Well, how about that? Three months after turning in a fairly dreadful set of results, seven months after declaring a new strategy and nine months after the co-head of the securities division declared himself "tired of losing" and urged employees to "add butter" in their dealings with clients, Goldman Sachs has happened upon its trading mojo again. Not only that, but it's been hiring a lot of people. And paying them more. And spending more on tech, whilst simultaneously achieving its highest annualized Return on Equity for five years. Stops have clearly been pulled out all over the place.
The chart below shows the extent to which things went right for GS in the first quarter. Year-on-year comparisons aren't everything, but it's notable that Goldman out-performed its U.S. competitors in nearly every business area, M&A excepted. The sickly FICC division saw revenues rise 107% on the final quarter of 2017; year-on-year they were up more than other U.S. bank to report so far. The implication is that Goldman is recovering market share.
What went right? Goldman cited, "improved market-making conditions and higher client activity," and said its currencies, commodities and credit traders did well and that its rates and mortgage traders did not. Goldman's been losing staff from its London rates trading desk this year, although Citi and J.P. Morgan also complained of weak rates revenues in the first quarter. Goldman aims to add an extra $1bn in fixed income revenues in the next three years. In the first quarter alone, it just added $389m compared to last year.
Goldman's success in equities, where it kept pace with Citi and BofA and outdid JPM, looks like testimony to its recent investment in that business and (late) push into electronic market making under Raj Mahajan, its head of electronic equities execution. Within equities, the really big growth was in client execution, where revenues doubled year-on-year to $1.1bn. In February the (still) CEO Lloyd Blankfein said Goldman added 100 people to its electronic trading business last year, of whom 70 were engineers.
It's not just electronic trading though. Across the firm, the rush of revenues has been accompanied by a rush of hiring. At the end of the first quarter, Goldman employed 3,200 more people than at the same point in 2017, an increase of 9%. In past quarters, headcount rises at GS have been accompanied by falling average pay as new staff arrive in low cost centres like Bangalore instead of London and NYC. Not any more. Following rumblings that Goldman didn't pay well for last year, average compensation per head is up 14% in the first quarter, to $110k. In total, spending on compensation was up 25%. With technology spend up 13% year-on-year and all non-compensation spending up 14%, the implication is that Goldman isn't done with human talent just yet - although insiders talk of a wave of tech hiring so far this year.
One thing didn't go right though, and that was M&A. Like BofA's M&A bankers, Goldman's bombed in Q1. Blankfein blamed an industry-wide dearth of M&A fees. This maybe so, except J.P. Morgan and Citi didn't seem to suffer similarly. Blankfein said not enough deals completed in the first quarter, although Dealogic and Mergermarket both said the first three months were exceptional for announced M&A. Maybe Goldman's pipeline will come through as the year progresses?
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