Goldman Sees `Bull Case' in Bonds With Morgan Stanley in Retreat

  • Investment bank remains committed to fixed-income trading
  • Goldman CFO sees more competitors leaving amid weak returns

As competitors flee fixed income, Goldman Sachs Group Inc. isn’t going anywhere, even after posting its worst year for the business since the financial crisis.

“I think you could strike a pretty aggressive bull case for fixed income,” Chief Financial Officer Harvey Schwartz said Wednesday on a conference call with analysts, adding that that’s not the outlook the firm is adopting for now. “We will react to that as we see it, but there certainly is an upside case.”

One scenario in which fixed-income trading bounces back includes an increase in clients buying and selling debt and derivatives in response to divergent central-bank policies and strengthening global growth, Schwartz said. The New York-based bank reported a 65 percent decline in fourth-quarter profit after a legal settlement, and brought in $7.1 billion from bond trading in 2015, the lowest since at least 2007 once accounting adjustments are excluded.

Schwartz’s comments are the latest to show the firm stands by its trading strategy even as rivals announce plans to scale back or abandon the business. Morgan Stanley has pared its fixed-income trading operation after concluding the outlook for the business is poor, and European competitors Barclays Plc, Credit Suisse Group AG and Deutsche Bank AG have also announced plans to shrink or shutter related businesses.

Limited Prospects

“That revenue pool for the industry has been shrinking, it’s continued to shrink, and we came to the conclusion that we thought the prospects for that revenue pool rebounding anytime soon was very limited,” Morgan Stanley CFO Jonathan Pruzan said Tuesday in an interview. The bank trimmed or closed businesses including currency trading outside of the G-10 group, sovereign credit-default swaps, Asia distressed securities and commodities, executives said Tuesday.

Schwartz said Wednesday that he expects more firms to capitulate after suffering years of returns that don’t meet their cost of equity. Rivals may also find it more difficult as the industry approaches new rules that must be implemented in 2018 and 2019, he said.

“It’s not surprising that you need to have a couple -- or several -- tough years, and that announcements will generally lag," Schwartz said. “We may see this over the next couple years now that we have been in this period of a tough couple years in FICC, and where the vast majority of the industry has had multiple years of performing below their cost of capital.”

Goldman Sachs has weathered the slowdown better than some in part because it didn’t over invest at the top of market, or cut too much at the bottom, he said, adding that the firm also moved more quickly than competitors to lower expenses. Morgan Stanley on Tuesday unveiled a $1 billion cost-cutting plan, Project Streamline, that will consolidate real estate and send workers to lower-cost areas. The move echoed Goldman Sachs’s drive in recent years to send some of its back-office personnel to cities including Salt Lake City, Dallas and Bangalore.

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