With Goldman having shuttered much of its commodity front-office in recent years, it probably won’t come as a big surprise that the bank has become increasingly less reliant on commodities as a profit center following repeated probes into manipulation by Goldman and other big banks, as well as organic revenue declines in the sector.
What is surprising, however, is the extent of the revenue decline because as Bloomberg reports this morning, Goldman suffered its worst commodities performance in the bank’s history as a public company, when a drop of about 75% in net revenues in 2017 put it behind long-time rival Morgan Stanley.
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For decades Wall Street’s dominant commodities trader, Goldman’s performance was dragged down by losses in gas and power. The slump means the bank’s storied natural resources unit fell behind competitors such as Morgan Stanley, where net revenues in the sector rose by about a fifth last year, one of the people said — a reversal of fortunes for the two banks known as the “Wall Street refiners.”
As previously reported, the last C in FICC – which once upon a time was a wildly profitable group – Goldman’s commodities unit had been under scrutiny both within the bank and among investors since it revealed its second-quarter performance was the worst in its post-IPO history. That triggered an informal review of the unit and several high-profile departures, including global commodities head Gregory Agran.
And, as Bloomberg adds, the bank’s commodities earnings in the final three months of 2017 were better than the previous two quarters as losing natural gas trades were closed. Nonetheless, “performance at the unit remained lackluster as it cut back risk-taking.”
Almost as if the lack of volatility unleashed by central banks to help banks was… bad for banks.
While Goldman does not breakout its commodities earnings, which are lumped into its fixed income, currencies and commodities division, Goldman had net revenues from the unit of a little under $1.1 billion in 2016, according to Bloomberg. And yet, it was ranked No. 1 among global investment banks in the sector, according to Coalition Development Ltd., a London-based analytics company.
A 75% drop suggests Goldman’s net revenues in commodities last year were less than half those of Morgan Stanley, where a strong performance in gas and power helped spur an increase in commodities net revenues to more than $600 million, according to one of the people.
And while the contribution of commodities to the banks’ overall results these days is small, the asset class was once a significant driver of profits. In its heyday in the mid-2000s, Goldman enjoyed net revenues that peaked at $3.4 billion in 2009 thanks to volatile markets, rising interest from investors and little competition from other banks.
And, as a reminder, many of the bank’s top executives – including Chief Executive Officer Lloyd Blankfein – cut their teeth in the commodities division, J. Aron.
The bank has remained committed to the unit in spite of its weak results, making at least seven new hires to the unit in the past few months, and pushing investment bankers to use their relationships with natural resources companies to help drive business.
There may be a silver lining: according to the report, so far 2018 is proving kinder to Goldman’s commodities business than 2017, according to one of the people: it had a good start to 2018, profiting from volatility in energy markets as the U.S. northeast was hit by a blast of freezing weather, which as we previously reported sent nat gas prices soaring to record highs.