Goldman Sachs Shares Rise as Net Tops Estimates on Lower Pay

Goldman Sachs Group Inc CEO Lloyd C. Blankfein
Chief Executive Officer Lloyd C. Blankfein, 57, is cutting costs and focusing on international growth to help offset a slowdown in trading, which contributes most of the firm’s revenue. Photographer: Chris Kleponis/Bloomberg

Goldman Sachs Group Inc. climbed 6.8 percent in New York trading after the bank reported profit that exceeded analysts’ estimates, helped by a reduction in compensation costs.

The shares rose $6.63 to $104.31 at 4:15 p.m., after reaching $105.83 earlier today. Fourth-quarter net income at the New York-based company dropped 58 percent to $1.01 billion, or $1.84 a share, beating the $1.23 average estimate of 26 analysts surveyed by Bloomberg.

Chief Executive Officer Lloyd C. Blankfein, 57, cut compensation 21 percent in 2011 as he reduced costs and focused on international growth to offset a slowdown in trading, which contributes most of the firm’s revenue. Goldman Sachs’s higher-than-estimated earnings contrasted with previous reports from Citigroup Inc., which fell short of analysts’ estimates, and JPMorgan Chase & Co., which matched projections.

“When you do have challenges on the top line, the first thing you look at as a securities analyst is ‘are you managing your costs?’” William Fitzpatrick, a Milwaukee-based financial-services analyst at Manulife Asset Management, said on Bloomberg Television’s “InsideTrack.” “We’ve seen a couple of the banks who aren’t necessarily doing that very well, but Goldman Sachs clearly has a good handle on that.”

Goldman Sachs reduced the amount of revenue it paid out in compensation during the fourth quarter to 36.5 percent, while analysts including Ed Najarian at International Strategy & Investment Group Inc. were expecting a ratio closer to 43 percent. The company’s tax rate fell to 28 percent for the year, compared with 30.3 percent for the first nine months.

Cost Cuts

The firm’s target is to reduce annual costs by $1.4 billion, more than the initial $1.2 billion goal set in the middle of last year, David A. Viniar, Goldman Sachs’s chief financial officer, said on a conference call with investors today. The company eliminated 2,400 jobs last year and reduced the size of its balance sheet to $923 billion at the end of the year from $949 billion three months earlier, the first quarterly decline since the end of 2009.

“While it is not possible to cut expenses as a means to prosperity, we understand the benefits of a proactive and disciplined approach particularly if the operating environment remains challenging,” Viniar said.

At the same time, Viniar echoed recent comments by Blankfein that the firm expects business to rebound. He compared the current slowdown with the collapse of hedge fund Long-Term Capital Management LP in late 1998, the decline in technology stocks in 2000 and the credit crisis in 2008.

Different World

“We’ve seen downturns before,” he said. “Every time you’re in one if feels like it’s never going to end and that the world is different now. I wouldn’t say, for example, that the environment feels worse than it felt in the fall of 2008 or necessarily after the tech bubble burst, nor necessarily after the fall of 1998.”

Net income for the year fell 47 percent to $4.44 billion, the lowest since 2008. Return on average common shareholders’ equity, known as ROE, was 3.7 percent for the year, down from 11.5 percent in 2010.

“Yes, we’re going to be prudent in managing our capital, yes we’re going to be prudent in managing our expenses,” Viniar said today. “But our ROE growth is going to largely be driven by growing our revenues, expanding our footprint, expanding our client base and growing the firm.”

Revenue Miss

Revenue for 2011 dropped 26 percent to $28.8 billion, the lowest since 2008, and declined 30 percent in the fourth quarter to $6.05 billion. The average estimate of 18 analysts surveyed by Bloomberg was for $6.39 billion in fourth-quarter revenue.

Compensation, the company’s biggest expense, decreased to $12.2 billion for the full year and fell 2 percent to $2.21 billion in the fourth quarter. The cost was 42.4 percent of total revenue for the full year. The total number of employees fell to 33,300 at the end of December from 34,200 three months earlier and from 35,700 a year earlier.

Discretionary compensation for 2011, which refers to cash and equity bonuses, declined “significantly more” than revenue on a full-year basis, Viniar said.

Goldman Sachs’s larger New York-based rivals have also suffered from the decline in trading. Citigroup, the third-biggest U.S. bank by assets, said yesterday that fourth-quarter net income dropped 11 percent as lower revenue from advising companies and trading securities led to the first quarterly loss at its investment bank since 2008. JPMorgan, the biggest U.S. bank, said last week that fourth-quarter net income slid 23 percent as investment bank earnings fell by half.

‘Encouraging Signs’

“As economies and markets improve -- and we see encouraging signs of this -- Goldman Sachs is very well positioned to perform for our clients and our shareholders,” Blankfein said in the company’s statement today.

In the last year Goldman Sachs lost about 50 partners, the highest rank of employees who share in a special compensation pool and are elected every two years. Among the departures were six members of the management committee, including trading co-heads Edward K. Eisler, 42, and David B. Heller, 44, last week.

Viniar said that fewer partners than normal left the firm over the last four years because they wanted to remain loyal to Goldman Sachs as it navigated the aftermath of the financial crisis and blows to its reputation such as the U.S. Securities and Exchange Commission’s 2010 lawsuit against the firm.

Partnership Turnover

“You tend to find 15 percent to 20 percent of our partnership turning over every two years,” Viniar said. “It’s been like that almost through our history, and you saw far less than that turning over the last four years. And I think what you’re seeing now is, as I said, normal progression.”

Institutional client services, the division that handles sales and trading for customers, generated $3.06 billion in the fourth quarter, down 16 percent from the same period of 2010. The business, now supervised by Isabelle Ealet, Pablo J. Salame and Harvey M. Schwartz, made $17.3 billion in full-year revenue, down from $21.8 billion in 2010.

Fixed-income, currency and commodities trading contributed $1.36 billion of revenue for the quarter and $9.02 billion for the year, down from $1.64 billion in the fourth quarter of 2010 and $13.7 billion for that full year. JPMorgan last week said its investment bank produced $2.49 billion of fixed-income trading revenue in the quarter and $15.3 billion for the year.

Accounting Gains

The company’s 2011 trading revenue included about $600 million in accounting gains related to the widening of the company’s credit spreads during the year, Goldman Sachs said in the statement. The effect of such adjustments in the fourth quarter was “not material,” the company added.

Equities, the business that Heller supervised, made $1.69 billion in fourth-quarter revenue, down from $2 billion, and $8.26 billion for the year, up from $8.1 billion in 2010. That compares with JPMorgan’s $779 million in fourth-quarter equities revenue and $4.83 billion for the year.

Goldman Sachs boosted its value-at-risk, the maximum amount the company estimates it could lose from trading on 95 percent of days, to $135 million in the fourth quarter -- the highest level since the second quarter of 2010 -- from $102 million in the prior quarter, the statement showed. The increase was driven by “significantly greater volatility in the interest-rate category,” Viniar said.

China Investment

Investing & Lending, which includes the firm’s gains and losses on its own stakes in companies, funds and securities, produced $872 million in fourth-quarter revenue, a 56 percent drop, and $2.14 billion for the year, a 72 percent decline. Gains from Goldman Sachs’s holding in Industrial & Commercial Bank of China Ltd., the country’s biggest lender, jumped to $388 million in the quarter from $55 million a year earlier. The investment recorded a loss of $517 million for the year, compared with a $747 million gain in 2010.

Goldman Sachs’s investment-banking division, managed worldwide by Richard J. Gnodde, David M. Solomon and John S. Weinberg, made $857 million in revenue for the quarter, down 43 percent from $1.51 billion a year earlier. Revenue for the full year slid 9 percent to $4.36 billion. JPMorgan made $1.12 billion in fourth-quarter investment-banking fees and a full-year total of $5.86 billion.

The company’s investment-banking transaction backlog, a measure of assignments that haven’t yet been completed, fell in the fourth quarter compared with the third and was higher than a year earlier, according to the statement.

Financial Advisory

Revenue from financial advisory, which includes the mergers and acquisitions business led globally by Gene T. Sykes in Los Angeles and London-based Yoel Zaoui, decreased 25 percent in the fourth quarter to $470 million and retreated 4 percent for the year to $1.99 billion. Goldman Sachs ranked No. 1 among advisers on global takeovers in 2011 for the first time since 2008, according to data compiled by Bloomberg.

Fourth-quarter revenue from equity underwriting, led by London-based Matthew Westerman, decreased 66 percent to $191 million and declined 26 percent to $1.09 billion for the full year. The bank ranked No. 1 in managing equity, equity-linked and rights sales in 2011 for the first time since 2006, data compiled by Bloomberg show. Debt-underwriting revenue was down 40 percent in the fourth quarter to $196 million and was virtually unchanged for the year at $1.28 billion.

Investment management, overseen by Timothy O’Neill and Eric S. Lane since the retirement of Edward C. Forst at year-end, made $1.26 billion in fourth-quarter revenue and $5.03 billion for the full year. That compares with $1.51 billion in the fourth quarter of 2010 and $5.01 billion for the full year. Assets under management climbed to $828 billion from $821 billion three months earlier and compared with $840 billion a year earlier.


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