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Last updated: January 17, 2013 12:56 am
Goldman Sachs put the brakes on bonuses in the fourth quarter, propelling the investment bank’s profits to their highest level in three years and defying the tepid global economy and new regulations.
The bank cut pay by 11 per cent to $1.98bn, helped by hundreds of job cuts.
Remuneration as a percentage of revenues fell to 21 per cent for the period, one of the lowest ratios since Goldman went public in 1999.
As Wall Street’s reporting season kicked off on Wednesday, earnings at both Goldman and JPMorgan Chase trumped analysts’ forecasts, with Goldman’s profits almost tripling to $2.8bn, thanks to lower expenses, modestly improved markets and higher asset prices that helped boost the value of the bank’s own investment portfolio.
Pay at JPMorgan’s investment bank division increased 21 per cent to $2.2bn against the year-ago quarter, rising in line with revenue growth.
But the bank halved chief executive Jamie Dimon’s 2012 bonus to $10m after management failings that allowed the bank to rack up more than $6bn in trading losses last year.
JPMorgan still reported net income of $5.7bn, up sharply from $3.7bn last year.
Remuneration as a percentage of revenues was flat at 29 per cent.
While Goldman reported improved revenues in its investment banking and market-making businesses, where it advises on deals and trades on behalf of clients, much of the fourth-quarter profit rise came from the bank’s own portfolio; revenue in its “principal transactions” business surged 135 per cent to nearly $2bn.
The proposed Volcker rule prohibits banks from making short-term trades for their own accounts but still allows them to make longer-term investments such as buying property or company stakes.
Goldman reported a $334m gain on the value of its investment in China’s ICBC in the quarter.
“What put us in a position to achieve the ROE [return on equity] really were the steps we took over the past two years in terms of managing expenses, and being quite disciplined,” said Harvey Schwartz, Goldman’s chief financial officer.
Trimming expenses is one of the main levers banks can pull to compensate for more modest revenues, and many from Citigroup to Morgan Stanley have recently cut pay and jobs.
At JPMorgan, two internal reports into the bank’s “London whale” affair, in which derivatives traders incurred large trading losses, were also released Wednesday.
Mr Dimon said he respected the board’s decision to cut his bonus. He said the trading losses were “very close to being a non-issue” from a financial perspective but acknowledged “there are other investigations” by regulators and law enforcement agencies that could prompt more action.
Shares in Goldman closed 4.1 per cent ahead at $141.09 in New York, their highest level since May 2011.
JPMorgan was up 1.0 per cent at $46.82.
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