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Goldman Profit Beats Analysts’ Estimates on Investments

By Christine Harper
January 16, 2013 5:35 PM EST 16 Comments
Chief Executive Officer Lloyd C. Blankfein, 58, has undertaken a $1.9 billion expense-reduction effort since mid-2011 and said he expected earnings growth to resume when the economy and markets improved.
Photographer: Jin Lee/Bloomberg
Chief Executive Officer Lloyd C. Blankfein, 58, has undertaken a $1.9 billion expense-reduction effort since mid-2011 and said he expected earnings growth to resume when the economy and markets improved.

Goldman Sachs Group Inc. (GS) climbed the most in 10 months after quarterly profit beat estimates and full-year revenue grew for the first time since 2009.

The stock rose 4.1 percent to $141.09 at 4:09 p.m. in New York, the biggest gain since March 13, pushing the year-to-date increase to 11 percent. The firm said fourth-quarter earnings more than tripled to $5.60 a share, surpassing even the highest estimate of 26 analysts surveyed by Bloomberg.

Chief Executive Officer Lloyd C. Blankfein, 58, who has undertaken a $1.9 billion expense-reduction effort since mid-2011, cut 900 jobs during the year and slashed the portion of revenue allocated to pay. A stock-market rebound and a $500 million profit from selling a hedge fund-administration unit helped revenue recover from the lowest first half since 2005.

“This is a very cyclical business, highly dependent on capital markets,” said Michael Vogelzang, chief investment officer at Boston Advisors LLC, which manages $2.4 billion, including Goldman Sachs stock. “The capital markets were doing well.”

Return on average common stockholders’ equity, a measure of how well the firm reinvests shareholder money, rose to 10.7 percent in 2012 from 3.7 percent in 2011.

“We’d like to do better,” Harvey M. Schwartz, 48, the trading co-head who will succeed Chief Financial Officer David A. Viniar at the end of the month, told analysts on a conference call. “We just don’t feel we have enough information to give you a target” for return on equity.

Revenue Rises

Full-year revenue jumped 19 percent to $34.2 billion from $28.8 billion in 2011 and net income rose 68 percent to $7.48 billion from $4.44 billion. Net earnings for common stockholders increased 191 percent to $7.29 billion, or $14.13 a share, from $2.51 billion, or $4.51, in 2011.

Tangible book value per share, an estimate of how much the company would be worth in liquidation, climbed to $134.06 as of Dec. 31 from $119.72 a year earlier.

Compensation, the firm’s biggest expense, climbed 6 percent to $12.9 billion and amounted to 38 percent of revenue for 2012, down from 42 percent a year earlier.

The ratio is “abnormally low,” said Richard Staite, a London-based analyst at Atlantic Equities LLP who has a neutral rating on Goldman Sachs stock. “I’d be very surprised if they can sustain this into 2013.”

The cost of salaries, bonuses, deferred stock awards and benefits equaled $399,506 for each of the 32,400 employees at the firm as of Dec. 31. A year earlier, the compensation expense was $367,057 for each of 33,300 people on staff at the time.

Operating Expenses

Fourth-quarter revenue climbed 53 percent to $9.24 billion from $6.05 billion a year earlier and total operating expenses in the period rose 3 percent to $4.92 billion from $4.8 billion.

Investing & 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 $1.97 billion, up from $872 million a year earlier. For the year, the segment generated $5.89 billion, an increase from $2.14 billion in 2011.

“It’s always good to beat earnings expectations but I think there are clearly question marks about the sustainability of the investing and lending division,” Staite said.

Investing & Lending includes Goldman Sachs’s stake in Industrial & Commercial Bank of China Ltd., that country’s biggest lender, as well as Facebook Inc. (FB), operator of the world’s largest social network. The segment also books profits or losses from the Special Situations Group, a proprietary investing unit led globally by Hong Kong-based Jason M. Brown, and divisions including Multi-Strategy Investing.

Volcker Rule

The so-called Volcker rule, a provision of the 2010 Dodd- Frank Act, limits how much of a bank’s capital can be invested in hedge funds and private-equity funds and restricts proprietary trading, or bets with a firm’s own money. While regulators are still crafting the rule, Atlantic Equities’ Staite said it may trim revenue from investing and lending.

“I wouldn’t say necessarily that we de-emphasize anything in investing and lending,” Schwartz said on the call. “Those are core competencies of the firm.”

Goldman Sachs, the fifth-biggest U.S. bank by assets, cut its estimates of how much the firm could lose in a day’s trading to the lowest since 2005. So-called value-at-risk was $76 million in the fourth quarter and $86 million for the year. Schwartz said the decline stems from a reduction in market volatility.

“There is no top-down directive to take less risk,” he said.

Incoming CFO

Revenue from sales and trading, led globally by New York- based Schwartz, Pablo J. Salame and London-based Isabelle Ealet, climbed 42 percent to $4.34 billion in the quarter and 5 percent to $18.1 billion for the year. Schwartz has been a co-head of the securities trading division since 2008.

Fixed-income, currency and commodity trading revenue surged 50 percent to $2.04 billion in the quarter and rose 10 percent to $9.91 billion for the year. Revenue from the equities division, overseen by co-Chief Operating Officers R. Martin Chavez, Michael D. Daffey and Paul M. Russo, increased 36 percent to $2.3 billion in the quarter and declined 1 percent to $8.21 billion for the year.

Goldman Sachs said $1.08 billion of equities revenue in 2012 was related to the firm’s reinsurance business, up from $880 million in 2011, according to a footnote in today’s earnings statement. It was the first time the company disclosed the contribution from that business. Fourth-quarter reinsurance revenue doubled to $317 million from a year earlier.

Reinsurance Stake

The company is considering whether to sell a majority stake in the reinsurance unit as capital requirements increase, Schwartz said on the call.

The business may be “better held in other people’s hands and we can be a minority owner,” he said, declining to comment further. Insurance Insider reported yesterday that Goldman Sachs is working on a transaction that would to sell up to 80 percent of Goldman Sachs Reinsurance Group to high-net-worth investors and would value the business at around $1.1 billion.

Fourth-quarter revenue from investment banking, the business run globally by Richard J. Gnodde, David M. Solomon and John S. Weinberg, climbed 64 percent to $1.41 billion. For the year, revenue rose 13 percent to $4.93 billion. The investment banking transaction backlog, an estimate of future revenue from incomplete assignments, was higher at the end of 2012 than the end of the third quarter and Dec. 31, 2011.

Takeover Advice

Financial-advisory revenue, including fees for takeover advice, advanced 8 percent to $508 million in the fourth quarter and fell 1 percent to $1.98 billion for the year. The mergers- and-acquisitions business, led by Gene T. Sykes, ranked first among advisers on global takeovers announced in 2012, the same position it held in 2011, data compiled by Bloomberg show.

Revenue from underwriting, a business led by Stephen M. Scherr, climbed 132 percent to $897 million in the fourth quarter and rose 25 percent to $2.95 billion for the year. Debt underwriting fees were $593 million in the quarter, up from $196 million a year earlier, and advanced 53 percent to $1.96 billion for 2012. Goldman Sachs was seventh among corporate bond underwriters last year, the same as 2011, Bloomberg data show.

Fourth-quarter equity-underwriting revenue climbed 59 percent to $304 million, and declined 9 percent to $987 million for the year. Goldman Sachs, which held the top spot among arrangers of global equity, equity-linked and rights offerings in 2011, dropped to second place after Morgan Stanley (MS) in 2012, according to data compiled by Bloomberg.

Revenue from asset management rose 20 percent in the fourth quarter to $1.52 billion and was up 4 percent to $5.22 billion for 2012. Total assets under management increased $26 billion during the quarter to $854 billion.

JPMorgan Chase & Co. (JPM), the biggest U.S. bank by assets, reported earlier today that 2012 was its third straight year of record profit. Bank of America Corp., the second-largest lender, and No. 3 Citigroup Inc. (C) are set to release results tomorrow. Morgan Stanley, the sixth-biggest bank, is due on Jan. 18.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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