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Goldman Sachs Traders Shine, But Don't Expect a Repeat

(Bloomberg Opinion) -- Goldman Sachs Group Inc.’s bond traders came through in the clutch.

The bank that’s synonymous with Wall Street has made no secret about its efforts in recent years to diversify its business to create more durable revenue and reduce sensitivity to financial market conditions. But the second quarter was no time to shy away from its roots, as earnings from JPMorgan Chase & Co. and Citigroup Inc. proved on Tuesday by delivering profits even after setting aside huge sums for loan losses. JPMorgan’s trading revenue in fixed-income, currencies and commodities rose in the second quarter by a whopping 120%,(1)while Citigroup’s jumped by 89%. In equities, JPMorgan posted a 38% increase while Citigroup had a modest drop.

Needless to say, 120% is a high hurdle. But Goldman cleared it and then some, reporting on Wednesday that FICC trading revenue soared 149% relative to a year ago to $4.24 billion, the highest in nine years and far and away outpacing estimates for $2.64 billion. Even in equities, trading rose 46%, the division’s best performance in 11 years. Together, traders accounted for more than half of the bank’s revenue in the second quarter. That kind of profiting from market volatility, combined with a doubling in revenue from underwriting stocks and bonds, pushed net income higher than it was a year earlier — quite the surprise, given the global pandemic and economic recession.

Then again, the swift and sharp turnaround in financial markets in April and May was also shocking, so perhaps it’s only natural that Goldman was in the best position to take advantage of Wall Street’s animal spirits while staying largely insulated from Main Street’s anxiety. Heading into this earnings season, its shares were only down about 10% in 2020, compared with declines of more than 30% for Bank of America Corp., Citigroup and JPMorgan (Morgan Stanley was down just 2.6%). On Tuesday, after the blockbuster quarters for bond traders at Citigroup and JPMorgan, it was Goldman shares that rallied 2.5%, more than any company in the S&P 500 bank index and the second most behind Berkshire Hathaway Inc. in the diversified financials sub-index. Shares extended their advance in pre-market trading.

In one of the more colorful comments on second-quarter earnings so far, Octavio Marenzi, chief executive officer of Opimas, called Goldman’s results “almost indecent” and may lead to an outcry for the government to take steps that don’t directly boost investment-banking profits.

Now, just because Goldman’s traders are clearly still talented at their jobs, and Wall Street trading businesses aren’t irreparably broken as some feared, doesn’t mean the bank should count on the second quarter becoming the norm. The S&P 500 Index staged one of its biggest rallies ever from its March lows but has since traded sideways for more than a month. Corporate-bond prices have trickled higher while the torrent of new deals has slowed considerably. The Federal Reserve used its shock-and-awe power to get markets to where they are today. There’s a good chance it’ll be a slog in the months ahead.

JPMorgan CEO Jamie Dimon effectively said as much on Tuesday toward the end of a call with analysts. “For trading, because no one asked, cut it in half,” he said of projecting coming revenue based on its second-quarter results. “Cut it in half, and that’ll probably be closer to the future than if you say it’s still going to still be double what it normally runs.”

Goldman’s leadership didn’t quite go that far. “I don’t think any of us are in a position to make such a declaratory judgment about the exact direction of trading revenues into the second half of the year,” Stephen Scherr, the bank’s chief financial officer, said during the earnings call in response to a question mentioning Dimon’s remarks. Earlier, he noted that Goldman “went to the market and didn’t pull back and away from the market, and in doing that we picked up market share, which I think will have lasting effect, notwithstanding where the market goes.” Market share is the holy grail of the banking industry, so investors were likely encouraged to hear that.

Goldman CEO David Solomon also acknowledged during the call that this huge windfall probably can’t last. “The activity levels that we saw at the end of March and in April were really extraordinary — we’ve not seen the same level of activity over the course of the last five or six weeks, since the beginning of June. But I would say the activity levels over the last five or six weeks, when looked at compared to activity levels in 2019 or 2018, still look pretty active.”

Solomon said in a statement that “the turbulence we have seen in recent months only reinforces our commitment to the strategy we outlined earlier this year to investors.” That likely refers to initiatives like its new U.S. transaction banking business, which takes deposits and provides escrow services, among other things, as well as its Marcus consumer bank and its joint effort with Apple Inc. on the Apple Card credit card.

Meanwhile, Goldman’s provision for credit losses is $1.59 billion, a fraction of what its more consumer-facing competitors have had to set aside. While that figure is seven times what it was a year ago, due in part to higher write-downs in private credit and real estate, JPMorgan’s was nine times greater and Wells Fargo & Co.’s was almost 20 times. Of course, Goldman has its own unique troubles: Provisions for litigation and regulatory proceedings were $945 million in the quarter, up from $66 million a year ago, as it nears a settlement with regulators over its 1MDB scandal.

To paraphrase the late football coach Dennis Green, Goldman and its legion of traders are who we thought they were. The bank proved it still dominates Wall Street during one of the most tumultuous periods for financial markets in recent memory. Frankly, if it didn’t blow away all expectations, that would have been something of a red flag.

Solomon shouldn’t let one set of eye-popping numbers distract from the longer-term approach of getting a foothold in new lines of business. He’ll sing praises for his traders today — and rightfully so — but probably knows deep down that he can’t count on a repeat performance.

(Adds remarks from Goldman Sachs executives in the eighth and ninth paragraphs.)

(1) This excludes the gain from the Tradeweb initial public offering in 2019's second quarter.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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