Goldman Sachs Cuts Costs, Boosts Dividend as Revenue Tumbles 20%
Goldman Sachs Group Inc., the world’s most profitable securities firm before the financial crisis, said earnings were little changed as the bank cut costs in response to a 20 percent drop in revenue. The firm increased its dividend 10 percent.
Shares of the company fell as revenue of $6.72 billion fell short of the $7.35 billion average estimate of 17 analysts surveyed by Bloomberg. Third-quarter net income rose to $1.52 billion, or $2.88 a share, from $1.51 billion, or $2.85, a year earlier, the New York-based company said today in a statement.
Chief Executive Officer Lloyd C. Blankfein, 59, is lowering expenses to show investors his firm can deliver higher returns while it waits on a cyclical climb in trading and investment-banking revenue that hasn’t arrived. The stock has traded below 1.5 times book value for the past 3 1/2 years, the longest such streak in the company’s history.
“Goldman typically outperforms, and cost controls help for the time being,” Keith Davis, an analyst at Farr, Miller & Washington LLC, which manages more than $900 million, said before the results were announced. “We’re still optimistic, though the third quarter wasn’t a home run by any means.”
Goldman Sachs declined 3 percent to $157.47 at 7:50 a.m. in New York. The stock had gained 27 percent this year through yesterday after advancing 41 percent in 2012. The shares are still below their pre-crisis peak of $247.92 on Oct. 31, 2007.
Expenses fell 25 percent to $4.56 billion. Compensation, the firm’s biggest cost, dropped 35 percent to $2.38 billion and amounted to 35 percent of revenue for the quarter, down from 44 percent a year earlier. The ratio was 38 percent for all of 2012.
Fixed-income, currency and commodity trading revenue was $1.29 billion, excluding a $47 million accounting adjustment, down 47 percent from a year earlier. That compared with analysts’ estimates of $1.85 billion from Sanford C. Bernstein & Co.’s Brad Hintz and $2.04 billion from Richard Staite at Atlantic Equities LLP.
JPMorgan, the biggest U.S. bank by assets, last week reported its first quarterly loss under CEO Jamie Dimon as the firm took a $7.2 billion charge to cover the cost of mounting litigation and regulatory probes. Citigroup Inc. on Oct. 15 reported a $3.23 billion profit that missed analysts’ estimates on a slump in bond-trading and mortgage revenue. Both companies are based in New York.
Banks have said clients pulled back amid speculation the Federal Reserve would slow its $85 billion in monthly bond buying. Fed Chairman Ben S. Bernanke said last month that the central bank decided not to taper its stimulus yet.
This quarter’s trading activity was marked by concern Congress might fail to raise the U.S. debt ceiling and default on the nation’s obligations. Blankfein led financial CEOs that met with President Barack Obama earlier this month and said that politicians shouldn’t use the threat of a default as a “cudgel.” A deal was struck last night that ended the standoff.
Part of Goldman Sachs’s fixed-income trading, the firm’s single largest revenue source, comes from physical commodities trading, which is facing a regulatory review. The Fed is examining all legal and regulatory exemptions that allow banks to participate in the commodities markets, a person briefed on the process said earlier this month.
Goldman Sachs’s physical commodities unit is a “core” business that provides a crucial service to clients, Blankfein said last month.
“The role we play in that business is very, very important to users in the market,” Blankfein said in an interview with CNBC. “Without us in that market, a good credit, a regulated company, the outcomes won’t be very good for the users of the market.”
Goldman Sachs’s equities-trading revenue, the highest among all global banks last year, may have been hampered by a programming error in August that caused the investment bank to send faulty stock-options orders. Most of the trades caused by the error were canceled, a person with direct knowledge of the matter said.
Warren Buffett’s Berkshire Hathaway Inc. earlier this month exercised warrants obtained through a 2008 deal to get 13.1 million shares of Goldman Sachs stock, making Berkshire the investment bank’s seventh-largest stockholder. Buffett and Blankfein have said that Berkshire intends to remain a long-term investor.
To contact the reporter on this story: Michael J. Moore in New York at firstname.lastname@example.org