Implications of Goldman's results for the industry

Goldman's results should not be extrapolated to the overall financial services industry, but there are some companies that could mimic the bank's 1Q

Michael Wong, CPA 17 April, 2009 | 11:23AM
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Goldman Sachs recently reported first-quarter earnings that exceeded Wall Street's estimates by a significant margin. (See "Our take on US banking results".) Though people may view Goldman as a poster child of the financial services industry, it is a poster child because of its differentiated nature. Therefore, the company's first quarter should not be extrapolated to the overall financial services industry.

The main contributor to Goldman's quarterly outperformance was the company's fixed income, currencies, and commodities (FICC) business. In fact, every other major business line was lower both year-on-year and sequentially. This implies that the tail winds that helped Goldman may also help companies with these types of trading operations and that the majority of banks with no trading operations will see no additional wind in their sails.

We caution investors that we believe this trading tail wind will be short-lived and may not affect all players equally. The reasons behind the outsized FICC revenues were largely increased fixed-income trading spreads and market share gains. Fear in the market led to traders requiring higher profit margins to trade. Eventually, the fear will come out of the market and spreads will tighten. Trading is also a competitive business and traders can smell where money is to be made like sharks smell blood in the water. The influx of additional players and more capital facilitation may reduce spreads even before fear comes out of the market.

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Michael Wong, CPA  Michael Wong is a stock analyst at Morningstar.