Goldman Sachs' Revenue Misses Expectations

Jan. 18, 2012 — -- Goldman Sachs said its earnings fell 58 percent in the last three months of 2011, although beating Wall Street's estimates. Its revenue, however, was lower than expected because of volatility in the financial markets.

Last year "was dominated by global macro-economic concerns which significantly affected our clients' risk tolerance and willingness to transact," Lloyd Blankfein, CEO of the investment bank, said in a statement today.

Goldman Sachs made $1 billion, or $1.84 per share, from October through December, beating the financial research firm FactSet's estimate of $1.28 per share from surveyed analysts, the Associated Press reported. But its quarterly earnings per share were well below the $3.79 from that of 2010.

For the entire year, its investment banking revenue was $4.36 billion, a decrease of 9 percent from 2010. Compared with a year ago, the company's quarterly revenue from investment banking fell 43 percent in the fourth quarter to $857 million.

The bank's backlog of pent-up business decreased, which shows a lack of confidence in the economy in general, said Michael Wong, equity analyst with independent investment research firm Morningstar Inc. "You would have to have a strong stomach to push through an M&A deal at the moment. And strong willingness to take risk."

For the third quarter, Goldman Sachs reported its second quarterly loss as a public company because of market volatility.

Compensation and benefits expenses, including salaries, discretionary compensation, amortization of equity awards and other items such as benefits, were $12.22 billion for 2011, a decrease of 21 percent compared to $15.38 billion in 2010. The ratio of compensation and benefits to net revenues for 2011 was 42.4 percent, compared with 39 percent of revenue last year.

"When revenue falls, you still have to pay your star performers," Wong said.

Goldman Sachs' total staff shrunk 7 percent compared with the end of 2010, the company reported in its earnings announcement.

Because of the slowdown in overall investment banking activity, annual bonus and compensation for the industry might be the lowest in three years, analysts forecast.

Investment bank Morgan Stanley reportedly will cap bonuses at $125,000 for most bankers, the Wall Street Journal reported Tuesday. Banks generally pay bonuses four to six weeks into its first quarter.

Because of the extended European sovereign debt crisis, Keefe, Bruyette and Woods had lowered earnings estimates at four of the universal banks, JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley.

Wells Fargo & Co. Tuesday reported a quarterly profit increase of 20 percent, in stark contrast to an 11 percent decline at Citigroup. Wells Fargo's net income rose to $4.11 billion, or 73 cents per share, while revenue decreased 4 percent to $20.6 billion.

"Wells Fargo's great quarter bodes very well for regular banks, particularly if you have less exposure to market-related items or international businesses," Anthony Polini, analyst with Raymond James said, referring to global concerns such as the two-year-old European debt crisis.

Polini said the San Francisco-based bank had strong growth in loans, deposits and credit quality. As the first traditional U.S. bank to report its fourth-quarter earnings, Wells Fargo might be an indicator of other banks without large exposure to investment banking, in contrast to Citigroup.

Citi's quarter, however, was "ugly" and "messy," Polini said.

"More than anything else, Citi missed on market-related items, like trading, or the investment banking side of the business," he added. "The more traditional side of the business performed more in-line. The investment banking side was weaker than expected."

Citi had a profit of $1.16 billion, or 38 cents per share, on revenue of $17.2 billion, less than expected. Citigroup had a profit of $1.3 billion and revenue of $18.4 billion for the same quarter last year. The bank's full-year net income for 2011 was $11.3 billion, up 6 percent from $10.6 billion in 2010.

JPMorgan Chase, the largest bank by assets, said Friday that fourth-quarter profit fell 23 percent but was in line with analyst expectations. The bank's profit fell to $3.73 billion, or 90 cents a share, from $4.83 billion, or $1.12, a year earlier. Investment banking revenue declined by 30 percent as trading slowed because of the financial crisis in Europe.

David Konrad, chief financial analyst with Keefe, Bruyette and Woods, called the JPMorgan's quarter "fairly soft...by their standards." However, a lower tax rate and low investment banking pay-to-revenue-ratios, known as compensation ratios, worked in the bank's favor.

Konrad said JPMorgan is "top" in the universal bank space given its diversified business mix, strong balance sheet and near-term potential for a return on equity.