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15 Oct 2015 By Antony Currie

Goldman Sachs’ third-quarter earnings make it look more like a carthorse than a thoroughbred. The $78 billion Wall Street bank’s $1.4 billion profit in the period only missed estimates by a hair. But its annualized return on equity fell to 7 percent for the quarter – in line with Bank of America and below Citigroup.

Goldman’s fixed income, currency and commodities traders had a worse time than their counterparts at larger rivals for the second quarter in a row. Revenue fell 27 percent from the same period last year, after stripping out a one-off gain. BofA and JPMorgan earlier this week reported top-line declines of just 11 percent, while Citi on Thursday said FICC trading revenue fell 16 percent.

The nature of Goldman’s customers hobbles the bank to some extent. It relies more than its peers on institutional investors and other big trading houses. These players are more likely to scale back their activity when markets are volatile than corporate clients whose daily business involves treasury services and commercial banking. That’s where big banks like Citi and JPMorgan focus, and the lower fees are offset by higher and steadier volume.

Chief Executive Lloyd Blankfein also presides over a business which still relies on proprietary investments for a good slug of revenue – a unit called Investing and Lending. It can be a lumpy business, as the three months to September proved. The top line fell by about 60 percent from both the same period in 2014 and this year’s second quarter to $670 million.

Often, Goldman manages to perform better than its rivals even when markets get choppy. For example, the bank managed an 11.7 percent annualized ROE, excluding legal costs, in the second quarter. But performance over the summer exposed the weaknesses of an edgier business model than others have. The ROE for the year so far is running below 9 percent.

Blankfein and his lieutenants took some remedial measures, including cutting the amount set aside for compensation to 34 percent of revenue against 42 percent in the first half of the year. But Goldman’s intentional risk-taking, which comes with earnings volatility, only justifies the firm’s premium valuation if it delivers outsized returns over time. In 2015, at least, the racehorse is looking too sluggish.


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