Investment Banking

Trading Revenue Drop Hurts Goldman Profit

“We underperformed this quarter,” new CFO R. Martin Chavez says as the firm reports its first earnings miss since the fourth quarter of 2015.
Matthew HellerApril 18, 2017
Trading Revenue Drop Hurts Goldman Profit

Goldman Sachs surprised Wall Street on Tuesday, reporting a rare earnings miss as trading revenue fell 2% to $3.36 billion.

The firm’s shares dropped 4.7% to $215.59, a 4-1/2 month low, on the first-quarter report, which also showed earnings per share of $5.15 and revenue of $8.026 billion. Analysts had expected earnings of $5.31 a share on revenue of $8.446 billion.

It was Goldman’s first miss on EPS since the fourth quarter of 2015. “We underperformed this quarter,” R. Martin Chavez, the firm’s new CFO, told analysts in a conference call.

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He explained that Goldman’s clients traded less with the bank because markets were calmer and because it does not lend as much as competitors. Banks with bigger balance sheets tend to profit not only from financing corporations but from capturing hedging and other markets-related business as well.

But Reuters said analysts seemed unsatisfied with the explanations from Chavez and outgoing CFO Harvey Schwartz. “I’m not fully — I’m still confused,” UBS’s Brennan Hawken told Reuters, adding, “I have some company.”

Goldman’s profit rose from a difficult year-ago quarter, when it posted earnings per share of $2.68. But the decline in trading revenue was in sharp contrast to results from JPMorgan Chase & Co ., Citigroup, and Bank of America, which all beat estimates due to strength in trading.

“The operating environment was mixed, with client activity challenged in certain market-making businesses and a more attractive backdrop for underwriting in our investment banking franchise,” CEO Lloyd Blankfein said in a news release.

During the first quarter the CBOE Volatility Index reached its lowest level since before financial crisis. Oil prices were also trading at years-low volatility levels.

“That lack of volatility meant [Goldman’s] investor clients, many of them hedge funds, were trading less,” Reuters said. “Goldman’s unusually large exposure to commodities trading also hurt its fixed income business.”

Net revenue from equities trading fell 6% to $1.67 billion. “Despite global equity prices generally increasing during the quarter, equities also operated in an environment characterized by political uncertainty, low levels of volatility and low client activity levels,” Goldman said.