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Last updated: January 18, 2012 5:37 pm
Like many of its investment banking competitors, Goldman was hit by ongoing eurozone turmoil and a subsequent slowdown in market activity in the last three months of 2011. The results follow disappointing earnings at rival JPMorgan and Citigroup after customers withdrew from trading.
Goldman responded to market conditions and client retrenchment – cutting its operating expenses by 14 per cent during the year to $22.64bn. That includes a striking 2,400 subtraction in headcount and a 21 per cent reduction in employee pay – including bonuses paid to its bankers.
“This past year was dominated by global macroeconomic concerns, which significantly affected our clients’ risk tolerance and willingness to transact,” Lloyd Blankfein, chairman and chief executive, said in a statement. “As economies and markets improve – and we see encouraging signs of this – Goldman Sachs is very well positioned to perform for our clients and our shareholders.”
With the cost-cutting, Goldman managed to partially offset a 26 per cent slump in fourth-quarter net revenue and surprise analysts with net income of $1.1bn. That equates to earnings of $1.84 a share, outstripping consensus expectations of $1.23 a share.
The bank’s ratio of total pay to revenue for 2011 was 42.4 per cent – up from 39.3 per cent in 2010, and likely to fuel some arguments that Wall Street still needs to drastically slim down. Shareholders have to contend with a 3.7 per cent return on equity for the full year, though Goldman shares jumped more than 6 per cent to $103.93 in afternoon trading in New York on Wednesday.
The bank launched an “internal initiative” in the second quarter, aiming to save $1.4bn, or around 6 per cent of its costs in 2010, chief financial officer David Viniar said in a conference call. Most of the savings have already been achieved with a small amount still to be done, he said.
In addition to volatile markets, Goldman has been grappling with a plethora of incoming financial regulation, including the Volcker Rule which aims to ban proprietary trading at US banks. Difficult market conditions and the new rules have sparked a debate about how the bank will cope.
Net revenues in Goldman’s investment banking division declined 9 per cent to $4.36bn in 2011, while earnings at the bank’s institutional client services unit fell a fifth to $17.28bn. The unit includes Goldman’s fixed income, currency and commodities division – traditionally one of the bank’s largest profit-generators. But FICC net revenue slumped more than a third to $9.02bn during the year.
“We will continue to review the environment as we go forward. We’ll continue to see where regulation ultimately comes out,” said Mr Viniar, adding that the bank would make sure it was “sized appropriately”.
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