corporate and investment bank only wins on one metric
Lastly, J.P. Morgan’s corporate and investment bank only appears to have one thing going for it this year: its return on equity.
Even this is questionable, however: the inclusion of commercial lending in J.P.M’s business mix may flatter its figures compared to rivals. Neither Citi nor BofA break out RoE.