Goldman Woes Led Banking Industry to Commodities Loss Last Year

  • Industry was hit by low volatility and Goldman trading losses
  • Net operating margin fell to minus 2 percent, Coalition says

The banking industry lost money in commodities last year, according to research group Coalition Development Ltd., as a business that had once been one of Wall Street’s powerhouses became a liability.

Operating margins for banks in commodities were minus 2 percent in 2017, meaning the industry’s estimated net revenues of $2.5 billion from the sector failed to cover its costs, according the analytics group, which compiles data from 12 major banks.

By comparison, operating margins for banks in commodities were 35 percent in 2016 and peaked at about 60-70 percent in the boom years of 2008 and 2009, Coalition said.

In the Red

Banks' operating margins in commodities

Source: Coalition

The collapse in profitability highlights how Wall Street struggled in commodities last year, battling low volatility, tougher regulation and trading losses at Goldman Sachs Group Inc., which for decades had been the banking industry’s dominant trader of natural resources.

Banks’ revenues in commodities fell to the lowest on record, down 42 percent from 2016 and more than 80 percent from their peak.

A large chunk of the decline was due to Goldman, which had its worst year as a public company in commodities, hit by losses in gas and power trading. Last month, Chief Financial Officer Marty Chavez implied that commodities revenues slid more than $750 million in 2017, from a little under $1.1 billion the previous year.

The tumble triggered an internal review at Goldman, which responded with a hiring spree and a plan to use investment banking relationships to drive more business to the struggling commodities unit. Chief Executive Officer Lloyd Blankfein told investors this month that the joint venture with the investment banking unit had generated 16 new commodity deals for Goldman since the autumn.

Annus Horribilis

Banks' commodities revenues plunged last year

Source: Coalition

Not all banks had a dire year in commodities. Morgan Stanley, which drastically shrank its commodities business in 2015 amid scrutiny from regulators and politicians, boosted net revenues by a fifth last year.

Coalition monitors commodities activities related to power, gas, oil, metals, coal and agriculture. The data includes Goldman Sachs, JPMorgan Chase & Co., Morgan Stanley, Societe Generale SA, UBS Group AG and HSBC Bank Plc. The analysis doesn’t include Australian, Canadian or emerging-market banks that have a large presence in commodities. It doesn’t comment on specific firms.

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