A trader works at the Goldman Sachs stall on the floor of the New York Stock Exchange.BRENDAN MCDERMID/Reuters
Trading revenue at some major Wall Street firms tumbled in the second quarter, as low volatility across the fixed-income market resulted in fewer securities changing hands.
On Tuesday, Goldman Sachs Group Inc. was the latest U.S. investment bank to report a slump in its trading division for the three months ended June 30, joining J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co.
Goldman posted a whopping 40-per-cent drop in revenue from fixed-income, currencies and commodities (FICC) trading from the same period last year, hampered by lighter levels of client activity. In fact, commodities at Goldman Sachs had its worst-ever quarter, prompting the mighty firm to ask itself how it can better serve its current clients and also attract new ones, chief financial officer Marty Chavez said Tuesday on a conference call with analysts.
"Not surprisingly, given the results, it was a difficult quarter on all fronts," said Mr. Chavez, referring specifically to the firm's FICC segment. "The market backdrop was challenged. Client activity remained light. And we didn't navigate the market as well as we aspire to or as well as we have in the past."
These results may not bode well for firms based north of the border.
Even though every firm's FICC offerings and client bases are different and the Canadian banks' reporting periods aren't the same as those in the U.S., one analyst says that trading revenue at the Canadian banks will be weighed down by low volatility when they report third-quarter results for the three months ended July 31.
"Market expectations for Q3 for the Canadian banks weren't really expecting anything spectacular from trading results – and that's basically confirmed," Meny Grauman, an analyst at Cormark Securities Inc., said in an interview.
"l don't think it's going to be a great quarter for trading in Canada, particularly on the fixed-income side. Investment banking should hold in a little better."
That's what happened at Goldman. Its investment banking revenues were up slightly compared with the first quarter. Advisory revenues were flat while underwriting fees rose, buoyed by growth in debt underwriting. But the segment still contracted, reporting a 3-per-cent decline in revenue from a year ago.
That said, during Goldman's earnings call Tuesday, analysts kept coming back to what happened with FICC trading. But Goldman wasn't the only U.S. bank to report weak results in that area.
Last week, J.P. Morgan reported a 19-per-cent dip in fixed-income revenue versus the same quarter last year, which saw banks benefit from higher levels of uncertainty and activity as investors repositioned their portfolios before and after the Brexit vote.
The division took a hit in this latest quarter because of "a lack of idiosyncratic events resulting in sustained low volatility, reduced flows and continued credit spread tightening," the bank said when it released earnings on Friday.
Citigroup recorded a more-modest 6-per-cent decline in revenue from fixed-income trading, saying its results were mainly a result of lower revenue from the trading of G10 currencies. The reason? You guessed it: low volatility.
But Goldman, J.P. Morgan, Citigroup, Bank of America and Wells Fargo were able to overcome lacklustre results in trading, as other parts of their businesses lifted their overall performance. All five banks beat average analysts' estimates for earnings per share and either surpassed or equalled revenue generated in the second quarter of 2016.