August proved challenging for financial markets, especially impacting the trading business of Goldman Sachs (GS, Financial). CEO David Solomon revealed at the Barclays Global Financial Services Conference that trading revenue is expected to decline by 10% in Q3 due to last month's tough conditions.
This warning signals potential trouble for other trading-reliant firms such as Morgan Stanley (MS, Financial), JPMorgan Chase (JPM, Financial), and Citigroup (C, Financial). However, a recovering investment banking sector may help mitigate the trading downturn.
- GS and its competitors had a strong Q2 in trading, particularly in FICC (fixed income, currencies, and commodities). GS saw a 17% increase in FICC net revenues, driven by interest rate and mortgage products. However, the FICC market weakened in August. Additionally, GS faces tough year-over-year comparisons in Equities, which grew by 8% in Q3 2023.
- In Q2, combined FICC and Equities trading net revenue accounted for about 50% of GS's total net revenue. By contrast, Fixed Income and Equity trading net revenue made up around 33% of MS's total net revenue, thanks to its more diversified business model.
- GS has been scaling back its consumer business to focus on core areas like investment banking, asset management, and trading. About a year ago, it sold home improvement lender GreenSky. Solomon also mentioned plans to exit a credit card partnership with General Motors (GM, Financial), adding another challenge to its revenue.
- On a positive note, the prospect of lower interest rates is boosting the investment banking industry. In Q2, investment banking fees rose by 21% to $1.73 billion, driven by higher revenues in debt and equity underwriting, especially from convertible offerings and IPOs. This improved environment for dealmaking should benefit GS when it reports Q3 earnings on October 15.
GS is experiencing a significant drop today, indicating that the Q3 trading revenue decline is worse than expected. Similar to recent quarters, Q3 appears to be a mixed bag for GS, with investment banking performance leading the way.
