Goldman Sachs has stuck to its guns with its trading division despite numerous changes to the industry and its competitors revamping. However, the bank finally appears to be changing its strategy. Since 2009, Goldman’s fixed income trading revenue has shrunk from over $23 bn in 2009, to just over $5 bn in 2017. Now the bank is changing its focus away from serving hedge fund clients, whom it has become overly reliant on, and towards big corporate clients, who offer a different sort of “flow” business based on interest swaps and other corporate needs.
FINSUM: We think it is smart for Goldman to diversify the focus on its fixed income unit. Especially since the $20bn plus revenue days don’t look like they are coming back.
Goldman Sachs just reported its first quarterly loss since 2011. The good news is that the loss does not mean the sky is falling in on investment banking or the markets. The loss was because of a huge $4.4 bn tax charge the company took in advance of the new tax regime for this year. Aside form the tax charge, Goldman’s business looked solid, with higher overall revenue and pre-tax margins in 2017. The one sore spot was bond trading, which produced only $1 bn of revenue.
FINSUM: The fall in bond trading revenue at GS has been prolific. In 2009 the firm created $23 bn of revenue in FICC trading. In 2017 revenues were just $5.3bn.
Banks are soon to be reporting their fourth quarter earnings, and Barron’s has put out an article advising investors on which stocks to buy ahead of the release. JPMorgan will report first and its numbers will have big implications for the sector. The piece cites analysts and says that Wells Fargo, Zion’s Bank, and Suntrust Bank look likely to do well, while investors should be underweight Goldman Sachs, CIT Group, and US Bancorp.
FINSUM: The tax package is going to be an interesting part of bank earnings both this earnings season and next, as some banks may do unusual tax maneuvers.
Here is a head-spinner: the US is the world’s new tax haven, at least according to Bloomberg. That is a huge shift for a country whose tax policy used to compel companies to reincorporate overseas in “tax inversion” deals. But it is actually a different policy that has made the US a tax haven—a lack of reciprocation in data sharing. Unlike many of its overseas counterparts, the US government cannot compel banks to disclose balances or beneficial owners of accounts, letting wealthy foreign citizens stash cash in US banks to evade foreign taxes.
FINSUM: This may be good business in the long run, but having a standard that others must abide by, but not doing so itself, is the kind of practice that undermines relations with other states.
While many Wall Street players argue that stocks overall are a solid buy, one of them in particular will be a good name to own. That name is Morgan Stanley, which rallied this week on an upgrade from Keefe, Bruyette, & Woods. There are two parts to the thesis. Overall, the idea is that MS will improve its profit margins and return on common equity, and will do so two ways. Firstly, the firm seems likely to benefit from regulatory ranges to the way the Fed reviews banks. Secondly, if the equity market keeps rising, MS stands to gain disproportionately, as its banking business is more tied to equities than other Wall Street rivals.
FINSUM: The point on regulatory changes makes sense, but the equity-related argument is risky, because if stocks end up doing poorly, MS would likely suffer more than other banks.