There’s a major rebound underway in the fixed income, currencies, and commodities — or FICC — trading business on Wall Street, and one bank stands to win big from it.
Goldman Sachs could earn as much as $3 billion in additional revenues over the next two years, according to UBS analyst Brennan Hawken. In a recent note, he forecast a $15 billion recovery in FICC revenues for the bulge bracket firms, bringing the wallet back to 2011-2013 averages.
Goldman, being the best-positioned FICC franchise in Hawken’s view, could stand to capture one-fifth of the revenue expansion.
That’s because he expects the shift towards macro businesses within FICC, like FX and rates, where Goldman Sachs is less strong, could reverse, “benefiting firms that have not pulled back dramatically from the businesses previously under pressure.”
“We are raising our 2017 and 2018 EPS estimates to $20.80 and $24.40, respectively, driven largely by a much stronger growth rate in FICC (upper teens CAGR up from a middle single digit CAGR to 2018E),” Hawken wrote. He is also expecting modest increases in investment banking, equities, and investing and lending revenues.
FICC sales and trading businesses across Wall Street have had a rough run of it in recent years, with revenues falling 9% across bulge bracket firms in 2015.
But the business started to pick back up for some firms in the second and third quarters of 2016. That was helped, in part, by increased activity after Britain’s decision to leave the EU in June and Trump’s surprise electoral win in November.
While some firms have made heavy cuts in their FICC businesses — Morgan Stanley, for example, cut 25% of its headcount at the end of 2015 — Goldman has mostly stuck by the business.
“We are very committed to it because when we’re with clients whether they are transacting on a particular day or not, it doesn’t matter to us — we know this service is important to them,” Goldman co-COO Harvey Schwartz, who was CFO at the time, said in November 2015.
He added that Goldman had, however, cut more than 10% of its FICC headcount since 2013.
In January 2016, Schwartz laid out a bull case for fixed-income activity.
“The stable to improving global growth — and we’re seeing that in the US and were seeing that across Europe — certainly could be a tailwind,” he said. So could diverging monetary policies around the world, and the increased business that will come from currency hedging over the course of the next couple of years.
“Everyone has to acknowledge that financial services is a cyclical industry,” he said at the time, noting that Goldman Sachs was careful not to over-invest when FICC business was good back in 2009.
Goldman Sachs will report fourth quarter earnings on January 18.