Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Goldman Sachs Group Inc. slimmed down in 2016 -- and not just because the Trump administration was recruiting. 

About Face
After three consecutive years of adding staff, Goldman cut its headcount by 7 percent last year
Source: Bloomberg

The New York-based bank reported fourth-quarter earnings on Wednesday that beat Wall Street expectations, helped in part by cost-saving measures that included lowering headcount by 500 positions. The decline brought reductions for the year to 2,400, or 7 percent of staff -- more than its peers. 

All In A Year's Work
In 2016, Goldman and Citigroup shed the most employees, while JPMorgan and Wells Fargo did the opposite.
Source: Bloomberg

It's notable that the two banks that led the way in job cuts were Goldman and Citigroup Inc., which separately on Wednesday delivered fourth-quarter profit that also topped analysts' projections. And it may have been the expectation of declining revenue that prompted the duo to take the action they did:

Managing Expectations
At the conclusion of this batch of bank earnings, it's clear that some banks achieved their profits by controlling expenses.
Source: Bloomberg

Still, even with the staff cuts, Goldman's compensation ratio ticked up to 38.1 percent from 37.5 percent a year earlier. KBW analyst Brian Kleinhanzl expects it to reverse course in coming years to 37 percent and 36.7 percent in 2017 and 2018, respectively. And if fee income from areas such as trading, investment banking and lending surges, Goldman's compensation ratio could decline even further, bringing it closer in line with Citigroup at 30 percent and JPMorgan Chase & Co. at 31.3 percent. 

As well as continuing to whittle down staff as necessary, Goldman also should continue reining in non-compensation expenses, including spending on training, technology and legal costs, among other things. That figure dropped to $8.7 billion in 2016, which president, Co-Chief Operating Officer and Chief Financial Officer Harvey Schwartz says was its lowest level since 2007. Incoming CFO Martin Chavez should aim to keep an equally tight -- or tighter -- grip on purse strings.

In terms of outlook, Goldman CEO Lloyd Blankfein said Wednesday he expects two to three rate hikes in 2017, which is in line with consensus and should lead to higher profits at all the big Wall Street firms. Citigroup, on the other hand, is forecasting a base case of zero rate hikes. Keeping costs in line should be a priority, especially considering that some of the rosier forecasts for a revenue lift from rising rates as well as looser regulation, potential tax reform, and economic growth may not quite pan out as planned. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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