Goldman Sachs Shares Drop After Earnings Fall for Third-Straight Quarter
Fixed-income, currencies and commodities trading, the firm’s largest source of revenue, tumbled 48 percent from a year earlier to $1.64 billion, the New York-based company said today in a statement. Equities-trading revenue dropped 5 percent to $2 billion and investment banking fell 10 percent to $1.5 billion.
Goldman Sachs’s clients bought and sold fewer stocks, bonds and other securities during the quarter because of the European debt crisis, regulatory changes and concern the economic rebound would stall, Chief Financial Officer David A. Viniar said on a conference call. While business picked up in January, Viniar said it’s too early to make predictions for the year.
“It was just a very weak environment for fixed-income trading and to a certain extent equity trading as well,” said Keith Davis, an analyst at Farr, Miller & Washington LLC in Washington, which manages about $700 million, including Goldman Sachs shares. “I don’t think one poor quarter from a trading perspective makes a trend.”
Goldman Sachs declined $8.19, or 4.7 percent, to $166.49 at 4:15 p.m. in composite trading on the New York Stock Exchange, the biggest drop since a 9.4 percent tumble on April 30. The shares had gained 3.9 percent this year through yesterday.
David Trone, an analyst at JMP Securities LLC in New York who has an “outperform” rating on Goldman Sachs stock, said in an interview that the results raise questions about whether firms like Goldman Sachs will have to depend more on investment banking and equity trading as revenue from fixed-income, currencies and commodities, known as FICC, erodes.
“The idea that clients had no conviction -- they’ve been saying that for three quarters now,” he said. “Within the context of client activity there seems to be something structural going on that would suggest that the FICC cycle is kind of over.”
The results prompted some analysts to reduce estimates for 2011 fixed-income trading revenue and earnings per share. Richard X. Bove at Rochdale Securities in Lutz, Florida, said in a note to investors that he cut his 2011 profit estimate to $14.70 per share from $20.32 previously. He reduced his price target on the stock to $188 from $214.
“It has been my thinking to this point that the businesses would regain their peak performance, driven by increases in money supply and economic activity,” Bove wrote. “This is still possible, but I now believe that there have been structural changes in the market which will delay regaining the peak for a number of years.”
Fourth-quarter net income fell to $2.39 billion, or $3.79 a share, from $4.95 billion, or $8.20, a year earlier. Estimates of 22 analysts surveyed by Bloomberg averaged $3.79 a share.
In the conference call with analysts, Viniar said the firm was still adding employees, especially in high-growth markets, because it expects a rebound in demand from clients after an unusually slow fourth quarter. While he said some credit-market products that were popular before the financial crisis are unlikely to return quickly, he doesn’t expect those businesses to disappear permanently.
‘Out of Favor’
“I don’t tend to think most things are permanent,” he said. “Some products that were in favor are now out of favor and are likely to stay out of favor for at least some period of time, but other products are likely to be developed to replace them.”
Chief Executive Officer Lloyd C. Blankfein, 56, worked to maintain Goldman Sachs’s profitability and reputation last year as trading revenue declined from a record in 2009 and the bank settled a civil fraud lawsuit filed by a U.S. regulator. Last week Goldman Sachs released a set of new business practices and changed financial reports to separate client-trading revenue from gains and losses generated by bets with its own money.
“We are seeing signs of growth and more economic activity and we are well-positioned to help our clients expand their businesses, manage their risks and invest in the future,” Blankfein said in the statement.
Goldman Sachs’s full-year revenue fell 13 percent to $39.2 billion in 2010 from $45.2 billion in 2009, the firm said. In the fourth quarter, revenue dropped 10 percent to $8.64 billion. The average estimate of 14 analysts in a Bloomberg survey was $8.86 billion in revenue.
Compensation and benefits, the bank’s biggest expense, decreased 5 percent to $15.4 billion from $16.2 billion as the number of employees rose 10 percent from a year earlier to 35,700. Goldman Sachs, which took a $600 million charge in the second quarter related to a one-time tax on bonuses in the U.K., recouped $135 million of that in the fourth quarter after determining it had overestimated the cost.
JMP Securities’ Trone said that the firm made up for a weaker-than-expected revenue figure by reducing compensation costs more than investors and analysts were anticipating.
Fixed-income traders had a tougher time making money in 2010 as volume fell and prices improved at a slower pace from the previous year. The extra yield investors demanded to own investment-grade debt instead of Treasuries tumbled 414 basis points in 2009 to end the year at 190 basis points, the biggest annual drop in Bank of America Merrill Lynch index data beginning in 1996. In 2010 spreads narrowed 24 basis points, the data show. A basis point is 0.01 percentage point.
Fourth-quarter earnings reports from JPMorgan Chase & Co. and Citigroup Inc., the second- and third-biggest U.S. banks by assets, showed that fixed-income trading revenue fell compared with the prior quarter and for 2010 as a whole. Average weekly trading volume in corporate debt dropped 11 percent in 2010 from 2009, according to Federal Reserve data.
Goldman Sachs’s FICC revenue fell 37 percent for the full year to $13.7 billion. Full-year equities-trading revenue dropped 25 percent to $8.09 billion.
Goldman Sachs cut the size of its trading bets during the year. Average value-at-risk, an estimate of how much the firm could lose trading in a single day, fell to $134 million in 2010 from $218 million in 2009. In the fourth quarter, the measure dropped to $120 million from $121 million in the prior quarter and from $181 million a year earlier.
Most of the decline in risk-taking was in bets on interest rates, where value at risk dropped to an average $93 million in 2010 from $176 million in 2009.
Investing and Lending
Viniar said on the conference call that some parts of the firm’s investing and lending unit may be prohibited under new rules being drafted by U.S. regulators. The firm, which has traditionally invested more than 3 percent of its own money into private equity and hedge funds it manages, will have to reduce those holdings under the new rules, he said.
Goldman Sachs’s investment bank and money-management divisions have been in the spotlight this month after the firm and some of its funds invested $450 million in closely held Internet social networking site Facebook Inc. and tried to sell $1.5 billion of the company in a private placement to wealthy clients. On Jan. 17, the firm said it would restrict the sale to clients outside the U.S. on concern media coverage of the deal would run afoul of rules governing private offerings.
Viniar declined to answer questions about the Facebook deal posed by analysts on today’s conference call.
The firm said its investment-banking transaction backlog decreased compared with the end of the third quarter, which JMP’s Trone said he thought was surprising.
“You would have thought the pipeline would have been up,” he said.
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