Investors cheer as Goldman cuts costs, keeps lid on pay
NEW YORK: Goldman Sachs Group Inc, the securities firm that set a Wall Street compensation record in 2007, is now demonstrating how little it can pay.
The portion of revenue allotted for salaries, bonuses, stock awards and benefits was 38% in 2012, down from 42% a year earlier and the lowest since 2009, the company said on Wednesday in a statement. The move helped the bank post a fourthquarter profit that beat analysts’ estimates and pushed return on equity to 10.7% for the year, up from 3.7% in 2011. The stock climbed the most in 10 months.
“It’s a better time to be an investor than when bonuses are becoming ridiculous,” said Michael Vogelzang, chief investment officer at Boston Advisors LLC, which manages US$2.4bil including Goldman Sachs shares. “You’re seeing a massive amount of overcapacity in the business and it’s continuing to push down the price of labour.”
Goldman Sachs still may be one of few Wall Street firms that pay employees more for 2012 because revenue surged 19% and it cut staff by 3%. JPMorgan Chase & Co, the biggest US bank by assets, cut total compensation expense at its corporate and investment bank 3% last year as revenue at that division rose 1%. The pay expense was 33% of revenue for the year, down from 34% in 2011.
‘Morgan Stanley, which is eliminating 1,600 jobs, would defer 100% of bonuses for some senior bankers and traders over three years as it reins in costs, a person briefed on the matter said earlier this week. Deutsche Bank AG was weighing 2012 bonus cuts of as much as 20% for investment bankers in Europe, while those in New York would see smaller declines, four people briefed on the matter said this week.
Anton Schutz, president of Rochester, New York-based Mendon Capital Advisors, said control of expenses, which rose 1% during 2012 even as revenue climbed 19%, is something Goldman Sachs investors have craved.
“One of the things we’ve been looking for in this space for a long time is operating leverage,” said Schutz, whose firm has about US$150mil under management including Goldman Sachs stock. “That’s exciting for shareholders. I don’t think it’s so good for employees unless they own a lot of stock.”
Goldman Sachs rose 1.7% to US$143.50 by 10.52 am in German trading after climbing 4.1% on Wednesday in New York to US$141.09, the biggest advance since March. The shares have gained 11% this year on top of a 41% advance in 2011.
The bank derived about 70% of its revenue last year from investments with the firm’s own money or trading with clients.
A stock-market rebound and a US$500mil profit from selling a hedge-fund-administration unit helped revenue recover from the lowest first half since 2005 as the company booked its first annual revenue gain in three years. Revenue in Investing & Lending, the segment that includes the firm’s stakes in stocks, bonds, real estate, private equity and hedge funds, almost tripled last year to US$5.89bil from US$2.14bil.
Ed Najarian, an analyst at International Strategy & Investment Group LLC, said he raised his estimates for Goldman Sachs’ earnings per share through 2015 because he expected the annual compensation ratio to hold below 40%. – Bloomberg