Mortgage bill comes due for Goldman Sachs

January 20, 2016 09:41 AM

Goldman Sachs Group Inc's profit slumped for the third straight quarter as a $5 billion settlement of crisis-era legal claims hit earnings in a tumultuous final three months of the year.

Like other banks, Goldman had a tough year as oil prices plummeted, concerns about China's economy intensified, and nervousness about the timing and pace of U.S. interest rate increases weighed on credit markets.

The new year has also started on a grim note, with oil prices falling to their lowest in 13 years and stock prices dropping sharply around the world.

Goldman, the last of the big U.S. banks to release fourth-quarter earnings, reported a 71.8% fall in net income applicable to common shareholders to $574 million, or $1.27 per share, from $2.03 billion, or $4.38 per share, a year earlier.

Analysts, on average, had expected the bank to report earnings of $3.53 per share, according to Thomson Reuters I/B/E/S. It was not immediately clear if the reported figures were comparable.

The legal charge, which stemmed from claims that the bank had misled mortgage bond investors during the financial crisis, reduced earnings per share by $3.41. 

On the whole, the big banks did better than expected, but mainly due to cost cuts - the part of their business over which they have most control.

Excluding litigation and regulatory costs, Goldman reduced non-compensation costs by about 7.2%, according to Reuters calculations.

REVENUE BEATS

Goldman, whose shares were down 1.5% in premarket trading on Wednesday, said total operating expenses increased 38% to $6.2 billion.

Non-compensation costs jumped 64% to $4.14 billion, due mainly to $1.95 billion the bank put aside for litigation and regulatory issues.

Net revenue fell 5.4% to $7.27 billion, beating the average analyst forecast of $7.07 billion.

Revenue from trading bonds, currencies and commodities (FICC), at $1.12 billion, was the lowest since the fourth quarter of 2008 during the depths of the financial crisis.

FICC comprised 15% of overall revenue, a far cry from the days when it regularly comprised about 40%.

Bond trading by U.S. banks has been declining since 2009, mainly due to new rules that discourage banks from taking unnecessary risks.

Investment banking revenue - which includes income from deals and underwriting of bond and share offerings - rose 7.4% to $1.55 billion.

Goldman ranked No. 1 in advising on both announced and completed mergers and acquisitions globally in 2015, according to Thomson Reuters data. 

Return on equity, a measure of how profitably Goldman uses shareholder's money, was 7.4% for 2015, well below the 30% or so the bank achieved before the financial crisis.

Many investors argue that banks need at least a 10% ROE to cover their cost of capital.

Goldman's spending on salary and compensation benefits as a percentage of total revenue rose to 28.3%, compared with 25.4% in the same quarter of 2014.

The bank's increased spending on employees is contrast to the cost cutting strategy adopted by its peers on Wall Street.

"All banks are adjusting to lower levels of client activity," said Stephen Biggar, an analyst at Argus Research.

"I expect we'll see some better compensation numbers, in terms of them being reduced as a percentage of total revenue, going forward."

Up to Tuesday's close of $156.82, Goldman's shares had fallen nearly 13% since the start of the year. The stock fell 7% in 2015, the second-worst performer among the big U.S. banks after Morgan Stanley, which fell 18%.

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