By Liz Hoffman
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 17, 2019).
Goldman Sachs Group Inc.'s merger bankers bailed out its bond
traders, who fared badly in late 2018's choppy markets and saw
their bonuses shrink as a result.
Goldman's fourth-quarter profit of $2.54 billion, or $6.04 a
share, rose from a year ago and easily beat the $1.64 billion, or
$4.27 a share, predicted by Wall Street analysts. Quarterly revenue
of $8.1 billion was flat, while full-year revenue was the highest
since 2010.
The fallout from Goldman's dealings with a Malaysian investment
fund known as 1MDB loomed over the generally strong results. The
firm socked away an extra $500 million to help cover legal costs
stemming from a U.S. Justice Department probe, and Chief Executive
David Solomon acknowledged a "reputational dent that we'll work
through."
Goldman shares -- the worst-performing among big banks last year
-- rose 9.5% Wednesday for their best day in nearly a decade.
It was a warm welcome for Mr. Solomon, who took over as chief
executive Oct. 1. He inherits a firm that is struggling to grow and
is pinning its hopes on unproven initiatives like consumer banking,
commercial payments and new trading technologies.
The financial costs of those ambitions were clear Wednesday.
Technology spending cracked $1 billion for the first time, head
count rose 9%, and marketing costs rose 26% to pay for television
ads, branding and direct mail used to bring in new retail customers
and burnish Goldman's Main Street image.
Offsetting those higher costs, Goldman's bonus pool shrank as a
portion of revenue. "We know where our priorities lie," said
Stephen Scherr, the company's chief financial officer. "If
circumstances change, we know where there are levers to throttle
back if we need to."
"It was a really treacherous quarter, and they navigated it
fairly well, " said Charles Lemonides, whose fund, ValueWorks LLC,
bought about $10 million worth of Goldman shares as the stock price
tumbled this past fall. "To have as difficult an environment as we
saw and have a 12% return on equity shows you're doing something
right on the cost side."
In Wednesday's earnings report, Goldman's merger bankers led the
way. Their $1.2 billion in quarterly revenue was the highest since
2007, a year of megabuyouts that showered Wall Street with fees. Of
the $1.3 trillion in deals its bankers advised on, about one-third
were under $5 billion in value. Goldman has historically dominated
megadeals but is now chasing smaller transactions, hiring more
bankers and courting the thousands of companies owned by
private-equity firms.
Another bright spot was Goldman's own portfolio of investments,
which contributed nearly $1 billion in revenue. Despite falling
stock prices during the quarter, Goldman's mostly-private
collection of company stakes held up well, boosted by partial or
outright sales of stakes in firms including Uber Technologies Inc.,
racetrack owner Centaur Gaming, and events-managing firm PSAV.
Fees from underwriting stocks, bonds and other securities fell
sharply as corporate executives shelved offerings in the face of
turbulent markets. Revenue in those businesses fell sharply across
Wall Street firms, which are pinning their hopes on the long line
of startups teed up to go public this year.
Goldman's traders extended their slump, struggling as much with
the market's recent volatility as they did with the years of calm
that preceded it.
Revenue in fixed-income, which trades bonds, commodities,
currencies and other products, fell 18% from a year ago to $822
million, the lowest since 2008. Stock trading was up 17%. Nervous
investors dumped shares rather than hedging their risk in synthetic
ways, boosting cash trades but sapping demand for derivative
products that make more money for the bank.
Debt trading was particularly weak, Goldman said. As interest
rates rise, banks can get stuck holding bonds and loans that are
worth less and out-of-favor with yield-hungry investors.
Goldman executives pulled tens of millions of dollars from the
fixed-income division's bonus pool in the last week of the year,
reflecting a particularly weak December, according to people
familiar with the matter.
"Let me be direct," Mr. Solomon said. "We are fully cognizant of
the reduction in industry wallet over the past decade and we will
not be complacent waiting for the market to return." Goldman is
shifting capital out of the trading division and into investment
banking and its faster-growing consumer business.
After years of blaming weak trading revenues on calm markets and
low interest rates, banks have fared no better amid the recent
volatility and rate increases. The Federal Reserve raised interest
rates four times in 2018.
Traders should, in theory, be able to capitalize on price moves.
But if swings get too wild, nerves set in and they tend to pull
back. Fixed-income trading -- a more risk-taking business than
stock orders that can be routed to exchanges for a fee -- were down
between 15% and 22% at JPMorgan Chase & Co., Citigroup Inc. and
Bank of America Corp. Morgan Stanley, a smaller player in
fixed-income trading, reports earnings on Thursday.
Goldman's asset-management unit, which manages money for
institutional investors and wealthy individuals, posted record
annual revenue of $7 billion. Dwarfed by giants such as BlackRock
Inc. or Vanguard Group, the business has focused on high-touch
service for big pension funds and governments, though it also
offers a smattering of low-fee, passive funds.
Assets under supervision -- a measure that includes money
investment in Goldman-branded funds as well as clients' money that
the firm steers to competing products --were down slightly to $1.5
trillion as stock prices fell.
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
January 17, 2019 02:47 ET (07:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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