If you work in fixed income currencies and commodities (FICC) at Goldman Sachs, you might be feeling a little exposed. The firm just reported its third quarter results and revealed a year-on-year reduction in FICC revenues of 33%.
That’s a big drop. It’s bigger than at Citi, which also reports its third quarter results today, and disclosed a 16% drop over the same period. It’s bigger than at J.P. Morgan (an 11% drop). And it’s bigger than at Bank of America (a 12% drop).
In the circumstances, you might think Goldman Sachs would be inclined to cut some fixed income salespeople and traders in the style of Credit Suisse or Nomura. You’d be wrong. In the call accompanying today’s results, Goldman CFO Harvey Schwartz made it clear that the bank has no intention of culling hundreds of staff. In fact, Goldman Sachs added 2,000 staff in the past three months. Year-on-year, headcount at the firm was up by a massive 3,400 people.
1. It’s cyclical not secular
Goldman is still adamant that FICC revenues will come back, one day. The current downturn in fixed income revenues is a bit like the downturn of M&A revenues in 2009 and 2010, said Schwartz. Back then, everyone said M&A revenues wouldn’t come back. And now they’re soaring ahead and the M&A pipeline is stronger than ever.
Schwartz said the decline in FICC revenues in the third quarter was down to the “usual seasonal drivers” and “macro developments.” The latter included events in China, disappointed rate hike expectations, and falling commodities prices with resulting risk aversion and increased credit spreads in the commodities sector. This could all pass.
2. Goldman’s goal is to be a ‘liquidity provider’ in all market conditions
As European banks pull back from fixed income, Goldman is hanging in there for its clients. “We want to protect the global client franchise,” said Schwartz. “We will never lose sight of the tremendous value we can bring to FICC clients over the long term.”
3. Goldman already cut 10% of its FICC staff
Schwartz emphasized that Goldman isn’t complacent about its FICC business. It’s already cut 20% of its FICC balance sheet. More importantly, Schwartz pointed out that Goldman already cut 10% of its FICC staff between 2010 and the first half of 2014.
4. Traders are less important now anyway – headcount growth is increasingly focused on regulation, graduates, and low cost locations
It’s not clear exactly how many traders Goldman employs – the bank doesn’t break that out. However, the firm has said before that most of its new hires now are in low cost locations like Mumbai and Salt Lake City and Schwartz said the additional staff in the past quarter were mostly graduate hires and regulatory professionals.
5. It’s wrong to base strategy on results for a single quarter
Yes, Goldman just had a bad quarter, but Schwartz said this is no big deal. Too much focus on quarterly changes can lead to “over-steering” of the business, he said.
6. It’s more about RoE than revenues
Schwartz also said he’s more focused on return on equity (RoE) than revenues. Once legacy costs are extracted, he said Goldman’s Return on Equity (RoE) was 12%.
7. Goldman’s business is balanced
Who cares that FICC revenues fell 33% (and equity underwriting revenues fell 55%) year-on-year in the past quarter? M&A revenues rose 36% and underwriting revenues rose 25%. Goldman is diversified, said Schwartz.
8. Who needs to cut staff when you’re cutting pay?
In the first three quarters of 2014, Goldman accrued $320k for its average member of staff. In the first three quarters of 2015, the comparable figure was $288k. That’s a 10% cut. You don’t need to cut staff by 10% when you can just pay them 10% less…