Goldman advisory division surges past fixed-income traders

Choppy markets cause investment banks to underperform retail banks in fourth quarter

Goldman Sachs’ quarterly results are expected to mark a historic moment next week: investment bankers in the group’s advisory division are set to make more revenue than its under-fire fixed income traders for the first time in a decade.

The results will offer a silverlining to new boss David Solomon as the former mergers and acquisitions adviser prepares to unveil a tough set of earnings and face questions on Goldman’s handling of the scandal over Malaysia’s 1MDB fund.

Several analysts believe Goldman’s M&A unit earned higher fourth-quarter revenues than its fixed-income powerhouse where former chief executive Lloyd Blankfein cut his teeth, thanks to a combination of an M& A boom and volatile fixed-income markets.

If confirmed by Goldman in Wednesday’s earnings, that would mark the first time that advisory revenue topped fixed- income since 2008, when revenues from trading things like bonds and currencies turned negative, UBS analysts wrote in a note to clients.

On an underlying basis, fixedincome has not undershot advisory for more than 20 years, since the 2008 fixed-income loss included a big hit from investing activities, which were taken out of the division in a 2010 restructuring.

Brennan Hawken at UBS expects Goldman’s advisory revenues to rise 42 per cent yearon-year to $1.1bn, reflecting a “monster quarter” where public data show the volume of closed deals the company advised on more than doubled. Mr Hawken expects Goldman’s fixed income, currencies and commodities (FICC) revenues to rise 6 per cent year-on-year, to $1.06bn.

Analysts at KBW, JPM Securities and Autonomous said their models also predicted Goldman would earn more from advisory than FICC in the last quarter, while Wells Fargo analyst Mike Mayo said advisory fees “could get close to the point of FICC revenues” but would not definitely beat them.

Mr Solomon became chief executive on October 1, ending 12 years of Mr Blankfein’s leadership. He launched a review that fuelled speculation Goldman would pivot away from its trading roots, where revenues have been increasingly volatile and capital demands are high, in favour of the more stable and capital-light advisory businesses.

The impact of Goldman’s heavy trading focus is evident in analysts’ predictions for the fourth quarter. Estimates submitted to data service Factset expect choppy market conditions to drag Goldman’s pre-tax profits down almost 13 per cent year-on-year for the quarter, the worst relative performance of the big six US banks.