Gold­man profit slumps af­ter huge mort­gage-backed bond set­tle­ment

The Pak Banker - - COMPANIES/BOSS -

Gold­man Sachs Group Inc's profit slumped for the third straight quar­ter as a $5 bil­lion set­tle­ment of cri­sis-era le­gal claims hit earn­ings in a tu­mul­tuous fi­nal three months of the year.

Like other banks, Gold­man had a tough year as oil prices plum­meted, con­cerns about China's econ­omy in­ten­si­fied, and ner­vous­ness about the tim­ing and pace of US in­ter­est rate in­creases weighed on credit mar­kets. The new year has also started on a grim note, with oil prices fall­ing to their low­est in 13 years and stock prices drop­ping sharply around the world.

Gold­man, the last of the big US banks to re­lease fourth-quar­ter earn­ings, re­ported a 71.8% fall in net in­come ap­pli­ca­ble to com­mon share­hold­ers to $574 mil­lion, or $1.27 per share, from $2.03 bil­lion, or $4.38 per share, a year ear­lier.

An­a­lysts on av­er­age had ex­pected the bank to re­port earn­ings of $3.53 per share, ac­cord­ing to Thom­son Reuters I/B/E/S. It was not im­me­di­ately clear if the re­ported fig­ures were com­pa­ra­ble. The le­gal charge, which stemmed from claims that the bank had mis­led mort­gage bond in­vestors dur­ing the fi­nan­cial cri­sis, re­duced earn­ings per share by $3.41.

On the whole, the big banks did bet­ter than ex­pected, but mainly due to cost cuts - the part of their busi­ness over which they have most con­trol. Ex­clud­ing lit­i­ga­tion and reg­u­la­tory costs, Gold­man re­duced non-com­pen­sa­tion costs by about 7.2%. Gold­man, whose shares were down 1.5% in pre­mar­ket trad­ing on Wed­nes­day, said to­tal op­er­at­ing ex­penses in­creased 38% to $6.2 bil­lion.

Non- com­pen­sa­tion costs jumped 64% to $4.14 bil­lion, due mainly to $1.95 bil­lion the bank put aside for lit­i­ga­tion and reg­u­la­tory is­sues. Net rev­enue fell 5.4% to $7.27 bil­lion, beat­ing the av­er­age an­a­lyst fore­cast of $7.07 bil­lion. Rev­enue from trad­ing bonds, cur­ren­cies and com­modi­ties ( FICC), at $1.12 bil­lion, was the low­est since the fourth quar­ter of 2008 dur­ing the depths of the fi­nan­cial cri­sis.

FICC com­prised 15% of over­all rev- enue, a far cry from the days when reg­u­larly com­prised about 40%.

Bond trad­ing by US banks has been de­clin­ing since 2009, mainly due to new rules that dis­cour­age banks from tak­ing un­nec­es­sary risks. In­vest­ment bank­ing rev­enue - which in­cludes in­come from which deals and un­der­writ­ing of bond and share of­fer­ings - rose 7.4% to $1.55 bil­lion. Gold­man ranked No. 1 in ad­vis­ing on both an­nounced and com­pleted merg­ers and ac­qui­si­tions glob­ally in 2015, ac­cord­ing to Thom­son Reuters data.

Re­turn on equity (ROE), a mea­sure of how prof­itably Gold­man uses share­holder's money, was 7.4% for 2015, well below the 30% or so the bank achieved be­fore the fi­nan­cial cri­sis. Many in­vestors ar­gue that banks need at least a 10% ROE to cover their cost of cap­i­tal. Gold­man's spend­ing on salary and com­pen­sa­tion ben­e­fits as a per­cent­age of to­tal rev­enue rose to 28.3%, com­pared with 25.4%in the same quar­ter of 2014. The bank's in­creased spend­ing on em­ploy­ees is con­trast to the cost cut­ting strat­egy adopted by its peers on Wall Street.


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