Barclays Capital have taken a closer look at Goldman’s 10-Q and unearthed — thanks to the former investment bank’s new status as a commercial lender — something of a curiosity in its balance sheet.
Not only did Goldman manage to generate improved returns from interest-bearing assets in the second quarter, it also somehow managed to generate returns on its liabilities too.
Now, it’s fairly safe to say that in most cases — bar negative deposit rate scenarios like in Sweden — banks pay out interest on their liabilities, not make it. But times clearly are changing.
As Barcap explain (our emphasis):
As a bank holding company, GS now discloses a net interest income table with rates on each of its interest-earning assets. Net interest spread in 2Q09 was 102bps (interest earning yield of 180bps less interest-bearing cost of 78bps), up from the 86bps in 1Q09 and 48bps in f2Q08. We note that in some cases liabilities were actually carrying a negative yield (generating income as liabilities), which we believe is quite unusual. That said, GS does not manage its business this way and GS’s P&L is largely driven by other factors outside of interest spreads, therefore we do not spend a great deal of time with this disclosure.
But it’s curious nevertheless.
The Barcap analysts, meanwhile, also have a go at breaking down the interest component in Goldman’s trading gains and losses. As they note:
SFAS 161 Disclosure In 1Q09, GS began disclosing its trading gains and losses by major risk type in accordance with SFAS 161. The table below compares the disclosure to the stated P&L from the segment income statement. Total FICC-related gains in 2Q09 were $5.0bn. After adding the $1.5bn of net interest income from the segment income statement, this approaches the disclosed FICC revenue of $6.8bn in the quarter. Likewise the equities-related gains according to the SFAS 161 disclosure were $1.6bn, which compared to the stated $2.2bn of equities trading revenue during the quarter.
Here’s the table:
Although they do warn not to take those figures too literally:
Once again, we caution not to overly rely on these tables for revenue proxies of each of the FICC sub-businesses. For example, during the earnings conference call, CFO David Viniar cited credit and currencies as having outsized performance during 2Q09. This compares markedly vs. the SFAS 161 disclosed revenues from these categories where those two asset classes were reported as actually the weakest. The issue with this disclosure is that the businesses use a variety of asset classes for hedging purposes, but the disclosure separates these hedged P&L’s into distorted buckets. The most extreme this quarter is currencies which, according to this disclosure, was a $1.4bn loss. We believe that this negative P&L is due to hedges in the interest rates business.
What they mean is that the results most likely reflect cross-asset hedging anomalies, i.e. losses which Goldman very much meant to take for the sake of all round profitability.
Related links:
Goldman’s $100m days shatter its records – FT
On Goldman’s fat tail risk – FT Alphaville