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Goldman Sachs’ profits mask revenue decline
Question of the Day
NEW YORK — On the surface, Goldman Sachs had a triumphant first quarter. By one popular measure, its profit more than doubled, and the bank announced it would raise its dividend.
But those achievements masked lurking problems. The jump in earnings was a quirk related to repaying Warren Buffett's Berkshire Hathaway last year. Revenue fell 16 percent compared to a year ago. And to make up for those weaknesses, the storied investment bank — Wall Street's almost-perennial winner — had to turn to cost-cutting.
Goldman shed 3,000 jobs over the year, or about 8 percent of its work force. It cut back on salaries, trimmed occupancy costs and paid less in brokerage fees, cutting total expenses by 14 percent. Average compensation per employee, which includes benefits, fell to $135,000 for the quarter, down from $148,000 a year ago.
Net income available to common shareholders rose to $2.1 billion, a 128 percent spike from $908 million in the first quarter of 2011. However, the $908 million strips out payments that the bank made that quarter to Berkshire Hathaway, when it bought back the investment that Berkshire gave Goldman as a lifeline in the height of the financial crisis. If that payment is included, then Goldman's profits fell 23 percent.
Like the rest of the banking industry, Goldman is struggling to navigate a world of stricter government controls that will dry up some of its key revenue streams. Regulations taking effect this year will reduce Goldman's ability to trade for its own account, which has previously been a big source of profits, especially in volatile markets. Analysts want the bank to clarify its new game plan.
In a call with analysts, chief financial officer David Viniar said he expected the regulatory uncertainty to last "for a while" as rule makers hammer out exactly how to implement the government's new regulations.
"Until the rules are finalized," he said, "we don't know exactly where it's going to go."
Unlike most of the banking industry, Goldman doesn't have a large consumer banking arm to fall back on when investment banking revenues are bumpy or get crimped by new rules. Goldman's clients are largely hedge funds and multinational corporations that need to hedge their bets on foreign currencies, fluctuating interest rates and commodities.
Stricter new rules for European banks have made analysts wonder if Goldman can benefit by taking some of their market share. Viniar said Goldman had "seen some opportunities to buy assets," but that purchases had been "muted."
Revenue from underwriting stock and bond sales fell 27 percent. Revenue from trading for clients fell 14 percent, hurt by lower fees and revenue from the division that trades bonds, currencies and commodities. Total revenue fell to $9.9 billion from $11.9 billion, though that beat the $9.4 billion that analysts polled by FactSet had been expecting.
Revenue from financial advising, where the bank advises big companies and investors on mergers and acquisitions, was one of the few areas to record a gain, 37 percent.
On a per-share basis, earnings were $3.92. That beat the $3.52 predicted by analysts. Goldman's stock rose 69 cents to $118.42 in afternoon trading.
The bank also announced it would raise its quarterly shareholder dividend to 46 cents per share from 35 cents, something it is allowed to do after passing the government's most recent round of stress tests. Citigroup and Bank of America, on the other hand, are paying token dividends of just a penny.
Still, the cracks in Goldman's foundation are showing. It recorded a quarterly loss last fall, only its second since going public in 1999. In 2010 and 2011, its net income fell year-over-year in six of the eight quarters. Return on equity in the first quarter was about 12 percent, in line with a year ago. But that was down sharply from 38 percent five years ago, before the global economic meltdown.
And that is to say nothing of Goldman's mounting public-relations crisis, which it didn't mention in the call with analysts. Last month, consumer vitriol against the bank came to a head when a mid-level executive resigned via a blistering editorial in the New York Times, accusing the bank of losing its "moral fiber" and caring only about its own profits rather than its clients'.
A raft of regulatory investigations, fines and lawsuits have followed. Last week, Goldman agreed to pay $22 million to settle regulators' charges that Goldman analysts shared confidential research with favored clients. In the first quarter, the bank set aside $59 million for litigation and regulatory proceedings.
In Tuesday's conference call, analyst Mike Mayo asked if the public would ever hear if the government concluded its investigation into Goldman.
"I actually don't know the answer to that question, Mike," Viniar replied.
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