Goldman Sachs dashes any hopes of a good bonus year
These hopes were all but dashed this week when the company announced that revenue in its fixed-income, currency and commodities division, a powerful unit that in better years has produced more than a third of Goldman's revenue, dropped 44 per cent during the past year.
The poor performance forced the company to cut its way to a decent profit, slashing the amount of cash it sets aside for pay and bonuses.
The weakness in this division has led to renewed concerns from analysts and investors about the headwinds Goldman and other banks are facing in big money-producing areas like the trading of interest rate products and currencies.
There is also concern that the decline is not short term and on Thursday, Goldman faced questions on the falling revenue. Analysts pushed, without much success, for more details on the reasons behind the drop in revenue for the unit.
They also pressed executives about their expectations for the firm's return on equity, which effectively measures the profit a bank is able to generate on its capital. That return is hovering around 8 per cent on an annualised basis, significantly lower than it has been in previous years, and well below the company's stated goal of 20 per cent over time.
By slashing what it sets aside for compensation, Goldman was able to post a decent third-quarter profit, despite the revenue weakness. Quarterly earnings came in at $US1.52 billion ($1.58 billion), largely flat compared with the period a year earlier. Its profit of $US2.88 a share managed to slightly exceed its performance of $US2.85 a share in the third quarter of 2012, but revenue in the quarter fell about 20 per cent to $US6.72 billion, well below analyst forecasts of $US7.36 billion.
New York Times
Frequently Asked Questions about this Article…
Goldman Sachs employees anticipated a good bonus year in 2013 because the company started the year strong, with second-quarter profits doubling compared to the previous year, despite economic concerns.
The decline in Goldman Sachs' revenue in 2013 was primarily due to a 44% drop in revenue from its fixed-income, currency, and commodities division, which historically contributed significantly to the company's overall revenue.
Goldman Sachs managed to post a profit by cutting the amount of cash set aside for pay and bonuses, which helped offset the revenue weakness and allowed the company to report a decent third-quarter profit.
Analysts are concerned about the headwinds Goldman Sachs faces in big money-producing areas like trading interest rate products and currencies, and whether the revenue decline is a short-term issue or a longer-term trend.
Goldman Sachs' current return on equity is around 8% on an annualized basis, which is significantly lower than previous years and well below the company's stated goal of achieving a 20% return over time.
Goldman Sachs' third-quarter earnings in 2013 were largely flat compared to the previous year, with a profit of $US2.88 per share slightly exceeding the $US2.85 per share performance in the third quarter of 2012.
The revenue decline led to a 20% drop in quarterly revenue to $US6.72 billion, which was well below analyst forecasts of $US7.36 billion, impacting the company's overall financial performance.
For everyday investors, Goldman Sachs' revenue challenges highlight the potential risks and volatility in the financial sector, emphasizing the importance of staying informed and diversifying investments to manage risk.
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