The fourth-quarter results of Goldman Sachs (NYSE:GS), while impressive, had more to do with adjusting their compensation structure outperforming by generating new business, as the company enjoyed profits of $4.95 billion, based on revenue of $9.62 billion.
Revenue for the quarter was in line with analysts’ expectations, who were looking for about $9.65 billion for the quarter. Whenever you see profits far beyond expectation like was the case with Goldman Sachs in their latest earnings report, you always have to look at something that is done concerning cutting costs, which in this case was adjusting the percentage and types of bonuses and compensation offered to their people.
This isn’t necessarily a bad thing, just the reason for the earnings numbers posted by the company. For earnings, the street was looking for about $5.20 a share, but the Goldman delivered an extraordinary $8.20 a share, underscoring the point I am making.
As far as how the company performed for the quarter, that wasn’t really unchanged concerning expectations, and they lined up for the most part with what was being looked for, other than the compensation changes.
For the entire year overall compensation grew to $16.19 billion, equal to 35.8 percent of net revenue. Even though compensation was up, the ratio fell by 48 percent over the 2008 numbers, and is the lowest in the company’s history. Bonuses and compensation grew by 48 percent for the year over 2008. Both those percentages, while the same, are still correct.
Chairman and chief executive Lloyd Blankfein was quick to remind people that the ratio stood at its lowest in company history and in the latter part of 2009 said the average ratio from 2000 to 2008 was 46.7 percent of net revenue. Since 2007 the company says total compensation has fallen 20 percent, or $4 billion.
The obvious question now becomes whether Goldman Sachs will maintain these compensation ratios and how the will effect their bottom line as early as the next quarter if they don’t.
After the negative response in reference to JPMorgan missing its revenue numbers, I wonder how that will be addressed in the minds of investors for Goldman Sachs, which experienced the same event for the quarter. The obvious connection is growth versus cutting costs as the way to generate profits, as that’s what investors and analysts see when revenue is down and profits exceed expectations.
Goldman obviously wanted to overwhelm our senses with the major increase in profits so we could focus on that rather than what it means to the company that they didn’t meet revenue expectations.
That and catering to the mainstream media keeping the attention of people on the bonus culture of banks and financial institutions, which has generated bad will toward banks in general, which forces changes in compensation to keep things under wraps until the economy really starts growing again.
As far as specific divisions in the company and how they fared, trading led the way for the entire year, generating a net of $34 billion for 2009, with $23 billion of that coming from fixed income, currency and commodities. Trading was also the key activity for the latest quarter as well, with revenue at about $6 billion, the major part of the $9.6 billion in revenue generated for the entire quarter.
The investment banking on the other hand didn’t enjoy near that success or amount of business, as asset management had revenue of $1.6 billion for the quarter and $6 billion for all of 2009, while for advising and underwriting, revenue for the quarter was also $1.6 billion, but only $4.7 billion for the entire year. Underwriting on its own garnered $962 million for the quarter. All of these numbers were a major improvement over the last quarter and the year-over-year results.
For mergers in acquisitions, Goldman was the No. 1 company in the world in 2009.
Added all together, this confirms we’re still in very difficult times, and revenue and business in general is relatively level and not growing at estimated increases, as major financial institutions and others must cut back on costs and continue adapting their compensation in order to generate numbers showing solid profits.
Again, profits are mainly coming from cost-cutting and not economic growth. That’s confirmed again by the release today of what is being endlessly called “unexpected” increases in jobless claims of 36,000. How long can it continue to be considered unexpected when this is the third week in a row jobless claims rose?
For Goldman Sachs and other banks, it’ll be interesting to see when actual growth starts to happen and profits coming from that growth rather than accounting changes and cutting back on costs.
