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Lower commodities revenue weights on Goldman's Q3 fixed income

Goldman posted a profit for Q3, saying trading of fixed income, currency and commodities done on behalf of its clients contributed nearly 30% more revenue compared with Q2.

(Reuters) - 

Goldman Sachs Group Inc said significantly lower revenues from commodities dragged down its trading businesses in the third quarter, singling out weak performance by an unit that had once been a pride of Wall Street's biggest investment bank.    

Goldman posted a profit for the quarter, saying trading of fixed income, currency and commodities done on behalf of its clients contributed nearly 30 percent more revenue compared with the second quarter.     

But Goldman -- also one of the largest proprietary traders at one time in commodities -- implied that the figure would have been more if not for its weak performance in commodities.    

During the third quarter, there were "significantly higher net revenues in mortgages and higher net revenues in credit products, currencies and interest rate products, partially offset by significantly lower net revenues in commodities", Goldman said, without breaking down numbers.       

Goldman said client activity remained generally low during the third quarter as broad market concerns persisted amid monetary easing by central banks.     

The bank has cited negative impact from commodities in previous earnings. But rarely has it drawn this much focus to the asset class for being a drag on revenue.    

Goldman's performance contrasts with strong commodity prices in the last quarter. The Thomson Reuters-Jefferies CRB index, a commodities bellwether, posted its biggest gain in nearly two years during the quarter, helped by economic stimulus.     

For years, Goldman had ruled commodities trading on Wall Street with a scale, savvy and expertise matched only by top rival Morgan Stanley. Operating physical commodity operations such as oil pipelines and crude shipping, the two also ran huge proprietary trading books that bet large sums of their own money on the energy, metals and agriculture markets, among others.    

Their fortunes in commodities began dwindling after new U.S. financial laws were passed in 2010 to limit excessive risk-taking by banks, prompting Wall Street's best to dump their "prop desks" and cater exclusively to client needs in trading and hedging.    

Fast-growing new competitor JPMorgan Chase has also stolen some of the luster in commodities from Goldman and Morgan Stanley, reporting a bumper revenue from the sector last year. Trading mostly metals before pushing into oil in 2009, JPMorgan has made a series of risky acquisitions and hires to ramp up its commodities business.          

HIGHER COMMODS RISK, LOWER REVENUE     

In the third quarter, the lower commodity revenue at Goldman came despite higher risk levels employed by the bank for trading the asset class.    

Goldman said its Value-at-Risk (VaR) in commodities averaged $22 million per day in the three months to September, versus the $20 million averaged in the second quarter and the $25 million of 2011's third quarter.    

VaR is an important consideration for investment banks when making trading and hedging decisions for an asset class.    

In Goldman Sachs' case, its VaR readings are based on a 95 percent confidence level of the potential loss it could make in trading commodities and other assets over a one-day time horizon.

The following lists commodities VaR at leading Wall Street banks over the past two years (in $ millions): 

*Value-at-Risk based on a 95 percent confidence level  

** Value-at-Risk based on a 99 percent confidence level        

Note: Citigroup has issued third quarter results but its VaR readings are reported in a separate regulatory filing. Bank of America, which will release Q3 results on Oct. 17, also reports VaR in a later filing.

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