Goldman Sachs Underwriting Revenue Increases, Trading Dips

Jan 16, 2014 12:28 pm ET

(Updates with investor’s comment in fourth paragraph.)

Jan. 16 (Bloomberg) -- Goldman Sachs Group Inc. reported the highest annual earnings in three years as underwriting revenue surged to a record and the firm’s reliance on trading fell to the lowest level in more than a decade.

Net income climbed 8 percent in 2013 to $8.04 billion, the New York-based company said today in a statement. In the fourth- quarter, profit dropped 19 percent to $2.33 billion, or $4.60 a share, from $2.89 billion, or $5.60, a year earlier. That surpassed the $4.18 average estimate of 25 analysts in a Bloomberg survey.

Still, Chief Executive Officer Lloyd C. Blankfein, 59, reported a fourth straight year of lower profitability than the firm achieved in the decade before the financial crisis, and the stock fell as much as 2.1 percent. Goldman Sachs’s return on equity, a gauge of profitability, was 11 percent last year, and the company has struggled to reach 10 percent in the past three years, a level that Blankfein has called “hardly aspirational.”

Last year’s profit “serves as a reminder that the glory days of posting 20 percent-plus ROE is a distant memory,” said Euan Sanderson, a money manager at Standard Life Investments, which has more than $270 billion in assets under management. “Higher capital levels and regulatory constraints make it more challenging for Goldman to be Goldman.”

Goldman Sachs fell 2.1 percent to $174.93 in New York trading at 12:24 p.m. While the shares have doubled since December 2011, they are still below their pre-crisis peak of $247.92 on Oct. 31, 2007.

Revenue Decline

Fourth-quarter revenue fell 5 percent to $8.78 billion. Compensation, the firm’s biggest expense, was $2.19 billion as the bank lowered its full-year ratio of compensation to revenue to 37 percent from 38 percent for 2012. That was the lowest since 36 percent in 2009. Return on equity, a gauge of profitability, was 11 percent for the year, up from 10.7 percent a year earlier.

Full-year trading revenue fell 13 percent and accounted for 46 percent of the total, the lowest since 2002.

“Our work in advancing our client franchise and in ensuring continued cost discipline has allowed us to provide solid returns even in a somewhat challenging environment,” Blankfein said in the statement. “We are well positioned to generate solid returns as the economy continues to heal.”

Fourth-quarter revenue from investment banking, the business run globally by Richard J. Gnodde, David M. Solomon and John S. Weinberg, climbed 22 percent to $1.72 billion. That compared with JPMorgan Chase & Co.’s $1.67 billion in investment-banking revenue and Bank of America Corp.’s $1.8 billion.

Merger Advice

The figure included $585 million of financial-advisory revenue, including fees for takeover advice, an increase of 15 percent. Revenue from underwriting, a business led by Stephen M. Scherr, climbed to $1.13 billion in the quarter, including $511 million from debt underwriting and $622 million for equity offerings.

For the full year, investment banking produced $6 billion of revenue, the second highest ever. That was driven by record underwriting revenue of $4.03 billion. The firm said its transaction backlog increased “significantly” compared with the end of 2012.

Keith Horowitz, an analyst at Citigroup Inc., called the fourth-quarter investment-banking results a “big beat.”

Goldman Sachs held the top spot among arrangers of global equity, equity-linked and rights offerings in 2013, according to data compiled by Bloomberg. It ranked first in advising on announced mergers and acquisitions and fifth in underwriting U.S. bonds, the data show.

Fixed Income

Fixed-income, currency and commodity trading revenue was $1.72 billion, down 15 percent from a year earlier and a 38 percent increase from the third quarter. Excluding a $163 million accounting adjustment, revenue was $1.89 billion. That compared with estimates of $1.61 billion from Sanford C. Bernstein’s Brad Hintz and $1.81 billion from Matt Burnell at Wells Fargo & Co.

Revenue from the equities division declined 27 percent from a year earlier to $1.68 billion. Excluding a $43 million accounting adjustment, revenue was $1.73 billion. That compared with Hintz’s $1.67 billion estimate and UBS AG’s Brennan Hawken’s $1.65 billion projection.

Trading Revenue

Total revenue from sales and trading, led by Pablo J. Salame and Isabelle Ealet, was $3.61 billion. That compared with $2.98 billion at Bank of America and $4.07 billion at JPMorgan.

Goldman Sachs posted the biggest decline in trading revenue among Wall Street banks in the third quarter, driven by a 47 percent drop in fixed income. Larger banks have surpassed the firm in bond-trading revenue, where Goldman Sachs set a Wall Street record in 2009 as competitors struggled to recover from the financial crisis.

Analysts including Societe Generale SA’s Andrew Lim have said that Goldman Sachs’s trading revenue will suffer as rates rise in 2014. The yield on the 10-year U.S. Treasury bond has climbed in each of the past five quarters after hitting a record low in 2012.

Further pressure could come from restrictions on commodities businesses. The Federal Reserve this week said it’s considering new limits on banks’ trading and warehousing of physical commodities. Policy makers are seeking comment on ways to curb ownership and trading of commodities such as oil, gas and aluminum by deposit-taking banks.

Morgan Stanley

Blankfein has said his firm is committed to its commodities unit, even as rivals such as Morgan Stanley and JPMorgan exit parts of theirs. Morgan Stanley agreed last month to sell a unit that stores, trades and transports oil products to a subsidiary of Russia’s OAO Rosneft. JPMorgan said last year it plans to sell some physical-commodity units.

Still, Goldman Sachs put its uranium unit up for sale amid the regulatory pressure, and fielded inquiries about its aluminum warehouse firm, Metro International Trade Services LLC. The lender owns Metro under a merchant-banking exemption and must sell it by 2020.

Investing and Lending, which includes gains and losses on Goldman Sachs’s own investments in stocks, debt, real estate, private equity and hedge funds, as well as loans, posted fourth- quarter revenue of $2.06 billion, up from $1.97 billion a year earlier.

Asset Management

Revenue from asset management rose 5 percent to $1.6 billion, the highest since Goldman Sachs started its current reporting structure in 2010. Total assets under management increased $51 billion during the quarter to $1.04 trillion, topping the trillion-dollar mark for the first time.

Provisions for litigation and regulatory proceedings for 2013 more than doubled to $962 million from a year earlier.

The firm has sought to entice investors through buybacks and dividends, returning $11 billion to shareholders in 2012 and the first nine months of 2013, more than double the combined total of Citigroup, Bank of America and Morgan Stanley. Goldman Sachs said it bought back $1.4 billion of stock in the fourth quarter.

--Editors: Steve Dickson, Dan Kraut