By Saabira Chaudhuri And Justin Baer
Goldman Sachs Group Inc.'s fourth-quarter net income fell 7.1%
as revenue from trading and investment banking slid.
Shares slipped 0.4% in early trading as Goldman turned in a
sharper-than-expected drop in fixed income, currencies and
commodities trading.
Still, Goldman's results were better than analysts expected,
something most other big banks couldn't accomplish with their
results earlier in the week. Goldman reported net income of $2.17
billion, or $4.38 a share, down from $2.33 billion, or $4.60 a
share, a year earlier. Analysts polled by Thomson Reuters expected
$4.32 a share. Net revenue fell 12% to $7.69 billion but topped the
$7.64 billion expected by analysts.
Goldman's results, more heavily dependent on trading than most
big banks, come after rivals turned in disappointing earnings
reports, largely due to a steeper-than-expected fall in such
revenue.
While the firm run by Chairman and Chief Executive Lloyd
Blankfein has stayed more committed to trading than some peers,
that business even at Goldman has become smaller since the 2008
crisis while other units such as investment management and merger
advisory have gained momentum.
Goldman's trading revenue of $15.2 billion for the full year,
down 3% from 2013, was the lowest figure since the crisis.
On Friday, Goldman reported that revenue from its large fixed
income, currencies and commodities, or "FICC," trading arm, fell
29% in the fourth quarter from a year ago to $1.22 billion amid
what it characterized as difficult market making conditions in
credit products, interest rate products and mortgages. The firm
said the drop was 19%, when stripping out a gain of $21 million on
the sale of a stake in its European insurance business in the
year-ago quarter.
"These are really bad" trading results, UBS AG analyst Brennan
Hawken said of Goldman's fixed-income division.
Earlier this week, Citigroup Inc. and Bank of America Corp.
reported their own FICC revenue fell 16% and 30%, respectively.
J.P. Morgan Chase & Co.'s FICC revenue dropped 23%, or 14%
after adjusting for the sale of certain businesses and other
items.
Mr. Hawken and other analysts say that the first quarter may
have started rough as well for trading desks, as market remain
choppy and subject to unexpected moves such as this week's shock
decision by the Swiss National Bank to remove the cap on its
currency.
Through much of 2014, FICC trading revenue at the nation's
biggest banks was dampened by quiet markets, but in the last few
months of the year, some bank executives said they grappled with
bouts of sudden volatility, which can make it hard to turn a
profit.
Goldman's stock trading by comparison was an area of strength in
the fourth quarter. Equities revenue--which includes stock trading
and the prime-brokerage services Goldman provides to hedge
funds--was up 15% from a year earlier to $1.93 billion as the firm
benefited from stronger revenue in executing client trades.
Merger advisory revenue of $692 million was another bright spot,
rising 18% from a year earlier. Underwriting revenue, however,
pulled results lower, with debt underwriting coming in 21% weaker
than the year-earlier quarter at $406 million, and stock
underwriting falling 45% to $342 million.
In Goldman's investing and lending segment--which is made up of
the firm's portfolio of public and private equities and
debt--revenue tumbled 26% from a year ago to $1.53 billion, but
analysts said the results were better than expected.
Jeff Harte, an analyst with Sandler O'Neill, said Goldman's
revenue totals beat analysts' average estimate in large part
because of better-than-expected results from the investing and
lending division. "When that's the driver, that's not viewed as
high-quality earnings," he added.
Goldman showed progress in controlling expenses in the fourth
quarter, slashing overall operating expenses by 14% from a year
earlier and 12% from the prior quarter to $4.48 billion.
Goldman's compensation and benefits fell 11% to $1.96 billion.
The figure was down 30% from the third quarter.
The firm's compensation ratio--or the proportion of revenue it
pays out to employees--was 36.8% for the year, roughly flat with a
year earlier, continuing a trend in which Goldman has kept its
ratio well below 40%, far from its precrisis levels above this
threshold.
Compensation costs are Goldman's biggest operating expense, and
a sharp decline in any quarter will boost profit. The firm also
pointed to lower provisions for litigation and regulatory
proceedings, and a decrease in depreciation and amortization
expenses as driving the decline.
As of the quarter's end, Goldman had a total of 34,000
employees, up from 32,900 a year ago and 33,500 in the previous
quarter.
Investors have been paying close attention to the returns
offered by investment banks as being indicative of a broader
upswing in the operating environment. Goldman reported Friday that
its annualized return on equity for the year was 11.2% versus 11%
for 2013.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and
Justin Baer at justin.baer@wsj.com
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