(Bloomberg) -- Goldman Sachs Group Inc. suffered the worst annual commodities performance in its history as a public company as a drop of about 75 percent in net revenue in 2017 put it behind long-time rival Morgan Stanley, according to people familiar with the matter.
For decades Wall Street’s dominant commodities trader, Goldman performance was dragged down by losses in gas and power. The slump means the bank’s storied natural resources unit fell behind competitors such as Morgan Stanley, where net revenue in the sector rose by about a fifth last year, one of the people said -- a reversal of fortunes for the two banks known as the "Wall Street refiners.”
Goldman’s commodities unit has been under scrutiny both within the bank and among investors since it revealed its second-quarter performance was the worst in its post-IPO history. That triggered an informal review of the unit and several high-profile departures, including global commodities head Gregory Agran.
The bank’s commodities earnings in the final three months of 2017 were better than the previous two quarters as losing natural gas trades were closed. Nonetheless, performance at the unit remained lackluster as it cut back risk-taking.
Goldman is due to report fourth-quarter results on Wednesday, while Morgan Stanley follows on Thursday. Both banks declined to comment.
The bank -- which does not report commodities earnings separately from its fixed income, currencies and commodities division -- had net revenue from the unit of a little under $1.1 billion in 2016, Bloomberg has reported previously. It was ranked No. 1 among global investment banks in the sector, according to Coalition Development Ltd., a London-based analytics company.
A 75 percent drop suggests Goldman’s net revenue in commodities last year was less than half those of Morgan Stanley, where a strong performance in gas and power helped spur an increase in commodities net revenue to more than $600 million, according to one of the people.
While the contribution of commodities to the banks’ overall results these days is small, the asset class was once a significant driver of profits.
In its heyday in the mid-2000s, Goldman enjoyed net revenue that peaked at $3.4 billion in 2009 thanks to volatile markets, rising interest from investors and little competition from other banks.
Many of the bank’s top executives -- including Chief Executive Officer Lloyd Blankfein -- cut their teeth in the commodities division.
The bank has remained committed to the unit in spite of its weak results, making at least seven new hires to the unit in the past few months, and pushing investment bankers to use their relationships with natural resources companies to help drive business.
Still, focus is likely to remain on the business and the executives charged with turning it around -- including Isabelle Ealet, co-head of the securities division who is leading the review, and Don Casturo, who was last year appointed chief operating officer of the unit.
So far, 2018 is proving kinder to Goldman’s commodities business than 2017, according to one of the people: it had a good start to 2018, profiting from volatility in energy markets as the U.S. northeast was hit by a blast of freezing weather.
©2018 Bloomberg L.P.
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