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Goldman Plans to Pull Back Commodities Trading Operations

Zacks Equity Research

The Goldman Sachs Group GS is planning to cut back Commodities trading, which used to be a major source of revenues for the investment bank. However, no final decision has been made by the executives, so far.

The decision to pull back from commodities comes after months of review conducted on Goldman’s businesses, as proposed by the new chief executive officer David Solomon, with a view to control costs and tap on areas that could generate higher profits.

A similar review on the commodities arm revealed that the wing was not being able to make enough returns to justify the amount of capital being invested. The executives are mulling to pull back physical trading of iron ore, platinum and other metals, which, in turn, would help lower costs associated with the storage and transportation of physical commodities.

For Goldman's commodities traders, 2017 was a disappointing year. In 2018, the scenario improved slightly. However, it is yet to regain the spark it had in 2000, when it contributed about 15% of Goldman's pretax profits.

The bank held on to the commodities business even though its peers pulled back since the financial crisis. Further, strict regulations made other banks exit the business. Morgan Stanley divested a fleet of oil tankers and pulled back energy trading. JPMorgan Chase stopped physical trading of commodities.

Solomon, who became the CEO in October 2018, plans to reallocate resources to lending to clients in the trading business and make its business profile similar to the rivals.

While Goldman is on track to remodel its business into a more profitable organization, it continues to be face investigations over its role in helping to raise funds for the 1Malaysia Development Bhd (1MDB). The Malaysian government has filed corruption and money laundering charges against Goldman and two former employees in connection with the probe.

Recently, this investigation led to Goldman holding back distribution of bonuses worth at least $7 million to the top executives until investigations related to the 1MDB scandal are completed.

Shares of the company have lost around 17% in the past six months compared with the 13.2% decline of the industry.

Goldman currently carries a Zacks Rank #5 (Strong Sell).

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