Goldman on the rebound in core business
A PERSISTENT complaint from analysts has been that since the global financial crisis, Wall Street banks have mainly relied on slashing costs - everything from people to paper cups - to increase profits and performance.
On Wednesday, Goldman Sachs released results that demonstrated it was not only benefiting from cost-cutting but it also finally had a significant rebound in its core businesses. Goldman's fourth-quarter profit of $US2.89 billion, or $US5.60 a share, was not only well ahead of last year's performance but it also handily beat analysts' expectations of $US3.78 a share.
Goldman is one of a number of banks releasing earnings this week. On Wednesday, JPMorgan Chase also reported a strong profit of $5.7 billion for the fourth quarter, up 53 per cent. Morgan Stanley reports on Friday.
Unlike many commercial banks, Goldman relies more on results in areas such as trading and investment banking. Its fourth-quarter results also benefited from one-off investment gains and a lower-than-expected compensation payout to its employees.
Investors reacted positively, and the stock rose 4.1 per cent to $US141 a share.
Still, embedded in the numbers were reminders of the continued uncertainty over the economy. It was also an indication of how much harder Goldman executives have to work in today's more regulated, less leveraged environment to produce its earnings.
Goldman's chief executive Lloyd Blankfein issued an optimistic outlook for the bank despite warning of a "challenging" economic backdrop.
"The firm's strategic position provides a solid base on which to grow and generate superior returns," he said.
Goldman employees are being notified of their bonuses for 2012 this week, and the firm's decision to ratchet down what it pays in compensation also buoyed fourth-quarter earnings.
The company plans to pay $US12.9 billion in compensation and benefits for 2012, or 37.9 per cent of revenue. This is a significant decrease from 2011, when 42.4 per cent of revenue went to cover compensation-related costs. It represents an average of $US399,506 for each of Goldman's 32,400 employees, though senior executives are allocated a bigger share. The firm produced $US9.24 billion in revenue in the three months to December 31.