Goldman Sachs Posts Lowest Annual Trading Revenue Since 2005

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Goldman Sachs Group CEO Lloyd C. Blankfein
Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein, whose firm is the most reliant on trading among the biggest U.S. banks, has seen revenue from that business drop in each of the past five years. Photographer: Scott Eells/Bloomberg

Goldman Sachs Group Inc., which set a Wall Street record for trading revenue in 2009, posted less than half that amount in 2014 as revenue from the firm’s biggest business fell to the lowest in almost a decade.

The decline helped push fourth-quarter net income 7.1 percent lower to $2.17 billion, or $4.38 a share, from $2.33 billion, or $4.60, a year earlier, the New York-based company said Friday in a statement. The average estimate of 23 analysts in a Bloomberg survey was $4.36.

The results offer a glimpse into a future in which Chief Executive Officer Lloyd C. Blankfein’s prediction that trading will rebound fails to materialize. Goldman Sachs in 2014 achieved a return on equity of 11 percent for a third straight year by paying employees a smaller share of revenue in response to trading declines.

“Goldman is reacting the best they can within a very challenging backdrop,” Devin Ryan, an analyst at JMP Group Inc., said in a phone interview. “It’s hard to predict when we return to some level of healthy volatility and strong business growth globally that could drive better trading activity.”

Fixed-income, currency and commodity trading revenue was $1.16 billion, down 31 percent from a year earlier, excluding accounting adjustments and a one-time gain in the same period of 2013. That compared with estimates of $1.65 billion from Barclays Plc’s Jason Goldberg and $1.55 billion from Brian Kleinhanzl at Keefe, Bruyette & Woods.

FICC Performance

The three largest U.S. banks -- JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. -- posted their worst combined quarterly trading revenue since 2011, led by a 23 percent drop in fixed-income, currencies and commodities, or FICC.

In the first half of the year, executives bemoaned markets that weren’t moving much, giving clients little reason to trade. That reversed in the fourth quarter, as oil prices plunged to the lowest since 2009, interest rates fell the most in two years and credit spreads widened.

“You have a lot of the investment banks blaming the lack of volatility, a year ago they blamed commodities backwardation,” or when quotes on futures contracts are lower than current prices, Chris Kotowski, an analyst at Oppenheimer & Co., said on Bloomberg Television before results were announced. “The year before that they blamed the euro crisis, but you stand back after four or five years and it just seems to me like there’s some ongoing pressure here.”

Revenue Drop

Revenue at Goldman Sachs fell 12 percent to $7.69 billion. The firm’s return on equity, a measure of profitability that takes into account how much capital the business uses, was 11.2 percent in 2014, compared with 11 percent for 2013.

Compensation, the firm’s biggest expense, rose to $12.7 billion for 2014, or 36.8 percent of revenue, compared with 36.9 percent in 2013. That was the second-lowest ratio since Goldman Sachs went public in 1999, surpassing only the 35.8 percent ratio in 2009.

Goldman Sachs fell 1.1 percent to $176.61 at 9:31 a.m. in New York, after dropping 1 percent Thursday. The stock slid 7.9 percent this year through yesterday, almost erasing last year’s 9.4 percent gain.

Revenue from the equities division rose 10 percent from a year earlier to $1.9 billion, excluding accounting charges. That compared with Goldberg’s $1.65 billion estimate and a projection of $1.76 billion from Kleinhanzl.

Trading Revenue

Revenue from sales and trading, led by Pablo J. Salame, Isabelle Ealet and Ashok Varadhan, was $3.07 billion. Total trading revenue for the year was $15.2 billion, the lowest since 2005, according to data compiled by Bloomberg.

Fourth-quarter revenue from investment banking, the business run globally by Richard J. Gnodde, David M. Solomon and John Waldron, declined 16 percent to $1.44 billion. It was the first drop in more than two years.

The total compared with estimates of $1.43 billion from Wells Fargo & Co.’s Matt Burnell and $1.52 billion from Goldberg at Barclays. It fell short of JPMorgan’s $1.81 billion in investment-banking revenue and exceeded Citigroup’s $1.06 billion.

Goldman Sachs’s figure included $692 million of financial-advisory revenue, including fees for takeover advice, an increase of 18 percent. Revenue from underwriting fell to $748 million in the quarter, including $406 million from debt underwriting and $342 million for equity offerings.

Stock Underwriting

Goldman Sachs held the top spot among arrangers of global equity, equity-linked and rights offerings in 2014, according to data compiled by Bloomberg. It ranked first in advising on announced mergers and acquisitions and fifth in underwriting U.S. bonds, the data show.

Last month, the bank named Waldron, global head of investment-banking services and client coverage, as the third co-head of investment banking. He replaced John S. Weinberg, one of the unit’s longest-serving leaders who’s taking a new role to strengthen relationships with clients.

The firm has sought to entice investors through stock buybacks and dividends. Goldman Sachs increased its quarterly payout to 60 cents last year and bought back $5.6 billion of stock in the 12 months ended in September.

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