Goldman Sachs Profit Drops 52% on Trading Decline

Goldman Sachs Profit Drops 52% on Trading Decline (Update1)

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Jan. 19 (Bloomberg) -- Goldman Sachs Group Inc.’s earnings dropped 52 percent as revenue from trading and investment banking declined, concluding the fourth-best year for profits in the firm’s history.

Fourth-quarter net income fell to $2.39 billion, or $3.79 a share, in the three months ended Dec. 31, from $4.95 billion, or $8.20, a year earlier, the New York-based company said today in a statement. Estimates of 22 analysts surveyed by Bloomberg averaged $3.79 per share, and ranged from $3 to $4.31.

Chief Executive Officer Lloyd C. Blankfein, 56, worked to maintain Goldman Sachs’s profitability and reputation last year as client-trading revenue dropped 33 percent from a record in 2009 and the bank settled a civil fraud lawsuit filed by a U.S. regulator. Last week Goldman Sachs released a set of new business practices and changed its financial reports to separate client-trading revenue from gains and losses generated by bets with its own money.

“I’m hugely confident of their ability to make money one way or another,” Benjamin Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages about $1 billion, said before the results were released. Still, “the big trends which were a help in ‘09 certainly softened a lot in 2010” in trading, Wallace said.

Profit for the year fell 38 percent to $8.35 billion, or $13.18 per share.

Shares Decline

Shares of Goldman Sachs declined to $170.15 at 8:13 a.m. in New York from $174.68 at the close on the New York Stock Exchange yesterday. They gained 3.9 percent this year through yesterday.

Goldman Sachs’s full-year revenue fell 13 percent to $39.2 billion in 2010 from $45.2 billion in 2009, the firm said. Compensation and benefits, the bank’s biggest expense, decreased 5 percent to $15.4 billion from $16.2 billion as the number of employees rose 10 percent from a year earlier to 35,700.

Fixed-income traders had a tougher time making money in 2010 as volume fell and prices improved at a slower pace from the previous year. The extra yield investors demanded to own investment-grade debt instead of Treasuries tumbled 414 basis points in 2009 to end the year at 190 basis points, the biggest annual drop in Bank of America Merrill Lynch index data beginning in 1996. In 2010 spreads narrowed 24 basis points, the data show. A basis point is 0.01 percentage point.

JPMorgan, Citigroup

Fourth-quarter earnings reports from JPMorgan Chase & Co. and Citigroup Inc., the second- and third-biggest U.S. banks by assets, showed that fixed-income trading revenue fell compared with the prior quarter and for 2010 as a whole. Average weekly trading volume in corporate debt dropped 11 percent in 2010 from 2009, according to Federal Reserve data.

Fixed-income, currencies and commodity trading revenue, known as FICC, accounted for more than half of Goldman Sachs’s overall revenue in 2009 under the firm’s old financial reporting system. That fell to 48 percent in the new disclosure, which moves revenue from some businesses to other divisions, according to a company filing last week.

Under the new reporting structure, fourth-quarter FICC revenue fell 48 percent from a year earlier to $1.64 billion, bringing the revenue total to $13.7 billion for the year. Equities-trading revenue decreased 5 percent to $2 billion in the quarter and totaled $8.09 billion in the year.

Investing and Lending

Gains from what the company now calls investing and lending, which includes stakes in companies such as Industrial & Commercial Bank of China Ltd. as well as real estate and proprietary trading, rose 45 percent to $1.99 billion in the fourth quarter from a year earlier and totaled $7.54 billion in 2010 compared with $2.86 billion in 2009.

Revenue from asset management climbed 14 percent to $1.51 billion in the fourth quarter from a year earlier and totaled $5.01 billion for the year, up from $4.61 billion in 2009. Investment-banking revenue decreased in the fourth quarter to $1.51 billion and was $4.81 billion in the year, down from $4.98 billion in 2009.

Goldman Sachs’s investment bank and money-management divisions have been in the spotlight this month after the firm and some of its funds invested $450 million in closely held Internet social networking site Facebook Inc. and tried to sell $1.5 billion of the company in a private placement to wealthy clients. On Jan. 17, the firm said it would restrict the sale to clients outside the U.S. on concern media coverage of the deal would run afoul of rules governing private offerings.

“You’re going to have a bunch of questions about Facebook,” said Anton Schutz, president of Mendon Capital Advisors Corp. in Rochester, New York, which has more than $200 million under management. “The pipeline for deals should matter a lot.”

Goldman Sachs said today that its investment-banking transaction backlog decreased compared with the end of the third quarter.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.