Daily Management Review

Following Bond Settlement, Goldman Posts Smallest Profit in Four years


Following Bond Settlement, Goldman Posts Smallest Profit in Four years
Due to a $5 billion settlement of crisis-era legal claims that added pain to an already tough three months, Goldman Sachs Group Inc reported its smallest quarterly profit in more than four years.
As oil prices plummeted, concerns about China's economy intensified, and nervousness about the timing and pace of U.S. interest rate increases weighed on credit markets, Goldman had a rough year like other banks.
There was a drop in revenue in all but one of its main businesses as reported by Goldman, the last of the big U.S. banks to release fourth-quarter earnings.
The only bright spot was investment banking, which helped the bank beat revenue and profit expectations for the three months ended Dec. 31.
This is the third straight quarter when the Wall Street bank's profit has plunged, the net earnings of Goldman fell 71.8 percent.
In early trading on Wednesday, Goldman's shares fell as much as 1.9 percent to $153.78, their lowest in more than 1-1/2 years.
With oil prices falling to their lowest in 13 years and stock prices dropping sharply around the world, the new year has also started on a grim note.
Due to cost cuts the big banks did better than expected in the quarter as a whole.
According to Reuters reports, after excluding litigation and regulatory costs, Goldman cut non-compensation costs by 7.2 percent.
The bank managed to beat the average analyst forecast of $7.07 billion despite Goldman's net revenue fell 5.4 percent to $7.27 billion.
From $2.03 billion, or $4.38 per share, a year earlier, the net income applicable to common shareholders fell to $574 million, or $1.27 per share, in the quarter.  
According to Thomson Reuters I/B/E/S, Goldman earned $4.68 per share, beating the average analyst estimate of $3.53 per share, excluding the settlement, which stemmed from claims the bank had misled mortgage bond investors during the crisis.
Since the fourth quarter of 2008 during the depths of the financial crisis, the revenue from trading bonds, currencies and commodities was the lowest $1.12 billion.
A far cry from the days when it regularly comprised about 40 percent, FICC comprised 15 percent of overall revenue.
Primarily due to new rules that discourage banks from taking unnecessary risks, bond trading by U.S. banks has been declining since 2009. Income from deals and underwriting of bond and share offerings, also known as investment banking revenue rose 7.4 percent to $1.55 billion.
According to Thomson Reuters data, Goldman ranked No. 1 in advising on both announced and completed mergers and acquisitions globally in 2015.
While advisory revenue was strong, it was unclear if the bank could keep up this momentum given current market turmoil, said KBW analyst Brian Kleinhanzl.  
The return on equity was well below what the bank managed to achieve before the financial crisis was at 7.4 percent for 2015. Many argue that in order to cover their cost of capital, banks need at least a 10 percent ROE.