Goldman Sachs profit drops, beats estimates on cost cuts

Goldman Sachs Group Inc., the fifth- biggest U.S. bank by assets, said profit dropped 58 percent, beating analysts’ estimates as the company cut compensation in response to falling revenue.

Fourth-quarter net income dropped to $1.01 billion, or $1.84 a share, from $2.39 billion, or $3.79, in the same period a year earlier, the New York-based company said today in a statement. Per-share earnings exceeded the $1.23 average estimate of 26 analysts surveyed by Bloomberg, whose predictions ranged from 70 cents to $2.50.

Chief Executive Officer Lloyd C. Blankfein, 57, reduced compensation 21 percent for the year as he cut costs and focused on international growth to help offset a slowdown in trading, which contributes most of the firm’s revenue. He has said he wants to prepare for a market rebound, even as he eliminates jobs and adapts to new rules that limit the bank’s ability to invest its own money and make trades for Goldman Sachs’s own account.

“There seems to be continued emphasis on cost control and compensation control and that’s a good thing,” said Charles Bobrinskoy, the Chicago-based vice chairman and director of research at Ariel Investments, which has about $5 billion under management and owns Goldman Sachs stock. “People have known that the trading environment has been lousy.”

Citigroup, JPMorgan

Goldman Sachs’s larger New York-based rivals have also suffered from the decline in trading. Citigroup Inc., the third- biggest U.S. bank by assets, said yesterday that fourth-quarter net income dropped 11 percent as lower revenue from advising companies and trading securities led to the first quarterly loss at its investment bank since 2008. JPMorgan Chase & Co., the biggest U.S. bank, said last week that fourth-quarter net income slid 23 percent as investment bank earnings fell by half.

“Historically Goldman has been spectacular at trading, that’s what really differentiated them,” said Bobrinskoy, who spoke in a phone interview before the results were released. “The reason that the stock is trading below $100 is because people do worry that they’re just not going to ever be as good traders as they once were.”

Goldman Sachs rose to $98.85 at 8:14 a.m. in New York trading from 97.68 yesterday. The shares climbed 8 percent this year through yesterday after retreating 46 percent in 2011. That compares with a 5.4 percent gain in the 81-company Standard & Poor’s 500 Financials Index this year and an 18 percent decline in 2011.

‘Encouraging Signs’

“As economies and markets improve -- and we see encouraging signs of this -- Goldman Sachs is very well positioned to perform for our clients and our shareholders,” Blankfein said in the statement.

In the last year Goldman Sachs lost about 50 so-called partners, the highest rank of employees who share in a special compensation pool and are elected every two years. Among the departures were six members of the management committee, including trading co-heads Edward K. Eisler, 42, and David B. Heller, 44, last week.

Full-year net income fell 47 percent to $4.44 billion, the lowest since 2008. Return on average common shareholders’ equity was 3.7 percent for the year, down from 11.5 percent in 2010.

Full-year revenue dropped 26 percent to $28.8 billion, the lowest since 2008, and declined 30 percent in the fourth quarter to $6.05 billion. The average estimate of 18 analysts surveyed by Bloomberg was for $6.39 billion in fourth-quarter revenue.

Lower Compensation

Compensation, the company’s biggest expense, decreased 21 percent to $12.2 billion for the full year and 2 percent to $2.21 billion in the fourth quarter. The cost was 36.5 percent of total revenue in the quarter and 42.4 percent for the full year. The total number of employees fell to 33,300 at the end of December from 34,200 three months earlier and from 35,700 a year earlier.

Institutional client services, the division that handles sales and trading for customers, generated $3.06 billion in the fourth quarter, down 16 percent from the same period of 2010. The business, now supervised by Isabelle Ealet, Pablo J. Salame and Harvey M. Schwartz, made $17.3 billion in full-year revenue, down from $21.8 billion in 2010.

“These markets will come back, but the question is when?” said William Fitzpatrick, a Milwaukee-based financial-services analyst at Manulife Asset Management, which oversees about $800 million, including Goldman Sachs stock. “They’re doing the right things in terms of cutting compensation. We’ve seen some turnover in some of the management positions but that’s pretty typical.”

Fixed Income

Fixed-income, currency and commodities trading contributed $1.36 billion of revenue for the quarter and $9.02 billion for the year, down from $1.64 billion in the fourth quarter of 2010 and $13.7 billion for that full year. JPMorgan last week said its investment bank produced $2.49 billion of fixed-income trading revenue in the quarter and $15.3 billion for the year.

Equities, the business that Heller supervised, made $1.69 billion in fourth-quarter revenue, down from $2 billion, and $8.26 billion for the year, up from $8.1 billion in 2010. That compares with JPMorgan’s $779 million in fourth-quarter equities revenue and $4.83 billion for the year.

Bank of China

Investing & Lending, which includes the firm’s gains and losses on its own stakes in companies, funds and securities, produced $872 million in fourth-quarter revenue, a 56 percent drop, and $2.14 billion for the year, a 72 percent decline. Gains from Goldman Sachs’s holding in Industrial & Commercial Bank of China Ltd., the country’s biggest lender, jumped to $388 million in the quarter from $55 million a year earlier and recorded a loss of $517 million for the year compared with a $747 million gain in 2010.

Goldman Sachs’s investment-banking division, managed worldwide by Richard J. Gnodde, David M. Solomon and John S. Weinberg, made $857 million in revenue for the quarter, down 43 percent from $1.51 billion a year earlier. Revenue for the full year slid 9 percent to $4.36 billion. JPMorgan made $1.12 billion in fourth-quarter investment-banking fees and a full- year total of $5.86 billion.

Revenue from financial advisory, which includes the mergers and acquisitions business led globally by Gene T. Sykes in Los Angeles and London-based Yoel Zaoui, decreased 25 percent in the fourth quarter to $470 million and retreated 4 percent for the year to $1.99 billion. Goldman Sachs ranked No. 1 among advisers on global takeovers in 2011 for the first time since 2008, according to data compiled by Bloomberg.

M&A Strength

“In a weak economy you’ve got a lot of companies that are just going to have a hard time surviving on their own, which I think bodes well for M&A activity,” Fitzpatrick said in a phone interview before the results. “If you’re looking for an area of strength in 2012, that might be it.”

Fourth-quarter revenue from equity underwriting, led by London-based Matthew Westerman, decreased 66 percent to $191 million and declined 26 percent to $1.09 billion for the full year. The bank ranked No. 1 in managing equity, equity-linked and rights sales in 2011 for the first time since 2006, data compiled by Bloomberg show. Debt-underwriting revenue was down 40 percent in the fourth quarter to $196 million and was virtually unchanged for the year at $1.28 billion.

Investment management, overseen by Timothy O’Neill and Eric S. Lane since the retirement of Edward C. Forst at year-end, made $1.26 billion in fourth-quarter revenue and $5.03 billion for the full year. That compares with $1.51 billion in the fourth quarter of 2010 and $5.01 billion for the full year. Assets under management climbed to $828 billion from $821 billion three months earlier and compared with $840 billion a year earlier.