It was a tough act for Goldman Sachs to follow: U.S. rivals Bank of America and JP Morgan had already announced their strong own financial results, and analysts were already expecting more of the same from Goldman.
And yet the world’s most famous investment bank still managed to surprise, reporting a 50-percent profit increase to $2.09 billion that sent its share price up 2.5 percent on opening.
“We are seeing strong performance in all areas,” said chief executive Lloyd Blankfein.
Compare that to Europe’s largest investment bank. When Deutsche Bank reports its own results later this month, analysts widely expect to see a significant decline in profits and, unlike Goldman Sachs, a decline in securities trading revenues by a third.
If that wasn’t clear before, it is now: A gap is widening between American and European financial institutions.
A simple ranking has already borne this out. According to figures from industry analytics firm Coalition, which compares the earnings performance of the world’s largest investment banks twice a year, U.S. banks now hold the top five positions on the list for the first time in five years.
Deutsche Bank tumbled out of the top five of the world’s largest investment banks over the first six months of this year, slipping to sixth place in the international ranking. Before the year began, the Frankfurt-based bank was ranked third worldwide. Earnings published for the third quarter have only confirmed the trend.
JP Morgan is still the industry leader, based on revenues, followed by Goldman Sachs, Citigroup, Bank of America und Morgan Stanley.
Europe’s powerhouses now all sit behind the U.S. top five: Deutsche Bank is followed by Britain’s Barclays and the Swiss banks Credit Suisse and UBS.
Europe’s largest investment bank doesn’t even earn the most money in Europe anymore.
A comparison with JP Morgan shows just how much Deutsche Bank has fallen behind. According to Coalition, the New York bank earned $12.5 billion in investment banking revenues in the first half of the year. Although JP Morgan earned most of its revenues in its U.S. home market, the Wall Street firm also earned $3.9 billion in Europe.
This was enough to oust Deutsche Bank from the top spot in its own home market. In other words, Europe’s largest investment bank doesn’t even earn the most money in Europe anymore.
Not all of this is Deutsche’s fault. JP Morgan, Bank of America and Goldman Sachs have all benefited Britain’s vote to withdraw from the European Union. They’ve benefited from price fluctuations, on the one hand, and from the withdrawal of European competitors from England, on the other.
For Goldman, that meant net revenue increased by 19 percent, to $8.17 billion, while analysts on average had expected $7.42 billion. The company’s $2.09 billion in profits exceeded forecasts by roughly $300 million.
Trading in securities, foreign currency and commodities accounted for about half of total revenue, increasing by 17 percent to $3.75 billion. That is where the Brexit effect comes in: The division had suffered in past quarters but, in the months from July to September, benefited from fluctuation in bond markets, which translates into more trade orders from institutional clients. Revenues from the trading of bonds, foreign currency and commodities increased by a third.
For Chief Executive Officer John Cryan, Deutsche Bank’s descent in the rankings is a logical consequence of his new strategy. To become leaner and more efficient, the lender has pulled out of some products and countries, and it has reduced the size of its customer base. It’s also cutting a tenth of its workforce.
Mr. Cryan hopes that these decisions will make the bank more profitable in the longer term, but it also means that revenues will fall: Analysts are predicting a decline in revenues from securities trading to €2.1 billion this year, down from €2.3 billion last year.
The profit situation is also going to get worse before it gets better. The experts expect a meager €90 million in earnings before taxes, even without special charges, while analysts are forecasting an unadjusted loss of €108 million.
Goldman Sachs is demonstrating that there is a different way to do things. The bank is slashing jobs, and in New York it has already completed its fourth round of layoffs of the year, with a total of 400 jobs lost. It plans to reduce staff by 10 percent in bond trading.
Mr. Blankfein has also fired dozens of senior managers, the latest being Mark Schwartz, who had served as vice-chairman for the bank’s Asia business. Business is not going well in Asia, and Goldman Sachs is also entangled in a corruption scandal in Malaysia. The bank denies all guilt.
Mr. Schwartz, a confidant of Mr. Blankfein, left of his own accord, according to the Wall Street Journal. However, his departure shows how much thinner the executive level has becoming at Goldman Sachs. Without the 62-year-old manager, there is now only one vice-chairman, compared to four in the past. The remaining vice-chairman is Michael Sherwood, head of European operations.
Mr. Blankfein’s strategy of handing over more responsibility to younger employees is paying off. Even its trading volume in stocks, long a problem child, increased by 2 percent. And although investment banking revenues declined slightly to $1.54 billion, they were still ahead of analyst estimates of $1.47 billion.
Goldman Sachs could be showing its best side in the especially challenging business of money management for institutional clients, like pension funds and insurance companies, where the bank increased its revenues by 4.4 percent, to $1.49 billion.
Michael Maisch is the deputy editor of Handelsblatt’s finance section and is based in Frankfurt. Thomas Jahn is Handelsblatt’s bureau chief in New York. To contact the authors: email@example.com and firstname.lastname@example.org