The Goldman Quarter: A Harbinger for Canadian Banks

Includes: GS
by: Mark McQueen

According to the NYT, the trading desk at Goldman Sachs (NYSE:GS) has been on fire during the past quarter. Rumors of a US$2 billion profit for fiscal Q2, which ended on June 30th, sets the market up for a nice increase over the US$1.66 billion profit registered in the first quarter.

It is difficult to ascertain whether or nor Goldman has dramatically increased the risk tolerance on their trading desk, but one thing is for sure — the universe is a happy place for anyone who trades commodities, currency or fixed income products.

Since the financial world went through its forced restructuring last year, the reality is that there are fewer firms trading, most “tradeable items” are experiencing volatility, and spreads are wider as a result.

With wider spreads, those who make markets are bound to make out like bandits.

The Goldman experience will be a sign of how the 2009 fiscal year is going for the Canadian banks who make markets in many of the products that Goldman specializes in. Look at the charts on things oil, gold, the Canadian dollar, or government bonds. What you don’t see are nice flat lines.

Instead, it’s up, down, up, down.

This trading pattern makes clients less sensitive to “the quote”, and frankly more interested in just getting the trade done. Which is great for the intermediary, particularly if that intermediary also plays the role of market maker and counter-party, as so many Canadian bank trading desks do.

The Goldman quarter may well serve as a harbinger of what’s to come for the Canadian Chartered banks this October. And the equity issuances have been incredibly strong so far this year in Canada, at least for all of the ECM desks who played in the recapitalization equity and pref offerings by Canada’s financial services industry.

Control the credit reserves, and let the market volatility drive trading spreads wider. Which winds up going straight to the bottom line.

What we do know, however, is that unlike Goldman, compensation won’t reach $600k per employee here in Canada. Bank boards have been waiting for years to restructure their investment banking bonus pools, and having survived the crisis — while preserving far more i-banking jobs than expected — this bonus season will likely be the demarcation line.

But there still will be plenty to go around at the banks, which makes for far happier days on Bay Street this summer than one could ever have imagined just four or five months ago.

(Disclosure - I own GS and some of the CDN banks)