Deconstructing Goldman’s Q2 conference call: what was said, what it means, what comes next

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It’s banks’ results season. Yesterday was Goldman’s results day. Today is Bank of America’s results day. Yesterday we focused on the fact that Goldman did rather well in FICC (compared to last year).  Others have focused on the fact that Goldman did badly in terms of profitability compared to both its former self and to its peers.

Both are true. Goldman did recover some market share in FICC sales and trading compared to Q2 last year, but the second quarter of 2012 was particularly soft. It did open the pay gap again with JPMorgan’s investment bankers, but it is also paying its own bankers less than last year (JPMorgan simply reduced pay even more). Most worryingly, Goldman’s ROE has fallen to unsustainably low levels in the long term.

Goldman CFO David Viniar addressed these issues in yesterday’s conference call, the transcript to which is – as ever – available on Seeking Alpha. 

In summary, this is what you need to know about what David said about the state of play at Goldman Sachs.

1. It’s a client thing

Rather like the British rail service’s tendency to blame leaves on the track for its short-comings, Goldman has taken to blaming the mental state of its clients. “Client psychology suffered from continued skepticism regarding the mechanisms and political will required to address the complex series of issues facing European governments,” Viniar said.

Conclusion: Client psychology is a nebulous concept, making it all the more difficult to predict when things will improve. This is in the hands of the Gods.

2.  Despite clients’ psychological issues and a low ROE, Goldman feels that it has no choice but to maintain a level of service until things improve

“While a challenging macro environment may translate into lower industry volumes, our focus on clients is unwavering,” said Viniar, adding that the advice provided by Goldman bankers is even more valued by its clients in a difficult environment (even though they may not be paying for it).

Similarly, when asked about Goldman’s mere 5% return on tangible equity, Viniar said there’s not too much he can do about it: “We'll continue to do the best we can with our clients, manage our expenses and manage our capital, but I would not expect that we're going to have acceptable ROEs in a macro environment like this.”

Conclusion: You might not be making any money for Goldman, but this doesn’t mean you’ll lose your job.

3.   Nevertheless, Goldman is cutting more costs than previously planned

Having initially targeted cost reductions of $1.2bn, Goldman decided to cut costs by $1.4bn. This has now been achieved, but is not enough: it plans to cut another $500m by the end of this year. If this were borne entirely by headcount cuts, Goldman’s average pay per head suggests 1,107 people would be cut.

However, Viniar said employees won’t be targeted disproportionately and that most of the cuts won’t be related to compensation expense. He also said the bank has no intention of ‘cutting its way to prosperity’ or ‘cutting its way to the appropriate level of returns’. These are hard times, but the emphasis is on keeping the franchise intact for the future.

“The question is how much of the upside that we want to give away to have slightly better performance today,” said Viniar.  “We're not at the point now where we're thinking of wholesale strategic changes or wholesale shrinkages in any way.”

Conclusion: See point 2.

4.  Although Goldman isn’t cutting absolute levels of headcount, it is changing the balance of headcount away from expensive senior staff

Pressed further on headcount and compensation expenditure, Viniar said the additional $500m of cuts may not manifest in lower headcount – in fact, headcount may rise in the next quarter as a result of campus recruitment.

However, Viniar also said: “We’ll have a more junior and less senior weighted headcount going forward.”

Conclusion: It’s going to be even harder than usual to move into Goldman Sachs at a senior level. Senior staff are most at risk of redundancy.

5.  It’s no longer about growing Goldman in growth markets, it’s about pulling back less than elsewhere

Goldman no longer seems to be adding to headcount in Asia Pac and Brazil. Instead, it seems to reducing headcount. The only caveat is that it’s reducing it in developing markets.

“We're certainly pulling back less in the growth markets than other places,” said Viniar.

Conclusion: You can’t get a job easily in Asia or Latin America any more.

6.  All that excitement about opportunities in Europe has so far come to nothing

Goldman has said recently that Europe is a growth market and that it has the potential to grow here as other banks retrench. It may be changing its mind about this.

“So far, there hasn't been that much activity [in Europe],” said Viniar. “And so it's really hard to see it come through….it could be a meaningful opportunity for us, but we haven't seen it yet.”

Conclusion: There is unlikely to be any increase in hiring in Europe as a result of hoped-for market share gains.

7.   Some people are still getting offers of multi-year guarantees

Multi-year guarantees may be outlawed in Europe, but they’re still happening somewhere.

“We live in a competitive environment,” said Viniar. “We still have people leaving for multiyear offers away from us, some from our competitors, some from other industry participants.”

Conclusion: Try Asia. However, consider point 5 first.

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