Peers saw similar performance gains
Goldman Sachs Group, Inc. (NYSE:GS) witnessed 12% year-over-year growth in its investment management division. JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C), and Wells Fargo & Company (NYSE:WFC) were all able to report strong results from asset management.
Goldman Sachs Group, Inc. (NYSE:GS) was able to grow earnings through cost-cutting and a slight improvement in revenue. Wells Fargo, JPMorgan Chase, and Citigroup reported either small declines or minor growth in revenue. The low revenue growth environment is here to stay. The big banks have all benefited due to declining loan loss allowances and decreasing litigation related expenses. That being the case, JPMorgan Chase continues to find itself under the cross-fires of a serious mess with regards to the London Whale incident.
JPMorgan Chase & Co. (NYSE:JPM), similar to Goldman Sachs, was able to grow asset management revenue 12%. JPMorgan’s top line growth was rather miserable, but the bottom line saw improvements as higher margin businesses (like asset management, and merchant services) were able to contribute better to the bottom line. JPMorgan Chase & Co. (NYSE:JPM) remains attractive due to a 3.22% dividend yield along with an 8.5 earnings multiple.
Citigroup Inc. (NYSE:C) saw similar gains in fee income, but what hurt the universal banks was the increased tier 1 capital reserve ratio. Citigroup was able to report 213% quarter-over-quarter EPS growth which was driven by a better economy (falling loan loss allowances) along with cost-cutting.
The cost-cutting is likely to continue, which should lead to higher profit margins in future reporting periods. Citigroup Inc. (NYSE:C) trades at a 16.2 multiple to earnings. Analysts anticipate earnings to grow 21% in 2013. The high P/E multiples are justified by the high earnings growth analysts have estimated for the current fiscal year.
Institutional client services a loser due to volatility
Goldman Sachs Group, Inc. (NYSE:GS)’ Institutional Client services division saw a decline in revenue of 10%. The division invests into fixed income, currency, and commodities on behalf of its clients. The 10% decline most likely came from the volatility in the foreign exchange markets, with Japan’s massive stimulus measures, the USD/JPY trade got downright parabolic (2000 pip move in a span of 3-months), the drop in gold prices (GLD has seen new lows for the year as gold prices declined 12% in the month of March).
This couldn’t have helped Goldman Sachs either, not to mention the 500 pip rally in the EUR/USD could have caused jitters among Goldman Sachs’ clients, the market volatility makes it difficult for traders at Goldman Sachs to make a profit on behalf of its clients. The commodities markets have been fairly difficult to trade in, as oil and coal prices have been declining, just take a quick look at KOL, and USO (both price charts are in a sustained down-trend).
Generally speaking, commodities have been a nightmare. Not even the mighty Goldman Sachs could post a profit for its clients. I highly doubt commodity/forex traders will be filing profits for the tax-season, unless they’re extremely talented. Volatility in commodities and foreign exchange is here to stay, with asset rotation leaning heavily towards the stock market.
Investors are finding value in broad-market ETFs like the SPDRs S&P 500 Trust Series ETF, and the Dow Jones Industrial Average ETF (DIA). The market saw a temporary resurgence in the demand for longer-term treasuries, but with the potential risk of the Federal Reserve Bank pulling back its open market operations, the demand for bonds has dropped.
This can be felt just by looking at the iShares Barclays TIPS Bond Fund which saw a modest decline of 2.5% between November and January, before rallying 1.4% from January to March. The volatility in currencies, bonds, and commodities had an awful effect on Goldman Sachs’ Institutional Client Services division, and while I am a hopeful optimist, I genuinely believe that bond, commodity, and currency market volatility is here to stay.
Stock market gains boost investing and lending
On the bright side, Goldman Sachs Group, Inc. (NYSE:GS) was able to see further growth in its investing and lending division. Goldman Sachs saw equity securities contribute 24% revenue growth year-over-year. The investing and lending division was able to grow revenue 8% year-over-year, and it is likely that the stock market will continue to rally.
In fact, stocks seem to be the flavor of the month, as investors have flocked to mutual funds. According to the ICI, mutual fund flows increased by $80.33 billion in January and $42.86 billion in February. Total mutual funds inflows have increased by $122 billion in the first two months of the year, and this trend is likely to continue.
