Goldman Sachs profit hit by lower bond trading revenue

Goldman Sachs has reported a 21 per cent drop in quarterly profit as revenue from fixed-income trading fell in what chief executive Lloyd C. Blankfein described as “a somewhat challenging environment.”

Net income applicable to common shareholders fell to $2.25 billion (€1.65 billion), or $4.60 per share, in the fourth quarter from $2.83 billion, or $5.60 per share, in the same quarter of 2012, the Wall Street bank said today.

Analysts had expected earnings of $4.22 per share, according to Thomson Reuters I/B/E/S.

Goldman’s shares were up slightly at $179 before the start of trading on the New York Stock Exchange today.

The bank was stung by its heavy reliance on the bond market, which historically has been a source of great profit.

The bond market began to soften in the fourth quarter as investors prepared for higher interest rates, a shift that affected trading, underwriting and investment income for Wall Street banks.

Goldman’s revenue from client trading in fixed income, currencies and commodities (FICC) dropped 15 per cent in the period to $1.72 billion.

Revenue from bond underwriting dropped 14 per cent to $511 million, while revenue from Goldman’s own loans and debt investments fell 13 per cent to $423 million.

FICC trading had arguably been Goldman’s strongest business in the decade leading up to the financial crisis, with the bank raking in billions of dollars from the credit boom and bust.

But it has come under increasing pressure due to new regulations that restrict activities such as proprietary trading and others that make it more expensive for banks to trade or hold securities on their balance sheets.

While Goldman is still a big player in bond markets, FICC trading revenue fell to 25.3 per cent of total revenue in 2013 from 48 per cent at its peak in 2009.

Other banks fared better in fixed-income in the quarter. JPMorgan Chase said revenue from fixed-income trading rose 1 per cent from a year earlier while Bank of America Corp's fixed-income trading revenue rose 16 per cent.

Citigroup Inc reported a 21 per cent rise in profit today as expenses declined and the company drew down reserves taken against bad mortgage loans.

Overall, Goldman’s revenue dropped 5 per cent to $8.78 billion compared with a year earlier.

The cost of compensation and benefits rose 11 per cent to $2.19 billion during the quarter, which is when Wall Street banks make final decisions about bonuses.

For the year, compensation and benefits expenses fell 3 per cent to $12.61 billion. Goldman paid out 36.9 per cent of its revenue to employees in 2013, the lowest level since 2009.

Mixed results

Goldman’s return-on-equity, which measures how much profit it wrung out of its balance sheet, was 11 per cent for 2013 - higher than the 10 per cent minimum that analysts say banks must produce to meet their cost of capital, but well below the 30 per cent returns Goldman generated in its prime.

The bank’s equity businesses turned in mixed results.

Revenue from client stock trading fell 22 per cent to $598 million even as stocks hit new highs, while equity underwriting revenue doubled to $622 million as more companies tapped the market for capital.

The bank’s own equity investments delivered a 25 per cent increase in revenue to $1.40 billion.

The stock market resurgence also helped Goldman’s investment management business, which provides advisory services to wealthy clients and manages money through funds.

That business reported a 5 per cent rise in revenue to $1.60 billion in the fourth quarter.

Goldman was ranked number one in all major equity underwriting categories in 2013, according to Thomson Reuters data.

Goldman led the high-profile initial public offering of Twitter Inc in the fourth quarter, which alone delivered an estimated $23 million in underwriting fees.

Revenue from advising on mergers and acquisitions rose 15 per cent to $585 million, although overall M&A activity declined in 2013.

There has been a resurgence in recent weeks, however. Other Wall Street banks have reported healthy backlogs of activity, signaling that the business may be turning a corner after several years of decline.

Reuters