- Jonathan Ernst/Reuters
- Goldman Sachs reported third-quarter earnings on Tuesday, crushing Wall Street estimates. The fixed income, currencies, and commodities business, which has been struggling, jumped 25% from a terrible second quarter. Still, FICC revenue for the first nine months of the year, at $4.3 billion, was down 23% from the same period last year. CFO Marty Chavez said on an earnings call that half of that decline was because of “commodities inventory,” or the bank’s positions in the commodities market. The bank has since cut commodity positions dramatically, with value-at-risk, a measure of exposure to commodity prices, almost halving since the second quarter.
We now know a little bit more about Goldman Sachs’ fixed income, currencies, and commodities woes.
The US bank on Tuesday reported third-quarter earnings, posting a quarter-on-quarter increase in FICC revenue. Still, FICC revenue is down 23% from the same period last year – and that’s an extension of a long-term decline.
Here’s a breakdown of Goldman’s nine-month FICC revenue in recent years:
- September 30, 2017: $4.3 billion. September 30, 2016: $5.6 billion. September 30, 2015: $6.2 billion. September 30, 2014: $7.2 billion. September 30, 2013: $6.9 billion. September 30, 2012: $7.9 billion.
On an earnings call, CFO Marty Chavez made clear that while the sequential quarter-to-quarter improvement was “good to see,” the business still had a lot more to do.
“We know we can do better, and we need to do better,” he said.
He also provided some detail on what drove the quarter-on-quarter improvement, what was behind the year-on-year decline in FICC revenue, and the bigger picture through 2017 so far:
- Second quarter 2017 versus third quarter 2017: FICC revenue jumped 25% from the second quarter, hitting $1.5 billion. Rates trading was behind most of the improvement. Chavez said that during the latter part of the quarter, economic data and central-bank action led to an uptick in trading activity. Additionally, commodities trading was less of a problem, with the bank reducing positions in the market, a fact reflected in a smaller value-at-risk number. Goldman Sachs’ average daily value-at-risk exposure to commodities prices dropped to $9 million from $17 million in the second quarter. Third quarter 2016 versus third quarter 2017: Goldman’s third quarter FICC revenue was 26% lower than a year ago, with four of the five main FICC business lines posting a drop. Mortgage trading was the one business to post an increase. The first nine months of 2016 versus the first nine months of 2017: Goldman’s nine-month FICC revenue was down 23%, at $4.3 billion, equivalent to a $1.26 billion drop. Chavez said half of that 23% drop, a $630 million hit, was “attributable to commodities inventory.” And half of that occurred in the second quarter, he said.
The details shed new light on the scale of the poor performance of the commodities business. While Goldman Sachs had previously said that the second quarter was the worst in commodities in the firm’s history as a public company, Chavez wouldn’t be drawn on the scale of the underperformance or on the extent to which it was dragging down every other business in FICC.