By Liz Hoffman and Peter Rudegeair
Goldman Sachs Group Inc. is getting used to life in the
pack.
The firm, long the pre-eminent trader and risk manager on Wall
Street, detailed staff cuts Tuesday that could have come from just
about any Main Street bank across the country. And in a quarter
where most of its rivals got a boost from strong trading, Goldman's
gains were more muted as the bank dialed back its risk.
The investment bank run by Chief Executive Lloyd Blankfein
detailed the new cost cuts as Goldman continued to grapple with
shrinking businesses and skittish clients. Goldman's revenue
dropped 13% to $7.93 billion, a sharper drop than at any of the
other big banks that have reported second-quarter earnings.
The bank's profit jumped 74% to $1.82 billion, after results in
the year-ago period were weighed down by a big legal charge related
to Goldman's precrisis mortgage activities.
Chief Financial Officer Harvey Schwartz said the bank continues
to face a "more challenging backdrop."
Earlier this year, Goldman quietly embarked on a cost-cutting
effort, trimming 2,000 jobs, a handful at a time. On Tuesday, Mr.
Schwartz said those reductions would save about $700 million a
year, or about 3% of the firm's 2015 expense base.
The cuts include relatively senior traders whose annual
compensation can easily top $1 million.
The tactics reflect a Wall Street firm nearly a decade after the
financial crisis that is dealing not only with tougher regulations
but clients less eager to trade.
Goldman "is dealing with the same challenges everyone else is,"
said Dave Ellison, portfolio manager of Hennessy Large Cap
Financial Fund, which holds shares of the bank. "They're in a
business that's not really growing and have to keep chugging
along."
The firm's return on equity, a closely watched measure of
profitability, stood at 8.7% during the second quarter -- in the
middle of the pack this quarter and below Goldman's three-year
average of 10.4%.
"You can only make so much money in this type of backdrop,"
Evercore ISI analyst Glenn Schorr said. "But what Goldman has been
great at since the crisis is doing what it takes to support
reasonable returns" without cutting so deeply that it risks missing
out on bigger profits if better times return to Wall Street.
Goldman shares, which rose over the past week as rivals posted
strong numbers, ended Tuesday 1.2% lower at $161.41. They are down
about 10.4% since the start of 2016, worse than the 7.7% fall in
the KBW Nasdaq Bank index of large commercial lenders.
Still, Tuesday's results provided some encouragement after an
April update in which the bank produced its lowest revenue for any
first quarter since Mr. Blankfein took the top job at the firm in
2006.
Banks started the second quarter with some momentum as investor
and corporate confidence returned from a skittish first quarter.
Heavy trading precipitated by the Brexit vote in the U.K. helped
Goldman's results as well.
But nearly all of Goldman's operating units posted lower
quarterly revenue than they did a year earlier. The exception was
trading, where revenue grew 2% year over year. Revenue from
fixed-income, currency and commodity trading rose 20%, though those
gains were offset by a 12% decline in stock trading that the bank
attributed to weakness in Asia.
Goldman's trading revenue remains well off its postcrisis highs.
The bank brought in $6.8 billion from fixed-income trading in the
second quarter of 2009. This year it booked just $1.9 billion,
partly explained by a reduction in risk-taking across the business.
The value-at-risk -- the amount the bank could lose on a typical
day in the quarter -- was $62 million, the lowest level in
years.
Excluding an accounting adjustment related to the value of
Goldman's debt, the bank's trading revenue rose 8% from 2015's
second quarter.
But this year, Goldman gains were smaller than those reported by
rivals. At J.P. Morgan Chase & Co., trading revenue rose 25% in
the second quarter, while it rose 15% at Citigroup Inc. and by 12%
at Bank of America Corp. J.P. Morgan's and Citigroup's trading
revenue eclipsed Goldman's by about $1.9 billion and $600 million,
respectively, while BofA's was essentially even with Goldman's.
The bigger commercial banks historically have had deeper ties to
corporate clients that trade more consistently than hedge funds, a
core Goldman clientele battered by low returns and exits by their
investors.
In May, Goldman Chief Operating Officer Gary Cohn said the bank
was courting corporate clients and asset managers, while
accommodating client preferences that have shifted "to more plain
vanilla products."
Goldman also is increasing its nascent focus on consumers. Mr.
Schwartz said the bank expects to launch its online-lending
platform this fall, which will offer loans to individual
borrowers.
"We are looking to build a durable business, so it will take
time," Mr. Schwartz said.
Goldman's investment-banking revenue fell 11% to $1.79 billion
as advisory revenues at Wall Street's top merger shop fell 3% to
$794 million. Goldman's estimate of future investment-banking fees
also fell.
A bright spot was debt underwriting, where revenue rose 20% amid
an uptick in borrowing by highly indebted companies and
asset-backed deals.
Meanwhile, fees from initial public offerings and other stock
sales fell 55%.
Goldman's investing-and-lending segment -- a roughly $100
billion bucket of public and private securities owned by the bank
-- rebounded from a lackluster first quarter, though the $1.2
billion in revenue it posted for the first six months of the year
was down 65% from the same period in 2015.
Goldman's investment-management business suffered from a
drop-off in incentive fees and clients moving out of more lucrative
funds.
Write to Liz Hoffman at liz.hoffman@wsj.com and Peter Rudegeair
at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
July 19, 2016 19:06 ET (23:06 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
Goldman Sachs (NYSE:GS)
Historical Stock Chart
From Aug 2024 to Sep 2024
Goldman Sachs (NYSE:GS)
Historical Stock Chart
From Sep 2023 to Sep 2024