Goldman profit slides as bond trading wilts
Goldman Sachs Group Inc posted a 53% decline in fourth-quarter profit as trading revenue tumbled, dashing hopes that the Wall Street bank had bucked a tough trading climate in debt markets.
January 20, 2011 / 12:04 IST
Goldman Sachs Group Inc posted a 53% decline in fourth-quarter profit as trading revenue tumbled, dashing hopes that the Wall Street bank had bucked a tough trading climate in debt markets.
Bond trading revenue, including commodities and currencies, slid 39% from the third quarter as worries about European sovereign debt and rising US Treasury yields kept investors on the sidelines."Things were just dead" in December, though "it's sure a lot more active" in January, Chief Financial Officer David Viniar said on a conference call.Profit fell for a third straight quarter, and revenue fell short of estimates, with year-over-year declines in investment banking and most other business segments. Viniar said Goldman's backlog of investment banking business fell from the third quarter, which may dampen revenue in the current quarter.Goldman shares closed down USD 8.19, or 4.7%, at USD 166.49 on the New York Stock Exchange, their biggest one-day percentage decline since last April 30, Reuters data showed.Results weighed on other stocks, as the Standard & Poor's financials index closed down 2.2%, while broader US stock market indexes dropped more than 1 percent."If Goldman Sachs can't show a strong performance, then good luck to anyone else trying," said Simon Maughan, an analyst at MF Global in London.Difficult environment The results capped a year that has tested Goldman Chief Executive Lloyd Blankfein, and also tested the bank's reputation for having the smartest bankers on Wall Street.Goldman has been criticized for activities such as its management of a private offering by social networking company Facebook Inc, and its marketing of a mortgage-related security that led it to pay USD 550 million to settle regulators' civil fraud allegations last July.Despite the weakness, Goldman shares have held up far better than those of many rivals, and trade around where they were when the financial crisis exploded in September 2008.Goldman said it would pay out nearly 40% of full-year revenue in the form of compensation and benefits, a higher percentage than in 2009, though 2010 profit fell 37% and revenue declined 13%. Compensation per employee dropped 14% to about USD 431,000.Quarterly net income after payment of preferred stock dividends fell to USD 2.23 billion, or USD 3.79 per share, from USD 4.79 billion, or USD 8.20 per share, a year earlier. Net revenue declined 10% to USD 8.64 billion.Excluding one-time items, profit was USD 4.11 per share, according to Thomson Reuters I/B/E/S.On that basis, analysts on average expected profit of USD 3.76 per share on revenue of USD 9 billion."It's a very difficult environment," said Keith Davis, an analyst at Farr, Miller & Washington, which owns Goldman stock. "Absent what we saw from JPMorgan, the Goldman results wouldn't have been a surprise. JPMorgan raised the bar."Blankfein said in a statement the bank is "seeing signs of growth and more economic activity" in 2011.JPMorgan Chase & Co last Friday posted a mere 8% drop in quarterly fixed-income revenue. In contrast, Citigroup Inc on Tuesday posted a 58% drop.Shares of Morgan Stanley and Bank of America Corp, which report results later this week, fell 3.5% and 4.2%, respectively, on Wednesday.Payout ratio rises Results so far have spurred questions about how much money banks can make from bond trading in 2011. Fixed income accounted for about half of revenue before the credit crisis, but is expected to account for less in the future.Quarterly investment banking revenue fell 10% from a year ago to USD 1.51 billion, though Goldman reclaimed from Morgan Stanley its crown as the top mergers and acquisitions adviser.Viniar declined to discuss Goldman's dealings with Facebook, including its decision this week to limit a private offering of Facebook stock to non-US investors.Goldman made more money from trading for its own account. Revenue from investing and lending rose 11% from the third quarter, accounting for 23% of total net revenue.Viniar said new regulatory rules might limit some of the bank's investing and lending activities.The bank said its average value at risk, or the amount it could lose from one day of trading with a 95% confidence level, was USD 120 million, down 1 percent from the third quarter and 34% lower than a year earlier.For all of 2010, Goldman's profit after preferred stock dividends fell to USD 7.71 billion, or USD 13.18 per share, from USD 12.19 billion, or USD 22.13. Net revenue fell to USD 39.16 billion from USD 45.17 billion.Long known for generous compensation, Goldman said total pay and benefits fell 5% to USD 15.38 billion in 2010.As a percentage of revenue, pay and benefits totaled 39.3% in 2010, up from 35.8% in 2009 but more than 6 percentage points below the average in the last decade.Goldman ended 2010 with 35,700 employees, up from 32,500 a year earlier, and Viniar said staffing could grow by a mid- to high-single-digit percentage in 2011. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
