Why Goldman's Slip Is Worse Than Bank of America's
Bank investors were left unsettled by some trouble spots at Bank of America Corp. and Goldman Sachs Group Inc. even after their second-quarter profit and revenue topped Wall Street's expectations. The worries are warranted, but they should temper at least some of their concerns.
At Brian Moynihan's Bank of America, shareholders are fretting about lower-than-expected net interest income, in part because of a slip in the lender's net interest margin. Investors are focusing on the miss because it was expected that a rising-rate environment would make this metric a bright spot for Bank of America. Instead, there was this hitch.
But ... it's a narrow miss and it doesn't derail the notion that the Charlotte, North Carolina-based bank will continue to be a significant beneficiary of rising rates. After all, net interest income came in at $11 billion -- and even though that's lower than analysts' consensus of $11.3 billion, it still marks a gain of 9 percent and is the bank's biggest second-quarter haul since 2011. And for what it's worth, Bank of America's CFO has guided to an improvement next quarter.
Over at Lloyd Blankfein's Goldman Sachs, investors were disappointed by its fixed-income, currencies and commodities (FICC) trading arm, which posted its lowest revenue in any single quarter since 2008. The tumble -- 40 percent since the same period last year -- was somewhat offset by better-than-expected equities trading and decent advisory fees, but it is a reason for apprehension. It was also the worst quarter for Goldman's commodities business, ever.
Goldman has long defended its dedication to trading and has stood out from its peers by keeping up its commitment to these areas while others have scaled back. But after Goldman's languid start to the year, it should consider following the lead of various European banks and more recently, Morgan Stanley, by restructuring that specific business.
Remember, following divergent first quarters for the two close rivals, Morgan Stanley managed to best Goldman in fixed income for the first time in almost six years even with a much smaller number of traders and salespeople, or a staff that is roughly three-quarters of what it was at the end of 2015. So it's reasonable that even after downsizing its fixed-income trading unit, Goldman could, like Morgan Stanley, find that it's able to maintain or boost its market share while also lifting its overall profitability.
To be sure, Goldman is already said to be reviewing the direction for its commodities arm, but it should widen this review to encompass the entire business. It should realize that trimming down won't signal a lack of commitment to clients, whose lull in activity is part of the reason for the bank's struggles in this area. A rethink doesn't have to mean a total retreat.
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