Goldman Sachs Group Inc. (NYSE:GS) earnings report released earlier today revealed that the company’s revenues are well down from the fourth quarter of last year while the firm’s profits were up to $2.1 billion. The company’s falling revenues have resulted in the company going on a major cost cutting campaign that has managed to grow profit while suffering a drop in revenue of $2 billion, almost the same as the company’s total profits.
Welcome to our latest issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring Point72 Asset Management losing about 10% in January, Millennium Management on a hiring spree, and hedge fund industry's assets under management swell to nearly Read More
With revenues still far below they were how long can the company continue to increase its profits? The market was indecisive on that this morning after the announcement and as of writing the firm’s stock was up slightly.
Goldman Sachs Group Inc. (NYSE:GS) did a good job in the past year of curbing its spending. More than 3000 jobs were cut around the world and the company managed to lower the costs of several of its other contracts. Average compensation per employee is now at $135,000, down from $148,000 this time last year.
The drop in compensation is around 16% the same as the drop in revenue year on year. The company has cut its costs by over 1 billion in the past year. Most of the increase in profits has however been deduced from the March 2011 dealt that saw them buy back preferred stock from Warren Buffett at a cost of 1.6 billion.
That deal, which saw the company give $5 billion worth of Stock to Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (BRK.B) in order to bring confidence to the investment bank during the financial crisis, was costing the company $500 million a year. Neglecting the cost of ending the deal last year profits at the company are actually down $600 million from this time last year. This may be an unfair analysis, given that the company is now out from under most of the stresses created by the 2008 financial crisis, but it is one worth making.
The fall in revenue at the company was greater than the rise in costs by almost $1 billion over the last twelve months. The company’s highest priority now is to staunch the falling revenue. Investors are worried about whether falling income is a short or long term issue for the company as the entire investment banking market faces huge changes.
With the Dodd Frank Bill coming into effect and regulators increasing their presence on Wall Street it is not an easy time to be in the field and investors are harder to part with their money.
It was noted yesterday that Citigroup had actually outperformed JPMorgan in its investment field in this quarter. JPMorgan Chase & Co. (NYSE:JPM) saw a fall in the fees it took in of a whopping 23% year on year while Citigroup Inc. (NYSE:C) had managed an increase of 2.3 % in the same period.
Goldman Sachs Group Inc. (NYSE:GS) took in $1.15 billion in investment banking revenue this year compared to $1.27 billion last year, a drop of over 9%The changing market has not been treating Goldman well so far and it is up to the company how things will go from here.
Investors are clamoring for lower fees and it seems that this is the driver for garnering new business in the market. Some companies are making revolutionary measures in an attempt to lower their fees and draw customers into their business. Blackrock has recently introduced its own bond trading platform that will allow investors to trade in bonds out side of the investment bank framework.
With more discerning customers and increased regulatory pressure it is a time for change in investment banking. Any company that refuses to change will suffer and as far as Goldman’s revenues show any changes they have made have not amounted to much. Perhap’s it will be that company’s shareholders that do the suffering.