Goldman Sachs dashes any hopes of a good bonus year
The chatter among Goldman Sachs employees started months ago that 2013 was going to be a good bonus year. The Wall Street bank began the year strong, and despite concerns about the economy, its second-quarter profits doubled over levels of a year ago.
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
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free