Goldman Sachs Group Inc. said Thursday it earned $4.79 billion in the fourth quarter as the bank cut back on compensation and its trading business again outdistanced the rest of the financial industry.
The company rewarded its employees with $16.2 billion in salaries and bonuses for 2009, up 47 percent from the previous year but still lower than many had expected. Compensation accounted for 36 percent of Goldman’s $45.17 billion in 2009 revenue, the lowest annual ratio ever for the company. In 2008, Goldman set aside 48 percent of its revenue to pay employees.
The pullback in pay helped the bank easily top analysts’ earnings estimates. Goldman earned $8.20 a share in the last three months of the year, well above the $5.20 a share expected by analysts surveyed by Thomson Reuters.
Trading of fixed income, commodities and currencies buoyed Goldman’s profits for the third straight quarter. The bank also reported higher fees from underwriting stock and debt offerings. Its shares initially rose but pulled back in midmorning trading, falling $2.99, or 1.78 percent, to $164.80.
Goldman, which has outperformed other financial companies for years, has been the strongest bank throughout the financial crisis. It had less exposure to toxic mortgage-backed securities than other companies and also has been more aggressive in its trading.
For the full year, Goldman earned $13.4 billion, almost as much as the $15 billion earned by the five other big national banks combined. 2009 was a difficult year for the banking industry, as companies with big lending operations lost money in those businesses.
JPMorgan Chase & Co., earned $11.73 billion for the year on the strength of its investment banking business, and Wells Fargo & Co. turned a $7.99 billion profit. But Citigroup Inc. and Bank of America Corp. lost a combined $3.81 billion. And Morgan Stanley, whose problems have been attributed in part to a lack of aggressiveness in its trading business, lost $907 million.
Despite its big profit, Goldman’s compensation costs came in well below the record $20.2 billion the bank paid to employees in 2007. Goldman said it reduced its compensation pool by $500 million in the fourth quarter and put the money in the bank’s two-year-old charity, Goldman Sachs Gives, a move apparently aimed at blunting criticism of Goldman’s outsized pay packages.
The lack of compensation expenses during the fourth quarter was the biggest reason Goldman’s profit blew away expectations, said Brad Hintz, analyst at Sanford C. Bernstein & Co.
“By booking negative compensation, (Goldman) certainly boosted its bottom line,” Hintz said, adding that investment banking and trading revenue were mostly in line with estimates.
Bonuses in the banking industry have come under attack by lawmakers and the public after the companies lost billions of dollars in bad debts on mortgages, contributed heavily to the credit crisis and recession and then had to be bailed out by the government.
Goldman Sachs received $10 billion in bailout funds, and was one of the first to repay the money last year.
David Viniar, Goldman’s chief financial officer, said the bank’s employees performed “quite well” in 2009 and that the risk of losing top talent to other firms factored into the pay calculations. Still, he said the bank tried to strike a balance on pay.
“What we attempted to do was be fair to our people … but show restraint,” Viniar said during a conference call with reporters. “It’s hard for me to judge how people are going to react.”
Once again, aggressive trading drove Goldman’s earnings. The bank had $6.41 billion in revenue from its trading and principal investments unit, down from $10.3 billion in the third quarter of 2009. That’s in line with earnings reports from Morgan Stanley and JPMorgan Chase, which also saw a slowdown in trading in the fourth quarter.
Investment banking revenue, considered the foundation of the company’s business, rose to $1.64 billion, up 58 percent from the fourth quarter of 2008 during the height of the financial crisis and 82 percent higher than the third quarter.
Goldman, like other Wall Street banks, makes much of its money in investment banking by charging fees to underwrite, or raise money for, bond and stock offerings. It also profits from managing mergers and acquisitions. Analysts like to see strength in investment banking because it is usually the most stable source of money for a Wall Street bank when the economy is strong.
Goldman’s underwriting business had $962 million in revenue, more than double the same period a year ago. The bank attributed the increase in equity underwriting to higher revenues from initial public offerings in the quarter.
Going forward, a big question for Goldman will be whether compensation stays at the reduced level or eventually returns to pre-crisis levels. The company’s CEO, Lloyd Blankfein and his management team are refusing cash bonuses for 2009 and instead are only taking deferred stock that can’t be cashed in for several. Other employees are also taking more money in deferred stock.
Under that structure, Goldman’s full compensation costs wouldn’t be recorded in the fourth quarter. Instead the expense would be recorded when the stock vests, meaning compensation costs could jump higher again in future quarters.
However, a permanent reduction in Goldman’s employee compensation costs, historically among the highest in the industry, would greatly benefit the company’s profitability, said Hintz at Sanford C. Bernstein & Co.
“If this is a permanent reduction, it’s very good for stockholders,” Hintz said.
Speaking to reporters, Viniar declined to give details on the bank’s future compensation plans.
Employees’ 2009 pay was “what we thought was appropriate,” he said. “In the future, we’ll have to see what the environment is.”
