In the UK, where trains are quite often late, train operators have a go-to excuse for their tardiness: there are “leaves on the track.” Now it seems that an investment banks have something similar for when their trading revenues fail to match up to rivals’. It’s called: “reversion to norm.”
Harvey Schwartz, COO of Goldman Sachs, reached for this in September when he tried to explain away the persistent under-performance of Goldman’s fixed income business. As the Wall Street Journal previously pointed out, there were various reasons for Goldman’s fixed income inadequacy. The firm’s figures were sub-par in the first quarter because it wrong-sided the Trump trade, expecting long term interest rates to rise and the dollar to appreciate – when, in fact, long term interest rates fell and the dollar did too. They were sub-par again in the second quarter because something bad happened in its commodities business, and they were miserable in the third quarter because the bank’s client-base seemed too highly-geared towards fence-sitting hedge funds instead of corporates.
Schwartz acknowledged some of this, but he also reached for the reversion-to-norm get-out. Between 2005 and 2009, Schwartz noted that Goldman increased its fixed income trading market share from 7% to 19% because it was one of the only, “dependable liquidity providers.” Any subsequent deterioration in Goldman’s relative performance was therefore entirely inevitable (and in any case, Goldman’s share is still higher than it used to be at 10%).
Now, it seems that J.P. Morgan is busy trotting out the same excuse. As we noted yesterday, JPM had a lacklustre third quarter compared to Citi – which now has the larger and more profitable investment bank of the two. In the call J.P. Morgan CFO Marianne Lake blamed this on norm-reversion. “You may recall that we gained 240 basis points of share in FIC in the third quarter of ’16, which will mean our year-on-year decline will look larger than most,” said Lake, omitting to mention why J.P.M couldn’t hold onto last year’s gains.
While J.P. Morgan’s trading business has been trailing, Lake also emphasized the bank has been very busy hiring investment bankers. No fewer than 200 have turned up since the start of 2016.
Lake said almost nothing, however, about the timorous performance of J.P. Morgan’s equities business. Here, sales and trading revenues were down 1% year-on-year in the first nine months of 2017, while equity capital markets revenues were up 22% but down 21% in the third quarter (compared to respective increases of 4%, 88% and 99% at Citi).
Lake’s silence was curious, given that improving J.P. Morgan’s equities market share is one of investment bank CEO Daniel Pinto’s stated aims and the bank’s been busy hiring equities traders from Goldman. At Citi, by comparison, there was some crowing over the strong equities quarter. “If you look at the equities franchise revenues, the equity markets plus the ECM they totaled over a billion dollars this quarter and that’s up 30% year-over-year,” said Citi CFO John Gerspach. “We’ve got a growing and balanced business with good momentum going with both our corporate as well as our investor clients.”
However bad things are at J.P. Morgan though, the RTN excuse is likely to be deployed with far greater vigour at Goldman Sachs when it reports its third quarter results next week. Following J.P.M’s mediocre turnout, banking analysts at KBW are predicting a 40% decline in fixed income revenues at GS in the third quarter. Maybe the market is simply reverting to a time when Goldman’s sales and trading business didn’t exist?