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Goldman Sachs’s Profit and Revenue Tumble in Quarter After a Rough Quarter, Goldman Faces Questions on Strategy
(about 3 hours later)
Goldman Sachs had its worst quarter in more than four years as volatile markets hit nearly all of the company’s business lines. Goldman Sachs has been betting that it will again see around the next corner better than its competitors.
In results announced on Tuesday morning, Goldman said that its revenue in the first three months of the year declined 40 percent from the same period a year earlier. Its profit was down even more sharply. As other large banks have been cutting back the trading and investing businesses that have long defined Wall Street, Goldman has fearlessly stuck to its guns.
The company earned $1.1 billion, or $2.68 a share, down 55 percent from the year-earlier period. Analysts polled by Thomson Reuters expected earnings of $2.45 a share. Some analysts said that when certain one-time items were included, Goldman did worse than they had expected. But after Goldman on Tuesday delivered the worst first-quarter results of any major bank — the latest of many challenging quarters — the firm faced some tough questions about whether a raft of changes in regulations and financial markets might be making its focus on Wall Street businesses the wrong bet.
In recent years, Goldman’s revenue and profit have suffered as volatile markets and increased regulations have crimped the trading and investing businesses where the company is most focused. After the latest disappointing results, the company faced sharp questions about its business prospects from several analysts. “When does Goldman say the time has come for transformational change — that we must do something radically different because we’re getting nowhere?” the banking analyst Richard X. Bove, asked Goldman executives on a conference call after the company announced its financial results for the first three months of the year.
“When does Goldman say the time has come for transformational change — that, ‘We must do something radically different because we’re getting nowhere’?” a banking analyst, Richard X. Bove, asked Goldman Sachs executives on a conference call with the bank’s executives on Tuesday morning. Goldman has already taken several steps to recalibrate its mixture of businesses. Most significantly, it has been looking at offering banking services to ordinary Americans, moving beyond its traditional business serving big companies.
Goldman has argued that it maintains a diversified array of Wall Street businesses so that when one division is struggling, another can carry the load. But in the latest quarter, revenue in nearly every business fell sharply. Just this week, Goldman opened GS Bank, which offers online savings accounts and certificates of deposit, a product of Goldman’s purchase last year of GE Capital Bank.
Goldman’s chief financial officer, Harvey M. Schwartz, defended the company’s approach on Tuesday – and suggested that analysts not focus too much on one quarter, particularly one in which there were many unanticipated shocks, such as the declining price of oil and the unstable outlook for interest rates. None of the new businesses, however, have come close to outweighing the old revenues that Goldman has lost.
But Mr. Schwartz also argued that the bank has been cutting employees and expenses to deal with the difficult environment. The first-quarter financial results from all the big banks have underscored the challenges facing the financial industry as it grapples with volatile markets and a wide array of new regulations that raise the cost of doing business.
“This has been — and I admit it – this has been a tough period,” he said. “But we have a long history of managing our business across the cycle.” Goldman is in a particularly difficult situation. It has again become a target during this election season, with the Democratic presidential candidate Bernie Sanders using the bank as a symbol of Wall Street greed.
Investors appeared to give Goldman the benefit of the doubt on Tuesday. The bank’s stock was up more than 2 percent in afternoon trading. At the same time, its reliance on trading and underwriting has made it more vulnerable than other big American banks to the new regulations and volatile markets. On Tuesday, the bank reported the lowest first-quarter profit and revenue since 2004, with declines across almost all of the bank’s major business lines.
Goldman is the last of the large Wall Street banks to announce its first-quarter financial results. The other banks were also buffeted by tumultuous financial markets, but because Goldman is so focused on trading, it had particularly weak results. The firm earned $1.1 billion, or $2.68 a share, down 55 percent from the same period a year earlier. Analysts polled by Thomson Reuters had been expecting earnings of $2.45 a share. Some analysts said that including certain one-time items, Goldman did worse than they expected.
As has frequently been the case over the last few years, Goldman’s trading desks were hit hard by the global economic uncertainty, which has whipsawed financial markets. At the fixed-income trading desks, which used to provide a large chunk of the bank’s earnings, revenue dropped 47 percent from a year ago. Goldman’s chief financial officer, Harvey Schwartz, defended the company’s approach — and suggested that analysts not focus too much on one quarter, particularly with the slide in the price of oil and the unstable outlook for interest rates.
In the last year, the company’s equities trading desks, where stocks are traded, have been a bright spot. But revenue there also fell 58 percent. But Mr. Schwartz also argued that the bank had been cutting employees and expenses to deal with the difficult environment.
Goldman sharply lowered the amount of money that it put aside for bonuses and salaries, in line with the declining revenue. “This has been — and I admit it – this has been a tough period,” Mr. Schwartz said on Tuesday. “But we have a long history of managing our business across the cycle.”
Investors appeared to give Goldman the benefit of the doubt on Tuesday. The bank’s stock ended the day up 2.3 percent. But it is still down 25 percent from a high reached last summer, and is far from the peaks reached before the financial crisis.
Goldman has developed a reputation for making smart moves ahead of its competitors. After the financial crisis, for instance, when bond trading was hot, Goldman made cuts to its operation, correctly anticipating that the good times would not last.
More recently, though, Goldman has been betting that there would be a revival in the fixed income markets where bonds are traded, even as rivals have cut back.
So far, the situation in the fixed income markets has only grown worse for Goldman. In the latest quarter, revenue from fixed income trading fell 48 percent from the same quarter a year earlier.
The company’s equities trading desks, where stocks are traded, have been a bright spot over the last year. But revenue there also fell 58 percent in the first quarter.
Goldman has now bowed to the challenging environment, later than most of its rivals, by making significant cuts to its fixed income unit.
Goldman is also laying the groundwork to cut salaries and bonuses across the firm in 2016. The firm slashed the amount put aside for compensation and by 40 percent in the first quarter.
Mr. Schwartz hailed the bank’s success in cutting costs, which has helped the bank remain profitable. But lowering salaries could ultimately make it hard to continue competing for the smartest young recruits from top American colleges and graduate schools — perhaps the most frequently cited factor behind Goldman’s success.
This week, analysts and investors expressed an even more basic concern that the business lines where Goldman is focused are likely to be much less profitable moving forward because of the array of new regulations phased in since the passage of the Dodd-Frank financial overhaul legislation.
“Have you considered the fact that there might not be any relief on the regulatory side in the context of your longer-term strategy for the business?” Steven Chubak, a bank analyst with Nomura Securities, asked Mr. Schwartz on Tuesday.
Mike Mayo, an analyst at CLSA, put it even more bluntly: “You danced pretty well the last three to four years without revenue growth. But it seems like you’re getting to the end of what you can do.”
In response, Mr. Schwartz cautioned that the worst problems in the first quarter came in the first two months of the year, and that the outlook had improved since then, which could improve results in the rest of the year. And he pointed to the moves to expand its retail business.
Still, Mr. Bove chastised Goldman for not doing more.
“When do you get control of your destiny as opposed to sitting here for nine years, letting the world control who you are and what you’re doing?” he said on Tuesday morning.
“I certainly wouldn’t agree with your statement that we’re sitting here waiting for the world to do what it does,” Mr. Schwartz countered.
“If we felt there was a client segment or a transaction we could do that would benefit our shareholders and we could deliver to those clients, we would do it,” he added. “We’re open-minded.”