November 28, 2020

DealBook: Goldman’s Profit Falls but Tops Estimates

Goldman Sachs stock was up more than 5 percent on Wednesday at the New York Stock Exchange.Richard Drew/Associated PressGoldman Sachs was up more than 5 percent on Wednesday at the New York Stock Exchange.

Goldman Sachs said on Wednesday that it earned $978 million in the fourth quarter, well below the $2.23 billion it posted in the period a year earlier, as it continued to struggle with lackluster economic conditions both here and abroad.

Still, the performance of $1.84 a share exceeded the expectations of analysts polled by Thomson Reuters, who were predicting Goldman would earn $1.24 a share.

And while the result is below that of a year ago and a world away from the earnings power Goldman was once known for, it is better than the showing in the third quarter, when Goldman posted a loss for only the second time since it went public in 1999.

“This past year was dominated by global macroeconomic concerns which significantly affected our clients’ risk tolerance and willingness to transact,” said Lloyd C. Blankfein, Goldman’s chairman and chief executive.

While Goldman’s profit number is always of note on Wall Street, this quarter investors will also be looking at the compensation number as the firm prepares to doll out billions of dollars in bonuses. Goldman disclosed that it had set aside $12.22 billion, or 42.4 percent, of its 2011 net revenue to pay compensation and benefits for its 33,300 employees. This is down from $15.38 billion in 2010, a decline reflecting the drop in Goldman’s net revenue in 2011.

Goldman’s compensation and benefit pool is enough to pay each of the firm’s employees $367,057. A year ago, its pool would have been enough to pay each employee $430,700.

Goldman produced net revenue of $6.05 billion in the fourth quarter, down 30 percent from the period a year earlier.

Goldman’s performance is not surprising. Some of its rivals, including JPMorgan Chase and Citigroup, have already weighed in with results, and they too are struggling to churn out big trading profits in this current environment.

As revenues on Wall Street fall, firms have laser focused on cutting expenses. Goldman’s headcount is down 2,400 over the past year and during a conference call with analysts to discuss the firm’s results, its chief financial officer, David Viniar, said that towards the end of the year Goldman increased its non-compensation cost-cutting goals by $200 million, to $1.4 billion, as previously reported by DealBook.

Goldman can’t cut its way to better results, but right now, facing a drop in revenue in all of the firm’s major divisions, it doesn’t have many other levers to play with. In a research report on the earnings, a Keefe Bruyette Woods analyst, David Konrad, noted that that lower expenses was a key factor in Goldman’s ability to beat analyst expectations.

“We are currently targeting $1.4 billion in savings and will closely monitor our expense run rate and make further adjustments as necessary,” Mr. Viniar said during the conference call.

Net revenue in Goldman’s division that trades bonds, currencies and commodities was $1.36 billion, down 17 percent from year-ago levels. The firm attributed the drop to lower results in mortgages and credit products “as continued global economic uncertainty contributed to difficult market-making conditions.” This division accounted for roughly 22 percent of the firm’s total revenue in the fourth quarter.

Net revenue from equities trading and commissions was $1.69 million, down 15 percent from year-ago levels. Goldman’s annualized return on equity, a crucial measure of profitability, was 5.8 in the quarter, compared with 13.1 percent in the period a year earlier. In 2006, it was 41.5 percent.

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